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Yes Bank: Provision write back boosts profits
Jan 16, 2014

Yes Bank declared its results for the third quarter and first nine months of financial year 2013-14 (9mFY14). The bank has reported 26% YoY and 27% YoY growth in net interest income and net profits respectively in 9mFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 27% YoY in 9mFY14 on the back of 17% YoY growth in advances.
  • Other income grows by 45% YoY in 9mFY14 due to robust growth in fee income.
  • Net interest margin remains stable at 2.9%, due to rise in proportion of CASA deposits.
  • Bottomline grows 27% YoY in 9mFY14 despite higher provisioning. The profits for 3QFY14 were up 21% YoY largely due to the write back of provisions.
  • Capital adequacy ratio (CAR) comfortable at 16.1% (Tier 1- 9.9%), gross NPA at 0.4% of advances at the end of December 2013.

(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 21,336  25,141 17.8% 60,064 74,133 23.4%
Interest Expense 15,493 18,487 19.3% 44,257 54,166 22.4%
Net Interest Income 5,843 6,654 13.9% 15,807 19,967 26.3%
Net interest margin (%)       3.0% 2.9%  
Other Income 3,132 3,879 23.9% 8,781 12,761 45.3%
Other Expense 3,340 4,386 31.3% 9,509 12,652 33.1%
Provisions and contingencies 566 132 -76.7% 1,184 2,894 144.4%
Profit before tax 5,069 6,015 18.7% 13,895 17,182 23.7%
Tax 1,645 1,857 12.9% 4,509 5,306 17.7%
Profit after tax/ (loss) 3,424 4,158 21.4% 9,386 11,876 26.5%
Net profit margin (%) 16.0% 16.5%   15.6% 16.0%  
No. of shares (m)         360.5  
Book value per share (Rs)*         194.9  
P/BV (x)         1.8  
*Book value as on 31st December 2013

What has driven performance in 9mFY14?
  • After a difficult second quarter for Yes Bank given the high exposure to treasury assets, the third quarter saw a reasonable uptick in loan growth as well as other income. Yes Bank clocked a respectable 16.5% growth in advances for 9mFY14, backed by 19% YoY growth in corporate loan book. This was against the backdrop of lower loan growth expectation due to muted GDP growth rates. The deposit growth however was higher at 21% YoY. What is worrisome is that wholesale deposits accounted for 31.9% of total deposits and are priced at higher rates The 38% YoY growth in CASA came on account of the higher interest offered by the bank on savings accounts. This catapulted the CASA deposits to 20.9% of total loan book. While NIMs are currently stable at 2.9% at the end of December 2013, they may come under pressure with upward movement in interest rates.

    Moderate growth in advances
    (Rs m) 9mFY13 % of total 9mFY14 % of total Change
    Advances 870,173   1,013,879   16.5%
    Retail 174,035 20.0% 182,498 18.0% 4.9%
    Corporate 696,138 80.0% 831,381 82.0% 19.4%
    Deposits 564,005   680,599   20.7%
    CASA 103,408 18.3% 142,461 20.9% 37.8%
    Term deposits 460,597 81.7% 538,138 79.1% 16.8%
    C/D ratio 154.3%   149.0%    

  • Yes Bank's non-funded income to total income remained stable at around 40% in 9mFY14 from 38% in 9mFY13. This can be largely attributed to higher fee income. The bank had incurred one-time depreciation of Rs 1.1 bn on its bond portfolio in 2QFY14.

  • Yes Bank increased its branch network by 105 over the past 9 months and the total count stood at 517 at the end of December 2013. The bank's total headcount stood at 8,645 in December 2013 (up 32% YoY). The bank expects its operating costs to increase at an annual average rate of around 40% over the next 2 to 3 years given the branch expansion targets. The cost to income ratio, however, stood stable YoY at 38%. Having said that, at 16.1% capital adequacy ratio (CAR), Yes Bank is one of the best capitalized in the sector. Also, it has one of the highest proportions of Tier II capital.

  • In relative terms, Yes Bank had a higher slippage in asset quality while the gross NPA stood at 0.4% of advances at the end of December 2013. Also, the possibility of slippages from the restructured loan book (0.2% of gross advances) looms large. Further, the rise is provision costs are a cause for concern. After the write back of provisions during the third quarter (3QFY14), Yes Bank had a lower provision coverage ratio of 78% as against 85% earlier.

  • The bank's annualized return on equity and return on assets stood at 24.7% and 1.6% at the end of 9mFY14, with the averages over the past 4 years being 20% and 1.5% respectively.
What to expect?
At the current price of Rs 353, the stock of Yes Bank is trading at 1.4 times our estimated FY16 adjusted book value. Although Yes Bank's performance has been in line with our estimates, we do see some margin and asset quality pressures in the medium term. The conflict on the bank's board, though not impacting fundamentals, can hurt long term prospects. Further, we would prefer to be cautious about its provisioning policy. The stock has gone up by 58% since we recommend buy on it in August 2013. We recommend investors to hold on to the stock at current levels. A gentle reminder that no stock should comprise more than 5% of your overall stock portfolio.

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