Yes Bank: ‘Re-rating may take a pause’

CMP Rs365, Target Rs375, Upside 2.8%

In our recent meeting, Yes Bank revealed that loan growth would improve, NIMs have bottomed-out and asset quality will remain stable. The bank firmly remains on track of its version 2.0 strategy which targets substantial diversification in loan book and granularity in funding. Core SME portfolio is expected to grow much faster than balance sheet while retail lending would receive a boost from recent introduction of six new products. CASA mobilization has been catalyzed by higher rate being offered by the bank while aggressive branch expansion has been driving accretion of retail TDs. Yes Bank’s reliance on whole funding would decline considerably over the next two years.

NIM after declining in Q4 FY12 by 10-15bps is expected to improve structurally driven by changing loan/deposit mix and benign liquidity conditions. Despite substantial increase in opex, C/I ratio would remain comfortably below 40% supported by margin expansion and healthy fee income growth. Asset quality has not shown any kind of stress in the ongoing credit cycle and outlook on credit cost remains sanguine. Improving business dynamics should elevate RoA above 1.5%. Capital raising will most likely take place in early FY14 with Tier-1 ratio at healthy 9.4%. Current valuation (2.2x 1-yr roll fwd P/adj.BV) though at 10% discount to six-year mean (justified by structural moderation in growth) is at 10% premium to Axis Bank. Near-term upside in the stock could be capped by expected weak performance in Q4 FY12. Upside to valuation exists in the longer term from higher than expected NIM improvement. Retain Market Performer rating on Yes Bank with enhanced 9m target of Rs375.   

Loan growth to improve after moderating in 9m FY12; segmental mix would continue to shift away from large corporate

Yes Bank’s loan growth has substantially decelerated in the past three quarters to 15% yoy. YTD, loan book has grown by just 4.4%. The moderation in growth has been acute in Wholesale Banking (3% yoy; -3% YTD) and Commercial Banking (6% yoy; -7% YTD) segments while Business Banking (SMEs, PSL and Retail) has witnessed robust growth (65% yoy; 26% YTD). Loan mix has shifted towards the latter segment; its share has increased by 500bps in the past 12 months. Core SME book is 7-8% of advances and has been growing much faster. As per the bank, though SME loans are inherently riskier than large/mid corporate loans, superior margin offsets the higher administrative and credit cost. Yes Bank is striving to achieve a segmental loan mix of 40-30-30 between Wholesale Banking, Commercial Banking and Business Banking by FY15.