>YES BANK: Next generation bank (CLSA:)

A differentiated business model that focuses on niche sectors and aims to maximise revenue per customer by effective cross selling, has enabled Yes Bank to deliver profitable growth in past 5 years. We expect growth momentum to remain strong and earnings to grow at a Cagr of 32% over FY09-12. Building of strong CASA franchise will be important to reduce liquidity risk in the present wholesale funded model. Healthy growth and a consistent track-record, with RoEs of +20%, will support premium valuations. BUY to our target price of Rs335, implying 31% upside.

Unique banking model promises high growth potential
Yes Bank (Yes) focuses on select sectors where it develops domain expertise and offers a full range of financial products / services to companies in those focussed sectors. Its unique business model has helped it to deliver +75% earnings growth over past 3 years with its domain expertise helping better ‘credit risk evaluation’ (in the recent economic downturn Yes had the lowest proportion of stressed assets). Rising demand for non-vanilla corporate loans will help Yes to grow at a cagr of 39%, over the twice sector growth rate.

Earnings to grow at a cagr of 32%, sustainable RoE of +20%
Yes’ multiple relationship model, its presence across the value chain of niche sectors will enable it to earn a healthy RoA of 1.4-1.5% (sector average ~1.1%). Improving share of CASA deposits, higher share of non-vanilla loans will help Yes to sustain NIMs at +3%, higher than the sector.. A wide product and service offering will also enable it to have higher contribution from fee income, supporting the higher RoA. Earnings estimated to grow at Cagr of 32% (FY09-12), sustainable RoEs to be +20%.

Improvement in liability franchise would be the key
Yes is highly dependent on wholesale funding, making it vulnerable to the volatility in liquidity conditions. Over the next 3-5 years, we expect CASA ratio to improve to 200-300bps annually led by (1) more than doubling of branch network, (2) improving branch efficiency and (3) build up of retail deposit franchise. Given its aggressive growth plans, Yes will need an estimated US$500mn in capital in next 4 years.

Valuation premium to sustain; Buy
We believe that Yes’ valuations will track those of its peers (HDFC Bank) in their initial days of operation supported by a healthy growth trajectory, higher profitability and consistent delivery track-record. Our one year price target of Rs335 is based on 3.5x one year forward price/ adjusted book. BUY.

To read the full report: YES BANK