Yes Bank Ltd: Best is yet to come

Money Times - - Expert Eye - By Vi­hari

(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.

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