Yes Bank (Q4 FY12)

CMP Rs358, Target Rs375, Upside 4.7% 

• Yes Bank delivered a lower than expected 6% qoq loan growth during Q4 FY12; yoy growth momentum substantially decelerated to muted 10.5%. Over the past four quarters, growth deceleration has been driven by largely driven by bank’s deliberate efforts to diversify and de-risk advances. A difficult credit environment, management’s preference of margin over growth and higher base also contributed to the significant moderation in credit growth.
  
• Within segments, growth was driven by Branch Banking (20% qoq and 51% yoy) while there was a sharp de-growth in Wholesale Banking (-5% qoq and -8% yoy). SME and Retail credit combined now contribute 18% of advances as against 10% at the end of Dec 2010. The bank remains on track to achieve portfolio mix of 40% - Wholesale Banking, 30% - Commercial Banking and 30% - Branch Banking by the end of FY15.
  
• Including the investment in credit substitutes (CP/Bonds of A+ to AAA corporate; yielding 75-100bps lower than advances), the growth in customer assets was much better at 20% yoy. During FY12, bank preferred to invest in credit substitutes due to attractive interest rates and challenging credit environment. This strategy is likely to reverse as rates come down and credit scenario stabilizes; expect robust 30%+ pa loan growth in FY13/14.
  
• Deposits growth (5% qoq and 7% yoy) also remained muted. However, the key highlight was robust traction in CASA deposits (25% qoq and 56% yoy) driven by accelerated mobilization of savings deposits (108% qoq and 206% yoy). The key drivers of savings accounts/balances have been higher interest rate offered (6-7%) post de-regulation in October and strong branch expansion (bank has nearly doubled branches to 350+ over the past five quarters). CASA ratio improved by substantial 240bps qoq to 15%; share of savings deposits improved by ~200bps qoq to 5%. SA mobilization has been much stronger than our expectation and therefore we raise our CASA outlook for FY13 (21%) and FY14 (26%).
  
• The significant CASA improvement and favorable shift in loan mix precluded NIM contraction which was expected by the street. NIM was stable at 2.8%. The impact of extremely tight liquidity conditions during Q4 FY12 is likely to be reflected more in the cost of funds of Q1 FY13. So, NIM may weaken by ~10bps qoq in the current quarter. We expect sustained improvement in margin thereafter driven by structural improvements in funding mix (increasing CASA share) and loan mix (increasing SME/Retail share). In our view, NIM would improve by 20bps each in FY13 and FY14.
  
• Notwithstanding a difficult year, fee income growth continued to surprise on the upside especially in financial markets (42% qoq and 186% yoy) and financial advisory (27% qoq and 32% yoy) segments. Financial markets fees largely comprise DCM transactions and Forex and financial advisory includes loan syndication, private equity, M&A advisory and investment banking fees. On the back of substantial branch additions, Branch Banking fees jumped by significant 37% qoq. Opex also increased sharply by 18% qoq on account of network expansion and manning of new branches. C/I ratio, as a result, deteriorated by ~200ps qoq to 39.8%. In the longer term, robust NII and fee income growth is expected to prohibit C/I ratio from sustaining above 40%.
  
• Absolute GNPL increased by 16% qoq being stable at 0.2% of gross advances. Provisioning remained modest at Rs285mn implying a credit cost of 30bps. Net NPLs rose by 21% qoq and PCR was stable at 79%. Restructured book continued to be at negligible 0.5% of advances. Unlike some stress witnessed in 2008-09 credit cycle, Yes Bank’s asset quality has held up relatively well in the current credit cycle.
  
• Capital adequacy was strong with Tier-1 capital at 9.9% and overall CAR at 17.9%. During the quarter, the bank raised Rs1.5bn of Tier-1 capital (IPDI) and Rs6.5-7bn of Tier-2 capital. A 28-30% asset growth in FY13 would likely absorb 90-100bps of core capital prompting the bank to raise equity capital in early FY14. Despite significant investments on increasing branches, bank’s RoA has been stable; estimate it to improve towards 1.7% over the next couple of years aided by NIM expansion.
  
• The bank beat our profit estimate by material margin supported by strong NIM and fee income performance. Substantial CASA improvement was the key highlight enforcing us to upgrade CASA and NIM assumption for FY13 and FY14. Current valuation though at 10% discount to mean (justified by structural moderation in growth), is at premium to the larger and more mature peer Axis Bank. Maintain MP rating on Yes Bank with 9-month target price of Rs375.