We recently hosted the senior management of Yes Bank for investor meetings in the US. We believe that Yes Bank has entered a sweet spot. With scale, digitisation and market vacuum, it is now able to ramp up growth. Mind share is fast converting to market share. While outstanding market share is small at 1.5%, incremental market share is now running at 7-8% on loans. Still smaller size is allowing the bank to be agile and nimble and be firstly present in every ‘industry disruption’ leading to disproportionate gains.
All-round growth is now well within reach
What was a range of 25-30% growth is now trending toward the upper end of the range, as sustainable growth is ahead. We believe that the bank will soon hit its own goal of 40% CASA by FY20 and will have liability side pricing to raise its margin profile. Yes has simultaneously been one of the few to bank on a ‘sustainable’ lending approach, with a focus on 14 ‘knowledge sunrise’ sectors for its business banking and SME customers, giving it an edge, with acquisition through branches, tie-ups with industry bodies and the supply chain. Finally, on the retail side, a large part of the groundwork is behind, especially with respect to reach, service, leadership, technology and processes.
Long-term compounder; Multiples to re-rate on granularity
Yes Bank’s initiatives on retail and a digital focus raise the visibility of sustainable and, importantly, granular EPS growth in FY17-20E. RoAs today, at 1.8%, are comparable with peer banks, despite a smaller retail franchise. The ‘J’ curve to be visible in retail in the next year should also drive ‘all round’ operational performance. We believe Yes has longer-term compounding potential. We raise our PO to
Rs 500, implying a P/B of 4x FY19E, or nearer to other retail banks’ multiples. Longer term, we estimate that Yes Bank’s market cap should almost double to $25 bn on sustained compounding of earnings. We reiterate our Buy rating and highlight Yes Bank as one of our top picks in the sector.
Key takeaways from management meetings
Mind share is fast converting to market share. While outstanding market share is small, at ~1.5%, incremental market share is now running at 7-8% on loans. The still-smaller size is allowing the bank to be agile and nimble, and to be first present in every ‘industry disruption’, leading to disproportionate gains.
Retail Banking, which is now 32% of the book, is likely to reach 40% by FY20. Within retail banking, consumer banking should be 17% by FY20. The ratio of commercial loans within retail banking to consumer banking stands at 70:30, which the bank plans to improve to 50:50 by 2020.
Yes Bank is confident about improving profitability in its retail business, with: (a) operating leverage playing out, (b) an addition of branch banking assets, (c) levers to cut interest costs on savings deposits, and (d) a surge in core retail fees. Yes Bank has 2.5 mn customers and is now adding 60-80k a month vs. 30-40k two years back on the liability side.
On business banking and MSME: Yes is focusing on 14 knowledge sunrise sectors and building a granular book. The bank is leveraging existing corporate relationships to boost vendor finance and channel finance. The typical sourcing strategy is branch leads, ins with trust bodies and industry associations or customer referrals. Not only is the focus here on lending, but also fee business. API banking is effectively utilised here to establish a relationship and take it to next level.
Yes is also targeting a CASA ratio of 40% and CASA + Retail TD ratio of 70% by FY20. Yes now believes that its 40%+ CASA ratio could be achieved by the end of CY18, two years earlier than stated before.
Yes today has three slabs of savings deposits: 5% for Rs 0.1 m and lower; 6% for
Rs 0.1-10 m and 6.25% for Rs 10 million+ after the recent re-balancing. The blended cost before the re-balancing was 6.15-6.2% and is likely to come down <6% after the recent re-balancing. This will add to margins, if not pass-through. Moreover, as it ramps up its CASA further, we believe the bank has enough headroom to cut savings rates, as most industry players are now offering a 3.5-4.0 % rate.
In the digital world, Yes Bank has materially captured market share, which today stands at 44%. We believe that, while it may not sustain as other banks pick up, it nevertheless has been agile and nimble and has allowed the bank to mine a lot of customer mind share.
—Bank of America Merrill Lynch