YES Bank - Managing well but re-rating contingent on growth outlook - Prabhudas Lilladher

Yes Bank's Q3FY14 PPOP performance was in line with expectations and PAT beat was largely driven by reversals of Q2FY14 MTM provisions. We believe Yes Bank has managed the volatility well in the last two quarters with limited NIMs/core fee impact. However, with a benign growth outlook, we see significant slowdown in PPOP growth (~10% YoY growth in FY15). Asset quality still remains manageable despite increasing slippages. Hence, we maintain our ACCUMULATE rating with a PT of Rs420/share. Risk-reward is getting a little better with the recent correction but material re-rating will be contingent on improving growth outlook.

Managed volatility well but PPOP growth now contingent on growth outlook: Yes Bank has managed volatility well in Q2 & Q3 with just 10bps margin contraction (moderated growth to protect NIMs) and sustained ~25% YoY fee growth despite lower B/S growth. But PPOP growth is moderating now (~9% YoY in QFY14) and we expect this to continue in the next 2-3 quarters (FY15e PPOP growth of ~10% YoY) as management is still cautious on growth outlook and branch expansion targets remain unchanged. Faster PPOP growth, thus, remains contingent on improving growth outlook.

Asset quality manageable: Gross NPAs have inched up ~10bps QoQ despite Rs600m of sale of NPAs to ARCs as slippages increased to 1.3% of loans. Though slippages have inched up, we do not see risk to our ~75bps of credit costs assumption for FY15. Low restructuring book (0.2% of loans) + Rs2bn of countercyclical buffer provide comfort despite increasing sales to ARCs (0.4% of loans).

Others: (1) MTM provision reversal of Rs520m out of the Rs1.1bn MTM loss provision in Q2FY14; SWAP book which provided hedge against MTM losses in Q2FY14, did not have any material losses, given its higher duration v/s bond book (2) Yes Bank acknowledged holding Indiabulls' Tier-1 capital; Reuters article indicated that Yes Bank/Indiabulls had subscribed to each other's Tier-1 paper.

Source : Equity Bulls

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