Monday, July 12, 2010

Say Yes to Yes Bank

As Yes Bank looks to expand beyond its mainly wholesale focus (on both lending and funding) to a stronger retail presence by scaling up to 750 branches from the present 150 in the next five years, its strong management and their sound execution history has added conviction on the strong performance going ahead.

The bank has targeted a 35% CAGR growth in advances and marginally higher deposit growth in this period, increasing low-cost CASA deposits (current account and savings account) by 2-3% every year. This should propel its revenues and earnings to grow at a clip of 30% over the next couple of years in tandem with peers, say analysts, adding that although targets are difficult to achieve, management expertise holds the key to execution. Having raised capital last year, the bank is well capitalized to fuel this growth with Tier I ratio at 12.9%.

The bank has seen its balance-sheet grow over 70% CAGR in the last four years, albeit over a small base with both deposits and loans growing at nearly 74% CAGR in this period. Net interest income and net profit after tax grew well over 50% y-o-y in FY10 to Rs 509 crore and Rs 304 crore, respectively. It maintained net interest margins at a reasonable 3.1% in FY10, up 20 bps y-o-y. Its portfolio quality is among the best in business with gross NPA ratio coming down 41 bps to 0.27% and Net NPA at 0.06% and specific loan loss provisioning coverage stands at 78% of gross NPAs. Its return on assets was 1.6% and return on equity was 23.75 for FY10and the bank also announced its first dividend of Rs 1.50 per share.

YES Bank has positioned its business model on a unique platform, with focus on developing wholesale business by catering to mid-tier and large corporates. It has specialized in key sectors including food and agri, engineering, TMT (technology, media and telecom), infrastructure, logistics and healthcare that together make up about 78% of its entire lending portfolio. The bank provides a one-stop shop for all financial services from extending credit to transaction banking to investment banking services with advisory services on accessing capital from debt markets, private equity and IPO’s. This has helped boost fee income 22% y-o-y to Rs 471 crore (48% of total income) in FY10.

This positioning means it is closely geared to the economic cycle with income spurting in an upswing such as in the current environment even as slippages and therefore provisioning requirements come down. However, the bank’s stock trades at a discount to other private bank peers like HDFC Bank and Axis bank, because of its current dependence on wholesale funding.

This dependence makes it vulnerable to margin pressures from higher cost of funds in a tightening cycle and the stock has been under pressure given impending policy rate hikes and expected monetary tightening in the face of runaway inflation. However, the stock has resurfaced after the policy rate hike turned out to be a moderate 25 bps alongwith a continued assurance from the RBI to maintain a calibrated approach to monetary tightening. Analysts believe that there is enough leeway for the bank to pass on the increase in funding costs. As the bank moves to grow its retail liabilities franchise, this risk will come down and with it, the valuation discount to peers giving some headroom for appreciation from these levels according to analysts.

The stock at Rs 275.75 trades at P/B valuation of about 2.6x adjusted book value per share estimates for FY11.

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