Investors with a two-year perspective can consider buying the stock of Yes Bank at the current price (135.65). The bank trades at 3 times its June 30 book value and 20 times its FY-08 earnings; at 15.8 times its FY-09 earnings and 2.4 times the FY-09 book value.
Yes Bank is among the youngest and the fastest growing private banks in India. The stock trades at a premium to ICICI Bank and at a discount to private sector rivals such as HDFC Bank and Axis Bank.
The bank has high quality assets, small exposure to the retail segment (2 per cent), comfortable capital adequacy, high proportion of core non-interest income to total income and strong growth in advances and deposits in the current challenging scenario.
However, a relatively small proportion of low-cost deposits and limited branch network are curtailing the company's retail banking growth opportunities.
Yes Bank is aggressively foraying into retail banking for deposits, while retail advances are not the focus. Its loan book is divided between corporate (57 per cent) and small and medium enterprises (41 per cent).
This loan mix holds the ability to weather the current high interest rate scenario with limited threat of slippage. Until 2007, the bank had no slippages, but in FY-08 and the Q1 of FY09 there has been an increase in delinquencies.
Financials
The 51 per cent earnings growth in Q1FY09 was much slower than the four preceding quarters when the earnings grew over 100 per cent. Yes Bank's balance-sheet and advances have grown by 130 per cent (compounded annually) in the last four years ended March 2008, whereas the deposits grew at 170 per cent (annualised rate) in the same period.
The high growth in the past is partly attributable to the effect of a low base.
The going can get tough from hereon. In the recent quarter, the bank posted a deposit and advances growth of 45 per cent.
The deposit base declined sequentially as the bank has shed high-cost deposits but improved low-cost Current Account Savings Account (CASA) deposits. After phenomenal growth in FY08, with total income growing at 112.9 per cent, the June 2008 quarter saw a decline in growth. The bank's net interest income grew at a healthy 122 per cent. However, the slow down in non-interest income as a result of decline in "income from financial markets" tempered the growth of the total income to 37 per cent in the June quarter.
Segments such as transaction banking, financial advisory and third-party product distribution have grown at a good pace to boost 'other income'.
Improving net interest margin
Comparison on a sequential basis suggests that the bank has managed costs well, with cost of funds remaining flat at 8.4 per cent, despite hikes in CRR and repo rates during the quarter.
This may have been achieved through an improvement in CASA (at (8.9 per cent) by 96 per cent over the year. Improvement in gross yield on advances from 11.2 to 11.5 per cent (PLR was hiked during this period) helped in propping up the net interest margin of the bank to 2.88 per cent.
A Rs 22-crore provisioning was created for the bank's mark-to-market loss in the available-for-sale bond portfolio. There was increase in gross NPA to Rs 21.3 crore and net NPA to Rs 17.4 crore, amounting to gross NPA/gross advance of 0.21 per cent and the net NPA proportion of 0.17 per cent.
The provision cover is low at 18 per cent but the bank is confident of recovering these advances. The bank has said that there has been no further loss in forex derivatives in the quarter in addition to the provision it made in the previous quarters.
The capital adequacy of Yes bank stands at 15 per cent after recent capital raising of Rs 564 crore. This will help the bank increase its asset base with ease this year. The credit-deposit ratio of the bank at 80 per cent is high but may come down as the balance-sheet expands.
Outlook
While the bank's balance-sheet may see lower growth, it may nevertheless grow at a rate superior to its peers, given its aggressive moves in opening retail branches, targeting SMEs and also building corporate relationships. Yes Bank has 100 branches mostly in large cities and it is likely to add 17 more (it has already received licences to open these branches) this fiscal year, but in future the bank may have to look towards semi-urban and rural areas to continue growing at these rates.
Yes Bank also plans a foray into asset reconstruction business by the end of this year; this can boost its 'other income'. The bank intends to increase its SME clientele to 1,000 by FY-09 and plans to add 5,000 customers under its Urban-Micro Finance programme.
The recent PLR hike to 17 per cent will cushion the bank from increasing cost of funds and maintain its net interest margins in the current quarter but there could be more slippages as the advances grow. The FII exposure of 28 per cent as of June 2008 exposes the stock to the risk of institutional liquidation.
Yes Bank is among the youngest and the fastest growing private banks in India. The stock trades at a premium to ICICI Bank and at a discount to private sector rivals such as HDFC Bank and Axis Bank.
The bank has high quality assets, small exposure to the retail segment (2 per cent), comfortable capital adequacy, high proportion of core non-interest income to total income and strong growth in advances and deposits in the current challenging scenario.
However, a relatively small proportion of low-cost deposits and limited branch network are curtailing the company's retail banking growth opportunities.
Yes Bank is aggressively foraying into retail banking for deposits, while retail advances are not the focus. Its loan book is divided between corporate (57 per cent) and small and medium enterprises (41 per cent).
This loan mix holds the ability to weather the current high interest rate scenario with limited threat of slippage. Until 2007, the bank had no slippages, but in FY-08 and the Q1 of FY09 there has been an increase in delinquencies.
Financials
The 51 per cent earnings growth in Q1FY09 was much slower than the four preceding quarters when the earnings grew over 100 per cent. Yes Bank's balance-sheet and advances have grown by 130 per cent (compounded annually) in the last four years ended March 2008, whereas the deposits grew at 170 per cent (annualised rate) in the same period.
The high growth in the past is partly attributable to the effect of a low base.
The going can get tough from hereon. In the recent quarter, the bank posted a deposit and advances growth of 45 per cent.
The deposit base declined sequentially as the bank has shed high-cost deposits but improved low-cost Current Account Savings Account (CASA) deposits. After phenomenal growth in FY08, with total income growing at 112.9 per cent, the June 2008 quarter saw a decline in growth. The bank's net interest income grew at a healthy 122 per cent. However, the slow down in non-interest income as a result of decline in "income from financial markets" tempered the growth of the total income to 37 per cent in the June quarter.
Segments such as transaction banking, financial advisory and third-party product distribution have grown at a good pace to boost 'other income'.
Improving net interest margin
Comparison on a sequential basis suggests that the bank has managed costs well, with cost of funds remaining flat at 8.4 per cent, despite hikes in CRR and repo rates during the quarter.
This may have been achieved through an improvement in CASA (at (8.9 per cent) by 96 per cent over the year. Improvement in gross yield on advances from 11.2 to 11.5 per cent (PLR was hiked during this period) helped in propping up the net interest margin of the bank to 2.88 per cent.
A Rs 22-crore provisioning was created for the bank's mark-to-market loss in the available-for-sale bond portfolio. There was increase in gross NPA to Rs 21.3 crore and net NPA to Rs 17.4 crore, amounting to gross NPA/gross advance of 0.21 per cent and the net NPA proportion of 0.17 per cent.
The provision cover is low at 18 per cent but the bank is confident of recovering these advances. The bank has said that there has been no further loss in forex derivatives in the quarter in addition to the provision it made in the previous quarters.
The capital adequacy of Yes bank stands at 15 per cent after recent capital raising of Rs 564 crore. This will help the bank increase its asset base with ease this year. The credit-deposit ratio of the bank at 80 per cent is high but may come down as the balance-sheet expands.
Outlook
While the bank's balance-sheet may see lower growth, it may nevertheless grow at a rate superior to its peers, given its aggressive moves in opening retail branches, targeting SMEs and also building corporate relationships. Yes Bank has 100 branches mostly in large cities and it is likely to add 17 more (it has already received licences to open these branches) this fiscal year, but in future the bank may have to look towards semi-urban and rural areas to continue growing at these rates.
Yes Bank also plans a foray into asset reconstruction business by the end of this year; this can boost its 'other income'. The bank intends to increase its SME clientele to 1,000 by FY-09 and plans to add 5,000 customers under its Urban-Micro Finance programme.
The recent PLR hike to 17 per cent will cushion the bank from increasing cost of funds and maintain its net interest margins in the current quarter but there could be more slippages as the advances grow. The FII exposure of 28 per cent as of June 2008 exposes the stock to the risk of institutional liquidation.
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