SPA Securities initiates coverage on Yes Bank

Yes Bank is among the fastest-growing private sector banks in the country, having a pan India branch network of 412 branches as of Dec 12. Given strong track record of consistently delivering superior profitability, we initiate coverage on YBL with a BUY recommendation for a target of INR 537.

Biggest beneficiaries of savings rate deregulation

YBL is one of the biggest beneficiaries of savings rate deregulation as it has successfully tapped several salary accounts and registered 39.7% CQGR in savings deposits over the past 6 quarters. The account opening rate has grown by ~6x the pre-deregulation regime to ~120000 customers per quarter currently. We expect this traction to persist in savings deposits with CQGR of 14.9% over the next 9 quarters to INR 171 bn in Q4FY15.

Best asset quality in the industry

Asset quality of Yes Bank remains among the best in the industry with impaired loan ratio (GNPA + restructured) of mere 0.60% largely owing to its stringent risk management system. It has well diversified (less than 5% exposure to any particular sector) and de-risked loan book with exposure to stressed sectors well below the industry average. Its exposure to the troubled Deccan Chronicle stands at INR 1.2 bn and YBL has already provided INR 0.9 bn of provisioning towards the same.

CASA deposits to increase at fast pace

Increasing traction in savings deposits coupled with increasing branch penetration and renewed focus towards building retail liability franchise would aid YBL to improve its CASA ratio by ~1-1.5% each quarter. RBI's recent grant for 146 new licenses for Tier 1 cities (metro/urban cities) to YBL vis-à-vis 56 in FY12 will significantly aid the bank's network expansion trajectory. We expect 52.5% CAGR in CASA deposit over FY13E-15E (59.0% over FY08-13E), resulting in improvement in CASA ratio from 18.3% in Q3FY13 to 28.4% in FY15.

NIMs to improve to ~3.2% levels

We expect NIMs to improve by 20-30 bps to ~3.2% levels aided by improving YoA (due to increased penetration in high margin mid corporate & retail segments that enjoys higher yields of ~75 bps & ~125 bps than large corporate yields respectively), rising CASA deposits and decline in wholesale rates (2/3rd of deposits being wholesale funded).

Well-distributed fee franchise

YBL has a well-distributed fee franchise and higher proportion of the same (~35% of total income) enables it to earn superlative return ratios. We expect non-interest income to register a CAGR of 27% over FY13E-15E aided by higher growth in Transaction Banking & Retail Banking Segment. This would enable YBL to maintain a RoE of +24% with a RoA ~1.6% in the coming years.

Outlook & Valuation

YBL is one of our preferred plays in private banking sector due to its expanding corporate book, strengthening balance sheet, strong & diversified fee income and superlative return ratios. Its strategy of shifting product mix in favour of high yielding segments coupled with continued traction in CASA deposit mobilization will drive the growth of company. We expect NII & Net Profit to register a CAGR of 29.9% & 27.2% respectively over FY13E-FY15E.

Currently YBL is trading at 1.8x FY15E ABV of INR 235, which we believe is attractive given increasing return ratios, top asset quality and earnings growth visibility. We recommend a BUY on the stock using an average of 2.4x FY15E P/ABV & three stage residual-income valuation method, to arrive at a target of INR 537 over a period of 18 months. At our target, YBL would trade at 2.3x FY15E ABV, which is at a discount to its 5 year historical average multiple of 2.6x.

Source : Equity Bulls

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