Yes Bank - Beneficiary of easing wholesale rates/falling G-sec yields - Antique

We believe that Yes Bank should be one of the key beneficiaries of easing wholesale rate environment and falling G-sec yields, given its relatively higher dependence on wholesale funding and large investment book which will enable the bank to expand margins in complete contrast to the rest of the sector. Hence rarnings for the bank is likely to grow at 22% CAGR over FY12-15e on back of strengthening balance sheet, diversified fee income, improvement in liability, uptick in NIM's and healthy return ratios. Hence, considering the above, we continue to maintain our BUY recommendation on the stock with a target price of INR 558/share.

Key highlights

Easing wholesale rates, declining G-sec yields and improving CASA should help margins

Enable by saving rate deregulation, Liability franchise for the bank continued to improve with increase in overall share of CASA ratio by 635bps to 18.9% in FY13 aided by strong traction in saving deposits accretion (141% YoY).The overall share of savings deposits ratio has increased to 9% of overall deposit. Further with wholesale rates having corrected very sharply over last one year and CASA expected to improve steadily in the next few years, Yes bank is poised for an improvement in margins with reversal in interest rate cycle. Further the outlook for treasury profits is quite strong for FY14e given the bank's large corporate bond portfolio and significant duration on the SLR portfolio. Hence margins for the bank are likely to improve in FY14e by 15-20bps on back a) expected fall in interest rates on wholesale deposits (b) increasing proportion in CASA deposits and (c) treasury gains. We believe margins are likely to expand from 2.9% to 3.10-3.15% levels for FY14e, thereby providing a cushion against a possible credit cost rise due to asset quality issues.

Best in class asset quality

Contrary to market expectations of large scale delinquencies, Yes Bank has managed its asset quality extremely well with reported GNPA and NNPA at 0.20% and 0.01% respectively. In fact it has one of the best credit track records amongst its peer group with GNPAs ranging between 0.1%-0.7% and negligible restructured loans on its books, thereby suggesting strong credit selection and monitoring processes. The bank has a well diversified (exposure to any particular sector is less than 5% of overall book) and de-risked loan book with lower exposure to stressed sectors like infrastructure, iron and steel, textile etc compared to its peers group thereby resulting in lower delinquencies. Going forward, with no material npl/restructuring in pipeline management expects credit costs at 50-65bps for FY14e.

Capital rising likely in FY14e

Currently CAR for bank continues to remain healthy at 18.30% with tier-1 ratio at 9.5%.However in order to support ~25-30% business growth over FY13-15e; the bank is likely to raise capital in near term. In fact it has recently passed an enabling resolution to raise capital to the extent of INR 29bn (USD 500mn) in one or more tranches by QIP or ADR/GDR or FPO. However, in the short-term, the bank can resort to credit substitutes, where risk-weights are lower, to drive earnings growth.

Source : Equity Bulls

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