Emkay's research report on Yes Bank
YES Bank has delivered strong core PPP and earnings CAGR of 28% each over FY11-15 amidst one of the most challenging period for Indian economy, while maintaining strong asset quality. Balance-sheet growth has resumed and bank is better placed to capitalize on any growth opportunity Indian economy presents with (1) better reach (630 as compared to 214 in FY11), (2) improved liability mix and (3) increased granularity on the asset side.
Comfortable liquidity conditions, moderating inflation and bulk deposit rate is a significant positive for YES from NIMs (higher short term liabilities) and bond gains perspective (13% of customer assets). While reported NIMs are expected to flat for FY16, core NIMs (ex- benefits of equity infusion) is expected to improve by 25bp+ over FY15/17E. Resultantly with strong loan CAGR of 28%, NII CAGR is expected to be 27% over FY15/17E.
YES has delivered strong asset quality performance with slippage ratio of 0.7% as compared to 0.9% in FY14 and credit cost of 20bp (26bp in FY14) even in the environment of high stress creation in the Indian economy. For YES the proportion of assets in the riskier segments has increased, however management indicated that the exposure is to top rated corporate where the risk of defaults is low. Nevertheless, we build in higher credit cost of 30/40bp for next two years as compared to average of 20bp over the worst phase of FY11/15 for Indian economy. Balance-sheet buffer (contingency provision) of 50bp of loans and strong PCR of 72% will provide cushion to our credit cost and earnings estimate.
"We have marginally tweaked our earnings estimates by 2/1% for FY16/17 and expect core PPP and earnings growth to remain strong at 27% and 25% over FY15/17E respectively. Return ratios are expected to remain healthy with RoA at 1.6%+ and RoE at 21%+. Current level of Tier I of 11.5% should support growth in near term (though capital consumption was high), however a strong loan growth may necessitate the need to raise capital in next 12-18 months. Given the growth prospects and strong asset quality performance we believe valuations are reasonable and hence maintain Accumulate", says Emkay Global Financial Services research report.
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