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Yes Bank: Betting big on expansion - Views on News from Equitymaster

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Yes Bank: Betting big on expansion
Apr 20, 2011

Yes Bank announced the fourth quarter results of financial year 2010-2011 (4QFY11). The bank has reported a 43% YoY and 45% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows 58% YoY in FY11 on the back of 55% YoY growth in advances.
  • Other income grows by a tepid 8% YoY in FY11 due to lower treasury gains.
  • Net interest margin comes in marginally lower at 2.9% (3.0% in FY10) due to pressure on interest costs.
  • Bottomline grows 52% YoY in FY11 thanks to write back of provisioning and higher operating leverage.
  • Capital adequacy ratio (CAR) comfortable at 16.5%, gross NPA at 0.2% (specific NPA coverage 88%).
  • Declared dividend of Rs 2.5 per share as against Rs 1.5 per share in FY10 (dividend yield 0.8%).


Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income †††† 6,646 ††† 12,226 84.0% ††††† 23,697 ††††† 40,417 70.6%
Interest expenses †††† 4,204 ††††† 8,741 107.9% ††††† 15,817 ††††† 27,948 76.7%
Net Interest Income †††† 2,442 ††††† 3,485 42.7% ††††††† 7,880 ††††† 12,469 58.2%
Net interest margin       3.0% 2.9%  
Other Income †††† 1,601 ††††† 1,867 16.6% ††††††† 5,755 ††††††† 6,233 8.3%
Other Expense †††† 1,467 ††††† 1,865 27.1% ††††††† 5,001 ††††††† 6,798 35.9%
Provisions and contingencies †††††††† 425 †††††††† 432 1.6% ††††††† 1,368 †††††††††† 982 -28.2%
Profit before tax †††† 2,151 ††††† 3,055 42.0% ††††††† 7,266 ††††† 10,922 50.3%
Tax †††††††† 749 ††††† 1,021 36.3% ††††††† 2,487 ††††††† 3,650 46.8%
Profit after tax/ (loss) †††† 1,402 ††††† 2,034 45.1% ††††††† 4,779 ††††††† 7,272 52.2%
Net profit margin (%) 21.1% 16.6%   20.2% 18.0%  
No. of shares (m)         ††††††† 347.1  
Book value per share (Rs)*         ††††††† 109.3  
P/BV (x)         3.0  
* Book value as on 31st March 2011

What has driven performance in FY11?
  • Rounding off FY11 with growth rates that were nearly 3 times the industry average, Yes Bank got closer to some of its larger peers in terms of market share in SME lending. Although term deposits comprised more than two thirds of the bankís overall deposit book. The bank was able to sustain margins (NIMs). As per the bank, one third of the higher yields were attributable to increase in base rate. Another one third was due to re-pricing of some SME assets. The rest were attributable to new loans that were booked at higher rates.

    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 not see rising interest rates putting pressure on 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 10.3% at the end of March 2011. 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 FY11 at 2.9% is well within our estimates.

    Retail led growth on full steam...
    (Rs m) FY10 % of total FY11 % of total Change
    Advances †††† 221,931   †††† 343,636   54.8%
    C&IB †††† 142,036 64.0% †††† 232,298 67.6% 63.5%
    Business Banking †††††† 61,031 27.5% †††††† 76,631 22.3% 25.6%
    Retail †††††† 18,864 8.5% †††††† 34,707 10.1% 84.0%
    Deposits †††† 267,986   †††† 459,389   71.4%
    CASA †††††† 28,065 10.5% †††††† 47,317 10.3% 68.6%
    Term deposits †††† 239,921 89.5% †††† 412,072 89.7% 71.8%
    Credit deposit ratio 82.8%   74.8%    

  • The proportion of Yes Bankís non-funded income to total income dropped to 33% in FY11 from 42% in FY10. 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 bring down its cost to income ratio at 35% in FY11 from 37% in FY10 because of improved productivity and operating leverage. The bank hired more than 900 employees in FY11 bringing the total headcount to 3,900. The bank expects its operating costs to increase at an annual average rate of around 40% over the next 2 to 3 years given the branch expansion targets. Yes Bank is targeting to take the total number of branches from 214 in FY11 to 260 by FY12.

  • Yes Bankís CAR stood comfortable at 16.5% (as per Basel II) at the end of FY11. 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 0.2% of advances at the end of FY11. Yes Bank had total loan-loss coverage ratio of 300%, well above the RBIís mandate of 89%.

What to expect?
At the current price of Rs 329, the stock is trading at 2 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 bankís conservative provisioning policy. Having said that, the current rate of growth as well as margins may not be sustainable. The current valuations of the bank offer reasonable upsides in the long term. We reiterate our positive view on the stock.

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