30 January 2012

YES Bank: Strong performance:: :Kotak Securities

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YES Bank (YES)
Banks/Financial Institutions
Strong performance. Yes Bank delivered 31% yoy earnings growth driven by 32%
yoy growth in revenues and 10% yoy decline in provisions. Asset quality continues to
remain strong with negligible gross NPLs and flat outstanding restructured loans. We
like the bank for its growth and strong return metrics. We expect the bank to deliver
19% earnings CAGR for FY2012-14E and RoEs (pre-dilution) of about 20% but we
believe that the bank would need to raise capital for the next stage of growth. The
stock is attractive at 1.9X book and 10X FY2013E EPS. Maintain BUY
Opportune time to strengthen balance sheet; maintain BUY
Yes Bank continues to deliver a strong performance driven by (1) healthy balance sheet growth
(36% yoy), (2) strong revenue growth on the back of stable NIMs (at 2.8%) and consistent
performance from various non-interest income businesses, (3) stable cost structure (38%) and (4)
low gross NPLs (0.2%). While the bank has slowed balance sheet growth, it is fairly opportunistic
by lending through investments as against loans—growth in business assets (loans and
investments) was high at 34%. Strong growth in CASA (post saving rate deregulation) and
introduction of retail lending products are positive though immediate advantages are negligible.
Given the volatility in capital markets, we believe that the current price offers an attractive
opportunity for Yes Bank to raise capital to strengthen balance sheet and position the bank for the
next stage of growth. The bank has a strong tier-1 of 9.7% but strong balance sheet growth
expected in 4QFY12E and dividend payout (10-12%) are likely to consume a large share of capital.
Retain BUY and target price of `375 valuing the bank at 2.4X FY2013E book and 12X EPS. We
expect Yes Bank to outperform the broader market as interest rates soften from current levels.
NIM declines 10 bps qoq; cost pressures remain high, making it unattractive for growth
NIM for the quarter declined by 10 bps to 2.8% as funding costs continue to remain high. Cost of
funds remains high at 8.9% which implies a negative return on SLR deposits—making it difficult
for Yes Bank to grow balance sheet in the current environment. Overall loan yields remain high at
12.4%, one of the highest among peers for an asset portfolio primarily in the corporate segment.
We believe that a combination of decline in wholesale lending rates as well as an improvement in
the liability franchise should enable the bank to improve margins by about 20 bps in FY2013E.

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