Emkay Global Financial Services has maintained `Accumulate` on Yes Bank with a price target of Rs 370 as against the current market price (CMP) of Rs 319 in its report dated Jan. 24, 2012. The broking house gave the following rationale:
Inline results; healthy traction in retail segment - key highlight for Q3:
Yes Bank`s Q3FY12 NII at Rs 4.3 billion and net profit at Rs 2.5 billion was largely inline with our / street estimates. Healthy 30% yoy growth in non-interest income and lower provisions compensated for higher operating expenses. Increasing footprint + deregulation of interest rates on saving deposit / NRE was a boon for the bank which penetrated further into the retail segment. The bank has added 140 branches in the last 12-mths; its share of CASA + retail deposits has increased materially to 31% of deposits and exposure to SME + retail segment now stands at 15% of total loans (10% in Q3FY11). On the balance sheet front: Against 15% yoy (5% qoq) growth in loan portfolio, growth in customer assets (ie. loans + credit substitutes) actually came in higher at 28% yoy (7% qoq). A 25bps increase in the base rate (at the beginning of Q3) + 11%+ yield on credit substitutes compensated for higher cost of fund. Resultant, reported NIM at 2.8% was down mere 10bps qoq. Deposits were up 19% yoy and 7% qoq. Growth in CASA deposits came in much higher at 47% yoy and 22% qoq.
Increasing share of retail liabilities will ensure stickiness …:
Yes Bank was the first amongst the banks to capitalize on deregulation of interest rates on savings deposits. This move has paid off well to the bank as SA deposits, albeit lower base grew by whopping 99% yoy and 40% qoq. We would like to adopt a wait and watch approach towards the bank`s increasing focus on SA front as interest rates on short tenure term deposits are in line with that of SA. Also, increasing footprint, primarily pan-India has aided healthy growth in CA deposits + retail term deposits. Resultant, CASA ratio has improved to 12.6% (10.2% in Q3FY11) and share of retail term deposits now at 18% (13.5% in Q3FY11).
While the bank has been paying a relatively higher 6% / 7% (vis-à-vis its peers) yield on savings deposits, CA deposits + retail term deposits would ensure stickiness in deposits and thereby enable the bank to reduce its dependence on wholesale deposits.
Strong growth in credit substitutes compensated for loan moderation:
At the first look, loan growth at 15% yoy (5% qoq/4% YTD) appears far too on the lower end. However, the mgmt attributed the reason for slower credit growth to increasing demand for credit substitutes. A credit substitutes (ie CP / corporate bond) is priced at a yield relatively lower to bank loan. From the bankers’`perspective, credit substitutes a) stay as part of investments b) is not eligible for PSL requirements and thereby do not consume capital. Resultant, bank earns higher yield with relatively lower risk. The increasing focus at branch banking (retail + SME segment) has paid off well with the book growing at healthy 8% qoq against 5% qoq growth on overall loan portfolio. Exposure to risky segments stands at: Power (2.8%), Electricity (2.2%), Gems and jewellery (0.8%), telecom (5.1%) and Infrastructure (5.1%).
Non-interest income held up well; C/income still well under control:
Other income at Rs2.1bn was up 31% yoy (down 1.2% qoq). The bank continues to witness healthy traction in all segments - Financial markets (up 18% yoy), financial advisory (up 51% yoy), transaction banking (28% yoy) and branch banking (8% yoy). On the cost front, despite huge branch additions and head counts, C/Income ratio remains comfortable at 38% levels. The bank has added 2000 employees and 175 branches since the inception of its Version 2.
Stable asset quality; Increasing share of branch banking - need for higher provisioning:
Asset quality continues to remain comfortable for the bank with GNPA/NNPA at 0.2% /0.04%. PCR too remains at healthy 80% levels. Restructured portfolio at Rs 1.7 billion (0.5% of net advances) was flat sequentially. The bank does not have any case under CDR window. In our view, an increasing share of branch banking model warrants higher provisioning.
Valuations and view:
Yes Bank has capitalized the current phase of growth moderation by increasing its credit substitute portfolio and enhancing its footprint. This has in turn enabled the bank to penetrate further into the high yielding SME + retail segment. As at Q3, share of SME + retail segment accounted for 31% of total deposits and 15% of loans. Being a wholesale funded, an increasing share of retail segment has provided cushion to margins. Retail deposits will ensure stickiness while increase retail loan mix will aid margin improvement. Further, through stringent credit quality measures, asset quality has remained comfortable.
We remain positive on Yes Bank (Q,N,C,F)* given its smooth transition to diversified balance sheet mix with stable asset quality and ability to deliver superior returns. The stock has outperformed Nifty in recent times and trades at 2.4x / 1.7x FY12/FY13 ABV against its historic valuations of 2x 1-year forward book. Maintain Accumulate.
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