We recently met Yes Bank management to understand the bank's business strategy for the next five years – called Version 2.0 by the bank and the business goals involving a shorter, medium term cycle. The goals, which are defined very objectively are ambitious and shall be path breaking for the new generation bank if fully realised. The Version 2.0 targets shall in our opinion test the bank's execution capabilities and business acumen in more challenging areas like the CASA liabilities. We have factored in structural changes to Yes Bank's balance sheet over next two years in terms of CASA, retail liabilities, branch franchise, and asset mix. While the bank's share already enjoys premium valuations despite the predominantly wholesale nature of the bank, we believe the evolving retail side can provide a further fillip to the valuation multiples. We maintain a 'buy' and revise price target to Rs.386 or 3x FY12E ABV Rs.128.5, an upside of 18.4% from current levels.
Key Meeting Takeaways
NIM's correlated to the rate cycle, can sustain, re-pricing risks notwithstanding
There shall be natural leads and lags in liability and asset re-pricing but we expect Yes Bank to 1) rollover maturing deposits at competitive rates and, 2) have flexibility to manage loan yields in order to maintain NIM's. We believe Yes Bank can positively surprise the dominant investor apprehension on the re-pricing risks. We estimate FY11E NIM's at 2.8% and FY12E NIM's at 2.6% compared to the average 2.7% FY05-FY10. Fast track front office rollouts for better sustainability of business momentum
Yes Bank plans to average 150 branches / year till FY15 to take its network to 750 branches compared to ~24 branches / year since its inception. This has been a much desired requisite from a business growth perspective and therefore brings better visibility to the bank's balance sheet expansion. We estimate a 35.4% CAGR in balance sheet FY10-FY12E and CASA improvement of ~216bps every year FY11E-FY12E. Retail diversity building in balance sheet but should become more tangible beginning FY12E
Our assumptions of ~430bps CASA expansion over FY11E-FY12E are relatively modest compared to the bank's target of 600bps/year and so are the estimates on retail assets. But with processes defined and business hubs in place, we expect the retail diversity in assets and liabilities to expand more rapidly post FY12E. Valuation multiples carry an upward bias compared to historical medians Yes Bank has historically traded in a broad P/ABV and P/E band with one year rolling forward multiples peaking at 5.34x and 30.2x respectively. The median valuations since listing have been 2.64x and 18.13x respectively. We believe the valuation premium can justifiably improve to capture the structural changes in balance sheet and business character. Maintain 'buy' with 1-year price target Rs.386 or 3.0x FY12E ABV Rs.128.5. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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