We believe Yes Bank has been one of the few banks in India that has consistently delivered quality earnings in the midst of India’s credit cycle. In this report, we look beyond earnings and into what is becoming important as part of ‘ESG’: incorporating ‘environmental’, ‘social’ and ‘corporate governance’ considerations into one’s framework. In this regard, Yes Bank has recently been upgraded to ‘AAA’ rating (vs ‘AA’) by MSCI ESG Research. We believe Yes bank has integrated environmental and social risks into its risk management framework, reflection of which is in its asset quality.
BAML US Strategist views ESG becoming a stock criterion
Our US Strategist (Savita Subramanian) has recently released a report on ESG titled Good companies can make for good stocks. In her report she highlights that (i) ESG is a strong indicator of future stock volatility, earnings risk, price declines and bankruptcies and (ii) trends in the investment landscape suggest that trillions of dollars could be allocated to ESG-oriented equity investments.
Bank’s contribution to ESG
On the environment front, Yes Bank has reduced its own specific greenhouse gas emissions by 20% y-o-y. Yes bank’s system market share is 1.2%, but its market share in India’s renewable energy sector exposure stands at 3%. On the social front, Yes bank has implemented inclusive social and branchless banking models to reach out to over 1.9 million rural households to provide comprehensive financial services to unbanked populations in rural and semi-urban areas. Finally, on the corporate governance front, Yes bank is the first Indian bank to release a sustainability report based on the Integrated Reporting guidelines of the International Integrated Reporting Council.
We rate Yes Bank as a Buy to capture the substantially higher volumes, lower credit costs and high return ratios. Rising distribution (2500 branches planned by FY20 from 900 now) should also aid growth/CASA/fees.
Price objective basis & risk
We set our PO for YES at R1,590 (pre-dilution). We value YES using the growth-adjusted P/BV method (Gordon Model), with the following key assumptions: sustainable long-term ROE at 22%, Cost of equity at 12.25%, Sustainable growth rate of 8.5%. Alternatively, our PO is at 16.4x our FY18E EPS for net profit CAGR of 25%+. Downside risks to our price objective are a sharp rise in NPLs and an inability to manage growth.
Yes Bank is a new-generation private sector bank providing ‘knowledge banking’ services (leveraging its expertise developed in key sectors), which drive its asset growth. It plans to build a deposit franchise by providing superior services, leveraging its technology platform and focusing on the northern region.