YES Bank Reports Strong Q4 Results With Rising Profits and Improving Asset Quality
1. India Equity Research | Banking and Financial Services Result Update
YES BANK •
Business growth rebounds; margins stable
YES Bank reported NII of INR 3.48 bn (up 43% Y-o-Y, 8% Q-o-Q) in Q4FY11, ahead April 20, 2011
of our estimate (INR 3.3 bn), aided by stable margins (2.8%) against expectation of
10bps decline and strong earning asset growth (up ~15% Q-o-Q). Barring financial Reuters: YESB.BO Bloomberg: YES IN
markets, all segments of other income witnessed strong traction, supporting a 17%
Y-o-Y and 16% Q-o-Q growth. Headline asset quality numbers continue to improve EDELWEISS 4D RATINGS
with gross NPA ratio at 0.23% and net NPA ratio of 0.03%; on account of higher NPL Absolute Rating BUY
provisioning, provision coverage improved sequentially by 12.5 percentage points to Performer
Rating Relative to Sector
88.64%. PAT came in at INR 2.03 bn (up 45.2% Y-o-Y, 6.4% Q-o-Q), in line with our
Risk Rating Relative to Sector Medium
estimate.
Sector Relative to Market Equalweight
Note:
Business growth rebounds Please refer last page of the report for rating explanation
Business momentum picked up during the quarter with deposit growth (16.4%
Q-o-Q, 71.4% Y-o-Y) outpacing advances growth (10.4% Q-o-Q, 54.8% Y-o-Y)
MARKET DATA
resulting in 4 percentage points contraction in CD ratio to 75%. Earning assets
CMP : INR 331
grew ~15% Q-o-Q. CASA deposits tracked overall deposits growth, resulting in
52-week range (INR) : 388 / 234
stable CASA ratio (10.3%). Management expects momentum in CASA accretion
Share in issue (mn) : 347.1
to continue. Broad-basing of credit to commercial banking and retail, which M cap (INR bn/USD mn) : 115 /2,593
began in Q2FY11, continued through H2FY11 in line with the bank’s VERSION 2 Avg. Daily Vol. BSE/NSE (‘000): 2,910.4
strategy, reducing the share of corporate book. YES Bank continued to reduce its
SHARE HOLDING PATTERN (%)
exposure to TMT (down 25% Q-o-Q). Management guided for 35% loan book
Promoters* : 26.6
growth over FY12.
MFs, FIs & Banks : 14.7
Margins stable: a key positive FIIs : 45.5
Against street expectation of margin compression given the wholesale funded Others : 13.2
liability of the business, the bank’s margins remained stable during the quarter * Promoters pledged shares
: 1.0
(% of share in issue)
(at 2.8%), drawing upon asset/liability re-pricing benefit. Both yield on advances
and cost of funds jumped 70bps sequentially to 10.7% and 7.8%, respectively, PRICE PERFORMANCE (%)
resulting in stable spreads. Management expects spreads to improve going Stock Nifty EW BFSI Index
forward with steepening of the yield curve. From a high of 3.2%, NIMs have
1 month 17.2 6.6 8.2
come off to 2.8%, bottoming ahead of peers.
3 months 24.4 0.1 6.4
Outlook and valuations: Balanced growth; maintain ‘BUY’ 12 months 29.5 8.9 24.0
We expect YES Bank to grow well above the system, albeit at a slower pace,
delivering superior earnings (at ~33% CAGR over FY11-13E) and attractive RoEs
of 23% by FY12E. A well entrenched fee income platform coupled with lower
credit cost will deliver high RoAs of 1.5%. Also, management has demonstrated
its strong execution capability by successfully managing the bank during the
cyclical downturn. The stock is currently trading at 2.5x FY12E adjusted book
and 11.7x FY12E earnings. We maintain ‘BUY/Sector Performer’
recommendation/rating on the stock. Nilesh Parikh
+91 22 4063 5470
nilesh.parikh@edelcap.com
Financials
Year to March Q4FY11 Q4FY10 Growth % Q3FY11 Growth % FY11 FY12E Kunal Shah
Net int. inc. (INR mn) 3,485 2,442 42.7 3,232 7.8 12,469 16,301 +91 22 4040 7579
Net profit (INR mn) 2,034 1,400 45.2 1,911 6.4 7,272 9,823 kunal.shah@edelcap.com
Adj.B/V per share (INR) 109 134
Diluted EPS (INR) 5.7 4.1 39.6 7.8 (27.2) 20.9 28.3 Vivek Verma
Price / Adj. book (x) 3.0 2.5 +91 22 4040 7576
Price/ PPOP (x) 9.7 7.3 vivek.verma@edelcap.com
Diluted P/E (x) 15.8 11.7
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2. Banking and Financial Services
Strong fees income growth
Fees income grew 16.6% Y-o-Y and 15.5% Q-o-Q, led by strong traction in transaction
banking (up 31% Q-o-Q) and financial advisory (up 44% Q-o-Q). However, fees income
from financial markets contracted 41% Q-o-Q, reflecting lumpiness of the business and
the impact of hit on account of equity exposure (~INR 50 mn). Going forward,
management expects traction to continue, as it leverages new business relationships.
Asset quality continues to be benign
The bank’s headline asset quality indicators continued to be healthy due to controlled
slippages and higher recoveries. With weak assets of INR 1.63 bn (reported gross non-
performing assets (NPAs) + standard asset restructuring) below ~1%, we believe YES
Bank is in a better position to navigate asset quality pressures. MFI exposure declined
sequentially by INR 400 mn to INR 2.5 bn (0.74% of advances).
Higher core income aiding cost-to-income improvement
YES Bank’s cost-to-income ratio for Q4FY11 declined 96bps Q-o-Q to 34.8%, an
impressive statistic, due to strong growth in core income. During the quarter, it added
144 employees and 29 branches. With the stated objective of expanding branch network
by 70 and adding 100 employees per month, cost-to-income ratio has an upward bias.
We have built in cost-to-income ratio of 35% for over FY11-13.
Branch expansion strategy: Key growth driver
Over the next few quarters, as balance sheet continues to grow (above industry),
building a deposit franchise will be critical. The subdued interest rate environment has
enabled YES Bank to maintain higher margins. Margins could, however, be hit, if branch
expansion/improving productivity from new branch strategy does not lead to lower yet
stable retail deposit franchise or improve the current account balances from existing
relationships. The bank is currently operating 214 branches and intends to reach 325
branches by FY12. Delay in expanding the branch network/presence could be a key risk
to the bank’s ambition of increasing its CASA ratio ~2-3 percentage points Y-o-Y.
Other highlights:
Tier I ratio stood at 9.7% at Q4FY11 end. The bank has obtained board’s approval to
raise USD 500 mn capital. At the expected growth rate, it will need capital between 12-
15 months from now.
Chart 1: Deposit growth outpaced advances growth; CD ratio declined by 4% pts to 74.8%
(%) Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411
Advances (INR mn) 126,710 162,943 187,104 221,931 262,568 303,481 311,220 343,636
Advances growth Q-o-Q (%) 2.2 28.6 14.8 18.6 18.3 15.6 2.6 10.4
Advances growth Y-o-Y (%) 26.1 41.5 71.1 78.9 107.2 86.2 66.3 54.8
Deposits (INR mn) 153,420 193,651 220,386 267,986 302,387 400,137 394,528 459,389
Deposit growth Q-o-Q (%) (5.1) 26.2 13.8 21.6 12.8 32.3 (1.4) 16.4
Deposit growth Y-o-Y (%) 22.2 35.1 62.8 65.7 97.1 106.6 79.0 71.4
CD ratio (%) 82.6 84.1 84.9 82.8 86.8 75.8 78.9 74.8
CASA (%) 9.5 9.6 10.1 10.5 10.5 10.1 10.2 10.3
Chart 2: Contribution of corporate and institutional banking continued to decline
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11
Corporate and institutional 65 72 73 69 73 70 68 65
Commercial 30 23 23 26 22 20 22 23
Retail (Branch banking) 6 5 4 5 5 11 10 12
Source: xxx
2 Edelweiss Securities Limited
5. Yes Bank
Company Description
YES BANK is a private Indian bank promoted by Rana Kapoor and Ashok Kapur with
financial support from Rabobank Nederland, and global institutional private equity
investors –AIF Capital, and ChrysCapital. It is operational since November 2004 and is
the only greenfield bank approved by RBI in last decade. It has market cap of INR 115
bn and balance sheet of ~INR 590 bn. It has branch network of 214 at the end of FY11
and a CASA ratio of 10.3%. Corporate lending forms 65% of its book, commercial 23%
and retail 12%.
Investment Theme
YES BANK is one of the few private sector banks with product depth, sustainable
competitive edge, and strong growth. Given the underlying credit demand and small
asset book, the loan book is expected to grow at more than 35% for the next two years.
The bank’s high proportion of fee income enables high return on assets (of 1.6%+) and
indicates its potential of generating higher than presently reported RoE (20%+), once
the capital ratios normalise. Considering the bank’s strong fundamentals reflected in its
product width, adept management, and technological prowess, we find it to be the
perfect acquisition candidate for a foreign player, once the regulations ease.
Key Risks
Lower CASA can be a negative for the bank at this point of time when most banks are
banking on their franchise network.
In the event of demand for credit dying down as in the current scenario, lack of pricing
power can impact its margins adversely (due to nascent deposit franchise).
Edelweiss Securities Limited 5
6. Banking and Financial Services
Financial Statements
Income statement (INR mn)
Year to March FY09 FY10 FY11E FY12E FY13E
Interest income 20,033 23,697 40,418 59,467 81,339
Interest expended 14,921 15,818 27,948 43,167 59,940
Net interest income 5,112 7,880 12,469 16,301 21,400
Non interest income 4,571 5,812 6,233 8,320 10,729
- Fee & forex income 2,739 4,283 5,532 7,207 9,345
- Misc. income 345 543 701 913 1,184
- Investment profits 1,486 986 - 200 200
Net revenue 9,682 13,691 18,702 24,621 32,129
Operating expense 4,187 5,007 6,798 8,686 11,086
- Employee exp 2,180 2,569 3,623 4,744 6,166
- Other opex 2,007 2,438 3,175 3,941 4,921
Preprovision profit 5,495 8,684 11,904 15,935 21,043
Provisions 836 1,419 982 1,051 1,320
Loan loss provisions 836 1,265 982 1,051 1,320
Investment depreciation - 154 - - -
Profit before tax 4,659 7,265 10,922 14,884 19,722
Provision for tax 1,621 2,489 3,650 5,061 6,706
Profit after tax 3,038 4,776 7,272 9,823 13,017
Reported PAT 3,038 4,776 7,272 9,823 13,017
Diluted EPS (INR) 10.2 14.1 20.9 28.3 37.5
Dividend per share (INR) - 1.5 2.5 2.5 2.5
Dividend payout (%) - 12.5 13.8 10.2 7.7
Growth ratios (%)
Year to March FY09 FY10 FY11E FY12E FY13E
NII growth 51.8 54.1 58.3 30.7 31.3
Fees growth 20.5 56.4 29.2 30.3 29.7
Opex growth 20.6 19.6 35.8 27.8 27.6
PPOP growth 37.7 92.0 54.6 32.2 32.5
PPP growth 56.9 58.0 37.1 33.9 32.1
Provisions growth 90.8 51.3 (22.3) 7.0 25.6
Net profit 51.7 57.2 52.2 35.1 32.5
Operating ratios
Year to March FY09 FY10 FY11E FY12E FY13E
Yield on advances 13.6 10.2 10.6 11.0 11.8
Yield on investments 8.2 6.8 7.1 7.1 7.0
Yield on assets 10.7 8.4 8.8 9.1 9.7
Net interest margins 2.7 2.8 2.7 2.5 2.5
Cost of funds 8.1 5.8 6.3 6.9 7.4
Cost of deposits 8.3 5.8 6.4 6.9 7.4
Cost of borrowings 9.8 7.8 8.1 8.4 8.6
Spread 2.6 2.6 2.5 2.3 2.3
Cost-income 43.2 36.6 36.3 35.3 34.5
Tax rate 34.8 34.3 33.4 34.0 34.0
6 Edelweiss Securities Limited
8. Banking and Financial Services
Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Diluted EPS (INR) 10.2 14.1 20.9 28.3 37.5
Y-o-Y growth (%) 51.1 37.5 49.0 35.1 32.5
Book value per share (INR) 54.7 91.0 109.3 134.7 169.3
Adjusted book value per share (INR) 53.7 90.7 109.1 134.2 168.5
Diluted PE (x) 32.4 23.5 15.8 11.7 8.8
Price/BV (x) 6.1 3.6 3.0 2.5 2.0
Price/ Adj. BV (x) 6.2 3.7 3.0 2.5 2.0
Dividend yield (%) - 0.5 0.8 0.8 0.8
Price to income (x) 19.3 15.5 12.2 9.5 7.4
Price to PPOP (x) 24.5 14.6 9.7 7.3 5.5
PPOP 13 23 34 45 60
8 Edelweiss Securities Limited
9. RATING & INTERPRETATION Yes Bank
Company Absolute Relative Relative Company Absolute Relative Relative
reco reco risk reco reco Risk
Allahabad Bank BUY SO H Axis Bank BUY SO M
Bank of Baroda BUY SO L Federal Bank BUY SO M
HDFC HOLD SU L HDFC Bank HOLD SP L
ICICI Bank BUY SO L Indian Overseas Bank HOLD SU H
Infrastructure Development HOLD SU M ING Vysya HOLD SP H
Finance Co Ltd
Karnataka Bank BUY SO L Kotak Mahindra Bank BUY SP L
LIC Housing Finance REDUCE SP M Manappuram General HOLD SU M
Finance
Oriental Bank Of Commerce BUY SU H Power Finance Corp BUY SO L
Punjab National Bank BUY SO L Reliance Capital HOLD SP M
Rural Electrification Corporation BUY SO L Shriram City Union Finance BUY SO H
South Indian Bank BUY SO H SREI Infrastructure Finance UNDER SO L
REVIEW
State Bank of India HOLD SP L Syndicate Bank BUY SP H
Union Bank Of India BUY SO L Yes Bank BUY SO M
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Edelweiss Securities Limited 9
10. Banking and Financial Services
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021.
Board: (91-22) 2286 4400, Email: research@edelcap.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services
Allahabad Bank, Axis Bank, Bank of Baroda, Federal Bank, HDFC, HDFC Bank, ICICI Bank, Infrastructure Development Finance Co Ltd,
Indian Overseas Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, Manappuram General Finance, Oriental Bank Of
Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, State Bank of India, Shriram City
Union Finance, South Indian Bank, Syndicate Bank, SREI Infrastructure Finance, Union Bank Of India, ING Vysya, Yes Bank
Yes Bank EW Indices
1,600
400
Buy
Buy 1,300
300
(INR)
Buy 1,000
200 Buy
100 700
0 400
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
16-Apr-10 16-Oct-10 16-Apr-11
Yes Bank Ltd.
EW Banks and Financial Services Index
Nifty
Distribution of Ratings / Market Cap Recent Research
Edelweiss Research Coverage Universe Date Company Title Price (INR) Recos
Buy Hold Reduce Total 19-Apr-11 State Bank Leader finally catching up- 2,733 Buy
of India Hikes lending rates by
Rating Distribution* 118 51 17 189 25bps; EdelFlash
* 3 stocks under review
18-Apr-11 HDFC Bank Earnings momentum intact; 2312 Hold
> 50bn Between 10bn and 50 bn < 10bn Result Update
Market Cap (INR) 111 61 17 18-Apr-11 Muthoot Superior, sustainable RoEs Subscri
Finance command premium be
valuation; IPO Note
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