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Yes Bank: Vibrancy of the youth! - Views on News from Equitymaster
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Yes Bank: Vibrancy of the youth!
Jun 13, 2006

Performance summary
Yes Bank, the youngest player in the Indian private banking sector, concluded its second full year of operations in FY06, declaring impressive growth numbers for the fourth quarter and year ended March 2006. In addition to the comfortable credit to deposit ratio, the growth in fee income and improvement in cost efficiency were key profit drivers. Zero NPA levels and sufficient capital (CAR) also places the bank in our comfort zone.

Rs (m) 4QFY05 4QFY06 Change FY05 FY06 Change
Interest income 198 675 240.8% 295 1,902 545.1%
Interest expenses 90 423 372.4% 119 1,047 783.7%
Net Interest Income 109 252 132.2% 176 855 384.7%
Other Income 69 339 388.0% 182 997 448.9%
Net interest margin       3.5% 3.0%  
Other Expense 167 255 52.5% 380 861 126.8%
Provisions and contingencies (24) 89   1 146 12100.0%
Profit before tax 35 247 602.6% (23) 844  
Tax 26 93 263.4% (1) 291  
Profit after tax/ (loss) 9 153 1529.8% (22) 553  
Net profit margin (%) 4.7% 22.7%   -7.4% 29.1%  
No. of shares (m)       200.0 270.0  
Diluted earnings per share (Rs)         2.0  
P/E (x)         35.6  

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 8 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. Netherlands based Rabobank is one of the major stakeholders (16%) in the bank, which had its IPO in 1QFY06.

What has driven performance in FY06?
C/D: Deposits pick up pace…
(Rs m) FY05 FY06 Change
Advances 7,610 24,071 216.3%
Deposits 6,630 29,104 339.0%
Credit deposit ratio 114.8% 82.7%  
Growth at the cost of margins? Yes Bank has witnessed an exponential growth in its advance and deposit books in FY06, albeit on a low base. The deposit growth being at a faster clip as compared to the credit growth, has brought the credit deposit ratio to a comfortable 83% in FY06. The bank is currently focusing on the ‘affluent segment’ (defined as income between Rs 2.5 m and Rs 5 m per annum). The subsequent focus will be on ‘mass affluent’ segment (defined as income between Rs 0.5 m and Rs 2.5 m per annum). The bank sees the mix of 70:30 between corporate and SME assets in the corporate credit book to go upto 60:40 in 1HFY07. However, Yes Bank’s limited proportion of CASA (approximately 6% in FY06) and its heavy reliance on wholesale deposits have considerably impacted its cost of funds. The short term funding costs in 4QFY06 rose by as much as 50 to 100 basis points owing to liquidity squeeze in the system. The NIMs dropped to 1.5% in 4QFY06 against an average of 3% for FY06 (average yield on advances at 8.7%, cost of funds at 5.8%). Going forward, margin sustainability is our main concern regarding the bank.

To fulfill the priority sector lending mandate, the bank purchased 40% of its total priority sector loans at the end of FY06 from institutions like ICICI Bank, Shriram Transport, HDFC and IDBI Home Finance largely in the form of mortgage loans at a premium. This further aggravated the funding cost.

Fee growth: Yes Bank is the only domestic banking entity to have a higher proportion of non-funded income (54% in FY06) as compared to funded income in the country. This has hedged the bank’s bottomline against the NIM pressures. 85% of the bank’s fee income was generated from client sales and advisory businesses. The bank, however, sees the 45:55 mix of NII and non-funded income increasingly difficult to maintain and envisages this to be 55:45 on a more normalized basis.

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 FY06. However, one must note that the period of operation of the bank is too short to judge the quality of longer-term loans. Infact, with the rise the interest rates, the susceptibility of high yielding assets to slippage will be more.

Economising costs: Yes Bank’s cost to income ratio, though currently at par with its peers in the private sector banking space (47% in FY06) has considerably improved over that in FY05 (above 60%). The bank, however, sees the costs reducing going forward as it rolls out additional branches and utilizes its operating leverage.

Higher returns: Yes Bank’s returns on assets (RoA) improved from 0.4% in FY05 to 2.0% in FY06. Since the bank witnessed a contraction in the average spread on lending, the increase in RoA can be largely attributed to the profits realised on equity investments and a higher contribution of fee based income. The return on equity also increased from 2% in FY05 to 14% in FY06.

What to expect?
At the current price of Rs 73, the stock is trading at 3.5 times its FY06 adjusted book value. A comfortable CAR (16.4%) further augments its scope for growth in 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 (by not venturing too much into retail) to bolster its operating margins. It would, however, be a matter of time before the bank's credentials are established.

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