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Yes Bank: Capital ‘boost’ the secret of energy - Views on News from Equitymaster

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Yes Bank: Capital ‘boost’ the secret of energy

Feb 1, 2008

Performance summary
  • Interest income grows 113% YoY on the back of 79% YoY growth in advances.

  • Other income grows 124% YoY aided by higher fee income contribution.

  • Net interest margins remain unchanged at 2.9% as in 9mFY07.

  • Bottomline grows 117% YoY due to better management of operating costs.

  • Raised equity capital to the tune of US$ 84 m through private placement of 14.7 m shares in 3QFY08. Received board approval for another QIP of 20 m shares in the coming quarters.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest income 1,624 3,464 113.3% 3,853 9,223 139.4%
Interest expenses 1,112 2,533 127.8% 2,602 6,941 166.8%
Net Interest Income 512 931 81.8% 1,251 2,282 82.4%
Net interest margin       2.9% 2.9%  
Other Income 433 968 123.6% 1,158 2,487 114.8%
Other Expense 467 889 90.4% 1,282 2,478 93.3%
Provisions and contingencies 98 157 60.2% 161 208 29.2%
Profit before tax 380 853 124.5% 966 2,083 115.6%
Tax 130 310 138.5% 331 728 119.9%
Profit after tax/ (loss) 250 543 117.3% 635 1,355 113.4%
Net profit margin (%) 15.4% 15.7%   16.5% 14.7%  
No. of shares (m)         294.7  
Book value per share (Rs)*         42.5  
P/BV (x)         5.9  
* Book value as on 31st December 2007

What has driven performance in 3QFY08?
  • SME catching up on C&IB: Clocking a growth of 79% YoY in advances (nearly 3 times the average sector growth, though on a very small base) and 103% YoY in deposits in 9mFY08, Yes Bank continued to outdo its larger peers in the private sector banking space in terms of growth in balance sheet size. The bank is clearly focusing on the higher yielding SME (business banking) segment for its advance growth. The relatively higher proportion of low cost deposits (CASA), which more than doubled in absolute terms in the last twelve months, has been a cause for the lower cost of funding. Also, the NIMs remained stable thanks to a fresh dose of equity funding through a private placement in the last quarter. The bank is targeting CASA base to comprise 25% of its deposits by FY10 and 30% by FY12.

    From baby to bigger steps…
    (Rs m) 9mFY07 % of total 9mFY08 % of total Change
    Advances 48,002   85,980   79.1%
    C&IB 32,065 66.8% 50,728 59.0% 58.2%
    Business Banking 15,937 33.2% 34,048 39.6% 113.6%
    Retail - 0.0% 1,204 1.4%  
    Deposits 54,609   111,289   103.8%
    CASA 2,757 7.0% 8,948 8.0% 224.6%
    Term deposits 51,852 93.0% 102,341 92.0% 97.4%
    Credit deposit ratio 87.9%   77.3%    

  • Fees give way to fund income: Yes Bank was earlier the only domestic banking entity to have a higher proportion of non-funded income (52% in 9mFY07) over funded income, which has been its highest so far. The same has, however, fallen to 48% in 9mFY08, in line with the bank’s guidance. The bank has set a target of maintaining its non-interest income at 47% of total income until FY10E.

  • NPAs kept at bay: In each of the focus sectors, Yes Bank has been able to restrict itself to the top 10 companies. Due to this, the bank had zero gross and net NPAs at the end of 9mFY08. However, one must note that the operations of the bank are yet to be judged in the high interest rate scenario in terms of the quality of longer-term loans.

  • Operating leverage trickling in: Despite trebling of its employee base and doubling its branch franchise, Yes Bank has managed to retain its cost to income ratio at 52% over the last 12 months. The bank sees this ratio sustaining at the current levels in FY08. Yes Bank has received additional licenses to open 56 new branches and 125 ATMs taking the total licensed network to 116 branches and 200 ATMs. The bank sees the employee base going up to 5,000 by FY08. The target franchise is 100 branches by FY08 and 250 branches by FY10.

  • Capital raising on the anvil: Yes Bank has received board approval for another QIP of 20 m shares in the coming quarters. This is expected to lead to 7.3% equity dilution. Its CAR stood at 14.2% in 9mFY08.

What to expect?
At the current price of Rs 250, the stock is trading at 3.6 times our estimated FY10 adjusted book value (without factoring in the planned equity dilution in 4QFY08 or 1QFY09). The bank has managed to emerge unscathed from the acute liquidity and net profit margin pressure faced by most of its peers due to the lack of fee income hedge, lack of diversity in revenue steam and commoditised lending business. Further, the continuous infusion of equity capital has been consistently providing the bank enough float to survive the cost pressures. We shall update our view on the stock on receipt of further details regarding the upcoming equity dilution.

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