Published on 17/03/2017 2:15:31 PM | Source: Sharekhan
Buy Yes Bank Ltd For Target Rs.1,680.00 - Sharekhan
* Consistent performance; transformation into a universal bank augurs well:
Yes Bank is undergoing a transformation from a wholesale funded bank to more of a diversified bank, with an attractive retail franchise. During the last five years, Yes Bank has been able to maintain attractive return ratios (ROE over 20%) and NIM (~3-3.4% range). Currently, its Retail business has started to gain scale, which we believe is important for its transformation into a universal bank. The transformation into a universal bank will not only provide Yes Bank growth opportunities but also lend stability to its earnings.
* Retail segment opens up fresh opportunities:
Yes Bank’s new business streams (Bancassurance, Credit Cards etc) are gaining traction and have helped the bank to achieve a strong 9% five-quarter CQGR from the Retail fees stream. Also, Yes bank has acquired top talent from industry leaders for its various Retail and Business banking divisions. Lateral hiring has helped the bank to quickly develop, launch and ramp up in the new business segments, thereby reducing the time to market. Also, a complete product bouquet will be helpful for Yes Bank to attract and retain clients, besides improving visibility for the bank. We believe that in the current scenario of tepid credit demand from the large corporate sector, Retail and Mid Corporate segments, coupled with Yes Bank’s relatively low base can be key to driving overall loan growth. Pick-up in card transactions and digital banking initiatives are positive for smaller banks like Yes Bank.
* CASA growth augurs well for diversification, COF benefits:
While the present Current & Savings Accounts (CASA) deposit ratio at 33% of total deposits (as of Q3FY2017) was helped by demonetisation, we can see strong pace of CASA accretion (39% four-year CAGR) even on a longer term basis, reflecting Yes Bank’s customer traction capabilities. The traction in CASA has also been helped by Yes Bank’s attractive high interest rates (6% for Savings Accounts), which are high compared to other similar sized Private Sector Banks (PB). The strategy has worked well for Yes Bank and we believe that the bank is likely to achieve its guidance of reaching ~40% CASA by FY2019E. We expect that once Yes Bank attains a critical mass, it will lower its interest rates, which will be positive for its NIM. The current pick-up and thrust on digital transactions will nudge the Small & Medium Enterprises (SME) too to adopt formal banking channels, which will be positive from a long-term perspective, as it will allow the bank to crosssell its offerings and also broad-base its funding mix.
Yes Bank is available at 3.4x/2.9x FY2018E/FY2019E ABV, which we find attractive for a business with comfortable capital position (CRAR of 16.9%; Tier-1 at 12.2%) and attractive return ratios (RoE of over 20%; RoA of over 1.8%). We have maintained our ‘Buy’ rating and have revised the price target to Rs1,680, valuing the bank at 3.1x FY2019E ABV (average of FY2018/FY2019).
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