>Yes Bank (IDFC SSKI)

Strong capitalization, uptick in margins

HIGHLIGHTS OF Q4FY09 RESULTS

Yes Bank delivered robust PAT growth of 24% yoy to Rs801mn in Q4FY09, surpassing our estimates. The outperformance was driven by robust NII growth and lower operating expenses.

• Higher capital adequacy fortifies comfort on growth: Tier-I ratio improved to 9.5% (Basel-II) as against 7.8% in Dec' 08 (Basel-I) boosted by Tier-I Perpetual bond issuance of Rs1.54bn. Overall CRAR increased to 16.6% from 14.6% in Q3FY09, bolstered by migration to BASEL-II during the quarter (14.5% under Basel-I).

• NII surpasses expectations; margins expand: NII was up by 45% yoy to Rs1.55bn, driven by 20bp qoq expansion in margins to 3.0%. Improvement in NIMs was driven by 80bp reduction in funding costs owing to a sharp decline in wholesale borrowing rates over the quarter. (Exhibit 1)

• Elevated provisioning expenses; Gross NPAs inch up: The bank made provisions of Rs322mn, marginally higher than expectations. Bulk of these (~Rs 240mn) are attributable to NPAs, while the bank has taken a ~Rs50 MTM hit on the G-Sec investments (Exhibit 6). Gross NPAs rose by 24bps qoq to 0.68%, while net NPAs increased to 0.33% (0.15% in Q3FY09). Coverage has come-off to 51.5% from 66.4% in Q3FY09. (Exhibit 5)

• Restructuring likely to touch 1.2-1.4% of credit: The bank restructured standard advances worth ~Rs200mn (0.2% of loans) during Q4FY09. Further, the bank has restructuring applications for standard loans worth ~Rs200mn (0.2% of book) and non-performing loans of Rs~450mn (0.4% of book). We expect Gross NPAs plus restructured loans to touch 1.2-1.4% of credit over the next 12 months before heading southwards.

• Lower expenses bolster earnings: Operating expenses declined by 3% yoy to Rs910mn (30% qoq decline on a high base), due to 15% yoy de-growth in employee costs, while other expenses increased by 10% yoy. Decline in employee expenses is indicated to stem from rationalization of employees as well as lower wage inflation.

• Robust credit growth: Credit grew by 32% yoy and 13% qoq to Rs124bn. During the quarter, ~75% of the incremental loans were attributable to large corporates, with another 18% to mid corporates. At the same time, SME loan book remained flat over the quarter.

• Strong deposit growth; CASA slips: Deposit growth remained strong at 22% yoy and 19% qoq. While CASA increased by 13% qoq and 25% yoy in absolute terms, strong deposit growth led to ~45bp qoq decline in CASA ratio to 8.74%. Given the corporate clientele, current deposits contribute ~75% to CASA. (Exhibit 2)

• Muted treasury gains; fee income remains a mixed bag: Other income declined by 17% yoy to Rs898mn on the back of decline in treasury sales, retail and financial advisory fees. However, things are improving at the margin with sequential rise in financial advisory (up 51% qoq) and trade guarantee income (up 30% qoq) buoyed by uptick in trade credit and LC business. (Exhibit 3)

• Introducing FY11 numbers: We see a profit growth of 24% yoy in FY11 to Rs4.6bn, driven by a 30% growth in credit and steady margins. NII is estimated at Rs8.5bn –26% yoy growth. We expect fee income to grow at 30% yoy and CASA at 15%.

VALUATIONS & VIEW
Amidst the economic slowdown and jittery capital markets, Yes Bank was hammered on concerns around the bank’s capital cushion. The stock has outperformed the Sensex by 38% since these concerns were alleviated by the management’s guidance of additional Tier-I capital issuance and migration to Basel-II (highlighted in our management meeting notes dated 6 April 2009). Management has re-affirmed that the bank is comfortable to sustain credit growth
of 20-25% without need to raise incremental capital over the next 12-18 months. In addition, re-pricing of whole-sale liabilities (costs down by 300-400bps over Q3FY09) is likely to drive an expansion in margins. Owing to likely improvement in NIMs and our comfort around asset quality, we are upgrading our estimates for FY10 by 6.9%. We expect a 22.6% CAGR in the bank’s earnings over FY09-11 (translating into 20.5% ROE). The stock is currently trading at compelling valuations of 1.1x FY10E and 0.9x FY11E adjusted book. Reiterate Outperformer with a price target of Rs120.

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