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Yes Bank: Franchise bearing fruits
Oct 17, 2007

Performance summary
  • Interest income grows 137% YoY on the back of 102% YoY growth in advances.

  • Other income grows 99% YoY aided by higher fee income contribution.

  • Net interest margins sustained at 2.9% as in 1HFY07.

  • Bottomline grows 110% YoY due to lower provisioning costs

  • To raise equity capital by issuing 20 m shares in FY08 - 6.7% equity dilution.

Rs (m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Interest income 1,279 3,035 137.3% 2,201 5,760 161.7%
Interest expenses 869 2,207 154.0% 1,491 4,124 176.6%
Net Interest Income 410 828 102.0% 710 1,636 130.4%
Net interest margin 2.9% 2.9%
Other Income 381 759 99.2% 753 1,519 101.7%
Other Expense 442 913 106.6% 816 1,589 94.7%
Provisions and contingencies 21 (10) 63 51 -19.0%
Profit before tax 328 684 108.5% 584 1,515 159.4%
Tax 113 232 105.3% 201 419 108.5%
Profit after tax/ (loss) 215 452 110.2% 383 1,096 186.2%
Net profit margin (%) 16.8% 14.9% 17.4% 19.0%
No. of shares (m) 270.0 279.9 270.0 279.9
Book value per share (Rs)* 29.4
P/BV (x) 6.9
* Book value as on 30th September 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 60 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 3,236 employees at the end of September 2007.

What has driven performance in 2QFY08?
Retail picks up pace: Yes Bank’s investments on its retail franchise and employee base seems to have started bearing fruit, as the bank reaps the benefits of a niche presence in the institutional and SME segments as well. Clocking a growth of 102% YoY in advances (nearly 4 times the average sector growth, though on a very small base) and 129% YoY in deposits in 1HFY08, 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.

The relatively higher proportion of low cost deposits (CASA), which tripled in absolute terms in the last twelve months, has been a cause for the lower cost of funding. This improved the bank’s NIMs by nearly 60 basis points to 2.9% this quarter (2.3% in 1QFY08), which remained stable over that in 1HFY07. The bank is targeting CASA base to comprise 25% of its deposits by FY10 and 30% by FY12. While Yes Bank continues to be focused on the large corporate (67% of advances) and SME (27% of advances) segments, it has been the retail assets (6% of advances in 1HFY08 from 1.5% of advances in 1QFY08) that the bank has accumulated at an accelerated pace this fiscal. It sees the mix of corporate, SME and retail assets moving to 60:30:10 in FY08. Also, Yes Bank will continue to differentiate itself on the basis of focusing on the affluent and mass affluent segments for its retail business with average ticket size of Rs 0.5 m to Rs 1 m for advances (currently offering only personal loans). 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.

Reaping franchise benefits…
(Rs m) 1HFY07 % of total 1HFY08 % of total Change
Advances 37,305   75,159   101.5%
C&IB 24,920 66.8% 50,582 67.3% 103.0%
Business Banking 12,385 33.2% 19,917 26.5% 60.8%
Retail - 0.0% 4,660 6.2%  
Deposits 43,299   99,302   129.3%
CASA 2,264 7.0% 7,348 7.4% 224.6%
Term deposits 41,035 93.0% 91,954 92.6% 124.1%
Credit deposit ratio 86.2%   75.7%    

Fees give way to fund income: Yes Bank was earlier the only domestic banking entity to have a higher proportion of non-funded income (52% in 1HFY07) over funded income, which has been its highest so far. The same has, however, fallen to 48% in 1HFY08, in line with the bank’s guidance. 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. What however, needs to be noted, is that Yes Bank will continue to focus on its third party distribution business as a part of its non fund base revenue stream as the bank hopes to break even on its retail liabilities through the revenue generated from this stream as against the margins earned on retail assets (advances). This is because the bank wishes to take a gradual approach in terms of expanding its retail asset base.

In 2QFY08, Yes Bank along with its strategic partner, Alterra, part of Wageningen University Research Centre, Netherlands entered into a MoU with Indu Projects, a leading project developer in South India for the implementation of an Agro Food Park in the state of Andhra Pradesh and other locations in South India. 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), US. 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 zero gross and net NPAs at the end of 1HFY08. 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 58% in 2QFY08 (56% in 2QFY07). The bank sees this ratio sustaining at the current levels in FY08. This is due to the fact that the bank rolled out 38 branches and hired 1,612 employees during the past 12 months. Yes Bank has received additional licenses to open 56 new branches and 125 ATMs taking the total licensed network to 116 branches and 200 ATMs. The bank sees the employee base going up to 5,000 by FY08. The target franchise is 100 branches by FY08 and 250 branches by FY10.

Provision write back buoys bottomline: Mark to market gains on the bank’s treasury portfolio and change in the mix of its loan book enabled Yes Bank to write back some of the provisioning made last fiscal, which in turn buoyed its bottomline. We have not factored in such write back in our estimations.

Capital raising on the anvil: 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 2HFY08. This is expected to lead to 6.7% equity dilution. Its CAR stood at 13% in 1HFY08.

What to expect?
At the current price of Rs 192, 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. The enhanced capital base (although leading to 6.7% equity dilution) will poise the bank attractively in terms of valuations. This capital raising, to be exercised in FY08, will add approximately Rs 4.3 bn to the bank's networth, thus inflating its book value by Rs 14 per share on the diluted share capital. We reiterate our view on the stock.

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