Equitquity Research Report On

7/29/2019 Equitquity Research Report On

1/13

www.hemonline.com

BROKING | DEPOSITORY | DISTRIBUTION | FINANCIAL ADVISORY

EEEEquityquityquityquity RRRResearchesearchesearchesearch RRRReporteporteporteport OOOOnnnn

Yes BankYes BankYes BankYes Bank LimitedLimitedLimitedLimited

FFFForororor IIIInstitutionalnstitutionalnstitutionalnstitutional CCCClientslientslientslients

or any [email protected]


2/13

www.hemonline.co

BROKING | DEPOSITORY | DISTRIBUTION | FINANCIAL ADVISO

Yes Bank Limited 3rd September 2009 BUY

For Private Circulation Only 1 Hem Institutional Research De

YES BANK BUSINESS DESCRIPTIONYES BANK BEGAN ITS OPERATION IN AUGUST2004. THE BANK HAS REGISTERED A CONTINU-OUS AND ROBUST GROWTH RATE. IT MAINLYOPERATES IN FOUR SEGMENTS: TREASURY,CORPORATE/WHOLESALE BANKING, RETAILBANKING AND OTHER BANKING OPERATIONS.IT ACCEPTS DEPOSITS AND EXTENDS LOANSAS WELL OTHER VALUE-ADDED PRODUCTSAND SERVICES TO ITS CUSTOMERS, INCLUDING

FINANCIAL MARKETS PRODUCTS AND SER-VICES, TRANSACTIONAL BANKING PRODUCTSAND SERVICES, INVESTMENT BANKING ADVI-SORY SERVICES AND WEALTH MANAGEMENTPRODUCTS. THE BANK OPERATES THROUGH123 BRANCHES AND OVER 200 ATMS IN INDIA.

STOCK PERFORMANCE

1m 12mYES BANK 6.95% 33.74%SENSEX 14.63% 9.50%

GROWTH (%)

Last Qtr. Last Yr. 4 Yr. CAGRREVENUE 3.47% 46.41% 70.28%

PROFIT 24.91% 51.90% 53.08%

EPS ANALYSIS

DIVIDEND ANALYSISYES BANK HAS NOT GIVEN ANY DIVIDEND TILLDATE SINCE IT INTERCEPTION. EVEN THE BANKHAS NOT ISSUED ANY BONUS.

RecommendationThe bank has registered a compounded growth rate of around 60 percent since it interception. We expect the bank to continue to grow at ahigh rate.

We are very positive on the long term business prospects of the com-

pany and financial performance. At Current Market Price of INR165.05 the stock is trading at a PE of 16.15x. With expected EPS forFY10 and FY11 of INR17.73 and INR 19.32 respectively, the stock istrading at a PE of 9.7x and 8.9x respectively.

The price of the stock is undervalued at current level of INR 165.05.

We reiterate BUY on the stock with target price of INR 244.00 witha medium term investment horizon. The Upside for the stock is INR79.00.

Highlights/Recent UpdatesGrowth plan of the bankYes Bank operates 123 branches across India and expect to targetgrow to 250 branches by the end of the current fiscal year to 750branches by March 2015 and with 3,000 ATMs. The bank also expectsstaffing to grow from about 2,000 to 10,000 in 2015.

Bank focus strongly on growth of its core banking businessYes Bank has reconsidered some of its diversification plans such aslaunching an asset reconstruction company. The company will insteadfocus strongly on growth of its core banking business. The plannedinitiatives to start an asset reconstruction company, asset manage-ment and a broking subsidiary are not in the bank immediate horizon.

Market Cap: Price as of 3r

Sept.: 52 Week Range: Beta: Industry:

4903.65 Crore 165.05 175.90 / 40.80 1.45 FINANCIAL

Outstanding Shares: Book Value Per Share: Face Value Per Share: BSE Code: NSE Code:

29.71 Crore 58.05 10.00 532648 YESBANK

Target Price

244.00

Upside:79.00


3/13

www.hemonline.com

For Private Circulation Only 2 Hem Institutional Research Des

The Financial sector is the biggest sector interms of Market Capitalization. The Financialsector it self holds around 22 per cent of thetotal BSE and NSE capitalization.

The credit-deposit ratio of All ScheduledCommercial Banks as on March 31, 2009stood at 72.6 per cent.

According to a report by ICRA Limited, arating agency, the public sector banks holdaround 75 per cent of total assets of thebanking industry, the private hold around 18per cent and foreign banks hold a little lessthan 7 per cent.

Banking Industry - Funding the Economy

Banking Industry is an essential part of any economy. In fact, banks

are the single most important supplier of credit. The banking industryhas the capital and commitment to support the financial needs of indi-viduals, businesses and all levels of government. Banks make loans toconsumers to finance purchases of homes, education, cars and majorappliances. Bank credit helps small businesses get started, grow andprosper. Banks help state and local governments fund a variety of pub-lic improvements like schools, roads, water & sewer and public healthfacilities. In each of these roles, banks support the creation of jobs andthe growth of our economy.

Banking Industry is the most dominant sector of the financial system inIndia, and with good valuations and increasing profits, the sector hasbeen among the top performers in the markets. But currently world-wide the banking industry is facing a tough time due to the failure offinancial system in the biggest economy i.e. United State of America.The problem arises due to default in sub prime mortgage lendingclubbed with rising national debt, current account deficit, and fiscalpolicies of US. This has led to the failure of some big investment bank-ing firm leading to file bankruptcy. Financial Institutions are the one toface the toughest challenge.

Indian Industries has witness an indirect, knock-on effect of the globalfinancial situation and is a reflection of the uncertainty and anxiety inthe global financial markets. While no country in world remained com-pletely insulated from the global financial crisis, Indian banking indus-try was better placed to cope with the adverse consequences of thefinancial turmoil. India is relatively better placed due to its robust policyframework, stricter prudential regulations with respect to capital andliquidity and strong growth performance. Recently we have experi-

enced few positive signs that indicate the recovery of the economy.Increase in primary demand clubbed with stable government has builta strong confidence in the mind of investor.

An added obstacle to the sustained improvement of the banking sys-tem is the fact that banks are mandated to provide funding to govern-ment-defined priority sectors dominated by small-scale business andagriculture. Loans to these sectors are at high risk of be-coming non-performing. Private-sector banks must ensure that 25 per cent of theirloans are directed towards these priority sectors; for state-ownedbanks, the figure is 40 per cent. These thresholds restrict the level ofcredit available to more efficient companies in non-priority sectors.

The level of bad loans has been falling in recent years as a result ofthe creation of asset-reconstruction companies and a rapid expansion

in lending. Non-performing assets (NPA) fell to less than 1.0 per centfor the fiscal year 2008-09. In the near future, for a stint, we expect tosee an increase in Non-performing Assets.


4/13

www.hemonline.com


The company expects the Capital Adequacyratio of the bank to be around 16 - 17 percent by the next financial year.

Yes bank has registered a continuousgrowth in Capital Risk Adequacy Ratio.

Return on Asset is among the highest in

banking industry.

Non Performing Assets has registered asharp rise, an issue to be worried, but stillless as compare to its peers and industry.

COMPANY OVERVIEW

Yes Bank began its operation in August 2004. In June 2005, when the

company issued Initial Public Offering (IPO), it received a wonderfulresponse and the IPO was oversubscribed by 25 times.

Yes Bank mainly operates in four segments: Treasury, Corpo-rate/wholesale Banking, Retail Banking and Other Banking Opera-tions. It provides various banking and financial solutions in India. Itoffers financial and risk management solutions to large corporationsand groups, multinational companies, central and state governments,government bodies, and public sector enterprises. It also providesadvisory and financial solutions across various sectors, including foodand agribusiness, life sciences, technology, and infrastructure com-prising renewable energy, education, healthcare, and water manage-ment; and business banking solutions comprising financial market ser-vices, trade and treasury services, and account services, as well asterm loans and working capital.

The companys corporate finance services include advisory and creditlinked products for the infrastructure sector clients; structured and pro-ject finance solutions for non-infrastructure clients; and specializedadvisory services on financial restructuring.

It also offers retail banking services, such as wealth management andglobal Indian banking services; and retail products comprising savingsand current accounts, fixed deposits, and retail loans. Further, thecompany offers private equity syndication services; advisory servicesrelated to mergers and acquisitions, divestitures, joint ventures, spin-offs, IPOs, open offers, rights issues, private placements, share buybacks, capital restructuring, distressed debt, and equity buy outs; andbrokerage services. Additionally, it provides foreign exchange ser-

vices, online Forex solutions, fixed income, derivatives and structuredproducts, commodity risk management advisory, and liquidity and bal-ance sheet management; and transaction banking services that in-clude cash management services, capital market and escrow accountservices, trade services, and trade finance services.

The bank operates through 123 branches and over 200 ATMs in India.

In a general sense, the facilities offered by the Yes Bank are:Corporate and Institutional BankingFinancial MarketsInvestment BankingBusiness and Transactional BankingRetail BankingPrivate Banking

Transactions BankingThe bank has a motto of technological advancement with wellequipped modern day amenities like net banking, phone banking andmobile banking.


5/13

www.hemonline.com


CARMELS Strategy

Capital Adequacy: Level of cushion or pro-tection available to the company creditors.

Asset Quality: To assess credit risk of a fi-nance company. Non-performing loans tototal loans (NPA) is one of the indicators.

Resource raising ability: Ability to generatefund for its operating model.

Management & System evaluation: The qual-ity of a companys management. Ratio ofnon-interest expenditures to total assets isone of the measures to assess the workingof the management.

Earnings potential: Earnings are the key in-put for supporting growth.

Liquidity/Assets Liability Management: Cashat bank and balances park with central bankis an indicator of bank liquidity.

Systems and Control: An important part intodays high advance banking technology.

CARMELS Strategy - Must for Banking Industry

The statutory mandated areas for banking industry are solvency, li-

quidity and operational health. For analyzing banking industry, themodel we prefer is known as CARMELS. The CARMELS model standfor: Capital Adequacy, Asset Quality, Resource raising ability, Man-agement & System evaluation, Earning potential, Liquidity/Assets Li-ability Management and System & Control.

(a) Capital Adequacy: Capital represents the level of cushion or pro-tection available to the company creditors to absorb losses from creditand other risks. It is measured by the ratio of capital to risk-weightedassets (CRAR). A sound capital base strengthens confidence of de-positors. The CRAR for the year end stands at 16.63 per cent whereas 17.63 per cent for the June quarter. The CRAR of Yes bank ishigher as compare to the statutory requirement by the RBI.

(b) Asset Quality: Asset quality is a primary consideration when as-sessing credit risk of a finance company. One of the indicators for as-

set quality is the ratio of non-performing loans to total loans (NPA).The Net NPA for Yes Bank stands at 0.33 per cent for the last yearend and 0.24 for the June quarter. The NPA of Yes bank is very stableas compare to its peers and industry average.

(c) Resource raising ability: Since funds are finance companys rawmaterial, its ability to generate them is essential for its operatingmodel. The bank plans to rise between $150 million to $250 millionthrough equity sale early in next year, and could also look to raise tierII capital worth about $100 million in the current calendar year. Theshare of the bank is trading at more than 3 times to it book value.

(d) Management & System evaluation: The quality of a companysmanagement, its business strategies and its ability to track and re-spond according to changes in market condition. The ratio of non-interest expenditures to total assets is one of the measures to assess

the working of the management. The non interest expenditure to totalassets for the bank stands at around 2.81 per cent which is very lowas compare to its peers. This variable includes a variety of expenses,such as payroll, workers compensation and training investment.

(e) Earnings potential: Earnings are the key input for supportinggrowth. Earning potential directly attract debt and equity. Earning isdirectly related to the growth of revenues of the bank. Yes bank hasregistered a continuous and robust growth in its earning since its inter-ception.

(f) Liquidity/Assets Liability Management: Cash maintained by thebanks and balances park with central bank is an indicator of bank'sliquidity. Bank has access to call market or RBI refinance facilities inthe event of liquidity crunch. The banks properly manage the time dif-ference between short term deposits with long term loans. Yes bank

has registered a growth of around 33.20 per cent in the cash and bal-ance with RBI. Its a strong indication of the liquidity of the bank.

(g) Systems and Control: The Systems and control access plays animportant part in todays highly advance banking technology. Due toelectronic technology advancement, the bank needs to have access aswell as control over the systems. Safety and security plays a vital rolein today world.


6/13

www.hemonline.com


SWOT ANALYSIS

StrengthEasier Funding - Reap benefits of easierfunding environment and to aid marketshare.

Margin improvement due to expansion ofCASA deposits - An upside movement ofCARA by around 200 bps over the past 8quarters.

Parental Support - Robo bank is a biggest

promoter

WeaknessLoan book - Share of SME has gone up, toput an upward pressure on NPAs.

Rising NPA could have an impact on earn-ings

OpportunityLarge market More than a billion popula-tion.

Rising disposable income - Increase in de-mand of financial products.

ThreatsNon Banking Financial Institution - NBFCoffering other financial services.

Reserve Bank of India persuade banks tolower the spread.

SWOT ANALYSIS

Strength

Easier FundingAfter the slowdown and liquidity crisis in FY09, the wholesale fundedfinancials, IDFC and Yes Bank, are this year expected to reap benefitsof easier funding environment, as their funding costs drop faster thanpeers and aid market share gains.

Margin improvement due to expansion of CASA depositsWe have witness an improvement in the CASA over the past few quar-ter. There is an upside movement of around 200 bps over the past 8quarters. We expect further improvement in the CASA deposits, whichwill helps the bank to register an increase in the margins.

Parental SupportRobo bank is among one of the biggest promoter of Yes bank. Yesbank always has a parental support and state-of-the-art benefits fromRobo Bank. Robo bank is a Nederland based bank which is world'ssingle AAA rated private Bank.

WeaknessLoan bookThe loan book of Yes bank largely comprised corporates and SMEs.We have witnessed that the share of SME has gone up. This can putan upward pressure on NPAs for the bank. We expect the asset qual-ity to stay healthy despite challenging macro conditions. The stresswas witnessed in only a single account, which was fully provided for inthe initial quarters, according to the management.

Rising NPA could have an impact on earningsRising NPA, which is still low as compare to its peers and industry,

could have an impact on the earning capabilities of the company.

OpportunityLarge marketIndia has a population of more than a billion. This helps the player tocover a bigger and rural market. Still there are lots of untapped market.

Rising disposable incomeIncrease in disposable income has resulted in demand of differentfinancial products and hence a new way to bet on the top line of thecompany.

ThreatsNon Banking Financial Institution (NBFC)NBFC are offering other financial services and eating up the share of

the banks.

Reserve Bank of India persuade banks to lower the spread

RBI can persuade banks to lower the spread which have a direct andhard impact on the margins for the service provider.


7/13

www.hemonline.com


PEST Analysis

Political FactorsFocus on Regulations - Robust policy frame-work, stricter prudential regulation.

High Capital Adequacy Ratio - Implementa-tion of strict Basel II norm.

Economic FactorsGrowing Economy - Regulatory body tookseveral steps to fight against the slowdown.

Low Interest Rates - Reduce the interest rateto stimulate the growth.

Social FactorsLoyalty Factor - Need for good royalty factor.

Increased Penetration of Cards - Lot of po-tential in the plastic money.

Technological FactorsIT Services & Mobile Banking - 24X7 bank-ing.

PEST AnalysisPEST analysis of any industry investigates the important factorsthat affect the industry and influence the companies operatingin the sector. PEST stands for Political, Economic, Social andTechnological analysis. The PEST Analysis is a tool to analyzethe forces that drive the industry and how those factors can in-fluence the industry.

Political FactorsFocus on RegulationsIndian Banking is least affected as compare to other developedeconomy which is attributed to Reserve Bank of India for itsrobust policy framework, stricter prudential regulations with re-spect to capital and liquidity. This gives India an advantage interms of credibility over other countries.

High Capital Adequacy RatioThe Implementation of Basel II norm has stricter rules and regulations.Indias regulatory systems are places above China and Russia; and atpar with Japan and Singapore.

Economic FactorsGrowing EconomyIndian economy has registered a growth of more that 9 per cent forlast three year prior to the current year ended. The regulatory bodytook several steps to fight against the slowdown. We expected Indianeconomy to maintain higher growth rate as compare to other devel-oped and developing countries.

Low Interest RatesReserve Bank of India controls the Interest rate, which is based on

several monetary policies. Recently RBI has reduced the interest rateto stimulate the growth rate of banking industry.

Social FactorsLoyalty FactorBanking industry services is lending and borrowing of funds. Thebanks need to have a good royalty factor as compare to counter part inother countries. The financial meltdown on Indian Banks is less impactas compare to other countries.

Increased Penetration of CardsIndia has registered a robust growth in plastic money. There is a stilllot of potential in the plastic market. India spends around 1 per cent oftheir total purchases through credit cards where as the world averageis stands more that 9 per cent.

Technological FactorsIT Services & Mobile BankingTechnology advancement has changed the face of traditional bankingsystems. Technology advancement has offer 24X7 banking even giv-ing faster and secured service.


8/13

www.hemonline.com


Porter's Five Forces Model

Rivalry among Competing FirmsRivalry among competitors is very fierce inIndian Banking Industry.

Potential Entry of New CompetitorsMerger and Acquisition expected in the nearfuture.

Potential Development of Substitute Prod-uctsWide range of choices and needs give a suf-ficient room for new product developmentand product enhancement.

Bargaining Power of SuppliersRBI is a statuary body to take monetary ac-tion.

Bargaining Power of ConsumersCustomer is the King so Banks offers differ-ent services according to clients need andrequirement.

Porter's Five Forces Model

Rivalry among Competing Firms

Rivalry among competitors is very fierce in Indian Banking Industry.The services banks offer is more of homogeneous which makes thecompany to offer the same service at a lower rate and eat their com-petitor markets share. Market Players use all sorts of aggressive sell-ing strategies and activities from intensive advertisement campaigns topromotional stuff. Even consumer switch from one bank to another, ifthere is a wide spread in the interest. Hence the intensity of rivalry isvery high.

Potential Entry of New CompetitorsReserve Bank of India has laid out a stagnant rules and regulation fornew entrant in Banking Industry. We expect merger and acquisition inthe banking industry in near future. Hence, the industry is less porn ofnew competitor. Even Yes Bank is a target for acquisition. If this hap-

pened, the hidden value can come out and the minor share holder willgain.

Potential Development of Substitute ProductsEvery day there is one or the other new product in financial sector.Banks are not limited to tradition banking which just offers deposit andlending. In addition, today banks offers loans for all products, deriva-tives, ForEx, Insurance, Mutual Fund, Demat account to name a few.The wide range of choices and needs give a sufficient room for newproduct development and product enhancement.

Bargaining Power of SuppliersBanking industry is governed by Reserve Bank of India. Reserve Bankof India is the authority to take monetary action which leads to directimpact on circulation of money in the Economy. The rules and regula-

tion lay down by RBI.

Bargaining Power of ConsumersIn today world, Customer is the King. Banks offers different servicesaccording to clients need and requirement. They offer loans at PrimeLending Rate (PLR) to their trust worthy clients and higher rate to oth-ers clients.


9/13

www.hemonline.com


A growth rate in revenue stands at ~46 percent where as for profit it stands at ~52 per

cent. The major attribute for increase in ex-penses was interest expense.

There is a continuous growth in top line aswell as in bottom line.

We have seen some up and down in the topas well as bottom line. The financial criseshave an impact on the working of financialinstitution.

FINANCIALS

Annual Result

The bank has registered a robust growth rate over the past few years.The company has recently reported total income of INR 2438.34 crorewhich was registered a growth of more than 46 per cent over the lastyear which stands at INR 1665.36 crore.

The bank has reported a sharp rise in the interest expenses, but wasable to maintain the employee expenses. The total business per em-ployee has registered an upward trend. The bank has posted a netprofit of INR 303.84 crore for the year ended March 31, 2009 as com-pared to INR 200.02 crore for the last year to register a growth ofaround 52 per cent.

Quarterly Result

The Company has registered a marginal growth in top line as compareto last quarter. The liquidity crunch and rise of interest rate has an im-pact on the company financials.

However the company was able to register decent growth in the bot-tom line. The company registered a growth of around 25 per cent overthe last quarter.

The company has performed very well since its interception.


10/13

www.hemonline.com


The bank has registered a high growth inCash balance, investment and advances.Even during the slowdown of the economy,the company has performed very well.

The company has planned to increase itpresence across the country. The companyhas big growth plan and is able to raise fundeven at the time of crises. It signifies astrong confidence level in the business

model.

The bank has huge growth potential andalso has registered high growth in the past.The business model of the bank will helps itto grow even at faster pace. The bank is ex-pected to register high EPS in the FY10 andFY11.

FINANCIALS

Annual Result - Balance Sheet

Growth Potential


11/13

www.hemonline.com


Yes Bank has informed that none of itsshare has been pledge.

No promoter has ever pledge the share of

the company.

Robo bank is the biggest share holder of thecompany.

SHARE HOLDING

Holding Pattern for the last 4 Years

Graphical presentation of Share Holding Pattern

Total promoter holding stands at 32.58 per cent of the total out-standing share of the company.

Pledge-O-Meter

The company has not pledge any share. Robo Bank is the biggestshare holder of the company.


12/13

www.hemonline.com


PE ratio of Yes Bank is among the lowest inthe list. There is huge potential for thegrowth in the company performance.

KEY TAKEAWAYS FOR THE INVESTOR - ROAD AHEAD

Among the major bank mention above, Yes Bank has a low PE ratio.The trailing EPS for Yes Bank is INR 12.37, which result to a low PEof 13.9x. Return on net worth is highest for Yes bank. It has performedvery well and has a high return on assets too.

OUTLOOK

Robo Bank is the largest share holder of the company. Robo bank,Nederland based, can acquire more shares to enter in Indian market.This will leads into gain for minority shareholder.

The bank has registered a compounded growth rate of around 60 percent since it interception. We expect the bank to continue to grow at ahigh rate.

We are very positive on the long term business prospects of the com-pany and financial performance. At Current Market Price of INR165.05 the stock is trading at a PE of 16.15x. With expected EPS forFY10 and FY11 of INR17.73 and INR 19.32 respectively, the stock istrading at a PE of 9.7x and 8.9x respectively.

The price of the stock is undervalued at current level of INR 165.05.

We reiterate BUY on the stock with target price of INR 244.00 witha medium term investment horizon. The Upside for the stock is INR79.00.


13/13

www.hemonline.com

www.hemonline.com

[email protected]

HEM SECURITIES LIMITED

MEMBER-BSE,CDSL

MUMBAI OFFICE: 14/15, KHATAU BLDG., IST FLOOR, 40, BANK STREET, FORT, MUMBAI-400001

PHONE- 0091 22 2267 1000 FAX- 0091 22 2262 5991

JAIPUR OFFICE: 203-204, JAIPUR TOWERS, M I ROAD, JAIPUR-302001

PHONE- 0091 141 405 1000 FAX- 0091 141 510 1757

GROUP COMPANIES

HEM FINLEASE PRIVATE LIMITEDMEMBER-NSE

HEM MULTI COMMODITIES PRIVATE LIMITEDMEMBER-NCDEX, MCX

HEM FINANCIAL SERVICES LIMITEDSEBI REGISTERED CATEGORY I MERCHANT BANKER

Disclaimer: This document is prepared on the basis of publicly available information and other sources believed to be reliable. Whilst we are not soliciting any action basedthis information, all care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended as an offer or solicitat

for the purchase or sell of any financial instrument. Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited and any of its employ

shall not be responsible for the content. The companies and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of material may from time to time, have long or short positions in, and buy or sell the securities there of, company (ies) mentioned here in and the same have acted upon or u

the information prior to, or immediately following the publication

Equitquity Research Report On

Documents