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Yes Bank: Signs of moderation - Views on News from Equitymaster

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Yes Bank: Signs of moderation
Apr 9, 2008

Performance summary
  • Interest income grows 123% YoY in FY08 on the back of 50% YoY growth in advances.

  • Other income grows 82% YoY aided by higher fee income contribution.

  • Net interest margin at 2.7% in FY08 against 2.8% in FY07.

  • Bottomline grows 112% YoY due to better management of operating costs.

  • Received shareholder approval for another QIP of 20 m shares in the coming quarters.

  • The bank has received licenses to open 57 branches and 125 ATMs in FY09.

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 2,024 3,885 91.9% 5,876 13,108 123.1%
Interest expenses 1,561 2,800 79.4% 4,163 9,741 134.0%
Net Interest Income 463 1,085 134.3% 1,713 3,367 96.6%
Net interest margin 2.8% 2.7%
Other Income 787 1,058 34.4% 1,946 3,545 82.2%
Other Expense 653 934 43.0% 1,935 3,412 76.3%
Provisions and contingencies 127 228 79.5% 288 436 51.4%
Profit before tax 470 981 108.7% 1,436 3,064 113.4%
Tax 162 336 107.4% 493 1,065 116.0%
Profit after tax/ (loss) 308 645 109.4% 943 1,999 112.0%
Net profit margin (%) 15.2% 16.6% 16.0% 15.3%
No. of shares (m) 280.0 295.8
Book value per share (Rs)* 44.6
P/BV (x) 3.8
* Book value as on 31st March 2008

    What has driven performance in 4QFY08?
  • Taking breather: After a steady pace in the first nine months of the fiscal, Yes Bank’s growth number for the full year FY08 appear muted. Clocking a growth of 50% YoY in advances and 62% YoY in deposits in FY08, Yes Bank has shown some signs of slow down in terms of growth in balance sheet size in the fourth quarter. However, the bank has clarified that the same is due to the tight liquidity situation in the economy and the securitisation of assets worth Rs 12 bn carried out in the quarter. 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) has also 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 12.5% of its deposits by FY09 and 15% by FY10.

    Cautious disposition…
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 62,900   94,300   49.9%
    C&IB 42,017 66.8% 51,865 55.0% 23.4%
    Business Banking 20,883 33.2% 40,549 43.0% 94.2%
    Retail - 0.0% 1,886 2.0%  
    Deposits 82,200   132,730   61.5%
    CASA 5,754 7.0% 10,671 8.0% 85.5%
    Term deposits 76,446 93.0% 122,112 92.0% 59.7%
    Credit deposit ratio 76.5%   71.0%    

  • Risks weigh on fees: Yes Bank managed to have a high proportion of non-funded income (51% of total income in FY08) over funded income, notwithstanding the risks on the derivative portfolio. Revenues from the derivatives portfolio comprised 12% of the bank’s total non-funded income, while advisory services contributed 27%. The increased business derived from the forex trade flows are expected to hedge the bank’s non-interest income. The bank has set a target of maintaining its non-interest income at 48% 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 0.9% net NPAs at the end of FY08. 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 49% 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 57 new branches and 125 ATMs taking the total licensed network to 117 branches and 200 ATMs. The bank had an employee base of 3,150 at the end of FY08, having added 707 employees during the fiscal.

  • 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 6.6% equity dilution. Its CAR stood at 13.6% in FY08.

What to expect?
At the current price of Rs 165, the stock is trading at 2.2 times our estimated FY10 adjusted book value. 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.

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