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Yes Bank: More provisions in the offing - Views on News from Equitymaster

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Yes Bank: More provisions in the offing
Aug 1, 2015

Yes Bank declared its results for the first quarter of financial year 2015-16 (1QFY16). The bank has reported 42.2% YoY and 27.7% YoY growth in net interest income and net profits respectively in 1QFY16. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 42% YoY in 1QFY16 on the back of 35% YoY growth in advances.
  • Other income grows by 32% YoY in 1QFY16 due to improvement in treasury income.
  • Net interest margin moves up to 3.3%, due to rise in proportion of CASA deposits.
  • Bottomline grows 27.7% YoY in 1QFY16 despite provisions growing over 3 times.
  • Capital adequacy ratio (CAR) comfortable at 15.0% (Tier 1- 10.9%), gross NPA at 0.46% of advances at the end of June 2015.

(Rs m) 1QFY15 1QFY16 Change
Interest income 26,796 32,519 21.4%
Interest Expense 19,343 21,920 13.3%
Net Interest Income 7,453 10,599 42.2%
Net interest margin (%) 3.0% 3.3%  
Other Income 4,136 5,452 31.8%
Other Expense 5,267 6,967 32.3%
Provisions and contingencies 237 980 313.5%
Profit before tax 6,085 8,104 33.2%
Tax 1,769 2,591 46.5%
Profit after tax/ (loss) 4,316 5,513 27.7%
Net profit margin (%) 16.1% 17.0%  
No. of shares (m)   418.1  
Book value per share (Rs)*   292.7  
P/BV (x)   2.8  
*Book value as on 30th June 2015

What has driven performance in 1QFY16?
  • With almost 16% growth in branch network and a similar growth in headcount in the past 12 months, Yes Bank managed an aggressive growth in balance sheet during the first quarter of the fiscal. Both, the bank's loans and deposits saw growth rates well above the sector average. 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 3.3% at the end of June 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 1QFY15 to 36% in 1QFY16. This can be largely attributed to lower treasury income.

    Good growth in advances
    (Rs m) 1QFY15 % of total 1QFY16 % of total Change
    Advances 589,886   796,656   35.1%
    Retail 176,966 30.0% 256,523 32.2% 45.0%
    Corporate 412,920 70.0% 540,133 67.8% 30.8%
    Deposits 761,028   953,159   25.2%
    CASA 169,746 22.3% 222,677 23.4% 31.2%
    Term deposits 591,282 77.7% 730,482 76.6% 23.5%
    C/D ratio 77.5%   83.6%    

  • Yes Bank increased its branch network by 90 over the past year and the total count stood at 662 at the end of June 2015. The cost to income ratio, however, went down from 45% to 43% over the past year. The bank expects its operating costs to increase at an annual average rate of around 30% over the next 2 to 3 years given the branch expansion targets.

  • In relative terms, Yes Bank had a higher slippage in asset quality while the gross NPA stood at 0.46% of advances at the end of June 2015. Also, the possibility of slippages from the restructured loan book (0.71% 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 71% as against 85% earlier.
What to expect?
At the current price of Rs 829, the stock of Yes Bank is trading at 2.0 times our estimated FY18 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. Based on our revised estimates we have arrived at a target price of Rs 1,032 from FY18 perspective. Thus the stock offers average annual returns of about 10% from current levels. Given the risks to asset quality we recommend investors to wait before buying the stock at more attractive levels. A gentle reminder that no stock should comprise more than 5% of your overall stock portfolio.

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