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Yes Bank: Lower costs rein profits - Views on News from Equitymaster
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Yes Bank: Lower costs rein profits
Jul 31, 2008

Performance summary
  • Interest income grows 52% YoY in 1QFY09 on the back of 45% YoY growth in advances.
  • Other income falls by 6% YoY due to losses in the treasury book.
  • Net interest margin improves to 2.9% in 1QFY09 with doubling of CASA.
  • Bottomline grows 51% YoY due to better management of operating costs.
  • Capital adequacy ratio (CAR) comfortable at 15.0%, net NPA at 0.2%.


Rs (m) 1QFY08 1QFY09 Change
Interest income 2,725 4,147 52.2%
Interest expenses 2,201 3,017 37.1%
Net Interest Income 524 1,130 115.6%
Net interest margin 2.7% 2.9%  
Other Income 760 715 -5.9%
Other Expense 676 931 37.7%
Provisions and contingencies 61 84 37.7%
Profit before tax 547 830 51.7%
Tax 187 286 52.9%
Profit after tax/ (loss) 360 544 51.1%
Net profit margin (%) 13.2% 13.1%  
No. of shares (m) 280.0 296.7  
Book value per share (Rs)*   46.3  
P/BV (x)   2.7  
* Book value as on 30th June 2008

What has driven performance in 1QFY09?
  • After a steady pace until FY08, Yes Bank took a conscious decision to keep its loan growth restrained in 1QFY09, particularly on the retail side to avoid cost pressure and threat on asset quality. Clocking a growth of 45% YoY in advances as well as deposits during the quarter, the bank maintained a balance between growth and profitability. The relatively higher proportion of low cost deposits (CASA grew by 96% YoY in 1QFY09, albeit on low base) helped the bank to improve its net interest margin (NIM) by 0.2% to 2.9% in 1QFY09. The bank is targeting CASA base to comprise 12.5% of its deposits by FY09 and 15% by FY10.

    Cautious disposition…
    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Advances 691,750   1,005,170   45.3%
    C&IB 462,089 66.8% 572,947 57.0% 24.0%
    Business Banking 229,661 33.2% 412,120 41.0% 79.4%
    Retail - 0.0% 20,103 2.0%  
    Deposits 863,970   1,255,220   45.3%
    CASA 56,997 6.6% 111,715 8.9% 96.0%
    Term deposits 806,973 93.4% 1,143,505 91.1% 41.7%
    Credit deposit ratio 80.1%   80.1%    

  • Yes Bank managed to have a high proportion of non-funded income in 1QFY09 (45.4% of total income) although the same was a tad lower than in FY08 (51% of total income in FY08), notwithstanding the risks on the derivative portfolio. Revenues from financial markets comprised 27% of the bank’s total non-funded income, while advisory services contributed 36%. However, we estimate that the losses in the bond portfolio ate into the bank’s other income. The bank has set a target of maintaining its non-interest income at 48% of total income until FY10.

  • In each of the focus sectors, Yes Bank has restricted itself to the top 10 companies. Due to this, the bank had 0.2% net NPAs at the end of 1QFY09 (0.1% in 4QFY08). 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.

  • Despite trebling of its employee base and doubling of its branch franchise in the last 12 months, Yes Bank has managed to retain its cost to income ratio at 50% in 1QFY09. The bank sees this ratio sustaining at the current levels in FY09. Yes Bank has received additional licenses to open 57 new branches and 125 ATMs taking the total licensed network to 117 branches and 200 ATMs.

  • Yes Bank raised Tier II and perpetual debt to the tune of Rs 3.6 bn as a result of which its CAR stood comfortable at 15% in 1QFY09. As such, the bank may not require equity dilution in the near term.

What to expect?
At the current price of Rs 126, the stock is trading at 1.4 times our estimated FY11 adjusted book value. Yes 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. Further, the continuous infusion of capital has been consistently providing the bank enough float to survive the cost pressures. Yes Bank remains our preferred play in the mid cap financial sector companies.

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