Initiating Coverage Report Ready for The Take–off nk Low CASA Need for Capital - On a restructuring mode - On a restructuring mode YES Ban n Book Growth ee Income iency t Quality Macro-economic Headwinds (Dark clouds) - High persistent domestic inflation - Increasing Interest rates Credit demand slowdown Theme for growth Above Industry Loa Diversified Fe Cost Effici Strong Asset - Credit demand slowdown - Asset Quality risk in high growth sectors - Global economic instability • Branch expansion • Capital Infusion • Restructuring the balance sheet profile Microsec Research Analyst – Abhisek Sasmal 033-3051-2175 [email protected]Microsec Research reports are also available on Bloomberg <MCLI> 20 th June’2011
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Initiating Coverage Report
Ready for The Take–off
nk
Low
CA
SA
Nee
d fo
r C
apit
al- On a restructuring mode- On a restructuring mode
YE
S B
an
gg
n B
ook
Gro
wth
ee I
ncom
e
ienc
y
t Q
uali
ty
Macro-economic Headwinds (Dark clouds)
- High persistent domestic inflation
- Increasing Interest rates
Credit demand slowdown
Theme for growth
Abo
ve I
ndus
try
Loa
Div
ersi
fied
Fe
Cos
t E
ffic
i
Stro
ng A
sset- Credit demand slowdown
- Asset Quality risk in high growth sectors
- Global economic instability
• Branch expansion• Capital Infusion• Restructuring the balance sheet profile
Microsec Research
Analyst – Abhisek Sasmal 033-3051-2175
[email protected] Microsec Research reports are also available on Bloomberg <MCLI>
20th June’2011
Investment & Valuation Brief 2
Company background 3-4
YES Bank – Launch Pad – Version 2.0 (the take off ) 5
Contents
Investment rationales 6-20
Peer Analysis 21
On the footsteps of leaders (Comparative study of Yes Bank with Axis & HDFC bank) 22
Stock Cues 23
Sensitivity Analysis 24Sensitivity Analysis 24
Valuation & Recommendation 25
Financial Projections 26
Ratios 27
Key concern to our call 28
Appendix – 1 (Typical YES bank branch) 29
Appendix – 2 (Macro Picture – Light at the end of the tunnel!!) 30
Note 31
Analyst page 32
Other Banking reports 33Other Banking reports 33
Disclaimer 34
Microsec Research
1
20th June’2011
YES Bank (Version 2.0 on course)
BUY Market Data
Current Market Price (INR) 282
Target Price (INR) (18 months) 358
Upside Potential (annualized) 18%
52 Week High / Low (INR) 388/234
Yes Bank has experienced unprecedented growth in the Indian banking sector since itstarted operations in late 2004. This is a significant achievement for a bank which hadstarted late when compared to other new age private sector banks. The bankdifferentiated itself from other players in the industry through its unique 'knowledgebanking approach', emphasis on technology, and human resources. The knowledgebanking approach was its main pillar of differentiation and using this it providedspecialized services to various sunrise industries through domain experts.
52 Week High / Low (INR) 388/234
Market Capitalization (In INR Mn) 103263
Promoter
Group
27%Foreign
Financial
Institution
s / Banks
Non-
Institution
s
13%
Share Holding pattern%
We re-initiate coverage on Yes Bank with a BUY rating. Our rating underpins thebank’s strong business momentum, diversified revenue stream, strong assetsquality, positive asset liability mismatch, strong institutional holding, superior costefficiency, unique technology proposition, high pedigree of Human Capital, thrust onimproving CASA driven by aggressive branch expansion plans and its superior andsustainable return ratios. However, heavy dependence on bulk deposits in a risinginterest rate scenario slightly impedes our optimism.
STOCK SCAN
BSE Code 532648
Mutual
Funds
5%
Insurance
Cos
5%
FII
45%
/
5% At the CMP of INR 282 the bank is trading at 1.82x FY13E BV. The bank delivered RoEof over 20% and RoA of 1.5% for FY11. We further expect the bank to deliver RoE of20%+ on the back of increased leverage, however we may see some pressure on RoAdue to moderation in earnings growth going forward on the back of rising loan lossprovisions and rising cost.
We have valued Yes bank on scenario model with different weightage given to eachscenario and arrived at a weighted average target price of INR358 which is 2.3x its
NSE Code YESBANK
Bloomberg Ticker YES IN
Reuters Ticker YESB.BO
Face Value (INR) 10
Equity Share Capital (INR. Mn.) 3471.5
Average P/E/PBV (3 yrs) 15.9/2.76
scenario and arrived at a weighted average target price of INR358 which is 2.3x itsFY13E BV of INR 155.4. Our recommended target price is 27% above the current price.We expect this target price to be met with in 18 months from the date of release of thisreport.
Key Risks - 1) Further rise in wholesale deposit cost. 2) Deferment of capital raisingplans due to depressed market condition. 3) Lower than expected improvement inCASA. 3) Higher than anticipated rise in slippages due to more focus on the SMEsegment. 4) TTM P/BV is still at 30% premium to the average valuation in last rate hike
Beta vs Sensex 1.35
Average Daily Volmes (6 M) 3181850
Dividend Yield (%) 0.84
Stock Return (1 Yr) 6.25%
Particulars (INR Mn) FY09 FY10 FY11 FY12E FY13E
Total Income 9462.00 13634.85 18702.01 25514.30 33904.26
Growth% 36.89% 44.10% 37.16% 36.43% 32.88%
NII 5092.99 7879.53 12469.30 16861.89 22086.09
Growth% 54.1% 54.71% 58.25% 35.23% 30.98%120 0
130.0
140.0
g ) / p gcycle. (refer page 28)
Net Profit 3,038 4,777 7,271 9,561 12,087
Growth% 51.90% 57.24% 52.22% 31.48% 26.42%
EPS 10.23 14.06 20.95 26.91 33.55
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%
NNPA% 0.33 0.06 0.03 0.09 0.06
70.0
80.0
90.0
100.0
110.0
120.0
Yes Bank SENSEX
Microsec Research
* All prices as on 17th June’11 Source: Company, Microsec Research
Yes Bank limited (YBL), incorporated in 2003 by Rana Kapoor and Late Ashok Kapur, is a new age privatesector 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 institutionalbanking, financial markets, investment banking, corporate finance, business and transaction banking, retailand wealth management across India.
The bank is part of global thought leadership forums like the Clinton Global Initiative (CGI), Triple BottomLine Investing (TBLI) and Tallberg Forum. Recently, it became the first Indian Bank to become a signatorywith the United Nations Environment Programme (Financial Initiative).
Yes Bank has partnered with various companies for delivering quality products and services namely CashTech, Cisco Systems, Gartner, Intel, i-flex, Reuters, VSNL, Wipro, De La Rue, Murex, Wincor Nixdorf andSanovi.
This new age private bank has global institutional investors like Rabobank, Franklin Templeton, AIF Capitaland Fidelity, amongst others
Received RBI license for commercial banking
IncorporationLaunch of financial market business
Maiden public offering of equity shares by the bank
YES Bank – Launch Pad – Version 2.0 (the take off )
At the end of Mar'11At the end of Mar'15
(Target)Implied CAGR%
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% 4 0%NIM% 2.8% 4.0%
RoE% (reported) 21.70% 22-24%
RoA% 1.52% 1.6-1.75%
Relationship / Product Matrix – to support growth
Microsec Research
5 Source: Company website
20th June’2011
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 averageindustry growth rate during the same time period. Higher than industry growth led to a consistentimprovement in market share for the bank. Market share stood at ~0.92% in FY11 as compared to 0.33% inFY07 G i h d h b k i i hi h h h f h i d d
Investment rationale
FY07. Going ahead we expect the bank to continue growing at a pace higher than that of the industry andhave factored in a CAGR of 28% for FY11-13. The growth will be well supported by aggressive branchexpansions, more penetration in the larger corporate segment & retail segment of the loan book. YESbank’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 maychange due to the need of faster improvements in some key metrics where its lags its larger peers.
749.03 400.0%800.00 Strong business growth
459.39
343.64
562.88
150 0%
200.0%
250.0%
300.0%
350.0%
300 00
400.00
500.00
600.00
700.00
0.0%
50.0%
100.0%
150.0%
0.00
100.00
200.00
300.00
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
D i (INR B ) Ad (INR B ) Y Y D G h% Y Y Ad G h%Deposits (INR Bn) Advances (INR Bn) YoY Dep. Growth% YoY Adv. Growth%
216
161
200
250
20 0%
25.0%
30.0%
35.0%
300
350
400Above industry loan growth from Inception Seasonal weakness in loan growth started to get visible
161
5032
7960
30 26
0
50
100
150
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
0
50
100
150
200
250
Microsec Research
6
Source: Company, Microsec Research
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Industry Loan growth% YES Bank's Loan Growth% Loan Book (INR Bn) gr% (RHS)
20th June’2011
Yes Bank currently has a branch count of 214 across 164 cities. It has 91 branch licenses and plans toexpand its reach to 250 branches by Q1’FY12 and to 325 branches by Q4’12. With initial focus inliability rich regions of North and West India (75% of branches), the bank now plans for a pan-Indiapresence. The new roll-outs are targeted at improving the SME and retail franchise. The bank plansto roll out 150 branches in South with in two years time. The metro centers are likely to have over30 branches each in the next few years. YES bank has separate team looking after the inclusive or
Branch Expansion strategy – well fit to the overall business model
social banking model (a combination of bricks & Mortar and technology-enabled branches) in Tier-3to 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 onretail deposits will help shore up CASA franchise.
YES bank uses “Hub and Spoke” model for faster maturity and greater efficiency of branches. Thisapproach has in-turn reduced IT and infrastructure spends. Also, with timely break-even in keybranches, cost-to-income for the bank has declined substantially from 53% in FY07 to 36% in FY11.
exp
ansi
on
. o
ck w
ise
South
East
10%
Branch Concentration
Pan
In
dia
Bra
nch
P
rio
rity
an
ti-c
l o
North
50%
West
25%
15%
Source: Company, Microsec Research
Advances Segmentation Clients Typical Exposure% Share of Loan
YES bank's competence in terms of using high-end technology, its 'knowledge banking'approach, and emphasis on highly qualified human resources helped it to differentiate itself fromother private banks in an increasingly commoditized market. In particular, its knowledge bankinginitiative drew a lot of interest. In the initial phase, the bank planned to target those sectors wherethe bank has a deep understanding of the industry. The bank has a team of investment banking
f i l h h h d i i d i i l i i d M&A b i Thprofessionals that have hands-on expertise in advisory, capital raising and M&A businesses. There aresector specialists that understand a particular sector and know the business intricacies to structuresuperior solutions from a banking perspective.
Skilled people
Knowledge banking
Superior technology
p p
banking
Unique Technology Proposition
Edu Background (FY10) Work exp (Yrs) (FY10)
High pedigree Human Capital
G dMBAs
CA/C
S
6%LLB
1%
0-1
16%6-10
20%
11-15
4%
16-20
1%
> 21
0%
Gradu
ates
50%
PG
7%
MBAs
36%
2-5
59%
Microsec Research
9
Source: Company, Microsec Research
20th June’2011
CASA augmentation remains the key
YES bank’s deposit base grew 5.6x within 5 year’s time, registering a CAGR of 53.75% over FY07-FY11 mainly due to base effect. However, the bank has historically relied more on wholesaledeposits to ramp up loan growth. In addition, relatively lower branches (most of the branches beingnew) impacted the CASA mobilization of the bank. Yes Bank's proportion of low cost deposits(CASA) is amongst the lowest in the Industry. However, in absolute numbers CASA has grown at78% CAGR d i FY07 FY11 Y B k i l ki d i l f l d b h i
B2B2C Strategy
Identifying current account rich
corporate customers
78% CAGR during FY07‐FY11. Yes Bank is looking to derive value from planned branch expansionand increase penetration to improve its CASA ratio. Management wants to increase the CASA shareto 30% by FY15. However, we expect a gradual improvement in the YBL’s CASA ratio from current10.3% to 12.5% till FY 2013. FY13 onwards, CASA mobilization may gain higher momentum asalmost 60% of the branches likely to cross breakeven productivity by then. The CASA share maythrow some positive surprises if the overall balance sheet growth lags the CASA growth. We expectCASA deposits to grow at a CAGR of 48.6% over FY10‐FY13. Of the incremental accretion todeposits, we expect the CASA contribution at 15.8% between Mar’11 to Mar’13.
Offering them salary a/c and various other wealth management
products
Offering them superior cash management & liquidity
40%
50%
60%
70%
80% Above industry deposit growth
management & liquidity management solution
including a SB a/c
Tied up with the corporates to tap a rich source of
references
18%19%
27% 28%
0%
10%
20%
30%
FY08 FY09 FY10 FY11 FY12E FY13E
Industry Deposit growth% YES Bank's Dep. Growth%
With larger share of Currentaccount in YBL’s overallCASA, economically the valueof this 10% CASA is comparableto any bank which has 15-16%
Source: Company, Microsec Research
y p g p
39.50%
30%
35%
40%
45%
Dependence on wholesale deposits – may put NIMs under pressure in an increasing rate scenario
to a y ba c as 5 6%CASA with more share fromSA. Thus any event related tosavings bank rate de-regulationwill be structurally positive forthis bank.
13.20%
7.50%
12.10% 10.90%
6.40%
10.30%
0%
5%
10%
15%
20%
25%
30%
C b h G C i i l CASA
Microsec Research
10 Source: Company, Microsec Research
FD - Corp
banking
FD - branch
banking
FD -
Commercial
banking
FD- Govt CDs Institutioanl
Deposits
CASA
Q4'09 Q4'10 Q4'11
20th June’2011
214
275
350
40
50
60
70
80
200
250
300
350
400 Strong Branch expansion
1740
67
117
150
0
10
20
30
40
0
50
100
150
200
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
YES bank’s newer branches arereaching the critical inflexionpoint where they can attractmore customers due to theirreach & faster productivity
Source: Company, Microsec Research
No of branches Expansion (RHS)
10 00%
12.00%
14.00%
250.0
300.0
reach & faster productivity.More and more newer branchesare coming up in Tier-2 & Tier-3 cities. These branches willreach break even faster thantheir Urban peers due to lowercost and less competition. Allthese will led to faster CASAmobilization in branch levelwith faster improvement for
CASA mobilization per branch on the rise
2.00%
4.00%
6.00%
8.00%
10.00%
50.0
100.0
150.0
200.0with faster improvement forCASA/branch.
Source: Company, Microsec Research
0.00%0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
CASA per branch (in Mn) CASA%
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
Microsec Research
11
Source: Company, Microsec Research
20th June’2011
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 witha 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 (< 1yr). The average tenure of deposit base is about 21 months and loans about 18 months which means
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 depositrates 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 inDecember 2010. However, we believe this cost increase is likely to be mitigated (to an extent) by a 200bps increase in the prime lending rate (PLR) and a 50 bps rise in the base rate (Yes Bank increased itsPLR by 50 bps in August 2010 September 2010 December 2010 and May 2010 The PLR is 18 5% andPLR by 50 bps in August 2010, September 2010, December 2010 and May 2010. The PLR is 18.5% andthe base rate at 9.5% currently). The impact of increasing SB rate by 50 bps will be limited to only 1 bpsincrease in cost of funds, however the increase in base rate and PLR will enable the bank to partiallyabsorb the increased cost on account of rising interest rates. However, further interest rate hike by RBIwill put pressure on its NIMs with a lag as more and more deposits will re-priced later.
6
8
10
12
14
16
8
10
12
14
16
18
Short-term interest rate on the rise – making wholesale deposit costly
0
2
4
6
CP 3month CP 6month CP 12 month
0
2
4
6
CD 3month CD 6month CD 12month
Rise in cost of funds pressurizing NIMs
11.84%
13.63%
10.24%10.57%
11.27%11.30%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
2.60% 2.70%2.80% 2.80%
2.53%2.61%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Microsec Research
13 Source: Company, Microsec Research
1.00%
FY08 FY09 FY10 FY11 FY12E FY13E
% yield on advances % yield on investments Cost of deposits% Borrowing cost% NIM%
20th June’2011
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 by69.88% CAGR growth in Net Interest Income (NII) & 45.1% CAGR growth in Other Income over thesame period. The dependence on other income (OI/TI) has come down from over 50% in FY05 to33.3% in FY11. Fee income constitute almost 95% of the other income. Fee income is mainly drivenby transaction banking & financial advisory (investment banking and project advisory). We may see
h d i i fi i l k ( i l i ) i i dsome growth moderation in financial market (mainly treasury income) in coming quarters due tosubdued market and rising bond yields. With increasing branch expansion, increasing focus on retailassets and stabilization of new branches, we may see contribution of branch banking in fee income toincrease. 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% and27.1% respectively over FY10-FY13.
In Mn
Core operating Income outpacing non-core income
In Mn
200 0%
250.0%
300.0%
350.0%
400.0%
450.0%
500.0%
1 000 0
20000.0
25000.0
30000.0
35000.0
40000.0
0.0%
50.0%
100.0%
150.0%
200.0%
0.0
5000.0
10000.0
15000.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
NII Other Income Total Income NII Gr% Other Income Gr% Total Income Gr%
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.
Transaction banking 31.4% 30%A key driver of growth, going forward, given the branch scale building up
Branch banking 8.8% 10%Insurance and MF – growth because of low base and expanding reach, despite challenging environmentreach, despite challenging environment
Unique cross selling opportunities give multiple & diversified revenue streams
Life Sciences Drugs √ √ √ √
Engineering Electric comp. √ √ √
TMT IT/Telecom √ √ √ √
Infrastructure Wind Energy √ √ √ √
Source: Company, Microsec Research
44.13%45.00%
50.00%
% Share of Fee income to Total Income (FY11)
31.38%
33.90%
24.02%25.00%
30.00%
35.00%
40.00%
Microsec Research
15
20.00%
YES Bank Axis Bank HDFC Bank ICICI Bank
Source: Company, Microsec Research
20th June’2011
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 onaccount of better business productivity per employee, unique technology proposition. Over the pastfive years, bank has successfully reduced its cost ratio from 52.88% to 36.35% in FY11. Goingforward, we expect this ratio to stabilize at 38‐40% levels with its aggressive hiring and branchexpansion plans. Yes bank has also improved its cost/assets by 86 bps over FY08-11, mainly due to
Cost to Income ratio
p p p y p ybetter 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 ofbranch and employee additions every year. Most of the bank's branches are comparatively new andyet to pick up in terms of productivity. Management indicates that increase in productivity (newerbranches to matured branches) will limit the upside in cost in coming years.
Other exp% Depreciation cost% Ad sales& Promotional expenses% Administative expenses % Staff cost%
20th June’2011
140
160
180
200
Assets/Employee (INR Mn)
2.00%
2.50%
Cost/Assets (%)
20
40
60
80
100
120
0.50%
1.00%
1.50%
70
80
90
60
70
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
0.00%
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Employee productivity on the rise
2.5
16.0
18.0
20
-10
0
10
20
30
40
50
60
70
0
10
20
30
40
50
0 0
0.5
1.0
1.5
2.0
0 0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
-200
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Employee/Branch Incr Empl/Bran (RHS)
2 40%
3.00%
Cost/Assets% (FY11)
42.70% 42 24%
47.90%
45 00%
50.00%Cost/Income% (FY11)
0.00.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Business per Employee Profit per Employee(RHS)
1.15%
1.96%
1.63%
2.40%
0.50%
1.00%
1.50%
2.00%
2.50%
36.35%
42.70% 42.24%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
Microsec Research
17Source: Company, Microsec Research
0.00%
0.50%
YES bank Axis Bank ICICI Bank HDFC Bank
10.00%
15.00%
YES bank Axis Bank ICICI Bank HDFC Bank
20th June’2011
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 assetquality in the industry. During FY05‐07, YBL hasn’t reported any slippages, however in FY08, itreported its first GNPAs of 0.1% and currently it stood at 0.21%. Restructured assets as a % of grossadvances improves from 0.36% in Q4’10 to 0.24% in Q4’11. Exposure to troublesome MFI sectorstood at INR 4500 Mn which is less than 1.5% of the total loan book. Also, YBL does not have any
h 2G l F h d ’ i f RBI’ l i dexposure to the new 2G players. Further, we don’t see any impact of RBI’s recently revised normsfor provisioning. However, higher provisioning for restructured assets may dent FY12 expected PBTby 0.08% to 0.11% (Microsec Internal calculation).
However with increasing focus on SME & retail segment we may see a spurt in slippages goingforward. Secondly, it will be hard for the bank to improve upon its GNPA % NNPA% further in thisincreasing rate scenario. Nevertheless it is noteworthy to mention, that even after factoring in anincrease in NPAs it still remains low as compared to its peer group. YBL’s provision coverage ratiostood at health 88 6% as on March’11
60%
70%
80%
2000
2500
0.6
0.7
0.8
0.9 Credit Cost%
stood at healthy 88.6% as on March 11.
Strong asset quality
0%
10%
20%
30%
40%
50%
0
500
1000
1500
0
0.1
0.2
0.3
0.4
0.5
FY09 FY10 FY11 FY12E FY13E
GNPA (Rs m) NNPA (Rs m) GNPA Ratio (RHS) NNPA Ratio (RHS)
90.0
100.0
Provision Coverage Ratio
FY09 FY10 FY11 FY12E FY13E
1.21700Restructured assets
10 0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
0.2
0.4
0.6
0.8
1
700
900
1100
1300
1500
Microsec Research
18 Source: Company, Microsec Research
0.0
10.0
FY09 FY10 FY11 FY12E FY13E
0500
Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11
Total Restructured Assets (INR Mn) % Gross Advances (RHS)
20th June’2011
Capital issuance critical for growth
YES bank has adopted a capital raising in every 1.5-2 years of operation from FY08. Currently YES bankis 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’10diluting 13% stake. Further management is expected to raise funds to the tune of USD500 Mn (INR22500 Mn) through an American Depository receipt by the end of FY12. However due to the subdued) g p y p ydomestic & overseas capital market, the bank may defer its plan till H1’FY13. This gives the bankenough issuance window to raise capital at a reasonable price. However, We have not factored in thecapital raising plan by the bank in our estimates for FY12 & FY13.
Capital raising once in every two years from FY08
15
20
25In Mn
20000
25000
30000
35000
40000
Capital raising once in every two years from FY08Adequate capital for sustainable growth
0
5
10
0
5000
10000
15000
20000
Source: Company, Microsec Research
0
FY09 FY10 FY11 FY12E FY13E
CAR (%) Tier 1 (%)
FY06 FY07 FY08 FY09 FY10 FY11
Networth Capital Raised
Microsec Research
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20th June’2011
Strong RoE(Cal) despite regular capital raising. RoAs may come down under pressure due to increase in cost/assets & Loan loss provisions (LLPs)
1.70%
20.00%
25.00%
1.40%
1.50%
1.60%
5.00%
10.00%
15.00%
20.00%
RoA Decomposition FY09 FY10 FY11 FY12E FY13E
1.30%0.00%
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% 1 69% 1 43% 1 46% 1 59%
Source: Company, Microsec Research
Less: Operating Exp 2.10% 1.69% 1.43% 1.46% 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%
Microsec Research
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20th June’2011
Particulars (In Mn) Yes Bank ICICI Bank HDFC Bank Axis Bank ING Vysya Bank Indusind Bank
Net Interest Income* 12469.20 90169.00 105431.30 65629.90 10065.20 13764.90
Birla Sun Life Mutual Fund 2.04 1.32 1.74 1.39 0.00
DSP BlackRock Mutual Fund 1.03 1.02 0.73 0.65 0.64
Franklin Templeton Mutual Fund 1.14 1.50 2.03 1.90 1.97
ICICI Prudential Mutual Fund 1.99 2.12 2.19 2.00 1.97
IDBI Mutual Fund 2 10 2 14 2 31 2 11 2 02
50% of AMCs has increased its stake in YESbank as on May’2011.
Most of the bulk deals in the recent pasthappened around the 260-270 price range. It IDBI Mutual Fund 2.10 2.14 2.31 2.11 2.02
IDFC Mutual Fund 2.90 2.67 1.89 2.66 2.21
ING Vysya Mutual Fund 2.07 3.07 1.75 1.73 1.68
JM Financial Mutual Fund 4.29 4.01 5.59 0.00 4.14
Kotak Mahindra Mutual Fund 1.29 1.07 1.11 1.05 1.14
L&T Mutual Fund 3.11 1.67 1.87 2.46 2.56
LIC Nomura Mutual Fund 1.07 1.05 1.07 0.96 0.94
Mirae Asset Mutual Fund 1.16 0.87 0.90 0.81 1.08
Motilal Oswal Mutual Fund 2.30 2.29 2.35 2.04 0.00
Principal Mutual Fund 1.22 1.20 1.22 1.06 1.04
pp p gmay act as a key accumulation zone for longterm investing.
FII share has came down in last 3 quarters,which has been lapped up by domesticInsurance companies.
Stock price volatility in last rate hike and globalcrisis was very high which made this stock very
Microsec Research
23Source: Bloomberg, ACE Equity Microsec Research
Principal Mutual Fund 1.22 1.20 1.22 1.06 1.04
Religare Mutual Fund 2.11 1.47 1.14 1.01 0.00
SBI Mutual Fund 2.18 2.32 2.75 2.43 3.47
Sahara Mutual Fund 3.90 2.60 0.00 NA NA
Sundaram Mutual Fund 1.24 1.44 2.01 0.00 1.12
Tata Mutual Fund 1.21 1.21 0.00 NA NA
y g yrisky in that time. 60D(days) volatility is on therise in recent time.
Decline in deliverable volume makes the stockprice range bound in recent past.
20th June’2011
RoE Sensitivity (FY13E)Deposit growth%
22% 24% 26% 28% 30%
Loan growth%
20% 19.92% 19.52% 19.12% 18.72% 18.32%
22% 20.23% 19.83% 19.43% 19.03% 18.63%
24% 20.54% 20.14% 19.74% 19.34% 18.94%
26% 20.85% 20.45% 20.05% 19.65% 19.25%
28% 21.17% 20.77% 20.37% 19.97% 19.57%
RoE Sensitivity (FY13E)Slippage ratio%
1.50% 1.75% 2.00% 2.25% 2.50%
20% 21.01% 20.71% 20.39% 20.07% 19.76%
22% 21 26% 20 94% 20 62% 20 30% 19 98%
RoE Sensitivity (FY13E)Cost of deposits %
6.00% 6.50% 7.00% 7.50% 8.00%
Loan growth%
22% 21.26% 20.94% 20.62% 20.30% 19.98%
24% 21.51% 21.19% 20.87% 20.55% 20.23%
26% 21.76% 21.43% 21.11% 20.79% 20.47%
28% 22.02% 21.67% 21.35% 21.03% 20.71%
Yield on Advances%
10.00% 21.13% 19.37% 17.49% 15.45% 13.25%
10.50% 22.50% 20.80% 19.03% 17.11% 15.04%
11.00% 23.79% 22.23% 20.56% 18.76% 16.83%
11.50% 25.02% 23.54% 21.96% 20.27% 18.45%
12.00% 26.18% 24.78% 23.28% 21.69% 19.98%
FY13 ExpectedTarget Price Analysis
Bear Case Base Case Bull Case
Loan growth% 24.00% 26.00% 28.00%
Deposit growth% 26.00% 28.00% 30.00%
YoA% 10.50% 11.30% 11.50%
CoD% 7.50% 7.00% 6.50%
Slippage Ratio% 2.25% 2.00% 1.75%
BV 138.21 155.4 161.3
Target Multiple 2 2.5 2.75
Target (INR) 276 389 444
Microsec Research
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Source: Company, Microsec Research
Weightage (%) 35% 50% 15%
Final Weighted average Target Price INR 358
20th June’2011
Valuation & Recommendation
We re-initiate coverage on Yes Bank with a BUY rating. Our rating underpins YBL’s strong businessmomentum, diversified revenue stream, strong assets quality, positive asset liability mismatch, stronginstitutional holding, superior cost efficiency, unique technology proposition, high pedigree of HumanCapital, thrust on improving CASA driven by aggressive branch expansion plans and its superior andsustainable return ratios. However, heavy dependence on bulk deposits in a rising interest rate scenarioslightly impedes our optimism.
Valuation & Recommendation
At the CMP of INR 282 the bank is trading at 1.82x FY13E BV. YBL delivered RoE of over 20% andRoA of 1.5% for FY11. We further expect the bank to deliver RoE of 20%+, however we may see somepressure on RoA due to moderation in earnings growth going forward on the back of rising loan lossprovisions and rising cost of funds.
We have valued Yes bank on scenario model with different weightage given to each scenario andarrived at a weighted average target price of INR358 which is 2.3x its FY13E BV of INR 155.4. Ourrecommended target price is 27% above the current price. We expect this target price to be met with in18 months from the date of release of this report.
25000 0
30000.0
35000.0
40000.0
45000.0
5 00
6.00
7.00
8.00
9.00
+ 1 S.D.
Valuation not very cheap nor expensive – tracking long term mean
0.0
5000.0
10000.0
15000.0
20000.0
25000.0
0.00
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2.00
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- 1 S.D.
700
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900
1000
1200
P/BV(x) Avg 5yr P/BV Avg P/BV in the last late hike
+1 S.D. - 1 S.D. Volume (000's)RHS
P/BV Band P/E Band
0
100
200
300
400
500
600
0
200
400
600
800
Microsec Research
25 Source: Microsec Research, Bloomberg
Actual Price INR P/BV of 4.00 P/BV of 3.00
P/BV of 2.00 P/BV of 1.00
Actual Price INR P/E of 27.00 P/E of 21.00
P/E of 15.00 P/E of 9.00 P/E of 3.00
20th June’2011
Financials & Projections
Income Statement (INR Million)
FY09 FY10 FY11 FY12E FY13E
Interest Income 20,014 23,697 40,417 59,672 76,246
Credit /Deposit Ratio 76.7% 82.8% 74.8% 76.3% 75.1%
CASA Ratio 8.7% 10.5% 10.3% 11.3% 12.5%
Investment/Deposit Ratio 44.0% 38.1% 41.0% 37.4% 40.0%
CAR 16.6% 20.6% 16.7% 14.4% 13.1%
Tier 1 9.5% 12.8% 9.9% 8.7% 8.1%
Asset Quality FY09 FY10 FY11 FY12E FY13E
GNPA (INR Mn) 849.0 602.0 805.2 1786.9 1970.1
NNPA (INR Mn) 412.0 130.0 91.5 402.1 337.7
GNPA Ratio 0.68 0.27 0.21 0.40 0.35
NNPA Ratio 0.33 0.06 0.03 0.09 0.06
PCR 51.5 78.4 88.6 78.0 82.3
Source: Company Microsec Research
Valuation FY09 FY10 FY11 FY12E FY13E
Book Value (Rs) 54.7 91.0 109.3 128.5 155.4
Price/BV (x) 5.17 3.11 2.59 2.20 1.82
EPS (Rs) 10.23 14.06 20.95 26.91 33.55
Price/Earnings (x) 27.66 20.12 13.51 10.52 8.44
Microsec Research
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Source: Company, Microsec Research
20th June’2011
Key concerns
o Disproportionate rise in wholesale deposit cost may depress NIMs more than expected. Every 10 bpsrise in cost of deposits is expected to depress RoE by almost 20-25 bps.
o Lower than anticipated CASA improvement may depress margin in high interest rate scenarioo Lower than anticipated CASA improvement may depress margin in high interest rate scenario.
o 55-60% of the YES bank’s loan book is still in PLR. With over 60% of YBL’s clients are formed bycorporates, the transition from BPLR to Base rate may be a key challenge for retaining clients.
o Increasing focus on SME segment (almost 10% of the current loan book) in the increasing rate scenariomay increase slippages. Every 100 bps rise in slippages is expected to depress RoE by almost 120 bps.
o Capital raising program can expose the bank to capital market cycle We can’t rule out possibility ofo Capital raising program can expose the bank to capital market cycle. We can t rule out possibility ofdeferment of capital raising program due to subdued or depressed market condition. In that case theBank’s growth plan will suffer.
o Higher foreign share holding at 50.4% (FII+FDI) (as on March’11) may put some pressure on stockprices in case of foreign money outflow from domestic market.
o Global macro economic instability with weakening economic datas from developed countries and debtcrisis in PIIGS also act as a risk.crisis in PIIGS also act as a risk.
o In the last rate hike cycle, YES bank has traded at an average valuation of 2x TTM BV. Currently itstrading at TTM P/BV of 2.72. If the current inflationary situation persists and RBI continues with its ratehike cycle, we may see negative pressure on the stock price. It can go substantially lowers than thecurrent level.
Microsec Research
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20th June’2011
Appendix 1 YES Bank – Sate of the Art Branch
YES Branch
YES Touch – Any Time Banking Counter YES Lounge – Corporate & HNI meeting point
Microsec Research
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20th June’2011
Appendix -2 Macro Headwinds at the peak – Light at the end of the tunnel ?!!
1000
Liquidity (INR Bn) – remained in the deficit mode for most of last
financial year30
Credit Growth% Deposit Growth%
Sectoral credit growth slows down
-500
0
500
10
15
20
25Credit Growth% Deposit Growth%
-1500
-1000
0
5
Inflation Trend (Y-o-Y %) – remains a key concern for RBI’s policy rate hikes to contain inflation
10 00%
4.00%
6.00%
8.00%
10.00%
12.00%
( ) y
Indian Economy
2.00%
4.00%
6.00%
8.00%
10.00%
CRR Repo Rate Reverse Repo
20
-2.00%
0.00%
2.00%
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IIP numbers suggesting slowdown in economy
0.00%
2.00%
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-08
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0
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20Light at the end of the Tunnel !!!
• End of QE2 in June 2011 and less possibility of QE3 mayshow some speculative funds outflow from globalcommodities which may cool down the prices a bit.
• Interest rate hardening cycle in two of the most powerfulemerging countries has resulted in slowdown in industrial
Microsec Research
30 Source: RBI, Microsec Research
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-11activities. This may further add to some cooling down in
commodity prices which may lead to lower inflation.