We rate Yes Bank an 'outperformer' and raise target to Rs 825 as we roll...
We rate Yes Bank an ‘outperformer’ and raise target to Rs 825 as we roll forward valuations to to 2.5x Q4FY16e price-to-book value (P/BV) from 2.0x Q2FY16e) to reflect higher economic leverage. The stock remains among our top picks. Yes Bank is a leveraged play on an economic growth revival and lower interest rates – and believe the outlook continues to improve, albeit gradually.
Management’s risk appetite is also recovering with loan growth expected to remain over 25% in near term. We expect NIMs to continue to improve medium term and with healthy fee income, should lead to ROEs of 20-21% over FY16-17e. Moreover, its valuations remain amongst the cheapest relative to peers (2.0x one-year forward P/BV). Yes Bank’s Q2FY15 profits were up 30% y-o-y, well above our estimates — primarily on a higher revenue momentum — both NII and non-interest income. NIMs were up 20 bps q-o-q to 320 bps, largely expected due to impact of recent capital raising. Expect NIMs to rise by 15-20 bps annually over the next two years. Core fee income growth remains strong (+51% y-o-y) led by financial advisory (+46% y-o-y) and transaction banking (+71% y-o-y).
Loan growth gains further momentum (up 5% q-o-q, 30% y-o-y), but remains skewed towards corporate loans. Customer assets also grew at healthy 22% y-o-y (5% q-o-q) despite higher sell-downs. Expect over 25% in the near term.