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Yes Bank: ‘Size’able growth! - Views on News from Equitymaster

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Yes Bank: ‘Size’able growth!

Nov 9, 2006

Performance summary
Stacking up its second quarter and half year ended September 2006 numbers aggressively against its larger peers, Yes Bank, the youngest player in the Indian private sector banking space, displayed a good traction in its asset growth. In addition to the comfortable credit to deposit ratio, the growth in fee income and improvement in cost efficiency were key profit drivers. Zero asset slippage and sufficient capital (CAR) also places the bank in our comfort zone.

Rs (m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Interest income 369 1,279 246.2% 659 2,201 233.9%
Interest expenses 170 869 412.5% 326 1,491 357.5%
Net Interest Income 200 410 105.2% 334 711 113.1%
Other Income 219 381 74.3% 409 753 84.1%
Net interest margin       3.2% 2.9%  
Other Expense 194 442 128.0% 349 816 133.8%
Provisions and contingencies 12 21 78.8% 15 63 331.5%
Profit before tax 213 328 54.1% 379 585 54.3%
Tax 71 113 60.7% 124 201 62.2%
Profit after tax/ (loss) 143 215 50.8% 255 384 50.4%
Net profit margin (%) 38.6% 16.8%   38.7% 17.4%  
No. of shares (m)       270.0 270.0  
Diluted earnings per share (Rs)*       1.9 2.8  
P/E (x)         40.5  

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 22 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. Netherlands based Rabobank is one of the major stakeholders (20%) in the bank, which had its IPO in 1QFY06.

What has driven performance in 2QFY07?
Margin blip: Given its differentiation strategy through the adoption of 'knowledge banking approach', Yes Bank continued to witness an exponential growth in its advance and deposit books in 2QFY07, albeit on a low base. The bank is currently focussed on the large corporate and SME segments and is yet to take retail assets (advances) in its books. It sees the mix of 70:30 between corporate and SME assets in the corporate credit book to go up to 60:40 in 1HFY08, with retail assets also acquiring a minor allocation. The bank is currently soliciting retail liabilities (majority of which are at a higher cost) without vending retail assets (offering higher yields) thus taking a dent on its margins. The NIMs of the bank have shrunk from 3.2% in 1HFY06 to 2.9% in 1HFY07. It must also be noted that the bank had earlier purchased some assets at a premium in the secondary market to fulfill its priority sector lending mandate that had further raised its funding costs. The bank expects its margins to hover between 2.7% to 3.0% in FY07E. We have estimated its FY07E NIMs at 2.9%.

Growth in leaps and bounds…
(Rs m) 1HFY06 % of total 1HFY07 % of total Change
Advances 13,464   37,305   177.1%
C&IB 9,000 66.8% 24,305 65.2% 170.1%
Business Banking 4,464 33.2% 13,000 34.8% 191.2%
Deposits 11,018   43,299   293.0%
CASA 361 3.3% 2,252 5.2% 524.0%
Term deposits 10,657 96.7% 41,047 94.8% 285.2%
Credit deposit ratio 122.2%   86.2%    

Fees shield growth: Yes Bank is the only domestic banking entity to have a higher proportion of non-funded income (51% in 1HFY07) as compared to funded income in the country. This has hedged the bank’s bottomline against the NIM pressures. 55% of the bank’s fee income was generated from client sales and advisory businesses in 1HFY07. The bank, however, sees the 45:55 mix of NII and non-funded income increasingly difficult to maintain and envisages this to be 55:45 on a more normalized basis.

The bank had about 60% of its treasury portfolio in Treasury Bills (at the end of 1HFY07), which are not to be marked to market with the rise in interest rates. The rest comprised of debentures (24%) and corporate bonds (16%). The corporate bonds, (which are to be marked to market) have a 2-year duration and 35% of this is currently in the HTM basket

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 nil gross and net NPAs at the end of 1HFY07. However, one must note that the period of operation of the bank is too short to judge the quality of longer-term loans. Infact, with the rise the interest rates, the susceptibility of high yielding assets to slippage will be more.

Economising costs: Yes Bank’s cost to income ratio, though currently at par with its peers in the private sector banking space (28% in 1HFY07), has considerably declined over that in 1HFY06 (33%). This is despite the fact that the bank rolled out more than 20 branches and hired more than 1,600 employees between 1HFY06 and 1HFY07. The bank sees the costs stabilising going forward as it rolls out additional branches and utilizes its operating leverage.

Enhanced returns: Yes Bank’s returns on assets (RoA) improved from 0.4% in 2QFY06 to 1.5% in 2QFY07. Since the bank witnessed a contraction in the average spread on lending, the increase in RoA can be largely attributed to the profits realised on equity investments and a higher contribution of fee based income. The return on equity also increased from 2% in 2QFY06 to 14% in 2QFY07.

What to expect?
At the current price of Rs 115, the stock is trading at 3.0 times our estimated FY08 adjusted book value. The bank’s enhanced capital base, post the QIP (qualified institutional placement) and Tier II borrowing recently, boosts up the scope for growth in advance book. We believe that the bank holds potential for effectively catering to a niche corporate segment (especially due its novel strategy) and focus on low operating overhead approach. However, the venture into retail lending space (albeit a niche premium segment) seems to be fraught with risks at a time when the segment seems to be already saturated. It would, however, be a matter of time before the bank's credentials are established.

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