>YES BANK (ICICI SECURITIES)

Yes Bank’s Q3FY10 results were above expectations – net profits grew 18.5% YoY (I-Sec: 4.3% YoY) led by 69.5% YoY growth in NII. Credit growth, though high at 71.1% YoY, was broad-based. CASA improved to 10.1% in Q3FY10, while NIMs rose ~30bps YoY to 3.1%. Asset quality improved marginally – GNPAs fell 2bps QoQ to 0.29% – with specific provision coverage ratio at 70.4%. Capital adequacy was healthy at 16.2% (tier 1 at 9.2%). We tweak earnings to factor in higher loan growth, stronger margin and capital dilution in FY10 (from FY11 earlier). With the stock trading at 16.2x FY11E EPS & 2.5x FY11E BV, our Rs335/share target price (at 20x FY11E EPS) implies 23% upside. Maintain BUY. Sharp spike in NPL is the key risk.

SURPASSING EXPECTATIONS

■ Sharp credit growth; margins rise YoY. A 71.1% YoY credit growth, funded by a 63% YoY rise in deposits (with CASA rising 55bps QoQ & 91bps YoY to 10.1%) was the key highlight in Q3FY10. Credit offtake was broad-based and characterised by higher working capital financing this quarter. Management indicated its intent to grow credit at ~2x the industry growth. Overall duration of assets at 15-16 months was lower than 19-20 months for liabilities, indicating a favourable ALM profile in a rising rate scenario. Despite 340bps YoY contraction in yield on advances, deposit repricing and CASA accretion led to a 300bps fall in the cost of deposits, resulting in 30bps YoY NIM improvement. NII grew 69.5% YoY. We expect higher 42% NII CAGR through FY12E due to likelihood of higher-than-estimated credit growth.

■ Other income (ex-treasury) robust; costs contract. While financial advisory and transaction banking witnessed robust growth, income from financial markets was weak given negligible trading gains and a lull in foreign exchange activity in Q3FY10. Costs, however, decreased 5.4% YoY as Yes Bank added only five branches this quarter and employee costs declined ~15% YoY. We expect branch expansion to gather pace. Cost-to-income should stabilise at ~40% by FY12E.

■ Asset quality maintained; restructured accounts fall. GNPAs declined 2bps QoQ to 0.29%, though NNPAs rose 1bp QoQ to 0.09%. Specific provisioning coverage at 70.4% was healthy, while overall provisioning coverage was at 270%. Restructured accounts declined Rs219mn in Q3FY10. Outstanding restructured accounts now stand at Rs1.35bn or 0.71% of gross advances.

■ Strong growth trajectory. We foresee robust credit CAGR of 46% through FY11E, driving NII CAGR of 42%. We tweak earnings marginally to incorporate higher credit growth assumptions and capital dilution in FY10 (from FY11 earlier). Continued strength in other income and well-maintained asset quality will continue to drive ~18% RoE through FY12E. We maintain our 20x FY11E EPS multiple, with target price of Rs335/share implying 23% upside. Reiterate BUY. Sharp inflection in interest rates, chunky slippages and execution are the key concerns.

To read the full report: YES BANK