Buy Yes Bank; target of Rs 444: Motilal Oswal

Motilal Oswal's research report on Yes Bank

YES reported robust PPoP growth of 6.7%/26.3% QoQ/YoY to INR19.57b (in-line; core PPoP growth at 34% YoY, backed by strong core fee income growth of 21% YoY), led by total income growth of 23.4% YoY and controlled opex (+19.4% YoY to INR14.4b). Controlled provisions of INR4.0b (-5% QoQ) led to a 29% YoY increase in PAT to INR11.8b (6% beat). Advances growth accelerated to 54% YoY at INR2.04t, while deposits grew 41% YoY to INR2.01t. CASA deposits grew 41% YoY, but the CASA ratio declined sequentially to 36.5% (38% in 3Q) as total deposits grew 16.9% QoQ. NIM shrunk 10bp QoQ to 3.4%, led by (i) higher proportion of borrowings as the bank raised INR30b/INR39b of Tier-2 bonds/Medium Term Notes (MTNs), (ii) a sequential drop in CASA share and (iii) increased lending to better-rated corporates. Cost to core income ratio at 42.4% was 30bp below the 3QFY18 levels, even as the bank added 50 branches during the quarter. Slippages declined to INR3.8b (1.1% annualized). GNPA/NNPA declined 12%/18% QoQ, with GNPA/NNPA ratios down 44/29bp QoQ to 1.28%/0.64%. PCR improved 340bp QoQ to 50%. Of the total RBI directed divergent amount of INR63.55b, INR26.3b continues to be outstanding standard exposure, while the rest has been either recovered, sold to ARC or classified as NPL. The board has approved capital raising of USD1b in one or more tranches, and has re-appointed Mr Rana Kapoor as MD & CEO for a period of three years, subject to shareholders approval at the upcoming AGM on 12 June.

Outlook

We believe that while YES is likely to maintain industry-leading growth, sustained strength in asset quality and consistency in operating metrics are critical for sustained re-rating of the stock. Driven by strong balance sheet growth, CET-1 ratio declined to 9.7%, and the bank will raise equity capital in the near term. Net stressed assets have declined to ~1.7% of advances. We estimate earnings CAGR of 32% over FY18-20E, and revise our PT to INR444 (2.9x Mar-20E ABV). Maintain Buy.