Initiating Coverage Report                                       Ready for The Take–off                                   ...
ContentsInvestment & Valuation Brief                                                                2Company background   ...
YES Bank                      (Version 2.0 on course)                                                               Yes Ba...
Company Background                            Yes Bank limited (YBL), incorporated in 2003 by Rana Kapoor and Late Ashok K...
Key Management Personnel            Name                       Designation                                       Previous ...
YES Bank – Launch Pad – Version 2.0 (the take off )                                                                    At ...
Investment rationale                              Business Momentum to continue                              YBL’s loan bo...
Branch Expansion strategy – well fit to the overall business model                                   Yes Bank currently ha...
Break up advances (Q4’11)                              Break up of advances based on knowledge based sectors (Q4’11)      ...
Knowledge banking – a key differentiator                            YES banks competence in terms of using high-end techno...
CASA augmentation remains the key    B2B2C Strategy    Identifying current                                     YES bank’s ...
400    Strong Branch expansion                                                                           350       80     ...
Favorable asset liability mismatch gives support to NIMs                                   Lower CASA has been well compen...
Margin scenario – strong pricing power may support NIMs                         YES bank is mostly a wholesale funded bank...
Strong core operating income growth & diversified fee revenue                     YBL’s total income grew strong at a CAGR...
FY15                  Fee Income composition                                                 FY11 Share    Target         ...
Cost efficiency one of the best in the industry                   In comparison with its peer group, YES bank enjoys one o...
Assets/Employee (INR Mn)                                                            Cost/Assets (%)                       ...
Asset quality one of the strongest in the industry                                            Due to higher credit exposur...
Capital issuance critical for growth                                   YES bank has adopted a capital raising in every 1.5...
Strong RoE(Cal) despite regular capital raising. RoAs may come down under                                    pressure due ...
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
Yes Bank Icr(20th June2011)
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Yes Bank Icr(20th June2011)

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Initiating Coverage Report on YES bank

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Yes Bank Icr(20th June2011)

  1. 1. Initiating Coverage Report Ready for The Take–off Need for Capital Low CASA nk YES Ban - On-a On a restructuring mode restructuring mode g gMacro-economic Headwinds (Dark clouds) Above Industry Loan Book Growth- High persistent domestic inflation Diversified Fe Income Strong Asset Quality- Increasing Interest rates iency ee- Credit demand slowdown t Cost Effici- Asset Quality risk in high growth sectors - Global economic instability Theme for growth • Branch expansion • Capital Infusion • Restructuring the balance sheet profileAnalyst – Abhisek Sasmal033-3051-2175asasmal@microsec.in Microsec Research reports are also available on Bloomberg <MCLI> 20th June’2011 Microsec Research
  2. 2. ContentsInvestment & Valuation Brief 2Company background 3-4YES Bank – Launch Pad – Version 2.0 (the take off ) 5Investment rationales 6-20Peer Analysis 21On the footsteps of leaders (Comparative study of Yes Bank with Axis & HDFC bank) 22Stock Cues 23Sensitivity Analysis 24Valuation & Recommendation 25Financial Projections 26Ratios 27Key concern to our call 28Appendix – 1 (Typical YES bank branch) 29Appendix – 2 (Macro Picture – Light at the end of the tunnel!!) 30Note 31Analyst page 32Other Banking reports 33Disclaimer 34 1 20th June’2011 Microsec Research
  3. 3. YES Bank (Version 2.0 on course) Yes Bank has experienced unprecedented growth in the Indian banking sector since it BUY started operations in late 2004. This is a significant achievement for a bank which had Market Data started late when compared to other new age private sector banks. The bankCurrent Market Price (INR) 282 differentiated itself from other players in the industry through its unique knowledgeTarget Price (INR) (18 months) 358 banking approach, emphasis on technology, and human resources. The knowledge banking approach was its main pillar of differentiation and using this it providedUpside Potential (annualized) 18% specialized services to various sunrise industries through domain experts.52 Week High / Low (INR) 388/234Market Capitalization (In INR Mn) 103263 We re-initiate coverage on Yes Bank with a BUY rating. Our rating underpins the Non- bank’s strong business momentum, diversified revenue stream, strong assets Share Holding pattern% quality, positive asset liability mismatch, strong institutional holding, superior cost Institution s Promoter efficiency, unique technology proposition, high pedigree of Human Capital, thrust on 13% Group improving CASA driven by aggressive branch expansion plans and its superior and Foreign 27% Financial sustainable return ratios. However, heavy dependence on bulk deposits in a risingInstitution interest rate scenario slightly impedes our optimism. s / Banks 5% Mutual Funds At the CMP of INR 282 the bank is trading at 1.82x FY13E BV. The bank delivered RoE 5% of over 20% and RoA of 1.5% for FY11. We further expect the bank to deliver RoE of FII 45% Insurance 20%+ on the back of increased leverage, however we may see some pressure on RoA Cos due to moderation in earnings growth going forward on the back of rising loan loss 5% provisions and rising cost. STOCK SCAN We have valued Yes bank on scenario model with different weightage given to each 532648BSE Code scenario and arrived at a weighted average target price of INR358 which is 2.3x itsNSE Code YESBANK FY13E BV of INR 155.4. Our recommended target price is 27% above the current price. YES IN We expect this target price to be met with in 18 months from the date of release of thisBloomberg Ticker report.Reuters Ticker YESB.BOFace Value (INR) 10 Key Risks - 1) Further rise in wholesale deposit cost. 2) Deferment of capital raising 3471.5 plans due to depressed market condition. 3) Lower than expected improvement inEquity Share Capital (INR. Mn.) CASA. 3) Higher than anticipated rise in slippages due to more focus on the SMEAverage P/E/PBV (3 yrs) 15.9/2.76 segment. 4) TTM P/BV is still at 30% premium to the average valuation in last rate hike g ) / p gBeta vs Sensex 1.35 cycle. (refer page 28)Average Daily Volmes (6 M) 3181850 Particulars (INR Mn) FY09 FY10 FY11 FY12E FY13EDividend Yield (%) 0.84 9462.00 13634.85 18702.01 25514.30 33904.26 Total IncomeStock Return (1 Yr) 6.25% Growth% 36.89% 44.10% 37.16% 36.43% 32.88% 140.0 NII 5092.99 7879.53 12469.30 16861.89 22086.09 130.0 54.1% 54.71% 58.25% 35.23% 30.98% Growth% 120.0 120 0 Net Profit 3,038 4,777 7,271 9,561 12,087 110.0 100.0 Growth% 51.90% 57.24% 52.22% 31.48% 26.42% 90.0 10.23 14.06 20.95 26.91 33.55 EPS 80.0 70.0 P/E * 27.66 20.12 13.51 10.52 8.44 NIM% 2.70% 2.80% 2.80% 2.53% 2.61% ROE (Reported till FY11) 20.70% 20.3% 21.7% 20.93% 21.59% Yes Bank SENSEX NNPA% 0.33 0.06 0.03 0.09 0.06 BV 54.69 90.95 109.29 128.54 155.41 P/BV* 5.17 3.11 2.59 2.20 1.82 Analyst – Abhisek Sasmal Adj.BV 53.99 90.25 108.59 127.84 154.71 91-033-3051-2175 asasmal@microsec.in P/Adj. BV * 5.24 3.14 2.61 2.21 1.83 * All prices as on 17th June’11 Source: Company, Microsec Research 20th June’2011 Microsec Research
  4. 4. Company Background Yes Bank limited (YBL), incorporated in 2003 by Rana Kapoor and Late Ashok Kapur, is a new age private sector bank. It is the only bank that has been awarded a greenfield license by the Reserve Bank of India (RBI) in the last 16 years. YBL offers a full range of products and services in areas of corporate and institutional banking, financial markets, investment banking, corporate finance, business and transaction banking, retail and wealth management across India. The bank is part of global thought leadership forums like the Clinton Global Initiative (CGI), Triple Bottom Line Investing (TBLI) and Tallberg Forum. Recently, it became the first Indian Bank to become a signatory with the United Nations Environment Programme (Financial Initiative). Yes Bank has partnered with various companies for delivering quality products and services namely Cash Tech, Cisco Systems, Gartner, Intel, i-flex, Reuters, VSNL, Wipro, De La Rue, Murex, Wincor Nixdorf and Sanovi. This new age private bank has global institutional investors like Rabobank, Franklin Templeton, AIF Capital and Fidelity, amongst others Received RBI license for commercial banking Maiden public offering of equity Shares issued at premium of Rs Launch of financial market business shares by the bank 259.5 to QIBsIncorporation NOV’03 MAY’04 AUG’04 SEP’04 OCT’04 JUNE’05 AUG’07 JAN’10 Launch of Corporate and Business Launch of Launch of Yes International Banking banking Transaction Banking business Source: Company website 3 20th June’2011 Microsec Research
  5. 5. Key Management Personnel Name Designation Previous Assignment Managing Partner / CEO & Managing Director - Rabo India, Bank of Rana Kapoor Founder/ Managing Director & CEO America (16 years) Rajat Monga Group President – Financial Markets & CFO Head of Treasury - Rabo India Executive Director and Country Head - Avigo Capital Partners/ Bank of Varun Tuli Group President – Branch Banking America Sumit Gupta President – Commercial Banking Associate Director & Head (North) - Rabo India President & Global Head – International Banking Arun Agrawal General Manager – ICRA General Surendra Jalan President – Indian Financial Institutions AGM AGM, Corporate Banking - ICICI Bank Group President– Corporate Finance and Somak Ghosh Director – Project Advisory & Infrastructure Mgmt - Rabo India Development Banking Group President –Transaction Banking Group, p g p, Global Transaction Services Head - Caribbean, Central & Latin America, , , Suresh Sethi S h S hi International Banking, Liabilities Product Mgt. Citibank President & Sr. Managing Director – Investment Aditya Sanghi Executive Director, Head of Mergers & Acquisitions - Rabo India Banking Group President and Chief Risk Officer Executive Kavita Venugopal Investment Banking, Kotak Mahindra Capital Company Director Alok Rastogi President & Chief Operating Officer Citibank N.A. Equity History Total amount raised Equity Capital Equity Dilution Particulars Issues (INR Mn) (INR Mn) (%) 5-Jul-05 IPO at INR 45 per share 3150 2700 35% Private placement of 10 Mn shares at INR 120 22-Dec-06 1200 2800 4% to Swiss Reinsurance Private placement of 14.7 Mn shares at INR 225 7-Dec-07 3308 2947 5% to Gl b l T Global Tamarind F d P Ltd i d Fund Pte L d 27-Jan-10 Issuance of 38.36mn shares to QIBs at INR269.5 1033.8 3386.3 13% Strong Institutional holding Name % of Shares as on Mar11 American Funds Insurance Series Growth Fund 4.92 HSBC Bank Mauritius Ltd A/c HSBC IRIS Investments Mauritius Ltd 4.84 RaboBank International Holding BV 4.81 Titiwangsa Investments Mauritius Ltd 4.23 SmallCap World Fund Inc 3.82 Morgan Stanley Mauritius Company Ltd 2.27 Life I Lif Insurance Corporaiton of India C i f I di 1.92 1 92 JP Morgan Funds 1.61 Deutsche Securities Mauritius Ltd 1.35 Franklin India Prima Fund 1.03 4 Source: ACE Equity, Company website20th June’2011 Microsec Research
  6. 6. YES Bank – Launch Pad – Version 2.0 (the take off ) At the end of Mar15 At the end of Mar11 Implied CAGR% (Target) Advances (INR Bn) 343.64 1000.00 30.60% Deposits (INR Bn) 459.39 1250.00 28.42% Balance sheet Size (INR Bn) 590.07 1500.00 26.24% Branches 214 750 36.77% Employees 3990 12000 33.40% NIM% 2.8% 2 8% 4.0% 4 0% RoE% (reported) 21.70% 22-24% RoA% 1.52% 1.6-1.75% Relationship / Product Matrix – to support growth 5 Source: Company website20th June’2011 Microsec Research
  7. 7. Investment rationale Business Momentum to continue YBL’s loan book has grown at a CAGR of 52.9% over the last 5 years, which is well above the average industry growth rate during the same time period. Higher than industry growth led to a consistent improvement in market share for the bank. Market share stood at ~0.92% in FY11 as compared to 0.33% in FY07. Going h d FY07 G i ahead we expect the b k to continue growing at a pace hi h than that of the i d h bank i i higher h h f h industry and d have factored in a CAGR of 28% for FY11-13. The growth will be well supported by aggressive branch expansions, more penetration in the larger corporate segment & retail segment of the loan book. YES bank’s loan book growth aspiration (Version 2.0) is mainly driven by 1) increasing market share and 2) putting revenue growth ahead of increasing cost. However in the long run, this approach from YBL may change due to the need of faster improvements in some key metrics where its lags its larger peers.800.00 Strong business growth 749.03 400.0%700.00 350.0%600.00 562.88 300.0%500.00 459.39 250.0%400.00 343.64 200.0%300.00300 00 150.0% 150 0%200.00 100.0%100.00 50.0% 0.00 0.0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Deposits (INR B ) D i Bn) Advances (INR Bn) Ad B ) YoY D G Y Y Dep. Growth% h% YoY Ad G Y Y Adv. Growth% h% 250 Above industry loan growth from Inception Seasonal weakness in loan growth started to get visible 400 35.0% 216 350 30.0% 200 300 25.0% 161 20.0% 20 0% 150 250 15.0% 200 10.0% 100 150 5.0% 79 100 0.0% 60 50 50 50 -5.0% 32 30 26 0 -10.0% 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Industry Loan growth% YES Banks Loan Growth% Loan Book (INR Bn) gr% (RHS) Source: Company, Microsec Research 6 20th June’2011 Microsec Research
  8. 8. Branch Expansion strategy – well fit to the overall business model Yes Bank currently has a branch count of 214 across 164 cities. It has 91 branch licenses and plans to expand its reach to 250 branches by Q1’FY12 and to 325 branches by Q4’12. With initial focus in liability rich regions of North and West India (75% of branches), the bank now plans for a pan-India presence. The new roll-outs are targeted at improving the SME and retail franchise. The bank plans to roll out 150 branches in South with in two years time. The metro centers are likely to have over 30 branches each in the next few years. YES bank has separate team looking after the inclusive or social banking model (a combination of bricks & Mortar and technology-enabled branches) in Tier-3 to Tier-6 segments of agri-rich Maharashtra, Gujarat, Rajasthan, Haryana, UP & MP. “Low cost – Rapid launch” branches are mapped out for Tier-3 to Tier-6 cities. The branch addition and thrust on retail deposits will help shore up CASA franchise. YES bank uses “Hub and Spoke” model for faster maturity and greater efficiency of branches. This approach has in-turn reduced IT and infrastructure spends. Also, with timely break-even in key branches, cost-to-income for the bank has declined substantially from 53% in FY07 to 36% in FY11. Branch Concentration Pan India Branch expansion. Priority anti-clo wise East 10% ockSouth 15% North 50% West 25% Source: Company, Microsec Research % Share of Loan Advances Segmentation Clients Typical Exposure Book Comments Corporate & Institutional Very low credit cost, strong asset Above INR 20Bn INR 500 -2000 Mn 65.6% banking quality Commercial Banking > 2Bn & <= 20Bn INR 100-500 Mn 22.5% Medium risk segment Branch Banking <= 2 Bn INR 20-100 Mn 11.9% High yield & High risk segment Source: Company, Microsec Research 7 20th June’2011 Microsec Research
  9. 9. Break up advances (Q4’11) Break up of advances based on knowledge based sectors (Q4’11) Branch Others Banking, 11.90 18% Infra & Logistics % 23% Commercial banking, 22.50 % Food & Agri businesses Corporate & Institutional 18% Engineering Banking, 65.60 22% % TMT 14% Healthcare 5% Source: Company, Microsec Research Q409 Q410 Q411 8% 5% 12% 26% 29% 22% 63% 66% 69% Corporate & Institutional Banking Commercial banking Branch Banking35% Focus on knowledge banking30% 25%25% 22% 22.70% 22 70% 20.70% 21.70%20% 18% 18.10% 17% 19.10% 16.90% 16% 15%15%10%5%0% Q408 Q409 Q410 Q411 Infra & Logistics Engineering Healthcare TMT Food & Agri businesses Others 8 Source: Company, Microsec Research 20th June’2011 Microsec Research
  10. 10. Knowledge banking – a key differentiator YES banks competence in terms of using high-end technology, its knowledge banking approach, and emphasis on highly qualified human resources helped it to differentiate itself from other private banks in an increasingly commoditized market. In particular, its knowledge banking initiative drew a lot of interest. In the initial phase, the bank planned to target those sectors where the bank has a deep understanding of the industry. The bank has a team of investment banking professionals that h f i l h have h d hands-on expertise i advisory, capital raising and M&A b i i in d i i l ii d businesses. Th There are sector specialists that understand a particular sector and know the business intricacies to structure superior solutions from a banking perspective. Skilled p p people Superior technology Knowledge bankingUnique Technology Proposition High pedigree Human Capital Edu Background (FY10) Work exp (Yrs) (FY10) 11-15 16-20 > 21 CA/C 0% 4% 1% S LLB 6% 1% 0-1 16% 6-10 20% MBAs Gradu G d 36% ates 50% 2-5 59% PG 7% Source: Company, Microsec Research 9 20th June’2011 Microsec Research
  11. 11. CASA augmentation remains the key B2B2C Strategy Identifying current YES bank’s deposit base grew 5.6x within 5 year’s time, registering a CAGR of 53.75% over FY07- account rich FY11 mainly due to base effect. However, the bank has historically relied more on wholesale corporate customers deposits to ramp up loan growth. In addition, relatively lower branches (most of the branches being new) impacted the CASA mobilization of the bank. Yes Banks proportion of low cost deposits (CASA) is amongst the lowest in the Industry. However, in absolute numbers CASA has grown at 78% CAGR d i FY07 FY11 Y B k i l ki to d i value f during FY07‐FY11. Yes Bank is looking derive l from planned b l d branch expansion h i Offering them salary and increase penetration to improve its CASA ratio. Management wants to increase the CASA share a/c and various other to 30% by FY15. However, we expect a gradual improvement in the YBL’s CASA ratio from current wealth management products 10.3% to 12.5% till FY 2013. FY13 onwards, CASA mobilization may gain higher momentum as almost 60% of the branches likely to cross breakeven productivity by then. The CASA share may throw some positive surprises if the overall balance sheet growth lags the CASA growth. We expect CASA deposits to grow at a CAGR of 48.6% over FY10‐FY13. Of the incremental accretion toOffering them superior cash deposits, we expect the CASA contribution at 15.8% between Mar’11 to Mar’13. management & liquidity management solution including a SB a/c 80% Above industry deposit growth 70%Tied up with the corporates 60% to tap a rich source of 50% references 40% 30% 27% 28% 20% 19% 18% 10%With larger share of Current 0%account in YBL’s overallCASA, economically the value FY08 FY09 FY10 FY11 FY12E FY13Eof this 10% CASA is comparableto any bank which has 15-16% a y ba c as 5 6% Industry Deposit g y p growth% YES Banks Dep. Growth% pCASA with more share from Source: Company, Microsec ResearchSA. Thus any event related tosavings bank rate de-regulationwill be structurally positive forthis bank. 45% 39.50% Dependence on wholesale deposits – may put NIMs under pressure in an 40% increasing rate scenario 35% 30% 25% 20% 15% 13.20% 12.10% 10.90% 10.30% 10% 7.50% 6.40% 5% 0% FD - C Corp FD - b branch h FD - FD- G Govt CDs C Institutioanl i i l CASA banking banking Commercial Deposits banking Q409 Q410 Q411 10 Source: Company, Microsec Research 20th June’2011 Microsec Research
  12. 12. 400 Strong Branch expansion 350 80 350 70 275 300 60 250 50 214 200 40 150 150 117 30 100 67 20YES bank’s newer branches are 40 50 17 10reaching the critical inflexionpoint where they can attract 0 0more customers due to their FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13Ereach & faster productivity productivity.More and more newer branches No of branches Expansion (RHS)are coming up in Tier-2 & Tier-3 cities. These branches will Source: Company, Microsec Researchreach break even faster thantheir Urban peers due to lower 300.0 14.00% CASA mobilization per branch on the risecost and less competition. Allthese will led to faster CASA 250.0 12.00%mobilization in branch levelwith faster improvement for 10.00% 10 00%CASA/branch. 200.0 8.00% 150.0 6.00% 100.0 4.00% 50.0 2.00% 0.0 0.00% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E CASA per branch (in Mn) CASA% Source: Company, Microsec Research FY07 FY08 FY09 FY10 FY11 FY12E FY13E CAGR% CA 4158.9 9821.3 12197.5 24271.6 39338.3 53750.5 74379.0 61.72 SA 579.8 1465.3 1920.6 3909.9 8170.4 12375.0 19250.0 79.30 Term Deposits 77465.3 121445.0 147576.1 239804.1 411880.7 519055.7 655402.9 42.74 Source: Company, Microsec Research 11 20th June’2011 Microsec Research
  13. 13. Favorable asset liability mismatch gives support to NIMs Lower CASA has been well compensated by a positive asset liability mismatch in longer term assets. Only 10% of the assets have fixed rate, which means it can raise lending rates quickly when faced with a liquidity squeeze. Longer term assets are mostly financed by borrowings (~76%) mainly term loans. The bank has ample liquidity in the form of short term deposits to finance its shorter term assets (< 1 y) yr). The average tenure of deposit base is about 21 months and loans about 18 months which means g p faster maturity of asset than liabilities. Longer term advances funded by borrowings FY10 FY10 80.0% 75.80% 90% 78.50% 70.0% 80% 70% 60.0% 60% 50.0% 50% 40.0% 40% 30.0% 30% 21.50% 21 50% 20.0% 13.70% 20% 13.70% 8.90% 10% 10.0% 0% 0.0% Advances maturing Infra Exposure Term Loans 3YR+ Dep. as % of 3YR 3YR+ Borr. as % of 3YR+ Adv. as a %of 3Yrs and above + adv 3YR+ adv total adv Positive ALM mismatch100% 0.60% 0.40% 5.80% 100%90% 7.90% 16.60% 90%80% 80%70% 33.50% 26% 70%60% 60% 90% 89.50%50% 50% 18.30% 17.30%40% 40%30% 7.70% 30%20% 38.10% 20% 27.80%10% 10% 10% 10.50% 0% 0% Advances Deposits Assets Liabilities < 3 mnths 3-6 mnths 6-12 mnths 1-3 yrs 3-5 yrs > 5 yrs Fixed Floating Source: Company, Microsec Research 12 20th June’2011 Microsec Research
  14. 14. Margin scenario – strong pricing power may support NIMs YES bank is mostly a wholesale funded bank (refer page 10). Due to the recent hike in retail deposit rates and with wholesale deposit rates at about 10.02% currently, the bank’s cost of funds has increased. The incremental cost of funds is 50-100bps higher currently, compared with the overall cost of funds in December 2010. However, we believe this cost increase is likely to be mitigated (to an extent) by a 200 bps increase in the prime lending rate (PLR) and a 50 bps rise in the base rate (Yes Bank increased its PLR by 50 bps in August 2010 September 2010 December 2010 and May 2010 The PLR is 18 5% and 2010, 2010, 2010. 18.5% the base rate at 9.5% currently). The impact of increasing SB rate by 50 bps will be limited to only 1 bps increase in cost of funds, however the increase in base rate and PLR will enable the bank to partially absorb the increased cost on account of rising interest rates. However, further interest rate hike by RBI will put pressure on its NIMs with a lag as more and more deposits will re-priced later. Short-term interest rate on the rise – making wholesale deposit costly16 1814 1612 1410 12 108 86 64 42 20 0 CP 3month CP 6month CP 12 month CD 3month CD 6month CD 12month Rise in cost of funds pressurizing NIMs 15.00% 14.00% 13.63% 13.00% 12.00% 11.84% 11.27% 10.57% 11.30% 11.00% 10.24% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 2.80% 2.80% 3.00% 2.60% 2.70% 2.53% 2.61% 2.00% 1.00% FY08 FY09 FY10 FY11 FY12E FY13E % yield on advances % yield on investments Cost of deposits% Borrowing cost% NIM% 13 Source: Company, Microsec Research 20th June’2011 Microsec Research
  15. 15. Strong core operating income growth & diversified fee revenue YBL’s total income grew strong at a CAGR of 58.8% over FY06-FY11. This is well supported by 69.88% CAGR growth in Net Interest Income (NII) & 45.1% CAGR growth in Other Income over the same period. The dependence on other income (OI/TI) has come down from over 50% in FY05 to 33.3% in FY11. Fee income constitute almost 95% of the other income. Fee income is mainly driven by transaction banking & financial advisory (investment banking and project advisory). We may see some growth moderation i fi h d i in financial market ( i l treasury i i l k (mainly income) i coming quarters d to ) in i due subdued market and rising bond yields. With increasing branch expansion, increasing focus on retail assets and stabilization of new branches, we may see contribution of branch banking in fee income to increase. Overall, we expect the core income for YES bank to outpace the other income during FY10- FY13. We are expecting Total income, NII & Other income to register a CAGR of 35.5%, 41.1% and 27.1% respectively over FY10-FY13. In Mn 40000.0 Core operating Income outpacing non-core income 500.0% 35000.0 450.0% 400.0% 30000.0 350.0% 25000.0 300.0% 20000.0 250.0% 15000.0 1 000 0 200.0% 200 0% 150.0% 10000.0 100.0% 5000.0 50.0% 0.0 0.0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E NII Other Income Total Income NII Gr% Other Income Gr% Total Income Gr% In Mn 900.0 Break up of Fee Income 800.0 700.0 600.0 600 0 500.0 400.0 300.0 200.0 100.0 0.0 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Transaction Banking Financial Markets Financial Advisory Branch Banking fees and others 14 Source: Company, Microsec Research20th June’2011 Microsec Research
  16. 16. FY15 Fee Income composition FY11 Share Target Drivers Financial Advisory 45.3% 30% Primarily IB and debt syndication. Will moderate, going forward Financials markets 14.5% 30% Fx/derivatives/rates. Driven by strong corporate relationships. A key driver of growth, going forward, given the branch scale Transaction banking 31.4% 30% building up Insurance and MF – growth because of low base and expanding Branch banking 8.8% 10% reach, despite challenging environment Unique cross selling opportunities give multiple & diversified revenue streams Knowledge Sectors Clients segment Credit products Financial Markets Transaction Banking Advisory Services Food & Agri Agro Chemicals √ √ √ √ Life Sciences Drugs √ √ √ √ Engineering Electric comp. √ √ √ TMT IT/Telecom √ √ √ √ Infrastructure Wind Energy √ √ √ √ Source: Company, Microsec Research % Share of Fee income to Total Income (FY11) 50.00% 44.13% 45.00% 40.00% 35.00% 33.90% 31.38% 30.00% 24.02% 25.00% 20.00% YES Bank Axis Bank HDFC Bank ICICI Bank Source: Company, Microsec Research 1520th June’2011 Microsec Research
  17. 17. Cost efficiency one of the best in the industry In comparison with its peer group, YES bank enjoys one of the leanest cost structure which is on account of better business productivity per employee, unique technology proposition. Over the past five years, bank has successfully reduced its cost ratio from 52.88% to 36.35% in FY11. Going forward, we expect this ratio to stabilize at 38‐40% levels with its aggressive hiring and branch expansion plans. Yes bank has also improved its cost/assets by 86 bps over FY08-11, mainly due to p p p y p y better utilization of its infrastructure. These offset its low CASA and somewhat laggard NIM. Productivity ratios of the bank remain as one of the best, regardless of having large number of branch and employee additions every year. Most of the banks branches are comparatively new and yet to pick up in terms of productivity. Management indicates that increase in productivity (newer branches to matured branches) will limit the upside in cost in coming years. Cost to Income ratio 55.0% 45.0% 39.75% 38.00% 35.0% 36.35% 25.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Staff cost rationalization helped overall cost efficiency 100% 90% 80% 52.09% 51.36% 53.30% 70% 58.20% 60.71% 59.33% 60% 50% 40% 18.24% 18.38% 13.30% 19.80% 13.95% 14.79% 30% 20% 10% 19.87% 18.23% 19.76% 22.12% 22.05% 18.74% 0% FY06 FY07 FY08 FY09 FY10 FY11 Other exp% Depreciation cost% Ad sales& Promotional expenses% Administative expenses % Staff cost% Source: Company, Microsec Research 1620th June’2011 Microsec Research
  18. 18. Assets/Employee (INR Mn) Cost/Assets (%) 2.50%200180 2.00%160140120 1.50%100 80 1.00% 60 40 0.50% 20 0 0.00% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Employee productivity on the rise18.0 2.5 70 9016.0 80 60 2.0 7014.0 50 6012.0 50 1.5 4010.0 40 8.0 30 30 1.0 6.0 20 20 10 4.0 0.5 0 2.0 10 -10 0.0 00 0.0 00 0 -20 20 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Business per Employee Profit per Employee(RHS) Employee/Branch Incr Empl/Bran (RHS) Cost/Assets% (FY11) Cost/Income% (FY11) 50.00% 47.90% 3.00% 45.00% 45 00% 42.70% 42.24% 42 24% 2.40% 2 40% 2.50% 40.00% 36.35% 1.96% 2.00% 1.63% 35.00% 1.50% 30.00% 1.15% 25.00% 1.00% 20.00% 0.50% 15.00% 0.00% 10.00% YES bank Axis Bank ICICI Bank HDFC Bank YES bank Axis Bank ICICI Bank HDFC Bank Source: Company, Microsec Research 17 20th June’2011 Microsec Research
  19. 19. Asset quality one of the strongest in the industry Due to higher credit exposure to the corporate segment, YES bank enjoys one of the best asset quality in the industry. During FY05‐07, YBL hasn’t reported any slippages, however in FY08, it reported its first GNPAs of 0.1% and currently it stood at 0.21%. Restructured assets as a % of gross advances improves from 0.36% in Q4’10 to 0.24% in Q4’11. Exposure to troublesome MFI sector stood at INR 4500 Mn which is less than 1.5% of the total loan book. Also, YBL does not have any exposure to the new 2G players. F h we d ’ see any i h l Further, don’t impact of RBI’ recently revised norms f RBI’s l i d for provisioning. However, higher provisioning for restructured assets may dent FY12 expected PBT by 0.08% to 0.11% (Microsec Internal calculation). However with increasing focus on SME & retail segment we may see a spurt in slippages going forward. Secondly, it will be hard for the bank to improve upon its GNPA % NNPA% further in this increasing rate scenario. Nevertheless it is noteworthy to mention, that even after factoring in an increase in NPAs it still remains low as compared to its peer group. YBL’s provision coverage ratio stood at health 88 6% as on March’11 healthy 88.6% March 11.0.9 Credit Cost% 2500 Strong asset quality 80%0.8 70%0.7 2000 60%0.6 1500 50%0.5 40%0.4 1000 30%0.30.2 20% 5000.1 10% 0 0 0% FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E GNPA (Rs m) NNPA (Rs m) GNPA Ratio (RHS) NNPA Ratio (RHS) Provision Coverage Ratio Restructured assets 100.0 1700 1.2 90.0 1500 1 80.0 70.0 1300 0.8 60.0 50.0 1100 0.6 40.0 900 0.4 30.0 20.0 700 0.2 10.0 10 0 0.0 500 0 FY09 FY10 FY11 FY12E FY13E Q210 Q310 Q410 Q111 Q211 Q311 Q411 Total Restructured Assets (INR Mn) % Gross Advances (RHS) 18 Source: Company, Microsec Research 20th June’2011 Microsec Research
  20. 20. Capital issuance critical for growth YES bank has adopted a capital raising in every 1.5-2 years of operation from FY08. Currently YES bank is adequately capitalized with Capital Adequacy Ratio (CAR) stood at 16.7% at the end of March’11. Bank has raised capital of INR 3386 Mn by issuing shares to QIBs at INR 269.5 per share in Jan’10 diluting 13% stake. Further management is expected to raise funds to the tune of USD500 Mn (INR 22500 Mn) through an American Depository receipt by the end of FY12. However due to the subdued ) g p y p y domestic & overseas capital market, the bank may defer its plan till H1’FY13. This gives the bank enough issuance window to raise capital at a reasonable price. However, We have not factored in the capital raising plan by the bank in our estimates for FY12 & FY13. Capital raising once in every two years from FY08 In Mn Adequate capital for sustainable growth40000 2535000 203000025000 152000015000 1010000 5 5000 0 0 FY06 FY07 FY08 FY09 FY10 FY11 FY09 FY10 FY11 FY12E FY13E Networth Capital Raised CAR (%) Tier 1 (%) Source: Company, Microsec Research 19 20th June’2011 Microsec Research
  21. 21. Strong RoE(Cal) despite regular capital raising. RoAs may come down under pressure due to increase in cost/assets & Loan loss provisions (LLPs) 25.00% 1.70% 20.00% 1.60% 15.00% 1.50% 10.00% 1.40% 5.00% 0.00% 1.30% FY09 FY10 FY11 FY12E FY13E RoE% RoA% (RHS) RoA Decomposition FY09 FY10 FY11 FY12E FY13E Yield on Assets 10.04% 7.99% 8.47% 8.97% 9.00% Less: Cost of Assets 7.48% 5.34% 5.86% 6.43% 6.39% Net Interest Income 2.55% 2.66% 2.61% 2.53% 2.61% Other Income 2.19% 1.94% 1.31% 1.30% 1.39% Less: Operating Exp 2.10% 2 10% 1.69% 1 69% 1.43% 1 43% 1.46% 1 46% 1.59% 1 59% Less: Provisions 0.31% 0.46% 0.21% 0.20% 0.25% Less: Tax 0.81% 0.84% 0.77% 0.74% 0.73% RoA 1.52% 1.61% 1.52% 1.44% 1.43% Source: Company, Microsec Research 2020th June’2011 Microsec Research

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