X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Yes Bank: Investing in growth - Views on News from Equitymaster
MidCapSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Yes Bank: Investing in growth
Apr 26, 2007

Performance summary
Yes Bank declared its fourth quarter and fiscal ended March 2007 results late yesterday. While the bank continued to clock a superlative rate of asset growth, its net interest margins proved to be a disappointment this quarter, dampening the margins for the full year period. The bank, however, sustained a strong position in its fee revenue stream making up for most of the margin losses. Higher operating costs due to investment in retail operations have been cushioned by zero NPA provisioning.

Rs (m) 4QFY06 4QFY07 Change FY06 FY07 Change
Interest income 681 2,023 197.1% 1,928 5,876 204.8%
Interest expenses 423 1,560 268.8% 1,047 4,163 297.6%
Net Interest Income 258 463 79.5% 881 1,713 94.4%
Net interest margin       3.3% 2.8%  
Other Income 332 787 137.0% 971 1,945 100.3%
Other Expense 255 653 156.1% 861 1,935 124.7%
Provisions and contingencies 89 126 41.6% 147 287 95.2%
Profit before tax 246 471 91.5% 844 1,436 70.1%
Tax 93 162 74.2% 291 493 69.4%
Profit after tax/ (loss) 153 309 102.0% 553 943 70.5%
Net profit margin (%) 22.5% 15.3%   28.7% 16.0%  
No. of shares (m)       270.0 279.9  
Diluted earnings per share (Rs)*       2.0 3.4  
P/E (x)         45.7  
* 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 40 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 2,443 employees at the end of March 2007.

What has driven performance in 4QFY07?
Liquidity pangs: Clocking a growth of 161% YoY in advances and 182% YoY in deposits in FY07, Yes Bank has made an appreciable attempt to catch up with its larger peers in the private sector banking space in terms of balance sheet size. As a result, while the sector clocked a 28% YoY growth in advances at the end of the fourth 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.

The highlight of the bank’s performance in this quarter, however, was the sharp depression in its net interest margins (NIMs), which fell from 3% in 3QFY07 to 2.6% in 4QFY07 (FY07 NIMs at 2.8%, against our estimates of 2.5%). 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 65:35 between corporate and SME assets in the corporate credit book to go up to 60:40 in FY08, 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. The relatively lower proportion of low cost deposits (CASA) in this fiscal, despite a growth of 52% YoY have been a cause for the higher cost of funding. The bank has, however, also clarified in the conference call that the lower margins in the last quarter were primarily due to compliance with the priority sector lending norms that required lending at lower yields. The bank expects its margins to hover between 2.9% to 3.0% in FY08. We had estimated its FY07 NIMs at 2.5% in the wake of higher liquidity concerns in the fourth quarter and our estimate for FY08 is 2.4%. The fact that the bank has assets with 16 to 18 months maturity and liabilities with 7 to 8 months maturity evince cautiousness with respect to faster re-pricing of the liabilities than the assets.

Expensive growth…
(Rs m) FY06 % of total FY07 % of total Change
Advances 24,070   62,900   161.3%
C&IB 16,079 66.8% 40,885 65.0% 154.3%
Business Banking 7,991 33.2% 22,015 35.0% 175.5%
Deposits 29,104   82,204   182.4%
CASA 3,137 10.8% 4,768 5.8% 52.0%
Term deposits 25,967 89.2% 77,436 94.2% 198.2%
Credit deposit ratio 82.7%   76.5%    

Diversified fee base: Yes Bank is the only domestic banking entity to have a higher proportion of non-funded income (63% in 4QFY07 and 53% in FY07 against 55% in FY06) over funded income. 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 53:47 mix of NII and non-funded income increasingly difficult to maintain and envisages this to be 55:45 on a more normalised basis by FY10. What, however, is enthusing is the fact that 50% of the non-funded income are derived purely from fee income stream and that too from well-diversified segments. Against this, most banks derive a major proportion of their fee income from single sources like third party distribution of products. Yes Bank has set a target of not bringing down its non-funded income to total income proportion below 45%.

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 FY07. 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: Trebling of its employee base and doubling its branch franchise led to Yes Bank’s cost to income ratio escalate to 53% in FY07 from 46% in FY06. The bank sees this ratio sustaining at the current levels in FY08. This is due to the fact that the bank rolled out 20 branches in FY07 and hired more than 1,800 employees during this period. The bank sees the employee base going up to 5,000 by FY08.

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. This was followed by raising of US$ 2 bn capital in the final quarter. The enhanced paid-up share capital of the bank has brought its capital adequacy to a comfortable 13.6% at the end of March 2007. The bank is targeting another private placement in the last leg of its capital raising plans in 1HFY08. The higher leverage ratio of the bank (from 5.8 times in FY06 to 10.6 times in FY07) has marginally shrunk its return on assets to 1.2% in FY07 from 2% in FY06. The return on equity has, however, improved to 13.9% in FY07 from 9.7% in FY06.

What to expect?
At the current price of Rs 153, the stock is trading at 2.8 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 and margins are shrinking.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

YES BANK SHARE PRICE


Feb 23, 2018 (Close)

TRACK YES BANK

  • Track your investment in YES BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

COMPARE YES BANK WITH

MARKET STATS