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Yes Bank: Treasury windfall - Views on News from Equitymaster

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Yes Bank: Treasury windfall

Jan 21, 2009

Performance summary
  • Interest income grows 57% YoY in 9mFY09 on the back of 27% YoY growth in advances.
  • Other income grows by 36% in 9mFY09 YoY largely on the back of gains in treasury book.
  • Net interest margin sustained at 2.8% at the end of 9mFY09.
  • Bottomline grows 65% YoY due to better management of operating costs.
  • Capital adequacy ratio (CAR) comfortable at 14.5%, net NPA at 0.2%.

Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 3,445 5,326 54.6% 9,180 14,370 56.5%
Interest expenses 2,533 4,123 62.8% 6,941 10,811 55.8%
Net Interest Income 912 1,203 31.9% 2,239 3,559 59.0%
Net interest margin       2.8% 2.8%  
Other Income 986 1,935 96.2% 2,531 3,453 36.4%
Other Expense 889 1,295 45.7% 2,478 3,275 32.2%
Provisions and contingencies 157 204 29.9% 208 296 42.3%
Profit before tax 852 1,639 92.4% 2,084 3,441 65.1%
Tax 310 581 87.4% 729 1,204 65.2%
Profit after tax/ (loss) 542 1,058 95.2% 1,355 2,237 65.1%
Net profit margin (%) 15.7% 19.9%   14.8% 15.6%  
No. of shares (m)       280.0 296.9  
Book value per share (Rs)*         52.0  
P/BV (x)         1.3  
* Book value as on 31st December 2008

What has driven performance in 3QFY09?
  • Given the liquidity crunch prevailing in the sector and with little support from its miniscule deposit base, Yes Bank pared its growth targets in the past quarter. Clocking a growth of 27% YoY in advances during the nine month period, the bank has outlined a target of 30% to 35% YoY growth in the same until the end of the fiscal. The relative easing of funding pressure helped the bank maintain its NIMs. However, going forward, with the bank having to pass on the rate cuts to customers, the margins may be unsustainable. We have estimated Yes Bank’s FY09 NIM at 2.4%.

    Cutting back on growth…
    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 85,980   109,350   27.2%
    C&IB 57,435 66.8% 67,797 62.0% 18.0%
    Business Banking 28,545 33.2% 41,225 37.7% 44.4%
    Retail - 0.0% 328 0.3%  
    Deposits 111,290   135,390   21.7%
    CASA 8,897 8.0% 12,456 9.2% 40.0%
    Term deposits 102,393 92.0% 122,934 90.8% 20.1%
    Credit deposit ratio 77.3%   80.8%    

  • The proportion of Yes Bank’s non-funded income in the last quarter was at 61% largely held up by gains in the investment book due to drop in interest rates. Treasury comprised nearly 70% of the bank’s non fund income and the same may not be sustainable going forward. Notwithstanding the fact that the bank has set a target of maintaining its non-interest income at 48% of total income until FY10, we have estimated the same to come down to a tad below 40% in the next 3 years.53% of the bank’s investments are currently in the HTM (held to maturity) basket.

  • Despite trebling of its employee base and doubling of its branch franchise in the last 12 months, Yes Bank has managed to retain its cost to income ratio at 47% in 9mFY09. The bank sees this ratio sustaining at the current levels in FY09. Yes Bank has received additional licenses to open 16 new branches (101 operational currently) taking the total licensed network to 117 branches.

  • Yes Bank’s CAR stood comfortable at 14.6% in 3QFY09 and the bank believes that it can grow its balance sheet by about 50% without raising any further capital. It also reiterated that it will not require any equity dilution in the near term. We have thus revised our estimates for the bank by not considering the capital raising plans that the bank had earlier formalised for FY09.

  • The net NPAs stood at 0.2% while the gross NPAs stood at 0.4% at the end of 9mFY09. The bank had loan loss coverage ratio of 66.4%.

What to expect?
At the current price of Rs 67, the stock is trading at 0.9 times our estimated FY11 adjusted book value. Yes Bank has failed to remain unscathed from the acute liquidity and margin pressure faced by the sector. The fall in fee income hedge and limited streams of cheap funding have also acted as a dampener. Further, as the continuous infusion of capital which had been consistently providing the bank enough float to survive the cost pressures has now dried up, Yes Bank will have to withstand the margin pressures in the near to medium term. Having said that, the adequate capital and good asset quality makes the bank relatively safer as compared to other smaller players in the sector.

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