22 April 2015 4QFY15 Result Update | Sector: Financials Yes Bank Alpesh Mehta ([email protected]); +91 22 3982 5415 Vallabh Kulkarni ([email protected]); +91 22 3982 5430 BSE SENSEX S&P CNX CMP: INR796 TP: INR950 (+19%) Buy 27,890 8,430 Bloomberg YES IN Equity Shares (m) 417.7 M.Cap.(INR b)/(USD b) 332.5/5.3 52-Week Range (INR) 910/429 1, 6, 12 Rel. Per (%) -3/24/61 Avg Val(INRm)/Vol’000 2,584/4,029 Free float (%) 77.9 Financials & Valuation (INR b) Y/E Mar 2015 2016E 2017E NII 34.9 43.9 53.2 OP 32.5 40.8 50.8 NP 20.1 25.4 31.9 NIM (%) 3.1 3.2 3.1 EPS (INR) 48.0 60.9 76.4 EPS Gr. (%) 7.0 26.8 25.6 BV/Sh. (INR) 279.6 332 393 ABV/Sh. INR) 278.2 331 392 RoE (%) 21.3 19.9 21.1 RoA (%) 1.6 1.7 1.7 Payout (%) 20.3 20.3 20.3 Valuations P/E(X) 16.6 13.1 10.4 P/BV (X) 2.8 2.4 2.0 P/ABV (X) 2.9 2.4 2.0 Div. Yield (%) 1.1 1.3 1.7 In-line performance; strong growth; uptick in restructured portfolio n Yes Bank’s (YES) 4QFY15 PAT was in line with our estimate (+28% YoY) at INR5.5b. Strong customer assets growth (+11% QoQ and +25% YoY), continued strength in fee income (+33% YoY) and 30bp YoY decline in cost of funds led to healthy PPP growth of 38% YoY. n GNPAs/NNPAs remained stable QoQ at 0.42%/0.12% respectively. However, restructured loans increased sharply to 50bp v/s 26bp in 3QFY15 (a road sector account restructured during the quarter). Thus, NSL increased to 62bp v/s 36bp in 3QFY15, however, remains one of the lowest in the industry. n Loan book growth remains strong (+13% QoQ and 36% YoY) led by strong growth in branch banking (SME + Retail) business (28% QoQ and +31% YoY). Proportion of credit substitutes declined to a 15-quarter low of 13.3% of customer assets. n Other highlights: (1) Provisions beat (INR1.3b v/s est. of INR743m) on account of INR510m counter cyclical provisioning, (2) strong sequential growth in SA deposits (+16% QoQ, +35% YoY), led to 50bp QoQ improvement in CASA ratio to 23.1% and (3) CET 1 remains comfortable at ~11%, though capital consumption over the last few quarters was high. YES plans to raise USD1b capital over the next 12 months. n Valuation and view: With economic indicators turning positive, the bank is better positioned with (1) strong capitalization (CET I of ~11%), (2) higher branch presence (630 v/s 214 in FY11) and (3) best-in-class asset quality. With the higher share of bulk liabilities and corporate investment portfolio, YES would continue to benefit from a falling interest rate cycle. We largely maintain the earnings estimate and expect return ratios to be strong, with RoA of 1.7%+ and RoE of 20%+. Reiterate Buy with a target price of INR950 (2.4x FY17E BV). Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities , Bloomberg, Thomson Reuters, Factset and S&P Capital.
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In-line performance; strong growth; uptick in restructured portfolio
n Yes Bank’s (YES) 4QFY15 PAT was in line with our estimate (+28% YoY) at INR5.5b. Strong customer assets growth (+11% QoQ and +25% YoY), continued strength in fee income (+33% YoY) and 30bp YoY decline in cost of funds led to healthy PPP growth of 38% YoY.
n GNPAs/NNPAs remained stable QoQ at 0.42%/0.12% respectively. However, restructured loans increased sharply to 50bp v/s 26bp in 3QFY15 (a road sector account restructured during the quarter). Thus, NSL increased to 62bp v/s 36bp in 3QFY15, however, remains one of the lowest in the industry.
n Loan book growth remains strong (+13% QoQ and 36% YoY) led by strong growth in branch banking (SME + Retail) business (28% QoQ and +31% YoY). Proportion of credit substitutes declined to a 15-quarter low of 13.3% of customer assets.
n Other highlights: (1) Provisions beat (INR1.3b v/s est. of INR743m) on account of INR510m counter cyclical provisioning, (2) strong sequential growth in SA deposits (+16% QoQ, +35% YoY), led to 50bp QoQ improvement in CASA ratio to 23.1% and (3) CET 1 remains comfortable at ~11%, though capital consumption over the last few quarters was high. YES plans to raise USD1b capital over the next 12 months.
n Valuation and view: With economic indicators turning positive, the bank is better positioned with (1) strong capitalization (CET I of ~11%), (2) higher branch presence (630 v/s 214 in FY11) and (3) best-in-class asset quality. With the higher share of bulk liabilities and corporate investment portfolio, YES would continue to benefit from a falling interest rate cycle. We largely maintain the earnings estimate and expect return ratios to be strong, with RoA of 1.7%+ and RoE of 20%+. Reiterate Buy with a target price of INR950 (2.4x FY17E BV).
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Exhibit 1: YES Bank: Quarterly performance vs expectation Y/E MARCH (INR m) 4QFY15A 4QFY15E Var. (%) Comments
Net Interest Income 9,771 9,575 2 Better than expected loan growth; Strong re-pricing benefit resulting in 30bp QoQ decline in cost of funds % Change (Y-o-Y) 36 33
Other Income 5,904 5,788 2
Net Income 15,675 15,363 2 Operating Expenses 6,300 6,455 -2
Operating Profit 9,375 8,908 5 Beat on PPP led by lower costs and marginally higher core income % Change (Y-o-Y) 38 31
Other Provisions 1,264 843 50 Higher than expected countercyclical provisions (INR510m)
Net Profit 5,510 5,592 -1 PAT largely inline as lower than expected opex compensated by higher provisioning % Change (Y-o-Y) 28 30
Source: MOSL, Company
NIM stable QoQ; Branch banking driving loan growth n Despite 200bp increase in CD ratio, reported NIM remained stable QoQ at 3.2%.
Re-pricing benefit on liabilities was evident as the cost of funds declined 30bp QoQ, but was compensated by 20bp QoQ decline in yield on loans leading to stable NIM.
n Loans grew 13% QoQ and 36% YoY led by strong growth in Branch banking (SME + Retail) loan book (+28% QoQ and +31% YoY). Share of retail banking in overall loans increased to 35.3% as compared to 31.3% in 3QFY15.
n Post a double digit growth last quarter, credit substitute portfolio declined by 2% QoQ to INR116b in 4QFY15 (-2% QoQ and -17% YoY). Hence, the overall growth in customer assets (11% QoQ and 25% YoY) was lower as compared to advances growth. Share of credit substitute as a percentage of customer assets decreased to 13.3% as compared to 15.1% in 3QFY15 and 20.1% in 4QFY14.
n YES’s monthly average Liquidity coverage ratio (LCR) of 80% is above the regulatory requirement of 60%.
Continued traction in non-interest income led by Financial markets and Third Party Distribution n Non-interest income grew 33% YoY (+10% QoQ) led by financial markets (+116%
YoY and +17% QoQ) and third party distribution (+34% YoY and +49% QoQ). Transaction banking fees increased 17% YoY and 19% QoQ.
n Contribution from lumpy financial advisory fee remained high at 35% of overall non-interest income – a concern.
Exhibit 2: Improved traction in TPP, transaction banking fees and financial markets
4QFY15 3QFY15 QoQ Gr. (%) 4QFY14 YoY Gr. (%)
Non Interest Income 5,904 5,368 10 4,455 33
Financial Markets 1,168 996 17 540 116
Financial Advisory 2,087 2,328 -10 1,762 18
Transaction banking 1,560 1,315 19 1,338 17
Third party distribution 1,089 729 49 815 34
Source: Company, MOSL
Loan growth remained strong (+13% QoQ; +36% YoY); Proportion of credit
substitutes in customer assets declined to 13.3%
Financial markets income grew 17% QoQ and 116%
YoY
Pick up in retail and other fees is encouraging, higher
share of lumpy fees is a concern
22 April 2015 3
Yes Bank
SA growth remains strong; CASA ratio improves QoQ n SA deposits grew 16% QoQ (+35% YoY). Resultantly, proportion of SA deposits
increased by 58bp QoQ to 13.8%. Blended SA deposits cost was stable QoQ at 7% in 4QFY15. Tweaking of category threshold to INR0.3m is expected to aid SA cost going forward.
n Management efforts in building granular liability book is showing fruits as the share of retail deposits has increased to 47.9% from 45.4% a quarter ago and 42% a year ago.
n CA deposits grew 21% YoY (+10% QoQ) and overall CASA grew 13% QoQ and 29% YoY. CASA ratio improved to 23.1% as compared to 22.6% in 3QFY15 and 22% in 4QFY14.
Headline GNPA stable; Sharp uptick in Restructured portfolio n Asset quality performance continues to be strong with GNPA% and NNPA % at
41bp (stable QoQ) and 12bp (stable QoQ). Slippages declined QoQ to ~INR520m from INR687m in 3QFY15 (INR3.9b in FY15).
n Bank did not sell any assets to ARCs during the quarter. PCR declined to 72% as compared to 77% a quarter ago.
n Restructured loan portfolio witnessed sharp uptick to 50bp from 26bp in 3QFY15 (One roads sector account restructured during the quarter). Resultantly net stress loans increased to 62bp vs 36bp in the previous quarter however remains one of the lowest in the industry.
Other highlights n During the quarter, YES added 30/34 branches/ATMs increasing the
branch/ATM network to 630/1,190. n RWA grew 7% QoQ (+36% YoY) v/s customer assets growth of 11% QoQ (+25%
YoY); CET I capital stood at 11% (Total CAR at 15.6%) n Bank’s board has approved capital raising plan of upto US$1b by way of QIP or
any other international offering such as ADR/GDR. Bank is yet to take shareholder approval.
Conference call highlights
Macro-economic outlook n Developments over the last couple of months such as Coal auctions, Telecom
Spectrum, passage of Mines and Minerals bills would take care of a lot of legacy issues. Management now has a reasonable visibility of economy improving from 2HFY16.
n Bank expects 50-75bp cut in repo rate by RBI in FY16 n Internal lead indicators pointing northwards; Upgrades are now higher than
downgrades in internal ranking system over last 2-3 quarters
Balance sheet related n Loan growth to remain strong over FY16, may exceed FY15 growth numbers.
Apart from branch banking, growth would emanate from corporate banking as well. In situations of excess growth, bank may look at partial sell down in corporate book.
n SA deposits growth remained strong in FY15. Despite realigning of SA thresholds, management expects to clock ~40% growth in SA deposits.
Strong growth in SA deposits led to a 50bp QoQ improvement in CASA ratio
Despite higher restructuring during the quarter, net
stressed loans remain one of the lowest in the industry
22 April 2015 4
Yes Bank
n Bank has not bought any assets through PTC structure for PSL purpose in FY15. PTCs bought in the earlier years are gradually running down and form just 4% of the total PSL requirements. Going forward, except direct agriculture sub-target, bank aims to meet PSL requirements through organic means.
Asset Quality n RL portfolio increased to 50bp vs. 26bp in 3QFY15. An account in road projects
segment was restructured due to 3-6 months delay in commencement of projects
n Provisions break up (INR1.3b in 4QFY15) –NPA provisions (INR126m), General Provisions (INR470m), Counter cyclical provisions (INR510m), UFCE and other regulatory provisions (INR160m).
n Provision break up (INR3.4b in FY15) – NPA provisions (INR1.3b), General provisions (INR980m), Countercyclical provisions (INR1.05b) and UFCE and other regulatory provisions (INR500m).
n Full year NPA movement – Slippages (INR3,875m), recoveries and upgrades (INR1,960m), write-offs (INR530m)
n Steel sector – Exposure (including credit substitutes and bonds) of 3.3% out of which 2/3rd of the portfolio is rated AA or better.
P&L Related n Transaction banking and retail banking fees showing steady improvement with
higher branches and better customer acquisition along with improved cross sell opportunities (cross sell ratio of 2, aim to increase the same to 3 over next 5 years)
n About 45% of fee income is not linked to credit exposures. n Bank is already using marginal cost of funding to compute base rates. Capital
raised in 1QFY15 resulted in NIM improvement of 25bp which was partially offset by higher Liquidity coverage ratio needs and increased leverage accounted for 6-8bp
Capital raising n Bank has taken board approval for raising USD1b and would take the
Shareholder approval in June 2015. However, there is no urgency to raise capital currently (Internal Tier-1 threshold of 9.5-10%) which would last for another 12-18 months. However, given better availability of capital currently, the bank is considering and pursuing sponsored ADR (Level 1) through JP Morgan.
Data points n Five year plan: (a) CASA of 35-40% (b) Loan growth CAGR of 20-30% (c) Branch
additions of 15-20% per annum (d) Additions of 2,500 employees per annum (e) Corporate-branch banking mix of 50:50.
n No loans sold to ARCs during the quarter n Outstanding counter cyclical provisions at 50bp n Average yield on core credit substitute book (ex-RIDF) is 10.0% n Bank would launch its credit cards business in FY16
Valuation and view n YES has navigated well even during the toughest period of economic
environment. Now with economic indicators are turning positive YES is well positioned to leverage on to the opportunity that Indian economy presents with (1) strong capitalization (CET I of 11.0%), (2) rapid branch expansion (630 v/s 214 in FY11) and (3) best in class asset quality (62bp NSL lowest in the industry).
Reiterate Buy with a target price of INR950
(2.4x FY17 BV)
22 April 2015 5
Yes Bank
n Comfortable liquidity, low inflation and bulk deposit rate is a significant positive for YES from NIMs (higher short term liabilities) and bond gains perspective (~14% share of corporate bonds in customer assets). Stable NIM and traction in fees will keep core PPP and earnings CAGR strong at 27% each over FY15/18E.
n YES has a well-laid strategy for growing small business loans (most of which qualify as priority sector loans) and cross-selling to acquired customers which would help granular retail fees growth.
n On balance-sheet front, initial focus of the bank will be on growing the liability side first and as customer relationships age, focus would be on cross-selling its retail assets. The bank has been expanding its branch network at an increasing pace. On an average, it has added 90-100 branches per year over FY11-15, up from an average of 40 branches per year over FY06-11. Going forward, management aims to add ~100-150 branches per year.
n Asset quality performance remains impeccable; however we conservatively factor in higher credit cost of 0.35-0.4% over FY15-18. This is expected to be compensated by improvement in core income and better net investment gains. Further, strong PCR of 72% and floating provisions of 0.5% on loans provide cushion on our earnings estimates.
n Return ratios are expected to remain healthy with RoA at 1.7% and RoE at 20%+. Reiterate Buy with a target price of INR950 (2.4x FY17E BV).
Exhibit 3: We largely maintain our estimates INR B Old Est. New Est. % Change FY16 FY17 FY16 FY17 FY18 FY16 FY17 Net Interest Income 43.0 53.6 43.9 53.2 66.7 2.0 -0.8 Other Income 25.4 32.3 25.5 32.6 41.2 0.4 0.7 Total Income 68.4 85.9 69.4 85.7 107.9 1.4 -0.2 Operating Expenses 28.8 35.1 28.6 34.9 42.6 -0.7 -0.6 Operating Profits 39.6 50.8 40.8 50.8 65.2 2.9 0.1 Provisions 3.6 5.4 3.9 4.6 5.9 PBT 36.0 45.4 36.9 46.3 59.3 2.3 1.8 Tax 11.0 13.9 11.4 14.3 18.4 4.0 3.5 PAT 25.0 31.6 25.4 31.9 40.9 1.6 1.1 Margins (%) 3.2 3.2 3.2 3.1 3.1 Credit Cost (%) 0.4 0.4 0.4 0.3 0.3 RoA (%) 1.7 1.7 1.7 1.7 1.7 RoE (%) 19.7 21.1 19.9 21.1 22.7
Source: MOSL, Company
Exhibit 4: Exhibit 4: One year forward P/BV
Source: MOSL, Company
Exhibit 5: One year forward P/E
Source: MOSL, Company
Expect strong earnings CAGR of 27% over FY15-18; ROEs expected to be 20%+
22 April 2015 6
Yes Bank
Exhibit 6: DuPont: Return ratios to improve driven by strong core operating performance (%) Y/E March FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net Interest Income 2.24 2.35 2.55 2.66 2.61 2.44 2.57 2.61 2.85 2.89 2.83 2.83 Core Fee Income 2.41 2.15 1.45 1.61 1.40 1.24 1.28 1.49 1.51 1.54 1.60 1.62
Company description Yes Bank, a private bank incorporated in 2003, is promoted and led by Mr. Rana Kapoor, who is currently the MD & CEO of the bank. Yes Bank has steadily built a full-service commercial bank with Corporate, Retail and SME Banking platforms, with a comprehensive product suite. It was the first bank to offer differentiated rates on savings account following RBI's deregulation of savings account rates in October 2011. The number of branches and ATMs stood at 630 (doubled in last 3 years) and 1,190 (quadrupled in the last 3 years) respectively.
Exhibit 22: Sensex rebased
22 April 2015 14
Yes Bank
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