Yes Bank - Q1FY14 Result Update - SPA Securities

Yes Bank reported strong set of numbers in line with our estimates. It registered an earnings growth of 38.2% YoY driven by 39.6% growth in NII, 20 bps improvement in NIMs, 130 bps decline in C/I ratio and 53.4% growth in non interest income (driven by 84.2% & 40.1% surge in income from financial markets & financial advisory segment respectively). YBL booked treasury gain of INR 950 mn to build contingency provisions of INR 750 mn, resulting in 3.2x increase in provisioning expenses. As a result, PCR now stands at 88.5% which along with loan impaired ratio of mere 0.51% remains amongst the best in the industry. We retain our BUY rating on the stock with a target of INR 537.

Robust growth in business

YBL's total business registered a growth of 27.5% driven by 29.9% deposit growth & 24.3% growth in loan book. The customer assets (advances + credit substitutes) grew by 24.2% to INR 613 bn with credit substitutes increasing by 23.7%. Advances growth was primarily led by 24.9% surge in large corporate portfolio (64.3% of advances) and sharp increase of 34.5% in retail banking (17.1% of advances). Overall business is expected to register a CAGR of 23.5% over FY13-FY15E led by 22.5% growth in deposits and 25.0% surge in advances over the same period.

Traction in CASA deposits continues

CASA traction continued with CASA ratio improving sequentially by 128 bps to 20.2% driven by 9.9% QoQ increase in savings deposits, which is in line with its Version II strategy. Number of new SA customers increased by 25% QoQ. The share of retail liabilities (CASA + retail term deposits) improved by 148 bps to 38.8%. 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.

Financial advisory and treasury income driving Non-Interest income

Other income grew by 53.3% YoY to INR 4426 mn led by 84.2% growth in Income from financial markets (39.3% of other income) and 40.1% growth in financial advisory segment (32.4%) coupled with 68.2% growth in branch banking fee income (8.2%). Income from core fee transaction banking segment recorded a growth of 27.1% as a result of enhanced cross selling of products to customers. YBL moved part of government book to AFS book from HTM book and monetized bond gains of INR 950 mn in the last quarter.

YBL believes that the recent rise in treasury rates would have negligible impact as most of its investment in Gsec is in HTM category with duration of ~4 years and its investment in corporate bond portfolio has been built over last 2 years with higher yields, providing it enough cushion from the rate movement currently.

Robust asset quality even in this challenging environment

Asset quality remained among the best in the industry with impaired loan ratio of mere 0.51% largely owing to its stringent risk management system. NNPA remained at negligible level of 0.03% (0.01% in Q4FY13). Rating profile of corporate book has also improved, limiting the risk on asset quality.

No new restructuring came during the quarter resulting in third consecutive decline in restructured loan book by 3.3% QoQ to INR 1395 mn. YBL used the bond gains to increase its provisioning expenses by 3.2x to build a buffer for any new bad loans that might emerge in future, as a result of which its PCR improved to 88.5% in Q1FY14.

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 the bank. Best asset quality in the industry with loan impaired ratio of mere 0.51% provides additional comfort. The stock at 1.6x FY15E ABV of INR 230 is trading at attractive valuations. We retain our BUY rating and target of INR 537 on the stock, which implies 2.31x FY15E P/ABV.

Source : Equity Bulls

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