Buy Yes Bank; target of Rs 1425: Edelweiss

Edelweiss's research report on Yes Bank

Deferment of capital raising plans by Yes Bank has halted the stupendous price run. But, the moot question is, has anything changed fundamentally? We suggest no, and current quarter numbers (NII 30% YoY, PAT 30% YoY) vindicates our view that the bank is on track to live out its Vision 2020. First, it is swiftly moving towards retailisation (CASA crossed 30% mark, retail/business banking forms 32% and retail fees tracking 40% growth). Second, it continues to deliver above-industry loan growth (up 35%) with tier-1 at 10% and RoE at 20%, which provides good growth visibility over next year or so. We maintain our thesis that a beefed up business model will reduce perceived volatility and aid further re-rating (refer our Braveheart note, Reality bite: Demystifying perceptions). Maintain ‘BUY’.

It is a matter of time before capital raising will happen. We believe it will be BV accretive and earnings dilution will be limited to 5%. Yes Bank has historically raised capital at attractive valuations and management’s track record of recouping RoE to pre-capital raising levels in short- to medium-term is impressive. Even post capital raising the bank will be able to deliver decent RoE of 18%. Sound structural levers and progress towards branch banking will aid the bank clock best-in-class return ratios and fuel re-rating. The stock is trading at 2.4x FY18E P/ABV. We maintain 'BUY/SO' with TP of INR 1,425 (on 2.6x FY18E P/ABV) and retain Yes Bank as our top pick.