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CIMB has retained its add rating on Yes Bank as it likes bank's strong growth, improving liabilities profile, strengthening retail
banking business and strong capital ratios.
The research firm expects 22 percent upside in the stock price at Rs 1,760 from current level.
After recent underperformance, the current valuations are attractive against the backdrop of 19 percent average return on equity over FY18-20, it feels.
The brokerage house said potential rerating catalysts include improving retail distribution and stable asset quality but higher than expected asset quality pressure remains the key risk.
Yes Bank has corrected by 13 percent off its peak in April 2017 due to divergence in asset quality versus RBI data. The bank reported FY16 NPL at Rs 750 crore against Rs 4,926 crore according to the Reserve Bank of India (RBI).
The stock also witnessed pressure post RBI's referral of large NPLs to the Insolvency and Bankruptcy Code (IBC).
CIMB believes such a divergence is unlikely in the future as most of these NPLs have been accounted for in FY17 (Rs 2,000 crore total NPLs; Rs 910 crore from a cement account that will likely be repaid).
Assuming 50 percent haircut on 50 percent of NPLs, the impact on net worth is likely to be 1.6 percent. The market is assuming higher stress than warranted, it said.
Yes Bank has since the deregulation of savings rate witnessed a steady improvement in its CASA ratio to 36 percent currently, comparable with peers. Its saving account per branch has improved over the past five years to Rs 33.3 crore, implying that the investment into its branch network is paying off.
While the spike in CASA ratio was mostly driven by demonetisation, CIMB expects CASA accretion of more than 75bp per quarter in the medium term and expects the ratio at around 40 percent by FY20. This, coupled with lower SA rates, could lift NIM, according to the research house.
Given the strong uptick in CASA and relatively resilient asset yields, it expects net interest margin of the bank to sustain at 3.5 percent. It also expects loan growth to remain among the strongest in the industry at 27 percent CAGR over FY18-20, largely driven by a ramp-up in retail growth and market share gains from public sector banks.
CIMB said pre-provisioning operating profit (PPoP) CAGR of 22 percent over FY18-20 remains among the strongest for corporate lenders, enabling it to absorb higher credit costs.
Management's guidance on credit costs remains unchanged at 50-70bp for FY18.
At 11:41 hrs Yes Bank was quoting at Rs 1,434.25, up Rs 18.80, or 1.33 percent. It has touched an intraday high of Rs 1,436.00 and an intraday low of Rs 1,401.05.
By Sandip Das
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