Tuesday, September 11, 2012


Back to Yes!

 Upgrade to Outperform: Over the past 3 months, YES Bank stock has underperformed the wholesale funded institutions by ~18% which we believe is unwarranted. We consider current levels a good opportunity to accumulate the stock. Upgrade to Outperform and TP raised to Rs415 from Rs380.

 Falling wholesale rates and improving CASA should help margins: With wholesale rates having corrected very sharply (down 250bps from the recent high on 30 March 2012) and current account savings accounts (CASA) expected to improve steadily in the next few years, we believe margins are likely to rise from 2.8% to 3.2% in the next three years. Higher margins should give YES Bank a cushion against a possible credit cost rise due to asset quality issues.

 Asset quality – too much fuss unwarranted: We think the market is overly worried about YES Bank’s asset quality which is probably the reason why the stock has underperformed relative to other wholesale funded institutions. Firstly, YES Bank has a very well-diversified portfolio with no concentration in any specific sector. Secondly, its quantum of restructured assets is well below that of peers. Thirdly, exposure to stressed sectors like infrastructure, iron and steel, textile etc is lower than its larger private sector peers. Fourthly, there is too much worry about its off-balance sheet activities. If one looks at riskweighted assets (RWA) as a proportion of total assets, YES Bank’s number is the lowest among large private sector banks, indicating that off-balance sheet transactions are not much different or riskier than for others. Finally, we have
already built in credit costs increasing virtually from nil levels last year to 50- 55bps in the next two years. Our numbers take into account an expected three-fold increase in gross NPLs over the next 2 years.

 Return ratios to be very healthy despite equity dilution: Despite the increase in credit costs and a 15% equity dilution factored into our numbers, we expect ROA of 1.4% and ROE of 20% in the next three years on average.

Earnings and target price revision
 We are marginally fine-tuning earnings. We raise our TP by 9% to Rs415 as we roll forward our valuation to FY14E.

Price catalyst
 12-month price target: Rs415.00 based on a Gordon growth methodology.
 Catalyst: Strong growth in profit, greater traction on CASA deposits.

Action and recommendation
 Favourable risk-reward, one of our top picks in financials: The stock trades at 1.6x FY14E P/BV (1.8x if we exclude equity dilution). It is now below its historical average valuation and risk-reward is very favourable at current levels. YES Bank is one of our top picks in the financial space.

To read report in detail: YES BANK