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Yes Bank: Fee income boosts profits

Oct 20, 2011

Yes Bank declared its results for the second quarter and first half of financial year 2011-12 (1HFY12). The bank has reported a 29% YoY and 36% YoY growth in net interest income and net profits respectively in 1HFY12. Here is our analysis of the results.

Performance summary
  • Net interest income grows 29% YoY in 1HFY12 on the back of 26% YoY growth in advances.
  • Other income grows by 38% YoY in 1QFY12 due to robust growth in fee income.
  • Net interest margin comes in marginally lower to 2.9% (3.0% in 1HFY11) due to pressure on interest costs.
  • Bottomline grows 36% YoY in 1HFY12 thanks to write back of provisioning and higher operating leverage.
  • Capital adequacy ratio (CAR) comfortable at 16.0%, gross NPA at 0.2% (specific NPA coverage 80%).

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 9,538 14,387 50.8% 16,930 28,382 67.6%
Interest expenses 6,406 10,530 64.4% 11,177 20,984 87.7%
Net Interest Income 3,132 3,857 23.1% 5,753 7,398 28.6%
Net interest margin       3.0% 2.9%  
Other Income 1,310 2,141 63.4% 2,748 3,793 38.0%
Other Expense 1,628 2,134 31.1% 3,197 4,081 27.7%
Provisions and contingencies 174 378 117.2% 300 394 31.3%
Profit before tax 2,640 3,486 32.0% 5,004 6,716 34.2%
Tax 877 1,130 28.8% 1,677 2,205 31.5%
Profit after tax/ (loss) 1,763 2,356 33.6% 3,327 4,511 35.6%
Net profit margin (%) 18.5% 16.4%   19.7% 15.9%  
No. of shares (m)         351.0  
Book value per share (Rs)*         122.2  
P/BV (x)         2.3  
* Book value as on 30th September 2011

What has driven performance in 1HFY12?
  • Yes Bank managed to outdo the sector average growth rate in loans in 1HFY12 primarily due to rapid growth in the retail segment. Despite starting FY12 at a relatively moderated pace, Yes Bank got closer to some of its larger peers in terms of market share in SME lending. Also in the results conference call the management cited that Yes Bank's loan book will continue to grow above sector average. However since most of its loan book can be re-priced in 12-months time, the bank does not see rising interest rates putting pressure on its margins.

    Although term deposits comprised nearly 90% of the bank's overall deposit book, the bank was able to sustain CASA proportion. The margins (NIMs) were affected due to higher costs with the aggressive rate hikes over the past few quarters. Having said that the bank has re-priced some SME assets and also booked new loans at higher rates. This will impact margins in the subsequent quarters.

    Retail led growth on full steam...
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 517,963   627,518   21.2%
    C&IB 331,496 64.0% 385,296 61.4% 16.2%
    Business Banking 142,440 27.5% 149,349 23.8% 4.9%
    Retail 44,027 8.5% 93,500 14.9% 112.4%
    Deposits 400,137   440,759   10.2%
    CASA 32,365 8.1% 48,483 11.0% 49.8%
    Term deposits 367,772 91.9% 392,276 89.0% 6.7%
    Credit deposit ratio 129.4%   142.4%    

  • The proportion of Yes Bank's non-funded income to total income increased to 36% in 1HFY12 from 32% in 1HFY11. This can be largely attributed to higher fee income. Notwithstanding the fact that the bank has set a target of maintaining its non-interest income at 40% of total income until FY13, we have estimated the same to come down to remain below 35% in the next 3 years.

  • Despite an addition to franchise as well as employee base, Yes Bank has managed to bring down its cost to income ratio at 36% in 1HFY12 from 37% in 1QFY11 because of improved productivity and operating leverage. The bank hired more than 1,000 employees in the past 12 months bringing the total headcount to 4,714 in September 2011. 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. Yes Bank is targeting to take the total number of branches from 305 in 1HFY12 to 500 by the FY14.

  • Yes Bank's CAR stood comfortable at 16.0% (as per Basel II) at the end of 1HFY12. The higher capital base also capacitates the bank to capitalise on growth opportunities being available in the sector going forward.

  • The bank had negligible net NPA while the gross NPA stood at 0.2% of advances at the end of September 2011. Yes Bank also had total loan-loss coverage ratio of 80%, well above the RBI's mandate. However, the management did not rule out possibility of slippages from the restructured loan book (0.5% of gross advances).

What to expect?
At the current price of Rs 285, the stock is trading at 1.5 times our estimated FY14 adjusted book value. Yes Bank's performance so far has been in line with our estimates for full year FY12. Further, we are enthused by the bank's conservative provisioning policy. Having said that, the rate of growth may continue to be moderated. Also delinquency risks, though minimal, remain. The current valuations of the bank offer reasonable upsides in the long term. We reiterate our positive view on the stock.

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