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Yes Bank: Sharp jump in operating cost
Aug 4, 2014

Yes Bank declared its results for the first quarter of financial year 2014-15 (1QFY15). The bank has reported 13% YoY and 10% YoY growth in net interest income and net profits respectively in 1QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 13% YoY in 1QFY15 on the back of 23% YoY growth in advances.
  • Other income falls by 3.7% YoY in 1QFY15 due to sharp fall in treasury income. Other income to total income falls to 36% from 40% in 1QFY14.
  • Net interest margin remains stable at 3%, due to rise in proportion of CASA deposits.
  • Bottomline grows 10% YoY in 1QFY15 due to write-back of provisions.
  • Capital adequacy ratio (CAR) comfortable at 18% (Tier 1- 12.6%), gross NPA at 0.33% of advances at the end of June 2014.

(Rs m) 1QFY14 1QFY15 Change
Interest income   23,979 26,796 11.7%
Interest Expense 17,388 19,342 11.2%
Net Interest Income 6,591 7,454 13.1%
Net interest margin (%) 3.0% 3.0%  
Other Income 4,420 4,256 -3.7%
Other Expense 4,212 5,267 25.0%
Provisions and contingencies 969 237 -75.5%
Profit before tax 5,830 6,206 6.4%
Tax 1,821 1,810 -0.6%
Profit after tax/ (loss) 4,009 4,396 9.7%
Net profit margin (%) 16.7% 16.4%  
No. of shares (m)   414.7  
Book value per share (Rs)*   253.1  
P/BV (x)   2.1  
*Book value as on 30th June 2014

What has driven performance in 1QFY15?
  • Despite a subdued performance in terms of loan book in FY14, Yes Bank managed to start FY15 on a buoyant note. The higher loan yields helped the bank sustain NIMs despite higher deposit cost. Yes Bank has been soliciting savings accounts at an interest rate of 7% per annum, which is significantly higher than the industry average.

    Yes Bank clocked 23.2% growth in advances for 1QFY15, backed by 30.5% YoY growth in high yielding retail loans. The deposit growth came in much lower at 16.6% YoY. The proportion of wholesale deposits came down from 34.7% of total deposits in June 2014 to 26.1% in June 2013. The 29% YoY growth in CASA came on account of the higher interest offered by the bank on savings accounts. This catapulted the CASA deposits to 22.3% of total loan book. While NIMs are currently stable at 3% at the end of June 2014, there may be limited headroom for expansion in NIMs despite the possibility of fall in interest rates.

    Moderate growth in advances
    (Rs m) 1QFY14 % of total 1QFY15 % of total Change
    Advances 478,976   589,886   23.2%
    Retail 95,795 20.0% 125,056 21.2% 30.5%
    Corporate 383,181 80.0% 464,830 78.8% 21.3%
    Deposits 652,448   761,028   16.6%
    CASA 131,632 20.2% 169,746 22.3% 29.0%
    Term deposits 520,816 79.8% 591,282 77.7% 13.5%
    C/D ratio 73.4%   77.5%    

  • Yes Bank's non-funded income to total income dropped from 40% in 1QFY14 to 36% in 1QFY15. This can be largely attributed to lower treasury income. The bank had incurred one-time depreciation of Rs 1.1 bn on its bond portfolio in 2QFY14.

  • Yes Bank increased its branch network by 12 over the past 3 months and the total count stood at 572 at the end of June 2014. The bank's total headcount stood at 9,051 in June 2014 (up 21% 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 38.3% to 45% over the past year. Having said that, at 18% capital adequacy ratio (CAR), Yes Bank is one of the best capitalized in the sector. Also, it has one of the highest proportions of Tier II capital.

  • In relative terms, Yes Bank had a higher slippage in asset quality while the gross NPA stood at 0.3% of advances at the end of June 2014. Also, the possibility of slippages from the restructured loan book (0.2% of gross advances) looms large. However the proportion has come down from 0.3% of loan book in FY13. Further, the rise is provision costs are a cause for concern. After the write back of provisions during the second half of FY14 and in 1QFY15, Yes Bank had a lower provision coverage ratio of 78.4% as against 85% earlier.

  • The bank's annualized return on equity and return on assets stood at 21.6% and 1.6% at the end of 1QFY15, with the averages over the past 4 years being 20% and 1.5% respectively.
What to expect?
At the current price of Rs 542, the stock of Yes Bank is trading at 2.1 times our estimated FY16 adjusted book value. Due to Yes Bank's aggressive growth stance, margin and asset quality pressures will remain in the medium term. The conflict on the bank's board, which has continued for over a year now, though not impacting fundamentals, can hurt long term prospects. Further, we would prefer to be cautious about its provisioning policy. We recommended investors to Sell the stock through a special update in April 2014. A gentle reminder that no stock should comprise more than 5% of your overall stock portfolio.

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