Yes Bank (yes) reported robust PPoP growth of 38% y-o-y/12% q-o-q to Rs 19.1 bn (10% beat), led by strong 34% y-o-y growth in total revenues and controlled opex. However, asset quality deteriorated sharply, adversely impacted by high divergence of Rs 63.55 bn, and thus, resulted in 56% y-o-y increase in provisions. PAT, however, still grew at a healthy 25% y-o-y to Rs 10.02 bn (largely in-line).
Business growth stood robust, with advances growing 35% y-o-y to Rs 1.48 trn and deposits increasing 23% y-o-y to Rs 1.58 trn. CASA deposits maintained strong traction and reported 51% y-o-y growth, resulting in a 40bp q-o-q increase in the CASA mix to 37.2%. Margins held stable at 3.7%. Cost-income ratio declined 290bp q-o-q to 39.2%, and we believe that opex growth for YES will continue to trail revenue growth, as the bank goes slow on branch expansion and focuses on productivity.
Asset quality deteriorated sharply, affected by the divergence of Rs 63.55 bn (19 accounts) — of which YES downgraded loans worth Rs 12.19 bn, sold three accounts worth Rs 4.61 bn to ARC and upgraded 12 accounts worth Rs 29.83 bn, and recovered Rs 16.9 bn. GNPL/NNPL thus increased 99/183% q-o-q, while the coverage ratio fell ~1,700bp to ~43%. Credit cost increased to 29bp (48bp in H1FY18); however, the bank has guided to maintain its FY18 credit cost at <70bp.
Valuation and view: We believe that while the repeated occurrence of such a big divergence (4.3% of loans) is a clear setback, strong resolution capability (FY16 divergence was dealt with pretty quickly, ~27% of FY17 divergence already recovered) gives us comfort. The RBI giving its approval on the upgrade of divergent accounts will further cement confidence. Total net stressed assets now stand at ~2.5% of advances. We estimate YES to deliver industry leading growth, with 25% earnings CAGR over FY17-20e. We revise our price target to Rs 380 (2.7x Sep-19E ABV). Maintain Buy.