Yes Bank (YES IN, INR 375, Buy)
We interacted with Yes Bank management recently. Key insights are: (1) increased benefits on margins due to easing wholesale borrowing costs, more so as PSU banks have been inactive in this market (NIMs to expand in Q3FY12); (2) the bank is refraining from locking one year money as it forecasts 3M CDs to inch towards ~8%; (3) rates on SA will continue at 7%(above 0.1mn) (where 70% of incremental SA money is flowing) unless one year rates drop materially; (4) optimistic on SA growing an absolute 1% of deposits/quarter; and (5) on stressed accounts, other than Deccan Chronicle, Yes Bank is not much concerned. On the investment side, it holds INR90bn corporate bonds with average duration/rating of three years/AA. With dual benefit of declining rates and contracting spreads likely to play out over the next 12 months, ~INR2.5bn worth gains (assuming 100bps yield benefit) can flow by churning the book. We remain confident of the bank’s march towards Version II target and easing interest rates giving fillip to its margin and profit. Maintain ‘BUY’ with target price of INR460, valuing at 2.5x one year rolling forward ABV.
Interest rates on downhill: NIM expansion and bond gains
Wholesale deposits make up two thirds of Yes Bank’s total deposits. With rates on three months CD down ~70bps since June to 8.4%, it is reaping decent benefits. Further, to capture the dip in rates, the bank is selectively managing the ALM. NIM improvement is likely to reflect in Q3FY12. Second, over the past year it has steadily built on the corporate bond portfolio (~18% of customer assets). With spreads and absolute yields reducing as well, churning of the portfolio can lead to healthy gains.
Stressed assets not a concern
On the ~INR1.4bn exposure to Deccan Chronicle, it has 70-75% collateral. Though the account is performing currently, Q2FY13 may see some prudential provisioning.
Outlook and valuations: Steady profitability; maintain ‘BUY’
We expect Yes Bank to grow well above the system, albeit at a slower pace, with a well entrenched fee income platform, healthy CASA accretion and lower credit costs, delivering superior earnings (~27% CAGR over FY12-14E) and attractive RoA/RoE of 1.6%/24.2% by FY14E. It is trading at 2.1x 1Yr rolling forward ABV. Maintain ‘BUY’.
Regards,
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