Upgrade target for Yes Bank to Rs.390 - Motilal Oswal

YES BANK: Interaction with management; Business growth and Return ratios to remain strong; Upgrading Target Price to Rs390

We met the management of Yes bank (YES IN, Mkt Cap US$2.4b, CMP Rs332, Buy) to get updates on business growth and earnings outlook going forward. Key takeaways:

- Bank reiterated its version 2.0 and remains confident of achieving 35% CAGR in balance sheet and scaling up balance sheet size to Rs1.5t (Rs410b as of 1QFY11). Focus remains on improving market share by 10bp every year (75bp as of 1QFY11).

- Bank is targeting to expand its branch network to 750 by FY15 from 150 as of FY10. Branch expansion cost for new branches will be lower as most of the hub branches are already operational.

- Mgmt remains confident of maintaining margins at ~3%, despite current liquidity tightness and sharp rise in bulk deposit rates, as ~95% of loans are linked to PLR.

- Return ratios will remain strong: RoA of 1.4-1.5% and RoE of 20%+. On back of strong growth the bank will have to come up for capital raising in next 12 months.

Reiterated version 2.0; Remains confident of growing 2x of the industry and improve market share 10bp every year

- Leveraging knowledge banking initiatives, superior technology platform, risk management capabilities and strong execution of strategies: Mgmt is confident of achieving its objectives of (1) increasing loan book to Rs1t (from Rs223b in FY10, 35% CAGR), (2) Balance sheet size to Rs1.5t (from Rs363b in FY10, 32% CAGR) and (3) increase branch network to 750 (from 150 in FY10, 38% CAGR).

- Mgmt remains confident of increasing its market share by 10bp every year till FY15 (75bp as of 1QFY11) and grow its loan book by 2x of the industry growth

- Wholesale and commercial banking (95% of Non priority sector loans) will remain a key growth drivers on asset side and on liability side focus remains on improving share of retail deposits (22.5% of deposits). Bank intends to increase the share of Retail and SME loans to ~30% (~5% of Non Priority sector loans) as branch expansion picks up.

Superior returns ratios to be maintained

- Mgmt aims to maintain RoA at 1.4-1.5% and RoE at 20%+ over next five years backed by: (1) Strong loan CAGR of 35% (2x of industry growth and improving market share by 10bp every year), (2) Stable margins at ~3% (improvement in CASA ratio, improving share of Retail and SME loans and loans repricing ~95% linked to PLR), (3) strong growth in fee income (due to diversified fee income source), and (4) stable credit cost.

- While revenue traction is likely remain strong, C/I ratio is expected to increase on back of increased branch expansion (expected to increase 40% every year)

Confident of maintaining margins at ~3% despite sharp rise in bulk deposit rates

- Yes Bank has no major exposure to consumer lending (carrying fixed rate of interest) and also ~95% of the loan book is linked to PLR

- As loans are largely on a floating rate basis, it can pass through the bulk deposit cost to borrowers and maintain margin at ~3%.

- Average duration of the loan book is 16-17 months whereas of deposits is at 19-20 months. Therefore YoA and CoD will track the prevailing interest rates in the economy. However, stability/improvement in NIMs would depend on pricing power and liquidity in the system in our view.

- In version 2.0, focus is on improving the share of retail liabilities (~22% currently comprising of 10.5% CASA and 11.5% term deposit rates) to provide stability to margins. Focus on improving share of high yielding retail and SME loans will also help to maintain/improve margins.

- Mgmt expects strong growth trajectory in CASA deposits to continue as existing branches mature (average life 15-16 months) and new branches are added. CASA ratio to improve 200-300bp every year.

Valuation and view

- We expect the bank to report EPS of Rs19 and Rs25 in FY11 and FY12. BV will be Rs108 and Rs130 respectively.

- Return ratios are likely to be strong at 1.4-1.5% over FY10-12 and RoE is expected to be superior at 20%+ over FY10-12.

- Over FY05-10, average PBV one year forward multiple stood at 2.6x and PE stood at 17x and Peak PBV stood at 4.8x and PE stood at 30x. While Yes bank is trading at near to average multiples, peers (HDFC Bank, Axis bank and ICICI Bank) are trading at premium of 15-20% to their 5-yr average multiples.

- Strong growth, proven execution capabilities, diversified fee income and superior return ratios will ensure premium valuations to prevail. The stock trades at P/E of 13x FY12 and P/BV of 2.6x FY12. We revise our target price to Rs390 (3x PBV FY12, 15% premium to average PBV over FY05-10).

Source : Equity Bulls

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