Retail push bodes well for Yes Bank

Yes Bank, a private sector lender, is expected to benefit from its stable asset quality and continued focus on growing its retail customer base.

Business
Incorporated in 2004, Yes Bank is among the fastest growing private sector banks with major focus on corporate and commercial banking. The bank offers a range of corporate banking services and has a pan-India presence across 180 cities, majority of them in northern and western India, through more than 264 branches and 275 ATMs. It has a diversified loan book across growth sectors and the majority of its advances are to large corporates and institutions (63.2% of loan book in quarter ended June). The bank, however, has a very low retail presence with share of low cost CASA (current and saving accounts) deposits standing at 10.9% of the total deposits.

Investment rationale
The bank has over the last three years shown tremendous business growth, with net interest income growing at a CAGR of over 54%, with healthy growth in advances and deposits at 52% and 44%, respectively. Though it has one of the lowest CASA ratios in the industry, the bank has been able to maintain its net interest margins (the difference between interest earned and expended as a proportion of the total assets) steady at 2.7-2.8% for the last three years.

The bank is now focusing on increasing its retail presence through its ‘version 2.0’ growth plan, which will help increase its CASA deposit base and also the share of high yielding retail loans. The bank aims to expand its branch network to 325 by the end of this fiscal and to 750 by the end of fiscal 2015, mainly in smaller cities in the west and north.

The bank has one of the best operating metrics with cost-to-income ratio closer to 37% levels; return ratios like return on average assets (ROA) and return on average equity (ROE) also remain healthy. The company has maintained an ROA closer to 1.5% and ROE at 20-21% levels over the last three years and has one of the best asset qualities among private lenders with gross non-performing assets (NPA) at 0.2% and net NPA at 0.03%.

Going forward, when asset quality is expected to be an issue for most banks, Yes Bank, which has so far restructured 0.26% of its gross assets, would stand out in terms of lower exposure to troubled sectors. It would also benefit from savings rate deregulation as it can then garner a higher share of savings deposits, offering competitive rates. At the same time, its cost of funds would come down from close to 7% at present.

Concerns
Any shortfall in meeting branch expansion targets would severely affect the bank’s plans to attract low-cost retail deposits, thereby affecting NIMs as well.

Valuations
Driven by stable net interest margins and rising share of low-cost deposits, the bank’s net interest income is expected to grow at 32% over FY11-FY13E, while the net profits are likely to grow at over 26% during the same period. At the current market price of Rs262.30 per share, the stock is trading at close to two times and 1.6 times its expected adjusted book value for fiscal 2012 and fiscal 2013, respectively. Considering the current weakness in banking sector, investors can utilise declines to add the stock for decent returns in the medium-to-long term.

Disclaimer: The writer does not hold any share in the company