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YES Bank
Can’t say NO to YES!
Initiate coverage with Outperform rating and 34% upside
We initiate coverage on YES Bank with an Outperform rating and a TP of Rs380,
offering 34% upside from current levels. YES Bank now is one of our top picks
in the financials space as we believe the risk to book is lower in the case of YES
Bank due to fewer asset quality issues compared to other banks and earnings
growth is expected to be healthy. Our earnings estimates are roughly 6-8%
ahead of consensus for FY12E/13E.
Return ratios to remain healthy; earnings CAGR to be 20%
We expect YES Bank to report strong earnings CAGR of 20% for FY11-FY14E
after factoring in close to 15% equity dilution in FY13E. We believe ROA and
ROE of around 1.3-1.4% and 20%, respectively, are sustainable, noting that in
the past the bank has consistently demonstrated its ability to recover its ROE
and maintain at 20% levels despite frequent equity dilutions. YES Bank’s high
return ratios are a function of higher risk-adjusted margins and tighter control on
opex. Leverage also is structurally higher considering it has a larger well-rated
corporate mix, due to which risk-weight requirements are lower.
Well-matched ALM profile to keep margins stable
Despite being wholesale funded, YES Bank historically has managed to maintain
its NIMs around 2.7-3.0% and we believe this is likely to continue owing to their
well-matched ALM profile. The gap between duration of advances and duration
of deposits is one of the lowest in the sector and the gap has been consistently
coming down. Also our analysis suggests that YES has relatively lower
dependence on its top 20 depositors compared to most of its peers, thereby
mitigating the risk of sudden withdrawals.
Asset quality – not a major concern; conservatively
factoring in higher credit costs
YES Bank has a well-diversified loan book. The bank’s concentration risk is on
the lower end with top 20 borrowers constituting 14% of the loan book. The
equivalent number for private peers is between 14% and 21%. Its historical track
record of managing asset quality has been very impressive and even during the
global financial crisis, YES Bank managed to control its delinquencies. Despite
its loan book being largely corporate (where the bulk of restructuring has
happened over the past few years for various banks), YES Bank’s restructured
book is much lower than its peers. On the infrastructure side loans are
predominantly working capital loans, where the risk is much lower compared to
term/project loans. We believe the normalised credit losses are unlikely to be
greater than 40bps over the asset quality cycle and have conservatively factored
provisions going up by 15-20bps over the course of next two years.
Valuations now below historical averages
YES Bank now is trading at 1.5x FY13E P/BV after factoring in equity dilution of
15% (1.8x pre-dilution), which is one standard deviation below historical
average. The stock trades at a 20% discount to its private sector peers, which
we believe is unjustified. The stock tends to get re-rated when liquidity is
expected to improve and/or interest rate cycle has peaked out. Key risk to our
investment thesis would be extension of the current tightening phase by RBI.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
YES Bank
Can’t say NO to YES!
Initiate coverage with Outperform rating and 34% upside
We initiate coverage on YES Bank with an Outperform rating and a TP of Rs380,
offering 34% upside from current levels. YES Bank now is one of our top picks
in the financials space as we believe the risk to book is lower in the case of YES
Bank due to fewer asset quality issues compared to other banks and earnings
growth is expected to be healthy. Our earnings estimates are roughly 6-8%
ahead of consensus for FY12E/13E.
Return ratios to remain healthy; earnings CAGR to be 20%
We expect YES Bank to report strong earnings CAGR of 20% for FY11-FY14E
after factoring in close to 15% equity dilution in FY13E. We believe ROA and
ROE of around 1.3-1.4% and 20%, respectively, are sustainable, noting that in
the past the bank has consistently demonstrated its ability to recover its ROE
and maintain at 20% levels despite frequent equity dilutions. YES Bank’s high
return ratios are a function of higher risk-adjusted margins and tighter control on
opex. Leverage also is structurally higher considering it has a larger well-rated
corporate mix, due to which risk-weight requirements are lower.
Well-matched ALM profile to keep margins stable
Despite being wholesale funded, YES Bank historically has managed to maintain
its NIMs around 2.7-3.0% and we believe this is likely to continue owing to their
well-matched ALM profile. The gap between duration of advances and duration
of deposits is one of the lowest in the sector and the gap has been consistently
coming down. Also our analysis suggests that YES has relatively lower
dependence on its top 20 depositors compared to most of its peers, thereby
mitigating the risk of sudden withdrawals.
Asset quality – not a major concern; conservatively
factoring in higher credit costs
YES Bank has a well-diversified loan book. The bank’s concentration risk is on
the lower end with top 20 borrowers constituting 14% of the loan book. The
equivalent number for private peers is between 14% and 21%. Its historical track
record of managing asset quality has been very impressive and even during the
global financial crisis, YES Bank managed to control its delinquencies. Despite
its loan book being largely corporate (where the bulk of restructuring has
happened over the past few years for various banks), YES Bank’s restructured
book is much lower than its peers. On the infrastructure side loans are
predominantly working capital loans, where the risk is much lower compared to
term/project loans. We believe the normalised credit losses are unlikely to be
greater than 40bps over the asset quality cycle and have conservatively factored
provisions going up by 15-20bps over the course of next two years.
Valuations now below historical averages
YES Bank now is trading at 1.5x FY13E P/BV after factoring in equity dilution of
15% (1.8x pre-dilution), which is one standard deviation below historical
average. The stock trades at a 20% discount to its private sector peers, which
we believe is unjustified. The stock tends to get re-rated when liquidity is
expected to improve and/or interest rate cycle has peaked out. Key risk to our
investment thesis would be extension of the current tightening phase by RBI.
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