This shift was partially driven by the bank’s cautious approach towards lending given persistent weakness in macro environment. In the longer term, Yes Bank strives to achieve a segmental loan mix of 40-30-30 between Wholesale, Commercial and Branch Banking.
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CMP Rs399, Target Rs430, Upside 7.8%
Yes Bank’s loan growth accelerated to 23% yoy (9% qoq) after being in the range of 13-16% yoy in the past four quarters. The credit expansion was almost entirely driven by the Wholesale Banking segment which grew by strong 15% qoq/35% yoy. While the growth in Commercial Banking continued to be weak (-3% qoq/-8% yoy), it was modest in the Business Banking segment (2% qoq/21% yoy). Consequently, Yes Bank’s loan mix significantly shifted towards the Wholesale Banking segment by 340bps qoq to 67.4%. This shift was partially driven by the bank’s cautious approach towards lending given persistent weakness in macro environment. In the longer term, Yes Bank strives to achieve a segmental loan mix of 40-30-30 between Wholesale, Commercial and Branch Banking.
The growth in customer assets (loans + credit substitutes) continued to be strong at 33% yoy and 10% qoq. In the wake of challenging credit environment and attractive interest rates, bank’s investment in credit substitutes (A+ to AAA rated CPs/Bonds) has grown by 3x over the past five quarters to ~Rs120bn. Yes Bank expects its loan book to grow slightly ahead of the system in FY13 (our expectation 18-19%) implying that a significant amount of incremental asset expansion would continue to be through credit substitutes. Bank is only likely to resume aggressive lending after credit cycle stabilizes and interest rates decline materially.
Aided by substantial branch addition over the past nine quarters (branch network has grown by 2.6x to 400) and higher savings rate (6-7%) offered since October 2011, Yes continues to witness robust CASA traction. The ratio increased to 17.3%, up 100bps qoq and 630bps yoy. The bank seems to be on track to reach 20% by end FY13 and 25% by end FY14. Slightly disappointing was absolute decline in Branch Banking FDs; share reducing to 19% from 21% in the previous quarter. The share of wholesale deposits increased to 54% from 52% mirroring the shift in loan mix.
As expected, NIM improved by 10bps qoq to 2.9% aided by sharp 30bps sequential decline in the cost of funds. Yes Bank being significantly wholesale funded, its funding cost is expected to further decline in the medium term tracking the decline in wholesale rates. Further, material CASA improvement would also aid in lowering blended deposit cost. Though lending yield was stable in Q2 FY13, it would decline in coming quarters. So while NIM could see a further up tick in near term, it is expected to stabilize near 3% in the longer term.
Non-interest income growth continues to be robust with strong traction in all four income streams. Financial Advisory fee (up 22% yoy for Q2 FY12 and up 30% yoy on trailing 12m basis) continues to show commendable resilience. Transaction Banking and Retail Banking fees grew by robust 31% yoy and 114% yoy (on small base) respectively. Financial markets fees were sequentially flat after excluding Rs350-400mn of G-Sec treasury gains from Q1 FY13. Opex growth remains strong at 48% yoy driven by substantial branch/employee additions. C/I ratio continued to be below 40%.
Asset quality was stable with GNPL and NNPL levels at 0.24% and 0.05% respectively. PCR marginally improved to 80%. Restructured advances (excluding NPAs) stood at negligible 0.46% of advances.
Over the past ten quarters, Yes Bank has consistently delivered strong operating profit growth (average 33% yoy) despite substantial investment on network expansion. Revenue growth has been robust (average 35% yoy) driven by impressive NIM and fee growth performance. Asset quality has also behaved well so far despite weakening macro and the deliberate moderation in loan growth since the start of FY12 provides comfort. Despite assuming a significant up tick in provisioning in H2 FY13 and FY14, Yes Bank would still likely deliver 22% earnings CAGR and 1.5% RoA over FY12-14. We raise our 9-month target to Rs430 (previous Rs375) but maintain Market Performer as the recent stock appreciation leaves marginal upside. Result table