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Yes Bank: Cost pressures to linger - Views on News from Equitymaster
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Yes Bank: Cost pressures to linger
Apr 29, 2015

Yes Bank declared its results for the fourth quarter and financial year 2014-15 (FY15). The bank has reported 28.4% YoY and 23.9% YoY growth in net interest income and net profits respectively in FY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 28.4% YoY in FY15 on the back of 36% YoY growth in advances.
  • Other income grows by 19% YoY in FY15 due to improvement in treasury income.
  • Net interest margin moves up to at 3.2%, due to rise in proportion of CASA deposits.
  • Bottomline grows 23.9% YoY in FY15 due to write-back of provisions.
  • Capital adequacy ratio (CAR) comfortable at 15.6% (Tier 1- 11.5%), gross NPA at 0.4% of advances at the end of March 2015.
  • Board has declared dividend of Rs 9 per share (dividend yield 1.1%)

Consolidated financial performance
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Interest income 25,681 30,883 20.3% 99,814 115,720 15.9%
Interest Expense 18,485 21,113 14.2% 72,650 80,842 11.3%
Net Interest Income 7,196 9,770 35.8% 27,164 34,878 28.4%
Net interest margin (%)       2.9% 3.2%  
Other Income 4,455 5,904 32.5% 17,216 20,464 18.9%
Other Expense 4,847 6,300 30.0% 17,498 22,847 30.6%
Provisions and contingencies  723 1,263 74.7% 3,616 3,394 -6.1%
Profit before tax 6,081 8,111 33.4% 23,266 29,101 25.1%
Tax 1,779 2,601 46.2% 7,085 9,047 27.7%
Profit after tax/ (loss) 4,302 5,510 28.1% 16,181 20,054 23.9%
Net profit margin (%) 16.8% 17.8%   16.2% 17.3%  
No. of shares (m)         417.8  
Book value per share (Rs)*         279.6  
P/BV (x)         3.0  
*Book value as on 31st March 2015

What has driven performance in FY15?
  • With almost 15% growth in branch network and 20% growth in headcount in FY15, Yes Bank managed an aggressive growth in balance sheet during the fiscal. This is particularly keeping in mind the moderate growth rates posted by its larger peers in private sector and PSU. Further, with the bank soliciting savings accounts at an interest rate of 7% per annum, the deposit growth has come on the back of CASA accumulation. Nevertheless, the bank has managed to sustain above average NIMs so far by raising the proportion of CASA deposits. While NIMs are currently stable at 3.2% at the end of March 2015, there may be marginal upside in NIMs due to fall in interest rates.

  • Yes Bank's non-funded income to total income dropped from 40% in FY14 to 36% in FY15. This can be largely attributed to lower treasury income.

    Good growth in advances
    (Rs m) FY14 % of total FY15 % of total Change
    Advances 556,331   755,498   35.8%
    Retail 166,899 30.0% 266,691 35.3% 59.8%
    Corporate 389,432 70.0% 488,807 64.7% 25.5%
    Deposits 741,870   911,758   22.9%
    CASA 163,211 22.0% 210,616 23.1% 29.0%
    Term deposits 578,658 78.0% 701,142 76.9% 21.2%
    C/D ratio 75.0%   82.9%    

  • Yes Bank increased its branch network by 80 over the past year and the total count stood at 630 at the end of March 2015. The bank's total headcount stood over 10,810 in March 2015 (up 23% YoY). 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. The cost to income ratio, went up from 39% to 41% over the past year.
  • In relative terms, Yes Bank had a higher slippage in asset quality while the gross NPA stood at 0.4% of advances at the end of March 2015. Also, the possibility of slippages from the restructured loan book (0.26% of gross advances) looms large. After the write back of provisions during the second half of FY14 and in FY15, Yes Bank had a lower provision coverage ratio of 72% as against 85% earlier.
What to expect?
At the current price of Rs 832, the stock of Yes Bank is trading at 2.4 times our estimated FY17 adjusted book value. Due to Yes Bank's aggressive growth stance, margin and asset quality pressures will remain in the medium term. Moreover, operating cost pressures can also dent margins. The proposed purchase of an asset management company will only add to the bank's other income over the longer term. At the current valuations, there is hardly enough upside from a medium term perspective. We recommend investors to not buy the stock at current levels. A gentle reminder that no stock should comprise more than 5% of your overall stock portfolio.

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