Buy Yes Bank - Prabhudas Lilladher

NIM outlook positive: Yes Bank's margins have inched up in Q2FY13 to 2.8% (10bps QoQ) after stagnating at ~2.7% for the last 5-6 quarters. Being largely wholesale funded, Yes Bank has started to gain from easing rates (CD rates down 70-80bps and AAA yields down 50bps in last 3mnts) and we believe margins to continue to gain over the next 2-3 quarters.

Underlying liability and fee income momentum strong: (1) Yes Bank's momentum on SA accretion has remained the strongest of banks which increased SA rates - Higher SA rate offer has led to significant increase in ticket size (2x since SA de-reg). Though interest rate sensitivity will remain high for Yes's SA franchise, the management has guided to keeping SA rates relatively high in the medium term. (2) Fee income momentum also continues to remain strong despite moderating B/S growth and is driven by all round performance rather than deal related corporate fees/treasury.

Asset quality comfortable despite some exposure to stress accounts: Credit costs have remained at just ~30bps despite Yes providing Rs0.6bn for their Deccan exposure. Yes has exposure to some stressed accounts like Suzlon (Rs2bn) but we believe higher credit costs assumptions factor these stress.

Valuations reasonable; ROEs high even on diluted basis: Yes generates ~22-23% ROEs which is among the highest in the industry and valuations on a PE basis is extremely reasonable for a bank with negligible thermal power exposure. An impending dilution will be ~15% book accretive leading to favorable valuations of 1.88 on FY14 book without denting ROEs <18-19%.

Source : Equity Bulls

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