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Equity Research Report On Yes Bank Limited

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Yes Bank Limited

Market Cap: 4903.65 Crore Outstanding Shares: 29.71 Crore Price as of 3 Sept.: 165.05 Book Value Per Share: 58.05
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3 September 2009

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BUY
Industry: FINANCIAL NSE Code: YESBANK Target Price: 244.00 Upside: 79.00

52 Week Range: 175.90 / 40.80 Face Value Per Share: 10.00

Beta: 1.45 BSE Code: 532648

YES BANK BUSINESS DESCRIPTION

YES BANK BEGAN ITS OPERATION IN AUGUST 2004. THE BANK HAS REGISTERED A CONTINUOUS AND ROBUST GROWTH RATE. IT MAINLY OPERATES IN FOUR SEGMENTS: TREASURY, CORPORATE/WHOLESALE BANKING, RETAIL BANKING AND OTHER BANKING OPERATIONS. IT ACCEPTS DEPOSITS AND EXTENDS LOANS AS WELL OTHER VALUE-ADDED PRODUCTS AND SERVICES TO ITS CUSTOMERS, INCLUDING FINANCIAL MARKETS PRODUCTS AND SERVICES, TRANSACTIONAL BANKING PRODUCTS AND SERVICES, INVESTMENT BANKING ADVISORY SERVICES AND WEALTH MANAGEMENT PRODUCTS. THE BANK OPERATES THROUGH 123 BRANCHES AND OVER 200 ATMS IN INDIA.

STOCK PERFORMANCE
YES BANK SENSEX 1m 6.95% 14.63% 12m 33.74% 9.50%

Recommendation
The bank has registered a compounded growth rate of around 60 per cent since it interception. We expect the bank to continue to grow at a high rate. We are very positive on the long term business prospects of the company and financial performance. At Current Market Price of INR 165.05 the stock is trading at a PE of 16.15x. With expected EPS for FY10 and FY11 of INR 17.73 and INR 19.32 respectively, the stock is trading at a PE of 9.7x and 8.9x respectively. The price of the stock is undervalued at current level of INR 165.05. We reiterate BUY on the stock with target price of INR 244.00 with a medium term investment horizon. The Upside for the stock is INR 79.00.

GROWTH (%)
REVENUE PROFIT Last Qtr. Last Yr. 4 Yr. CAGR 3.47% 46.41% 70.28% 24.91% 51.90% 53.08%

EPS ANALYSIS

Highlights/Recent Updates
Growth plan of the bank Yes Bank operates 123 branches across India and expect to target grow to 250 branches by the end of the current fiscal year to 750 branches by March 2015 and with 3,000 ATMs. The bank also expects staffing to grow from about 2,000 to 10,000 in 2015. Bank focus strongly on growth of its core banking business Yes Bank has reconsidered some of its diversification plans such as launching an asset reconstruction company. The company will instead focus strongly on growth of its core banking business. The planned initiatives to start an asset reconstruction company, asset management and a broking subsidiary are not in the bank immediate horizon.

DIVIDEND ANALYSIS
YES BANK HAS NOT GIVEN ANY DIVIDEND TILL DATE SINCE IT INTERCEPTION. EVEN THE BANK HAS NOT ISSUED ANY BONUS.

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Banking Industry - Funding the Economy

Banking Industry is an essential part of any economy. In fact, banks are the single most important supplier of credit. The banking industry has the capital and commitment to support the financial needs of individuals, businesses and all levels of government. Banks make loans to consumers to finance purchases of homes, education, cars and major appliances. Bank credit helps small businesses get started, grow and prosper. Banks help state and local governments fund a variety of public improvements like schools, roads, water & sewer and public health facilities. In each of these roles, banks support the creation of jobs and the growth of our economy. Banking Industry is the most dominant sector of the financial system in India, and with good valuations and increasing profits, the sector has been among the top performers in the markets. But currently worldwide the banking industry is facing a tough time due to the failure of financial system in the biggest economy i.e. United State of America. The problem arises due to default in sub prime mortgage lending clubbed with rising national debt, current account deficit, and fiscal policies of US. This has led to the failure of some big investment banking firm leading to file bankruptcy. Financial Institutions are the one to face the toughest challenge. Indian Industries has witness an indirect, knock-on effect of the global financial situation and is a reflection of the uncertainty and anxiety in the global financial markets. While no country in world remained completely insulated from the global financial crisis, Indian banking industry was better placed to cope with the adverse consequences of the financial turmoil. India is relatively better placed due to its robust policy framework, stricter prudential regulations with respect to capital and liquidity and strong growth performance. Recently we have experienced few positive signs that indicate the recovery of the economy. Increase in primary demand clubbed with stable government has built a strong confidence in the mind of investor. An added obstacle to the sustained improvement of the banking system is the fact that banks are mandated to provide funding to government-defined priority sectors dominated by small-scale business and agriculture. Loans to these sectors are at high risk of be-coming nonperforming. Private-sector banks must ensure that 25 per cent of their loans are directed towards these priority sectors; for state-owned banks, the figure is 40 per cent. These thresholds restrict the level of credit available to more efficient companies in non-priority sectors. The level of bad loans has been falling in recent years as a result of the creation of asset-reconstruction companies and a rapid expansion in lending. Non-performing assets (NPA) fell to less than 1.0 per cent for the fiscal year 2008-09. In the near future, for a stint, we expect to see an increase in Non-performing Assets.

The Financial sector is the biggest sector in terms of Market Capitalization. The Financial sector it self holds around 22 per cent of the total BSE and NSE capitalization.

The credit-deposit ratio of All Scheduled Commercial Banks as on March 31, 2009 stood at 72.6 per cent.

According to a report by ICRA Limited, a rating agency, the public sector banks hold around 75 per cent of total assets of the banking industry, the private hold around 18 per cent and foreign banks hold a little less than 7 per cent.

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COMPANY OVERVIEW
The company expects the Capital Adequacy ratio of the bank to be around 16 - 17 per cent by the next financial year. Yes Bank began its operation in August 2004. In June 2005, when the company issued Initial Public Offering (IPO), it received a wonderful response and the IPO was oversubscribed by 25 times. Yes Bank mainly operates in four segments: Treasury, Corporate/wholesale Banking, Retail Banking and Other Banking Operations. It provides various banking and financial solutions in India. It offers financial and risk management solutions to large corporations and groups, multinational companies, central and state governments, government bodies, and public sector enterprises. It also provides advisory and financial solutions across various sectors, including food and agribusiness, life sciences, technology, and infrastructure comprising renewable energy, education, healthcare, and water management; and business banking solutions comprising financial market services, trade and treasury services, and account services, as well as term loans and working capital. Yes bank has registered a continuous growth in Capital Risk Adequacy Ratio. The companys corporate finance services include advisory and credit linked products for the infrastructure sector clients; structured and project finance solutions for non-infrastructure clients; and specialized advisory services on financial restructuring. It also offers retail banking services, such as wealth management and global Indian banking services; and retail products comprising savings and current accounts, fixed deposits, and retail loans. Further, the company offers private equity syndication services; advisory services related to mergers and acquisitions, divestitures, joint ventures, spinoffs, IPOs, open offers, rights issues, private placements, share buy backs, capital restructuring, distressed debt, and equity buy outs; and brokerage services. Additionally, it provides foreign exchange services, online Forex solutions, fixed income, derivatives and structured products, commodity risk management advisory, and liquidity and balance sheet management; and transaction banking services that include cash management services, capital market and escrow account services, trade services, and trade finance services. The bank operates through 123 branches and over 200 ATMs in India. In a general sense, the facilities offered by the Yes Bank are: Corporate and Institutional Banking Financial Markets Investment Banking Business and Transactional Banking Retail Banking Private Banking Transactions Banking The bank has a motto of technological advancement with well equipped modern day amenities like net banking, phone banking and mobile banking.

Return on Asset is among the highest in banking industry.

Non Performing Assets has registered a sharp rise, an issue to be worried, but still less as compare to its peers and industry.

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CARMELS Strategy - Must for Banking Industry The statutory mandated areas for banking industry are solvency, liquidity and operational health. For analyzing banking industry, the model we prefer is known as CARMELS. The CARMELS model stand for: Capital Adequacy, Asset Quality, Resource raising ability, Management & System evaluation, Earning potential, Liquidity/Assets Liability Management and System & Control. (a) Capital Adequacy: Capital represents the level of cushion or protection available to the company creditors to absorb losses from credit and other risks. It is measured by the ratio of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors. The CRAR for the year end stands at 16.63 per cent where as 17.63 per cent for the June quarter. The CRAR of Yes bank is higher as compare to the statutory requirement by the RBI. (b) Asset Quality: Asset quality is a primary consideration when assessing credit risk of a finance company. One of the indicators for asset quality is the ratio of non-performing loans to total loans (NPA). The Net NPA for Yes Bank stands at 0.33 per cent for the last year end and 0.24 for the June quarter. The NPA of Yes bank is very stable as compare to its peers and industry average. (c) Resource raising ability: Since funds are finance companys raw material, its ability to generate them is essential for its operating model. The bank plans to rise between $150 million to $250 million through equity sale early in next year, and could also look to raise tier II capital worth about $100 million in the current calendar year. The share of the bank is trading at more than 3 times to it book value. (d) Management & System evaluation: The quality of a companys management, its business strategies and its ability to track and respond according to changes in market condition. The ratio of noninterest expenditures to total assets is one of the measures to assess the working of the management. The non interest expenditure to total assets for the bank stands at around 2.81 per cent which is very low as compare to its peers. This variable includes a variety of expenses, such as payroll, workers compensation and training investment. (e) Earnings potential: Earnings are the key input for supporting growth. Earning potential directly attract debt and equity. Earning is directly related to the growth of revenues of the bank. Yes bank has registered a continuous and robust growth in its earning since its interception. (f) Liquidity/Assets Liability Management: Cash maintained by the banks and balances park with central bank is an indicator of bank's liquidity. Bank has access to call market or RBI refinance facilities in the event of liquidity crunch. The banks properly manage the time difference between short term deposits with long term loans. Yes bank has registered a growth of around 33.20 per cent in the cash and balance with RBI. Its a strong indication of the liquidity of the bank. (g) Systems and Control: The Systems and control access plays an important part in todays highly advance banking technology. Due to electronic technology advancement, the bank needs to have access as well as control over the systems. Safety and security plays a vital role in today world.

CARMELS Strategy

Capital Adequacy: Level of cushion or protection available to the company creditors.

Asset Quality: To assess credit risk of a finance company. Non-performing loans to total loans (NPA) is one of the indicators.

Resource raising ability: Ability to generate fund for its operating model.

Management & System evaluation: The quality of a companys management. Ratio of non-interest expenditures to total assets is one of the measures to assess the working of the management.

Earnings potential: Earnings are the key input for supporting growth.

Liquidity/Assets Liability Management: Cash at bank and balances park with central bank is an indicator of bank liquidity.

Systems and Control: An important part in todays high advance banking technology.

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SWOT ANALYSIS
SWOT ANALYSIS Strength Easier Funding - Reap benefits of easier funding environment and to aid market share. Margin improvement due to expansion of CASA deposits - An upside movement of CARA by around 200 bps over the past 8 quarters. Strength Easier Funding After the slowdown and liquidity crisis in FY09, the wholesale funded financials, IDFC and Yes Bank, are this year expected to reap benefits of easier funding environment, as their funding costs drop faster than peers and aid market share gains. Margin improvement due to expansion of CASA deposits We have witness an improvement in the CASA over the past few quarter. There is an upside movement of around 200 bps over the past 8 quarters. We expect further improvement in the CASA deposits, which will helps the bank to register an increase in the margins. Parental Support Robo bank is among one of the biggest promoter of Yes bank. Yes bank always has a parental support and state-of-the-art benefits from Robo Bank. Robo bank is a Nederland based bank which is world's single AAA rated private Bank. Weakness Loan book The loan book of Yes bank largely comprised corporates and SMEs. We have witnessed that the share of SME has gone up. This can put an upward pressure on NPAs for the bank. We expect the asset quality to stay healthy despite challenging macro conditions. The stress was witnessed in only a single account, which was fully provided for in the initial quarters, according to the management. Rising NPA could have an impact on earnings Rising NPA, which is still low as compare to its peers and industry, could have an impact on the earning capabilities of the company. Opportunity Large market India has a population of more than a billion. This helps the player to cover a bigger and rural market. Still there are lots of untapped market. Rising disposable income Increase in disposable income has resulted in demand of different financial products and hence a new way to bet on the top line of the company. Threats Non Banking Financial Institution (NBFC) NBFC are offering other financial services and eating up the share of the banks. Reserve Bank of India persuade banks to lower the spread RBI can persuade banks to lower the spread which have a direct and hard impact on the margins for the service provider.

Parental Support - Robo bank is a biggest promoter

Weakness Loan book - Share of SME has gone up, to put an upward pressure on NPAs.

Rising NPA could have an impact on earnings Opportunity Large market More than a billion population. Rising disposable income - Increase in demand of financial products. Threats Non Banking Financial Institution - NBFC offering other financial services.

Reserve Bank of India persuade banks to lower the spread.

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PEST Analysis

PEST Analysis PEST analysis of any industry investigates the important factors that affect the industry and influence the companies operating in the sector. PEST stands for Political, Economic, Social and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry. Political Factors Focus on Regulations Indian Banking is least affected as compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework, stricter prudential regulations with respect to capital and liquidity. This gives India an advantage in terms of credibility over other countries.
High Capital Adequacy Ratio The Implementation of Basel II norm has stricter rules and regulations. Indias regulatory systems are places above China and Russia; and at par with Japan and Singapore. Economic Factors Growing Economy Indian economy has registered a growth of more that 9 per cent for last three year prior to the current year ended. The regulatory body took several steps to fight against the slowdown. We expected Indian economy to maintain higher growth rate as compare to other developed and developing countries. Low Interest Rates Reserve Bank of India controls the Interest rate, which is based on several monetary policies. Recently RBI has reduced the interest rate to stimulate the growth rate of banking industry. Social Factors Loyalty Factor Banking industry services is lending and borrowing of funds. The banks need to have a good royalty factor as compare to counter part in other countries. The financial meltdown on Indian Banks is less impact as compare to other countries. Increased Penetration of Cards India has registered a robust growth in plastic money. There is a still lot of potential in the plastic market. India spends around 1 per cent of their total purchases through credit cards where as the world average is stands more that 9 per cent. Technological Factors IT Services & Mobile Banking Technology advancement has changed the face of traditional banking systems. Technology advancement has offer 24X7 banking even giving faster and secured service.

Political Factors Focus on Regulations - Robust policy framework, stricter prudential regulation.

High Capital Adequacy Ratio - Implementation of strict Basel II norm.

Economic Factors Growing Economy - Regulatory body took several steps to fight against the slowdown.

Low Interest Rates - Reduce the interest rate to stimulate the growth.

Social Factors Loyalty Factor - Need for good royalty factor.

Increased Penetration of Cards - Lot of potential in the plastic money.

Technological Factors IT Services & Mobile Banking - 24X7 banking.

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Porter's Five Forces Model

Porter's Five Forces Model

Rivalry among Competing Firms Rivalry among competitors is very fierce in Indian Banking Industry.

Rivalry among Competing Firms Rivalry among competitors is very fierce in Indian Banking Industry. The services banks offer is more of homogeneous which makes the company to offer the same service at a lower rate and eat their competitor markets share. Market Players use all sorts of aggressive selling strategies and activities from intensive advertisement campaigns to promotional stuff. Even consumer switch from one bank to another, if there is a wide spread in the interest. Hence the intensity of rivalry is very high. Potential Entry of New Competitors Reserve Bank of India has laid out a stagnant rules and regulation for new entrant in Banking Industry. We expect merger and acquisition in the banking industry in near future. Hence, the industry is less porn of new competitor. Even Yes Bank is a target for acquisition. If this happened, the hidden value can come out and the minor share holder will gain. Potential Development of Substitute Products Every day there is one or the other new product in financial sector. Banks are not limited to tradition banking which just offers deposit and lending. In addition, today banks offers loans for all products, derivatives, ForEx, Insurance, Mutual Fund, Demat account to name a few. The wide range of choices and needs give a sufficient room for new product development and product enhancement. Bargaining Power of Suppliers Banking industry is governed by Reserve Bank of India. Reserve Bank of India is the authority to take monetary action which leads to direct impact on circulation of money in the Economy. The rules and regulation lay down by RBI. Bargaining Power of Consumers In today world, Customer is the King. Banks offers different services according to clients need and requirement. They offer loans at Prime Lending Rate (PLR) to their trust worthy clients and higher rate to others clients.

Potential Entry of New Competitors Merger and Acquisition expected in the near future.

Potential Development of Substitute Products Wide range of choices and needs give a sufficient room for new product development and product enhancement.

Bargaining Power of Suppliers RBI is a statuary body to take monetary action. Bargaining Power of Consumers Customer is the King so Banks offers different services according to clients need and requirement.

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FINANCIALS
A growth rate in revenue stands at ~46 per cent where as for profit it stands at ~52 per cent. The major attribute for increase in expenses was interest expense. Annual Result The bank has registered a robust growth rate over the past few years. The company has recently reported total income of INR 2438.34 crore which was registered a growth of more than 46 per cent over the last year which stands at INR 1665.36 crore. The bank has reported a sharp rise in the interest expenses, but was able to maintain the employee expenses. The total business per employee has registered an upward trend. The bank has posted a net profit of INR 303.84 crore for the year ended March 31, 2009 as compared to INR 200.02 crore for the last year to register a growth of around 52 per cent.

There is a continuous growth in top line as well as in bottom line. We have seen some up and down in the top as well as bottom line. The financial crises have an impact on the working of financial institution.

Quarterly Result The Company has registered a marginal growth in top line as compare to last quarter. The liquidity crunch and rise of interest rate has an impact on the company financials. However the company was able to register decent growth in the bottom line. The company registered a growth of around 25 per cent over the last quarter.

The company has performed very well since its interception.

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FINANCIALS
Annual Result - Balance Sheet

The bank has registered a high growth in Cash balance, investment and advances. Even during the slowdown of the economy, the company has performed very well.

The company has planned to increase it presence across the country. The company has big growth plan and is able to raise fund even at the time of crises. It signifies a strong confidence level in the business model.

Growth Potential

The bank has huge growth potential and also has registered high growth in the past. The business model of the bank will helps it to grow even at faster pace. The bank is expected to register high EPS in the FY10 and FY11.

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SHARE HOLDING
Holding Pattern for the last 4 Years

Yes Bank has informed that none of its share has been pledge.

Graphical presentation of Share Holding Pattern

No promoter has ever pledge the share of the company.

Robo bank is the biggest share holder of the company.

Total promoter holding stands at 32.58 per cent of the total outstanding share of the company. Pledge-O-Meter The company has not pledge any share. Robo Bank is the biggest share holder of the company.

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KEY TAKEAWAYS FOR THE INVESTOR - ROAD AHEAD

PE ratio of Yes Bank is among the lowest in the list. There is huge potential for the growth in the company performance.

Among the major bank mention above, Yes Bank has a low PE ratio. The trailing EPS for Yes Bank is INR 12.37, which result to a low PE of 13.9x. Return on net worth is highest for Yes bank. It has performed very well and has a high return on assets too. OUTLOOK Robo Bank is the largest share holder of the company. Robo bank, Nederland based, can acquire more shares to enter in Indian market. This will leads into gain for minority shareholder. The bank has registered a compounded growth rate of around 60 per cent since it interception. We expect the bank to continue to grow at a high rate. We are very positive on the long term business prospects of the company and financial performance. At Current Market Price of INR 165.05 the stock is trading at a PE of 16.15x. With expected EPS for FY10 and FY11 of INR 17.73 and INR 19.32 respectively, the stock is trading at a PE of 9.7x and 8.9x respectively. The price of the stock is undervalued at current level of INR 165.05. We reiterate BUY on the stock with target price of INR 244.00 with a medium term investment horizon. The Upside for the stock is INR 79.00.

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