YES Bank has been one of the fastest growing mid-sized banks in India, and with new capital, it has now refueled itself for the next leg of growth. We believe a few things could change (i) more retail in the mix (ii) and higher NIMs; while strong earnings & credit growth trajectory should remain relatively unchanged. We raise earnings 5-12%, incorporate new capital and raise target price to `1,800.
Growth: High, but more diversified— We see YES sustaining its high growth trajectory, with its recent capital raise. While the overall credit demand environment remains weak, YES is confident of both Corporate growth as well as a ramp-up in Retail. YES is targeting Retail at 15-20% of portfolio by 2020.
Retail expansion: YES’ retail expansion has been a tale of two speeds: while Retail liabilities have run full steam ahead, retail assets growth has been measured. Management, though, is confident of acceleration and wants to build up a ‘transactional’ retail portfolio. YES’ branch investments should continue, though a significant amount of hiring is already done.
Earnings trajectory: Driven by rapid growth, better margins— We see gains on NIMs, 1) driven by CASA gains; 2) lower SA costs, 3) shift in mix towards Retail/MSME and 4) recent capital raise. With stable asset quality and some cost gains, we expect YES to deliver strong earnings growth of 29% over FY17-19e. Key Risks are asset quality flutters, execution challenges in Retail assets and slowing fee income.
Incorporate fresh capital, raise earnings and target price: We incorporate YES’ recent capital raise, raise earnings 5-12%. Our revised target price is `1,800, which continues to be benchmarked at 3x PBV (rolled fwd to Sep18e). Maintain Buy.
Growth: Geared up for the next leg—Yes Bank has grown at a strong CAGR of 45% over FY06-16 – one of the fastest among the mid-sized private sector banks in India. Importantly, it has done so while maintaining relatively stable asset quality, as well as high returns. While we see YES sustaining its high levels of growth, we also see a continued shift in its asset profile. Going forward, Retail loans should form a more meaningful part of the overall loan mix, with YES having made significant investments in people, branches and products.
Corporate Lending: On corporate banking, YES’ management believes there are opportunities available on financing of renewable power projects and M&A financing. YES has been doing international lending through the GIFT City (IFSC), and this now forms ~1% of its portfolio.
Retail Lending: While growth rates in the retail segment have lagged in recent Qs, YES believes this should accelerate going forward. Disbursement rates have picked up in Jan-Feb. YES’ retail banking mandate is to take on lesser risk and develop more transactional products, rather than acquiring customers using retail assets. Growth in the retail segment will also help YES towards achieving its PSL targets organically — 5-6% of the overall portfolio will be sourced from deeper geographies. Management has been seeing decent traction on the credit cards business. CV/CE loans have been doing fairly well in recent months. The current retail portfolio has more ‘commercial’ orientation – they will add more ‘consumption’ orientation going forward e.g. Auto loans, credit cards, mortgages. Retail loans could form ~15-20% of the total portfolio by 2020, while overall non-corporate loans could increase from the current 31% to 45% over the same period.
Management believes YES should be able to achieve 25% loan growth on aggregate, though the Retail portfolio should grow at a much faster pace.
Margins: See upsides — YES has made significant gains on NIMs in recent Qs as funding costs have fallen and mix has improved. Going forward as well, we see levers in place for NIM expansion. As YES grows its branch network, continues acquiring customers and deepens relationships, CASA should expand from the current 33% (management targets 40% before 2020). SA rates should continue to fall – YES has been taking calibrated SA rate cuts through changes in buckets — e.g. it only offers 6% SA rate now to customers who maintain balances in excess of `0.3mn, vs. 7% earlier i.e. before Nov 2015 7% was offered to customers who maintained balances in excess of `0.3mn; for balances above `10 mn, YES offers 6.5% vs. 7% before Feb 2017.
As the loan mix shifts in favour of retail and SME, there should be gains on yields, though there could be some countervailing pressure on yields from the corporate segment. Management targets getting to a 4.0% NIM level by 2020.
Fees: Mix could change— Yes Bank generates a significant part of its operating revenues from fee income (28%). Over the last few Qs as well, YES’ fee income growth levels have been strong, driven by rapid balance sheet growth and strong transactional revenues. Corporate banking (lending related) fees still constitutes a significant 35% of YES’ fee income. This could trend in line with loan growth going ahead. As the Retail franchise gains traction, YES is likely to introduce more fee components in its retail products— and the Retail banking fees could form a more significant part of the fee mix.