>YES BANK (MORGAN STANLEY)

Potential for Outperformance in Early Stage Growth: OW

Initiate coverage with an Overweight rating and a price target of Rs330, implying 39% upside: We believe valuations for the stock are very attractive, especially in the context of where other private sector banks are trading and the strong growth that we believe lies ahead for this bank. The stock is currently at 16.2x F2011e earnings, 2.3x BV, 9.3x Core PPOP, and is currently generating 20%+ ROE. We expect EPS growth to average 24% over F2010-12 (after factoring in a US$200 million capital issuance in F2011).

Potential for outperformance is large early in its growth cycle: With only 0.5% market share of system loans, Yes Bank in our view is positioned to grow its loan book faster than average, as it is at an inflection point in branch network and asset size. As it delivers on growth, we believe the stock has the potential to mirror the outperformance HDFC Bank and Axis Bank saw relative
to the market in the early stages of their growth cycles.

F2009 performance demonstrated capability: Yes Bank’s solid performance during the liquidity squeeze and impaired loan cycle in F2009 in our view demonstrated the underlying strength of its
management and the processes that it has put into place. While the impaired loan ratio for our coverage rose from 3% as of March 2008 to 5.8% as of June 2009, Yes Bank fared much better, with its ratio rising only from 0.4% to 1.4%.

Catalysts – development of liability franchise and evidence of early-stage growth story panning out: Yes Bank’s low-cost deposit or CASA ratio is currently at only 9.5%, significantly lower than that of peers. However, the bank has now reached critical mass of 100+ branches – as these branches mature and the distribution network expands further, we believe that Yes Bank will be able to organically increase its CASA ratio to 15% by F2012. A rise in low-cost deposits coupled with strong asset/earnings growth will likely be the catalysts that will drive the stock higher.

To see the full report: YES BANK