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Yes Bank: Well poised - Views on News from Equitymaster

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Yes Bank: Well poised
Mar 28, 2007

Performance summary
Yes Bank had recently declared its third quarter and nine months ended December 2006 results. While the bank did not display any precariousness in its asset growth (albeit on a lower base) and net interest margins, it fell in line with most of its peers in the private sector in terms of a drop in the net profit margins. Despite the accretion of low cost deposits, the higher provisioning and operating costs have dented the bank’s margins. Having said that, the zero asset slippage and sufficient capital (CAR) are matters of comfort.

Rs (m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Interest income 568 1,608 183.1% 1,227 3,809 210.5%
Interest expenses 299 1,112 272.4% 625 2,603 316.7%
Net Interest Income 269 496 84.3% 602 1,206 100.3%
Other Income 250 449 80.0% 659 1,202 82.5%
Net interest margin       3.2% 3.0%  
Other Expense 257 467 81.3% 606 1,283 111.5%
Provisions and contingencies 43 98 128.5% 58 161 178.2%
Profit before tax 219 381 74.2% 597 965 61.7%
Tax 74 130 76.2% 197 331 68.0%
Profit after tax/ (loss) 145 251 73.2% 400 634 58.6%
Net profit margin (%) 25.5% 15.6%   32.6% 16.6%  
No. of shares (m)       270.0 270.0  
Diluted earnings per share (Rs)*       2.0 3.1  
P/E (x)         46.3  
* trailing 12 months

The latest entrant to private sector banking
Yes Bank, which received its banking license (the only greenfield license given by RBI in the last 10 years) in May 2004, commenced its lending operations in October 2004. The bank, at present, is operating through 29 branches and is largely concentrated on the corporate segment for its advances portfolio. Yes Bank has adopted a knowledge-based product delivery, wherein it has put together a team of experienced professionals with sector and banking product knowledge that would develop relationships with customers and deliver sector focused advice in food and agri-business, life sciences, infrastructure, telecommunications, media and technology (TMT), engineering, textiles and retailing sectors. The bank had 2,161 employees at the end of December 2006.

What has driven performance in 3QFY07?
C/D moderation: While a multiplication of 1.5 times in advances and 2.0 times in deposits certainly suggests no slowdown, one must keep in mind that the growth figures of Yes Bank are on a much smaller base as compared to most of its peers in the private sector banking space. As a result while the sector clocked a 29% YoY growth in advances at the end of the third quarter, despite liquidity pressures following the CRR hike, Yes Bank outperformed it by a wide margin. Nevertheless, the visible fall in the bank’s credit to deposit ratio suggests a slowdown in the accretion to incremental assets.

Yes Bank is currently focussed on the large corporate and SME segments and is yet to take retail assets (advances) in its books. It sees the mix of 70:30 between corporate and SME assets in the corporate credit book to go up to 60:40 in 1HFY08, with retail assets also acquiring a minor allocation. The bank is currently soliciting retail liabilities (majority of which are at a higher cost) without vending retail assets (offering higher yields) thus taking a dent on its margins. Having said that, the relatively high proportion of low cost deposits (CASA) in this quarter, has shielded the bank’s net interest margins (NIMs, 3% in 3QFY07) over that of the preceding quarter. The bank expects its margins to hover between 2.7% to 3.0% in FY07E. We have estimated its FY07E NIMs at 2.9% in the wake of higher liquidity concerns in the fourth quarter.

Signs of moderation…
(Rs m) 9mFY06 % of total 9mFY07 % of total Change
Advances 19,112   48,002   151.2%
C&IB 12,767 66.8% 30,241 63.0% 136.9%
Business Banking 6,345 33.2% 17,761 37.0% 179.9%
           
Deposits 17,781   54,609   207.1%
CASA 587 3.3% 3,986 7.3% 579.4%
Term deposits 17,194 96.7% 50,623 92.7% 194.4%
Credit deposit ratio 107.5%   87.9%    

Fees shield margins: Yes Bank is the only domestic banking entity to have an equal proportion of non-funded income (50% in 9mFY07 against 52% in 1HFY07) and funded income in the country. The higher proportion of the former has relatively hedged the bank’s bottomline against the NIM pressures over the past few quarters. The bank, however, sees the 50:50 mix of NII and non-funded income increasingly difficult to maintain and envisages this to be 55:45 on a more normalized basis.

The bank had about 60% of its treasury portfolio in Treasury Bills (at the end of 1HFY07), which are not to be marked to market with the rise in interest rates. The rest comprised of debentures (24%) and corporate bonds (16%). The corporate bonds, (which are to be marked to market) have a 2-year duration and 35% of this is currently in the HTM basket.

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 nil gross and net NPAs at the end of 9mFY07. 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. Infact, with the rise in the interest rates, the susceptibility of high yielding assets to slippage will be more.

Lack of operating leverage: Yes Bank’s cost to income ratio, though currently at par with its larger peers in the private sector banking space (49% in 9mFY07), has continued to scale up with the expansion of franchise and addition to the employee base. This is due to the fact that the bank rolled out 7 branches in 3QFY07 and hired more than 1,700 employees between 9mFY06 and 9mFY07. The bank sees the costs stabilising going forward as it rolls out additional branches and utilizes its operating leverage.

Enhanced capital base: Yes Bank completed the infusion of equity capital of Rs 1.2 bn (US$ 26.5 m) comprising of private placement of 10 m equity shares to Swiss Reinsurance Company, Zurich (Swiss Re), Switzerland in 3QFY07. The enhanced paid-up share capital of the bank has brought its capital adequacy to a comfortable 14.3% at the end of December 2006. The bank also issued subordinated debt of Rs 1.8 bn (lower Tier II) for a period of 9 years and 6 months. The higher leverage ratio of the bank (from 3.9 times in 9mFY06 to 8.8 times in 9mY07) has marginally shrunk its return on assets to 1.4% in 3QFY07 from 1.5% in 2QFY07. The return on equity has, however, improved from 14.0% in 2QFY07 to 14.6% 3QFY07.

What to expect?
At the current price of Rs 145, the stock is trading at 2.5 times our estimated FY09 adjusted book value. The bank’s enhanced capital base, post the private placement and Tier II borrowing recently, boosts up the scope for growth in the advance book. We believe that the bank holds potential for effectively catering to a niche corporate segment (especially due its novel strategy) and focus on low operating overhead approach. However, the venture into retail lending space (albeit a niche premium segment) seems to be fraught with risks at a time when the segment seems to be already saturated. Absence of delinquencies in the asset book, higher operating leverage and sustenance of margins would do well for the bank to help it establish its credentials in the longer term.

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