Yes Bank: Buy :: Business Line

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The banking sector is facing another year of slowdown with overall credit growth slipping to a five-year low of 9.7 per cent in September. In these challenging times, banks showing resilience — by delivering strong loan growth, sporting healthy return ratios, and keeping bad loans under check — provide a good buying opportunity. YES Bank has been one such steady performer, with earnings growth of 18 per cent in the first half of this fiscal, backed by strong growth in loan book and improved margins. The bank recently shored up its capital, raising $500 million through a qualified institutional placement (QIP). As economic growth revives, YES Bank should benefit from a strong capital base to fund its next leg of growth.

Impressive performance

At the current price of ₹676, the stock is trading at two times its one-year forward book value, much lower than its five-year historical average of 2.5 times. With expected earnings growth of 22-24 per cent over the next two years, the stock offers a good buying opportunity for investors with a two- to three-year horizon.

YES Bank loan growth of 18 per cent in 2013-14 beat the overall sector credit growth of 14 per cent. Even in the recent September quarter, the bank’s loan growth was a strong 30 per cent, in contrast to the overall sluggish credit growth in the banking system.

Corporate banking accounts for 71 per cent of YES Bank’s loan portfolio, while retail and MSME (micro and small enterprises) put together constitute 17 per cent of the loan book. The bank expects to scale up its business from the retail and MSME segments to about a third of its total portfolio over the next two-three years.

YES Bank has also reduced its exposure to corporate bonds in recent quarters and has, instead, upped its lending business. During 2012-13, given the growing risks in the economy, the bank started deploying funds towards corporate bonds. Now, with the bank more confident about the business environment, it is reducing its exposure to bonds and using funds to lend more.

This change in mix has led to higher loan growth and better margins. The net interest margin for the bank increased from 2.9 per cent last year to 3.2 per cent in the September quarter. The other factor aiding margins was the improving low-cost current account savings account (CASA) ratio. Following the deregulation of interest on savings account from October 2011, YES Bank was the first to offer differentiated rates, and increased its share in savings accounts significantly. The CASA ratio has grown to 22.5 per cent from 20.4 per cent a year back. Over the last two years, the CASA ratio has gone up by about 5 percentage points.

The bank’s focus on low-cost deposits continues. In the long run, lowering the differentiated rate on savings accounts can help margins.

YES Bank’s recent equity raising has taken its capital adequacy (Tier I) up to 12.2 per cent — positioning it well to drive loan growth of 19-20 per cent over the next two years. The bank also plans to raise about ₹8,000 crore through issue of infrastructure bonds as well as Tier I and Tier II bonds. In July, the Reserve Bank of India (RBI) allowed banks to raise funds specifically for lending to the infrastructure sector and affordable housing segment without regulatory requirements, such as cash reserve ratio, statutory liquidity requirement and priority sector lending targets.

Well diversified

By issuing these bonds, YES Bank should be able to lower its cost of funds and lend to long-term projects.

YES Bank has maintained good asset quality, thanks to its well-diversified exposures in various sectors — with the maximum exposure to any single industry capped at about 5 per cent. The bank’s exposure to stressed sectors such as power, infra and metals is low.

Its gross non-performing assets (GNPA) stood at a low 0.36 per cent of loans in the September quarter. The restructured loans are also low, at 0.19 per cent of all loans, down from 0.26 per cent last year. The bank’s healthy provisioning cover, at about 76 per cent, lends comfort.