Yes Bank (Q2 FY14) - BUY - IIFL

CMP Rs365, Target Rs437, Upside 19.7%

- Yes Bank's deposits grew by strong 29% yoy on the back of robust 53% yoy growth in CASA franchise. Savings balances grew by 81% yoy driven by substantial network expansion and higher savings rate offered. Savings deposits now comprise more than 50% of CASA balance. CASA ratio though stable qoq at 20.4% represented a sharp 300bps improvement on yoy basis. Sequential improvement in the ratio was restricted by migration to short-term TDs. The share of retail FDs improved by 250bps qoq to 21.5% (a substantial 18% growth in absolute terms) as the bank replaced high-cost CDs with relatively cheaper deposits. Therefore, granularity in deposits further increased during the quarter in-line with the stated strategy. Wholesale deposits above Rs250mn stood at 31% of total deposits.

- Customer assets (loans + credit substitutes) growth moderated to 13% yoy from 24% yoy in the previous quarter. Loan growth decelerated to 14% yoy with the book being flat qoq. Credit substitutes (A+ to AAA rated CPs/Bonds) book contracted by 1.5% qoq forming 22%/13% of customer assets/balance sheet. The segmental composition of customer assets moved significantly towards the wholesale banking segment with commercial and branch banking assets contracting by 16% and 5% qoq respectively.

- NIM contracted by less-than-expected 10bps qoq to 2.9%. Gross lending yield improved marginally despite the shift in asset mix towards the corporate segment on account of base rate hike (by 25bps on Aug 1). Funding cost increased by 20bps qoq due to spike in wholesale rates. NIM outlook is strong as softening of bulk deposits rates and sustained improvement in CASA ratio should lower overall cost of funds. Further, the planned capital raising (up to US$500mn) will push margin higher on the back of reduction in leverage. We estimate CASA ratio at 23% and 27% by the end of FY14 and FY15.

- Core fee growth (ex-treasury) was muted at 15% yoy with slowing traction in Financial Advisory (up 4% yoy) and Transaction Banking (14% yoy) fees. Branch Banking fee growth was robust at 69% yoy. Financial markets income of Rs1.8bn included MTM gains of Rs1.1bn on interest rate swaps. Opex growth moderated substantially to 28% yoy and underpinned an improvement of more than 300bps in cost/income ratio.

- Gross NPLs increased by 26% qoq on the back of higher slippages of Rs1.5bn (implied annualized delinquency ratio of 1.3%) and consequently there was an uptick in GNPL ratio. Annualized credit cost was 55bps which included counter-cylical provisioning of Rs270mn. Cumulative counter-cylical buffer stood at 0.4% of loans as at the end of the quarter. Net NPL ratio was stable as bank provided adequately against the fresh slippages. During Q2 FY14, bank made provision for the entire MTM depreciation of Rs1.1bn on its AFS/HFT investments thereby not choosing to amortize it over the year. We expect loan-loss provisioning to pick-up in H2 FY14 as elevated slippages are likely to continue.

- We upgrade FY14/15 earnings estimates on the back of substantial profit beat delivered in Q2 FY14 and factoring a better NIM outlook in the medium term (assumed capital raise at Rs450/share in H1 FY15). Despite building higher provisioning in FY14/15, we do not envisage any dilution in the bank's RoA delivery (average at 1.5%, similar to the average of FY12-13). Earnings growth would moderate to 22% pa over FY13-15 tracking moderation in balance sheet growth. Given inexpensive valuation at 1.4x FY15 P/ABV, we retain BUY rating on the stock and raise 9-month target to Rs437.

Source : Equity Bulls

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