>YES BANK (IDFC SSKI)

'Interest'ing times

Yes Bank will be a key beneficiary of declining interest rates, and thereby a collapse in wholesale borrowing costs, given the bias of its funding mix. Lower deposit costs are expected to drive a structural improvement in CASA – one of the key focus areas. The bank has surprised positively on the strength of its asset book, reflected in the 200bp+ of capital release on migration to Basel-II. We expect 26% earnings CAGR for the bank over FY09-11 driven by margin expansion, stable asset quality and robust fee income growth. Owing to a potential expansion in NIMs and comfort around asset quality, we are upgrading our earnings estimates by 3.9% for FY10 and 5% for FY11. At 1.8x FY10E and 1.5x FY11E adjusted book, valuations are attractive when viewed in conjunction with the stock’s historical trading multiples. Maintain Outperformer with a revised 12- month price target of Rs200.

■ Key beneficiary of collapse in bulk deposit rates: Wholesale borrowing costs, which had soared in Oct 2008 due to tight liquidity, have been rapidly falling over the past few months – CP rates now near to all time lows touched in 2003. Being largely bulk funded (only ~9% of deposits in CASA), Yes Bank will be a key beneficiary of the same. Around 60% of the bank’s liabilities are likely to get re-priced over the next 12 months, translating into lower deposit costs and an expected ~15bp expansion in NIM in FY10.

■ Well-capitalized for growth: Tier I ratio of 9.5% (as of March 2009) provides Yes Bank headroom to grow at ~30% for the next 18-24 months. Migration to BASEL-II has led to capital release of 210bp and enhanced the capital cushion. Further, as more corporate accounts get rated, another 50-100bp of capital release is likely over the next six months. That also underlines superior quality of the bank’s loan book.

■ Attractive valuations; reiterate Outperformer: Yes Bank is expected to report a strong 26% CAGR in earnings over the next two years. We expect RoE expansion (21% in FY10E against 14% in FY07) to lead to re-rating of the stock in the near term. At 1.8x FY10E and 1.5x FY11E adjusted book, current valuations offer an attractive entry point as the stock trades on the lower end of its historical price to book band. Reiterate Outperformer with a revised 12-month price target of Rs200 (3x FY10E and 2.4x FY11E adjusted book).

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