Yes Bank - Asset quality stress remains; recommend BUY on attractive valuations - Nirmal Bang

Yes Bank results on operational front was broadly in line with expectations; while on asset quality front it was below expectation.

- Higher operating cost (included Rs 15 cr on account of one-time fee income for IFC loan) and lower growth in total income led to a sharp increase in cost to income ratio.

- Cost of funds increased by 10 bps QoQ. Despite an increase in yield on advances by 20 bps margins were flat sequentially owing to slower growth in advances as compared to deposits.

- Provisions were lower as the bank reversed back Rs 52 cr worth of provision made on investment book last quarter.

- Asset quality remained stressed as accounts worth Rs 140 cr (Rs 150 cr last quarter) slipped into NPA of which Rs 62 cr was sold to ARC.

- There was no new restructuring done in the quarter and restructured book stood at 0.21% of gross advances.

- Provision coverage ratio stood at 78.4% vs 79.6% in Q3FY13.

- Growth slowed down and customer assets witnessed growth of 14.4% YoY given the underlying weakness in the economy.

- Management is targeting credit growth in line with industry trend.

- Wholesale Deposits (above Rs 25 cr) accounts for 31.9% of total deposits in Q3FY14 as compared to 35.7% in Q3FY13

- Capital Adequacy Ratio stood at 16.1% (Tier I at 9.3%)

Management sounded optimistic in maintaining margins at current levels. The bank's strategy of protecting margins rather than chasing loan growth looks good in the current circumstances. Asset quality concerns continue to remain given the high slippages witnessed in the last two quarter. While we remain cautious on this front and have factored in higher credit cost for FY14E; management sounded confident and has given guidance of a recovery in Q4FY14 or early FY15E. The key concern for the bank remains its lower Tier-I capital ratio of 9.3%, which requires to raise capital to comply with the Basel-III norms. The fact that the Tier I ratio still stands much lower as compared to peers is limiting growth for the bank.

Despite all the concerns prevailing, we see that Yes Bank will still be able to sustain RoE of 20%+ and RoA of 1.5% for FY14E which is commendable. We expect PAT to witness CAGR growth of 16.7% over FY13-FY15E. At CMP, the stock is trading at a PE of 8.01x and 7.18x of FY14E and FY15E EPS and at an adjusted P/BV of 1.81x and 1.50x FY14E and FY15E Adj BV. We roll over our target multiple to FY15E (1.8x FY15E ABV) and arrive at target price of Rs 425 indicating an upside of 20.3% from current levels.

The challenging macro conditions and high interest rate scenario coupled with difficulty in raising capital will remain an overhang on the stock in the near term. Any improvement in margin from easing liquidity conditions will provide an upside trigger for the stock.

Source : Equity Bulls

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