Yes Bank: No slowdown in growth

Yes Bank declared its 3QFY11 results. The bank has reported a 53% YoY and 52% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary

• Net interest income grows 65% YoY in 9mFY11 on the back of 66% YoY growth in advances.
• Other income grows by a tepid 5% YoY in 9mFY11 due to lower treasury gains.
• Net interest margin comes in marginally lower at 2.9% (3.0% in 9mFY10) due to pressure on interest costs.
• Bottomline grows 55% YoY in 9mFY11 due to write back of provisioning and higher operating leverage.
• Capital adequacy ratio (CAR) comfortable at 18%, gross NPA at 0.2% (specific NPA coverage 76%).

Rs (m)	3QFY10	3QFY11	Change	9mFY10	9mFY11	Change
Interest income	6,264	11,262	79.8%	170,511	281,913	65.3%
Interest expenses	4,154	8,030	93.3%	116,133	192,071	65.4%
Net Interest Income	2,110	3,232	53.2%	54,378	89,842	65.2%
Net interest margin				3.0%	2.9%
Other Income	1,278	1,617	26.5%	41,539	43,651	5.1%
Other Expense	1,226	1,736	41.6%	35,341	49,332	39.6%
Provisions and contingencies	254	250	-1.6%	9,428	5,495	-41.7%
Profit before tax	1,908	2,863	50.1%	51,148	78,666	53.8%
Tax	648	952	46.9%	17,377	26,291	51.3%
Profit after tax/ (loss)	1,260	1,911	51.7%	33,771	52,375	55.1%
Net profit margin (%)	20.1%	17.0%		19.8%	18.6%
No. of shares (m)					346.8
Book value per share (Rs)*					106.5
P/BV (x)					3.3

* Book value as on 31st December 2010

What has driven performance in 9mFY11?

• Yes Bank managed to sustain a high growth rate in 9mFY11 partially on the back of bulk disbursements to the telecom sector during the first six months of FY11. At the same time bulk deposits too comprised more than two thirds of the bank’s overall deposit book. So the bank’s growth so far this fiscal has at best been lumpy. Also in the results conference call the management cited that while it will continue to grow above sector average the current rate of growth may not be sustainable. However since most of its loan book can be re-priced in 12-months time, the bank does see rising interest rates hurting its margins. In fact Yes Bank sees NIMs sustaining at around 3% for the fiscal.

  CASA (current and savings accounts) as a proportion of total deposits remained stable at 10.2% at the end of December 2010. The bank has set a target of achieving 25% CASA by FY12 and 40% by FY15. The same may however be impacted by competition from the PSU and private sector players. As this proportion goes on increasing for the bank, the relative ease of low cost funding will help it shield its net interest margins (NIM) against cost pressures. The NIM for 9mFY11 at 2.9% is well within our estimates.

  Retail led growth on full steam...

  (Rs m)	9mFY10	% of total	9mFY11	% of total	Change
  Advances	187,104		311,122		66.3%
  C&IB	119,747	64.0%	210,318	67.6%	75.6%
  Business Banking	51,454	27.5%	69,380	22.3%	34.8%
  Retail	15,904	8.5%	31,423	10.1%	97.6%
  Deposits	220,386		394,528		79.0%
  CASA	22,291	10.1%	40,369	10.2%	81.1%
  Term deposits	198,095	89.9%	354,159	89.8%	78.8%
  Credit deposit ratio	84.9%		78.9%

  
  
• The proportion of Yes Bank’s non-funded income to total income dropped to 33% in 9mFY11 from 43% in 9mFY10. The drop can be largely attributed to lower treasury gains. Notwithstanding the fact that the bank has set a target of maintaining its non-interest income at 40% of total income until FY13, we have estimated the same to come down to remain below 35% in the next 3 years.

• Despite an addition to franchise as well as employee base, Yes Bank has managed to sustain its cost to income ratio at 37% in 9mFY11 as in 9mFY10 because of improved productivity and operating leverage. The bank hired 969 employees in the first 9 months of FY11 bringing the total headcount to 3,785.

• Yes Bank’s CAR stood comfortable at 18.2% (as per Basel II) at the end of 9mFY11. The higher capital base also capacitates the bank to capitalise on growth opportunities being available in the sector going forward.

• The bank had negligible net NPA while the gross NPA stood at 0.1% of advances at the end of 9mFY11. Yes Bank had total loan-loss coverage ratio of 283%, well above the RBI’s mandate of 70%.

What to expect?

At the current price of Rs 271, the stock is trading at 1.7 times our estimated FY13 adjusted book value. Research Pro subscribers can view the latest updates here. Yes Bank has managed to outperform our broader growth estimates for FY11. Further, we are enthused by the bank’s conservative provisioning policy. Having said that, the current rate of growth as well as margins may be sustainable. The current valuations of the bank offer reasonable upsides in the long term. We reiterate our positive view on the stock.