Yes Bank Ltd: Best is yet to come
(BSE Code: 532648) (CMP: Rs.1578.85) (FV: Rs.10)
This stock is strongly recommended on account of the Bank’s sustained profit growth driven by strong loan growth and robust operating revenue growth. Deposits were positively impacted by demonetisation leading to strong sequential accretion in CASA balances thereby restricting its need for higher cost funding.
Yes Bank Ltd, India's fourth largest private sector Bank, is an outcome of the professional entrepreneurship of its Founder, RanaKapoor and his competent top management team to establish a high quality, customer centric, service driven, private sector Indian bank catering to the ‘Future Businesses of India’. It has adopted the best international practices, the highest standards of service quality and operational excellence and offers comprehensive banking and financial solutions to its valued customers. It has a knowledge-driven approach to banking and a superior customer experience for its retail, corporate and commercial banking clients.
Yes Bank is the only bank that has obtained a greenfieldlicence awarded by the RBI in the last 18 years and is associated with the finest pedigree of investors. The Bank continues to demonstrate strong traction in Current and Savings Account (CASA) on the back of an expanding branch network, enhanced Savings Rate offering and improvements in productivity. With a pan India presence across all 29 states and 7 Union Territories of India, Yes Bank has a network of over 1,000 branches and 1,800 ATMs. It added 250 new branches in FY17 and is likely to continue branch expansion at a similar pace going forward in the absence of any adverse event. Its total headcount stands at 20,125 as at 31 March 2017, after adding 725 employees in the quarter and 6,025 employees during the year.
For FY17, its net profit climbed 31% to Rs.3330 crore on 37% higher net income of Rs.9954 crore fetching an EPS of Rs.78.9. Its net interest income rose 27% to Rs.4156.8 crore. During the year, advances grew 35% to Rs.132260 crore while deposits grew 29% to Rs.142870 crore. Credit-Deposits ratio was 92.6%; CASA at Rs.51870 crore grew 65.5% YoY; CASA ratio was 36.3%; Saving Accounts deposits at Rs.32780 crore grew 61%; and Total Assets grew 30% to Rs.215060 crore. Gross NPA stood at 1.5% of Gross Advances and Net NPA at 0.81% of Net Advances. NIM was 3.4%. During Q4FY17, Yes Bank’s net profit climbed 30% to Rs.1640 crore on 42% higher net income of Rs.2897 crore fetching an EPS of Rs.21.6. NIM (net interest margin) was 3.6%.
Recently, the Bank raised Rs.4906.6 crore ($750 mn) through a qualified institutional placement (QIP). “These funds are expected to strengthen the Bank’s capital buffer and also boost its loss absorbing buffers. The capital growth is credit positive because it strengthens the Bank’s capitalisation and supports its credit growth”, said Moody’s. The agency also expects the Bank to grow its risk weighted assets by 30% in FY18, in line with the growth over 3 years. With an equity capital of Rs.456.5 crore and reserves of Rs.21584 crore, Yes Bank’s share book value works out to Rs.483 as at FY16 v/s Rs.327 in FY16. The promoters hold 20.2% of the equity capital, FIIs hold 47%, DIs and MFs hold 23.3% and PCBs hold 0.9%, which leaves 8.6% stake with the investing public.
Yes Bank has intensified its focus on investing significantly on new-age media and digital technologies to achieve a heightened customer engagement and experience. It has launched key digital initiatives in partnership with e-commerce companies revolutionizing the payments ecosphere through various initiatives.
The management targets over 40% CAGR over the next four years in the MSME (Micro, Small and Medium Enterprises) and SME segments. Yes Bank has been incrementally lending to lower-ticket-size SMEs and MSMEs with demand in the large corporate segment shifting to corporate bonds. Considering the granularity of the book, the existing book itself will drive growth during an economic upturn. The Bank is focused on 15 sunrise segments, with major thrust on service- oriented industries. Further, by leveraging on its strong large and mid-corporate relationships, the Bank is targeting the entire supply chain.
Yes Bank’s key competitive strength lies in its book, which remains predominantly wholesale and it continues to leverage that. Despite being a relatively new bank, its domestic corporate book is now nearly as large as many of the older banks. This will probably be the fastest growing segment over the next 2-3 years (over retail) and the Bank’s positioning in this segment is better.
Yes Bank’s recent divergence was discomforting, which was disclosed in the earnings call of 19 April
2017, but the quantum of divergence was not disclosed. When the RBI inspects the books of accounts of a bank, its inspection is based on the company’s audited numbers of the previous year (FY16). NPLs reported by Yes Bank for FY16 were
Rs.750 crore while those assessed by RBI were Rs.4950 crore.
However, the management had clarified on their earnings call that the entire divergence was dealt with in FY17. The Bank sold standard loans worth
Rs.860 crore to ARCs (asset restructuring companies). It is estimated that Rs.1600 crore, which is 36% of the total divergence or 1.1% of loans, did not slip at all.
For other banks, slippages from the RBI list are higher. Yes Bank’s overall divergence of Rs.4900 crore or 3.2% of loans is higher than ICICI Bank’s Rs.5500 crore or 1% of loans and Axis Bank’s Rs.9800 crore or 2.5% of loans. While Axis Bank’s divergence is high, the proportion of slippages from the divergence list is higher than Yes Bank’s.
Of the total slippage of Rs.1900 crore in Q4FY17, Rs.1500 crore was from a single account in the cement sector (JPAssociates). There was a partial recovery of Rs.600 crore from the same account in the quarter. Thus, the net slippage during Q4FY17 from JPA was Rs.900 crore. Despite a weak corporate cycle that led to a substantial increase in credit cost for corporate banks, Yes Bank’s credit cost remains amongst the lowest.
Yes Bank’s business continues to be on track with healthy accretion to loans and deposits, sustained asset quality and healthy operating efficiencies from older branches. The current legal tangle involving the promoter entities has not
affected its business. The Bank continues to grow its assets and add low-cost deposits at a fast clip, focus on expanding coverage of retail products across branches and increased efforts to maintain its superior credit quality. Given its robust profitability profile, strong outlook on balance sheet growth and proven record of accomplishment, the Yes Bank stock is expected to continue to command premium valuations versus its peers.
The Bank expects NIMs to improve 3.7% in FY18. It expects credit cost to be in the range of 50-70 bps for FY18. It aims to further improve CASA ratio to more than 40% by FY20. Average cost of saving account deposits stood was 6.1-6.2% as at 31 March 2017.
The Bank plans to sub-divide its equity share of Rs.10 paid-up. The Board will consider the proposal on 26 July 2017. Yes Bank may post an EPS of Rs.95 in FY18 and Rs.105 in FY19. At the CMP of Rs.1578.85, the stock trades at a P/E of 16.61x and P/BV of 2.6x on FY18E earnings and at a P/E of 15.03x and P/BV of 2.2x on FY19E earnings. A reasonable P/E of 20x will take its share price to Rs.1900 in the medium-term and Rs.2100 thereafter. The stock’s 52-week high/low is Rs.1652.90/1091.25.