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Yes Bank: Emerging winner - Views on News from Equitymaster

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Yes Bank: Emerging winner
Jul 26, 2007

Introduction to results
  • Interest income grows 191% YoY on the back of 118% YoY growth in advances.

  • Other income grows 112% YoY aided by higher fee income contribution.

  • Net interest margins lower at 2.3% against 3.0% in 1QFY07.

  • Bottomline grows 114% YoY despite higher tax outgo.

  • Net profit margins decline from 18% to 13%.

Rs (m) 1QFY07 1QFY08 Change
Interest income 935 2,725 191.4%
Interest expenses 622 2,201 253.9%
Net Interest Income 313 524 67.4%
Net interest margin   2.3%  
Other Income 359 760 111.7%
Other Expense 374 676 80.7%
Provisions and contingencies 42 61 45.2%
Profit before tax 256 547 113.7%
Tax 88 187 112.5%
Profit after tax/ (loss) 168 360 114.3%
Net profit margin (%) 18.0% 13.2%  
No. of shares (m) 270.0 279.9  
Book value per share (Rs)* 21.9 29.4  
P/BV (x)   6.2  
* Book value as on 30th June 2007

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 54 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 2,792 employees at the end of June 2007.

What has driven performance in 1QFY08?
Making headway into retail: The high interest cost and lower incremental credit disbursements that seems to have choked the spreads for the banking sector and visibly slowed down its asset growth does not seem to have materially impacted Yes Bank, primarily because of its differentiated approach and well hedged revenue stream. Clocking a growth of 118% YoY in advances (albeit lower than the 150% YoY clocked in 1QFY07 on a lower base) and 168% YoY in deposits in 1QFY08, 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 24% YoY growth in advances at the end of the first quarter, Yes Bank outperformed it by a wide margin.

Nevertheless, the spike in funding costs has dampened the bank’s NIMs by nearly 70 basis points, which fell from 3% in 1QFY07 to 2.3% in 1QFY08. While Yes Bank continues to be focused on the large corporate (65% of advances) and SME (33.5% of advances) segments, it has been taking retail assets (1.5% of advances in 1QFY08) in its books. It sees the mix of corporate, SME and retail assets moving to 60:35:5 in FY08. 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 it has reduced fixed deposit rates by 75 bps to 9.5% per annum in 1QFY08 and securitised assets worth Rs 11 bn to reduce the pressure on NIMs. Going forward, the bank expects the re-pricing of loans to help its NIMs improve to 3% by FY08. We have a conservative estimate of NIMs of 2.6% in FY08.

No signs of slowdown…
(Rs m) 1QFY07 % of total 1QFY08 % of total Change
Advances 31,700   69,170   118.2%
C&IB 21,176 66.8% 44,961 65.0% 112.3%
Business Banking 10,524 33.2% 23,172 33.5% 120.2%
Retail - 0.0% 1,038 1.5%  
Deposits 32,200   86,400   168.3%
CASA 3,752 11.7% 5,702 6.6% 52.0%
Term deposits 28,448 88.3% 80,698 93.4% 183.7%
Credit deposit ratio 98.4%   80.1%    

Leading the fees pipeline: Yes Bank is the only domestic banking entity to have a higher proportion of non-funded income (59% in 1QFY08 against 55% in 1QFY07) over funded income, which has been its highest so far. The higher proportion of the former has adequately hedged the bank’s bottomline against the NIM pressures over the past few quarters. Yes Bank has set a target of maintaining its non-interest income at 47% of total income until FY10E. What also is enthusing is the fact that 52% of the non-funded income is derived purely from fee income stream and that too from well-diversified segments. It is also venturing into the niche segment of SME financial advisory. Against this, most banks derive a major proportion of their fee income from single sources like third party distribution of products.

Yes Bank was the financial advisor and debt arranger to Suzlon Energy for the acquisition of Repower Systems AG, Germany, which represented the third largest outbound M&A transaction for India at Euro 1.3 bn. It was also the sole financial advisor to Sintex Industries for the acquisition of Wausaukee Composites Inc (WCI), USA. Yes Bank executed 4 out of the top 10 outbound cross border deals done out of India in the calendar years 2006 and 2007. The bank is contemplating carving out its M&A business into a separate subsidiary going forward.

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. What is enthusing here is the fact that realizing the high susceptibility of high yielding retail assets to slippage during firm interest rates, the bank has adopted a cautious approach and is limiting its exposure to collateral backed mortgage assets and corporate personal loans.

Operating leverage yet to trickle in: Trebling of its employee base and doubling its branch franchise led to Yes Bank’s cost to income ratio escalate to 53% in 1QFY08. The bank sees this ratio sustaining at the current levels in FY08. This is due to the fact that the bank rolled out 14 branches in 1QFY08 and hired more than 350 employees during this period. The bank sees the employee base going up to 5,000 by FY08.

Enhanced capital base: Yes Bank will infuse capital to the tune of Rs 8.6 bn (US$ 210 m) comprising of private placement of 20 m equity shares and the rest through debt in 2QFY08. This is expected to lead to 7% equity dilution. Its CAR stood at 12.5% in 1QFY08.

What to expect?
At the current price of Rs 185, the stock is trading at 2.6 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. Its enhanced capital base, post the private placement and Tier II borrowing, will boost 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.

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