>YES BANK : Another Strong Quarter; Maintain OW

Yes Bank reported a PAT of Rs1.4 bn (+11% QoQ, +75% YoY): This compares with our expectation of Rs1.35 bn. On a per share basis (given equity issuance), earnings were up 57% YoY and 1% QoQ.

■ NII growth driven by volumes: NII was up 16% QoQ, driven by loan growth, which was up 19% QoQ. Margins expanded by 10 bps QoQ to 3.2% as the bank benefited from the free funds effect of the equity issuance. Adjusted for this, NII grew at about 10% QoQ and
margins were flat to slightly down sequentially.

■ Non-interest income (ex-capital gains) grew 26% QoQ and 72% YoY: YoY strength was broad-based with all segments growing well. In this quarter, the key driver was financial markets, which saw a sharp uptick, owing to some chunky deal-related revenues.

■ Weak liability franchise means margins will compress in F2011, but will still deliver 18% ROE: We expect Yes Bank’s margins to come off from current levels in the coming year as rising short rates (given low CASA/assets), impact of free funds effect fading, and CRR hikes filter through. Despite this, we expect the bank to deliver 18% ROE in F2011.

■ Well positioned for growth cycle in terms of capital and asset quality: With a Tier I ratio of 12.9% and an impaired loans ratio of 0.5%, we think Yes Bank is well positioned entering the new credit growth cycle, especially given its small size. We agree that margin progression will be challenging near term, but believe that this has already been factored into expectations.
Yes Bank trades at 15.7x F2011 earnings and 2.6x BV – we believe that the risk-reward is still favourable and hence maintain our Overweight rating.

To read the full report: YES BANK