Yes Bank’s Q4FY11 profits increased 45% yoy, led by sharp loan growth (55% y-o-y, 10% q-o-q) and supported by better than expected net interest margins and fee income growth. Asset quality remained stable and does not show any signs of immediate pressure. There was sharp addition to the distribution network as well, while costs were largely under control. Overall, it was a strong quarter.
Key positives during the quarter are: a) NIMs flat q-o-qat 280bps. we believe high funding costs will remain a drag; b) Healthy fee income growth – multiple drivers, especially retail and transaction banking, financial advisory also a significant contributor; c) Operating costs remained in check. Cost/income ratio declined further to 34.8% in 4Q11; and d) Credit costs remained low. High overall coverage levels (300%) should provide significant earnings cushion.
Yes Bank’s growth trajectory has remained strong ? management maintains its 2x industry growth guidance (35-40% in absolute terms). However, it is wholesale focused (corporate and SME advances comprise ~90% of loans) and in our view more leveraged to the macro environment. Funding mix has remained stable, pace of improvement slower than expected and likely makes the bank more susceptible to industry cycles and margin risks. Asset quality remains strong ; management does not see any visible risks on the horizon. However, due to its higher corporate leverage, additional capital raising, we believe relatively high valuations. Risks of more than expected rate hikes could also weigh on the stock near term.
We rate Yes Bank Buy/Medium Risk with an EVA-based R330 target price. Our Buy rating on Yes Bank is based on its relatively higher loan growth outlook, easing pressures on mid-market loan segment, NIM expansion due to excess liquidity conditions and its own wholesale funded balance sheet; and a bounce back in capital-market related fee incomes.
We rate Yes Bank Medium Risk due to Bank’s high leverage to the economic growth and asset quality improvement cycle.