The recent rally has partially taken the valuation argument out and the cheap absolute valuations arent that attractive in the context of slowing earnings. We cut estimates by about 5% and downgrade to the stock to underweight. Interest rates remain elevated and volatile. Both short- and long-term rates are up since the April 1 credit policy announcement. Moreover, all concurrent indicators continue to point to a weak macro. For Yes Bank Ltd , the ability to pass on higher rates to borrowers could be inhibited by the weak macro, placing growth at risk.
We think credit costs for Yes should remain elevated through FY15, in line with our macro and sector views. The economy remains weak, and Yess SME/mid-corporate book remains vulnerable to the prevailing high interest-rate environment.
We think ROAs have peaked and the higher credit costs could see a temporary decline in FY15 with loan growth also slowing, EPS could stay muted for a while.
Yes faces multiple growth challenges. The weaker macro is bad for its high-yield wholesale book and throws up fewer credit-safe opportunities. Its retail loan business is yet to reach critical size in reach or volumes and the retail deposit base is still not strong enough to drive high growth in low-yield segments.