YES Bank - Delivering on re‐rating catalysts - Prabhudas Lilladher

Yes Bank's Q4FY12 PAT of Rs2.72bn (up 34% YoY) was 6% higher than our/consensus estimates. Higher fee income and lower provisions more than offset higher‐than‐expected opex. Yes Bank continues to surprise positively on both asset quality and liability franchise which remain the key re‐rating catalysts. With wholesale rate easing, robust asset quality and significant SA momentum, Yes Bank remains our top pick in the sector. Current valuations at <10x Sep‐12 EPS seem reasonable and book valuations adjusted for dilution also seem reasonable at 1.8x FY13 book considering post dilution ROEs of 19‐20%.

- Big improvement in liability franchise: Sequential SA growth of >2x was better than expected, taking the total CASA share to 15% from 11% in H1FY12. A structural re-rating is contingent upon sustenance of the H2FY12 trend but monthly accretion of Rs4.3bn in Q4FY11 indicates significant traction in account acquisitions which may remain sticky as rates come off.

- Fee income compensates for moderation in loan growth: Loan growth, including credit subs, was subdued at ~20% but fee income growth of 43% compensated for the slow growth. Margins remained stable in Q4FY12 but with moderation in wholesale rates and RBI delivering a surprise ~50bps repo cut, we believe Yes Bank could be the key beneficiary of a moderating cycle, given high dependency on wholesale funding.

- Asset quality stable: Gross NPAs % remained stable in Q4FY12 and provisioning was lower-than-expected with credit costs at just ~30bps. Delinquency and credit costs continue to remain low and Yes Bank's involvement in CDR cases seem very low and hence asset quality will continue to surprise positively. We, thus, believe market expectations of ~70bps credit costs in FY13 may not materialize, leading to positive earnings surprise in FY13.

Source : Equity Bulls

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