Maintain ‘buy’ on Yes Bank with target price of R980. Despite the recent outperformance to Sensex by 26% in past six months, Yes Bank is trading at 1.9x FY17e P/ABV with structural levers in place to achieve RoA/RoE of 1.8%/20% by FY17. We expect the stock to re-rate closer to 2.5x FY17e P/ABV.
Our recent interaction with the management reinforces our belief that Yes has structural levers in place—investment in retail infrastructure over past 3-4 years beefed up with an experienced management team — which will propel NIMs by 50 bps and RoA to 1.8% by FY17e.
It was heartening to learn that despite current low base management has not aggressively pursued growth but was focusing on building a quality franchise (reflected in KPIs). Taking into account that building and reaping retail benefits will play out in the longer term, management laid out its 5-pronged strategy 1) customer acquisition; 2) branch-centric model; 3) focus on sales; 4) building customer franchise; and 5) maintaining strong leadership position.
While concerns surround the bank’s volatile business model, it has been striving to derisk its business model. Against this backdrop and with an experienced management at the helm, we expect NIMs to improve by 50 bps by FY17 (highest among our coverage universe).