Yes Bank. Improved retail focus, better NIM, stable asset quality; Buy. Banks. Company Update. Rating: Buy Target Price: `735 Share Price: `595

Transcription

1 India I Equities 19 September 214 Yes Bank Improved retail focus, better NIM, stable asset quality; Buy Key takeaways Modest credit growth likely with improved retail focus. While we expect 23.5% CAGR in credit over FY14-16e, the bank s incremental focus is likely to be on retail products, primarily mortgages, loan against property, commercial vehicle and construction equipment. With a customer base of 1m in FY14, 572 branches in Jun 14 and an improving macro-environment, the bank is poised to achieve its retail advances target of `15bn (~3% of loans) by end-fy15e from `8bn currently. NIM likely to improve. Over FY14-16e, we expect NIM to improve from 2.8% to 3.1%, supported by: (1) CASA share improving from 22% to 25% over FY14-16e; (2) faster growth in loans (23.5% CAGR) that are higher yielding relative to investments (2.8% CAGR); and (3) recent equity infusion of `29.4bn. With addition of 191 branches over Jun 12-14, average CASA per branch has improved from `23m to `288m. Hence, likely branch addition (14 branches) over FY15-16e augurs well for CASA and NIM. Stable asset quality likely, well-capitalized for growth. In FY15, management expects fresh additions to NPAs to be <1% of loans, and targets recoveries of 5% of its gross NPA and loans sold to ARCs. While the bank s NPA coverage of 78.4% is the highest among peers, restructured loans are `1.13bn (.19% of loans), one of the lowest in the banking sector. With a likely strong pre-provisioning profit CAGR of 24.2% over FY14-16, any increase in credit costs ahead is unlikely to constrain earnings growth. The bank s tier-1 capital is a high 12.6% (including 1QFY15 profits), which is more than sufficient to support a 24% CAGR in advances over FY Our take. We maintain Buy, as we expect the bank to sustain a ~1.7% RoA over FY15-16, propelled by its expanding branch network, stable margin and healthy asset quality. At our Mar 16 target, the stock would trade at PBV of 2.2x FY16e and 1.9x FY17e. Our target is based on the two-stage DDM (CoE: 19.4%; beta: 1.4; Rf: 8.5%). Risks. Slower credit growth, delay in branch-expansion plans, change in management. Financials (YE: Mar) FY12 FY13 FY14 FY15e FY16e FY17e Net interest income (`m) 16,156 22,188 27,163 34,75 43,531 55,2 Net profit (`m) 9,77 13,7 16,178 2,652 25,568 32,122 EPS (`) Growth (%) PE (x) PABV (x) RoE (%) RoA (%) Dividend yield (%) Net NPA (%) , Anand Rathi Research Banks Company Update Rating: Buy Target Price: `735 Share Price: `595 Key data IN / B.BO 52-week high / low `634 / `28 Sensex / Nifty / m average volume US$4.m Market cap `247bn / US$4.1bn Shares outstanding 414.7m Shareholding pattern (%) Jun 14 Mar 14 Dec 13 Promoters of which, Pledged Free Float Foreign Institutions Domestic Institutions Public Relative price performance Oct-13 Nov-13 Jan-14 Source: Bloomberg Feb-14 Apr-14 May-14 Jul-14 Sensex Aug-14 Clyton Fernandes clytonfernandes@rathi.com Kaitav Shah kaitavshah@rathi.com Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL ) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

2 Quick Glance Financials and Valuations Fig 1 Income statement (` m) Year-end: Mar FY13 FY14 FY15e FY16e FY17e Net interest income 22,188 27,163 34,75 43,531 55,2 NII growth (%) Non-interest inc 12,574 17,216 19,485 23,712 29,28 Total income 34,762 44,378 53,56 67,243 84,31 Total Inc growth (%) Op. expenses 13,345 17,499 2,728 25,754 32,1 Operating profit 21,417 26,88 32,832 41,489 52,299 Op profit growth (%) Provisions 2,16 3,617 2,237 3,41 3,996 PBT 19,257 23,263 3,595 38,448 48,34 Tax 6,251 7,85 9,943 12,88 16,182 PAT 13,7 16,178 2,652 25,568 32,122 PAT growth (%) FDEPS (`/sh) DPS (`/sh) , Anand Rathi Research Fig 2 Balance sheet (` m) Year-end: Mar FY13 FY14 FY15e FY16e FY17e Share capital 3,586 3,66 4,141 4,183 4,225 Reserves & surplus 54,49 67, , , ,538 Deposits 669, ,92 893,55 1,116,319 1,386,279 Borrowings 263,49 277,2 319,649 37,83 432,188 Minority interests Total liabilities 991,41 1,9,158 1,329,731 1,624,423 1,981,229 Advances 469, ,33 678, ,43 1,6,53 Investments 429,76 49,54, ,231 77,2 Cash & bank bal 4,658 58,917 71,114 81,324 94,85 Fixed & other assets 5,628 65,48 79,784 97, ,874 Total assets 991,41 1,9,158 1,329,731 1,624,423 1,981,229 No. of shares (m) Deposit growth (%) Advances growth (%) , Anand Rathi Research Fig 3 Key ratios (%) Year-end: Mar FY13 FY14 FY15e FY16e FY17e NIM Other inc. / total inc Cost-income Provision coverage Dividend payout Credit-deposit Investment-deposit Gross NPA Net NPA BV (`) Adj. BV (`) CAR Tier RoE RoA , Anand Rathi Research Fig 4 PE band 1 8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Source: Bloomberg, Anand Rathi Research Fig 5 Price-to-book band Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Source: Bloomberg, Anand Rathi Research Fig 6 Yes Bank vs. Bankex Oct-13 Source: Bloomberg Nov-13 Jan-14 Feb-14 Apr-14 May-14 Bankex Jul-14 Aug-14 17x 13x 9x 5x 3.x 2.5x 1.5x.5x Anand Rathi Research 2

3 Key highlights Modest credit growth likely, with improved retail focus While we expect a 23.5% CAGR in credit over FY14-16e, the bank s incremental focus is likely to be on retail products, primarily mortgages, loan against property, commercial vehicle and construction equipment. Over the past three years, the bank has set the foundation for strong growth in retail banking by strengthening its retail assets team, continuously expanding branch network and building robust risk management systems and processes. With a customer base of 1m in FY14, 572 branches in Jun 14 and an improving macro-environment, the bank is well placed to achieve its retail advances target of `15bn (~3% of loans) by end-fy15e from `8bn currently. Fig 7 Credit-deposits has only recently inched upwards (`bn) (%) 81 Fig 8 Credit growth was modest over FY14 (%) Advances Credit-deposit (RHS) Fig 9 Strong management team in place for retail assets and liabilities Name Designation Previous work experience Mr. Aalok Gupta GEVP & Country Head- Retail Banking Risk Management At HSBC, he was responsible for controlling delinquencies across the Personal Financial and Credit Card businesses. A two site predictive dialer for outbound telecalling was also implemented under his leadership. At HDFC Bank, he managed the LAS (loan against securities) portfolio. Under his leadership, this product added variants and expanded geographically to rapidly build a retail franchise. At Bank of America, he worked in various capacities across geographical markets in India. Ms. Chitra Pandeya Senior President & Country Head Liabilities Management, Cards and Direct Banking More than 27 years of experience in Product Management in Savings Liability, Prepaid & Debit cards, Net-Banking, Bullion Products, Lockers and Branch Banking. She has expertise in Customer Segmentation, Customer Life Cycle Management & Customer Engagement Strategies. At HDFC Bank, she was Head of Liabilities & Payments Products, Retail Banking and responsible for the overall growth of Liability businesses by leveraging branches & client relationships across all business segments. Mr. Malcolm Athaide Senior President & CRO - Risk Management: Business Banking, Retail Banking, Agri and Inclusive & Social Banking 19 years of experience in lending to Retail (Mortgage, Cards, P-Loans, Auto, CVs, Construction Equipment), MSME Lending and Corporate Finance. At Standard Chartered Bank India, he was Head Credit Risk Underwriting, managing SME Small Business and Retail Lending businesses. He has also worked with Siemens Limited, Tata Finance, Bank of Nova Scotia and ICICI Bank. Mr. Pralay Mondal Senior Group President Retail & Business Banking Over two decades of experience in Colgate Palmolive, Wipro Ltd, Standard Chartered and HDFC Bank. At Standard Chartered, he headed the Direct Sales Liabilities. In his 12 years at HDFC Bank, he managed various Businesses. In his last assignment, he managed Retail Assets, Credit Cards, Outbound Contact Center and merchant establishment business. Mr. Nipun Jain Mr. Dhavan Shah President -Consumer Banking Assets President & Country Head CA Liability Product Management 19 years of work experience in Retail and Branch Banking. At ICICI Bank, he was Product Head Government Banking for Retail Branches, FDs & TASC 17 years of experience in areas of institutional and retail sales, portfolio and channel management, retail trade and forex services and cash management services. Previously worked at HDFC Bank and ICICI Bank Anand Rathi Research 3

4 NIM likely to improve over FY14-16e Despite an improving share of retail deposits in overall liabilities over FY9-14, the bank s NIM has hovered at %. One of the key reasons for this is the bank s focus on corporate investments where credit rating is high, buy yields low. This may have helped in keeping the bank s asset quality largely stable over the last two years, as credit quality deteriorated for the banking sector. Also, over the past year, banking and system liquidity were exceptionally tight which kept funding costs high. Over FY14-16e, we expect the bank s NIM to improve from 2.8% to 3.1%, supported by CASA share improving from 22% to 25% over FY14-16e, faster growth in loans (23.5% CAGR) that are higher yielding relative to investments (2.8% CAGR) and 3. recent equity infusion of `29.4bn in May 214. With the addition of 191 branches over Jun 12-14, average CASA per branch has improved from `23m to `288m. Hence, likely branch addition (14 branches) over FY15-16e augurs well for CASA and NIM. Fig 1 Proportion of CASA, at 22%, has steadily improved (`bn) (%) CASA CASA share (RHS) Fig 11 Sturdy NIM and better average CASA per branch (`m) (%) Avg CASA per branch NIM % Fig 12 Avg. CASA per branch (peer comparison): FY14 (`m) Axis 474 HDFC Bk 386 ICICI Bk 342 Jammu & Kashmir 315 IndusInd 261 Yes 238 ING Vysya 151 Federal Fig 13 CAGR (FY1-14) in avg. CASA per branch (%) Yes 3.8 IndusInd 7.1 Jammu & Kashmir 1.1 ING Vysya 2.8 Federal (4.4) Axis (.3) HDFC Bk (4.8) ICICI Bk Anand Rathi Research 4

5 Stable asset quality likely, well-capitalised for growth While the macro-economic environment is witnessing a fragile recovery, we do not expect the bank s asset quality to see significant deterioration. The bank s exposure to infrastructure and non- infrastructure project loans are ~5% of the overall advances. Also, it does not have any large infrastructure exposure, particularly to ultra mega power projects (UMPPs). Also, contingent provisions over-and-above standard asset provisions are ~` bn (~3bps of loans), which the bank can utilize for NPAs, if needed. In FY15, management expects fresh additions to NPAs to be <1% of loans, and targets recoveries of 5% of its gross NPA and loans sold to ARCs. While the bank s NPA coverage of 78.4% is the highest among peers, restructured loans are `1.13bn (.19% of loans), one of the lowest in the banking sector. With likely strong pre-provisioning profit CAGR of 24.2% over FY14-16, any increase in credit costs ahead is unlikely to constrain earnings growth. In May 214, Yes Bank raised `29.43bn (US$m) through a qualified institution placement. Hence, its tier-1 capital is now a high 12.6% (including 1QFY15 profits), which is more than sufficient to support a 24% CAGR in advances over FY Fig 14 Asset quality was strained in FY14, likely to stabilise over FY15-16e (`m) (%) 2, 96 1, , 88 1, , Gross NPAs NPA coverage (RHS) Anand Rathi Research 5

6 Valuations At the ruling price, the stock trades at PABV of 1.8x FY16e and 1.6x FY17e. We maintain our Buy rating, as we expect the bank to sustain a ~1.7% RoA over FY15-16, propelled by its expanding branch network, stable margin and healthy asset quality. At our Mar 16 target, the stock would trade at PBV of 2.2x FY16e and 1.9x FY17e. Our target is based on the two-stage DDM (CoE: 19.4%; beta: 1.4; Rf: 8.5%). Fig 15 Past one-year-forward P/BV SD +1SD Mean -1SD -2SD Source: Bloomberg, Anand Rathi Research Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Fig 16 Valuation: Large private banks PAT CAGR RoA % RoE % PABV PE FY14-16e FY15e FY16e FY15e FY16e FY15e FY16e FY15e FY16e Yes Bank IndusInd Bank HDFC Bank ICICI Bank* Axis Bank Risks Less-than-expected economic growth over FY15-16, leading to NPA being more than estimated, consequently leading to higher credit costs. Delay in branch-expansion plans could slow down the pace of CASA mobilisation and impact NIMs over FY15-16, leading to lower profitability. Anand Rathi Research 6

7 Financials We expect the bank s business to register a 23.5% CAGR over FY14-17, with advances and deposit CAGRs of24% and 23.2%, respectively. We expect a 25.7% CAGR in net profit over the same period. Fig 17 Income Statement Year-end: Mar (` m) FY13 FY14 FY15e FY16e FY17e Interest Income 82,94 99, , , ,326 Interest Expended 6,752 72,651 84,864 16,26 134,36 Net Interest Income 22,188 27,163 34,75 43,531 55,2 Growth (%) Non-interest Income 12,574 17,216 19,485 23,712 29,28 Total Income 34,762 44,378 53,56 67,243 84,31 Non-interest income/total Inc. (%) Operating Expenses 13,345 17,499 2,728 25,754 32,1 Employee Expenses 6,555 7,844 9,327 11,589 14,41 Other Expenses 6,79 9,655 11, 14,165 17,61 Pre-provisioning profit 21,417 26,88 32,832 41,489 52,299 Growth (%) Provisions 2,16 3,617 2,237 3,41 3,996 Profit Before Tax 19,257 23,263 3,595 38,448 48,34 Taxes 6,251 7,85 9,943 12,88 16,182 Tax Rate (%) Profit After Tax 13,7 16,178 2,652 25,568 32,122 Growth (%) Number of Shares (m) Earnings Per Share (`) Source : Company, Anand Rathi Research Fig 18 Balance Sheet Year-end: Mar (` m) FY13 FY14 FY15e FY16e FY17e Share Capital 3,586 3,66 4,141 4,183 4,225 Reserves and Surplus 54,49 67, , , ,538 Net Worth 58,77 71, ,27 137,31 162,762 Deposits 669, ,92 893,55 1,116,319 1,386,279 Other Liabilities & Provisions 263,49 277,2 319,649 37,83 432,188 Total Loans 932,965 1,18,94 1,212,74 1,487,123 1,818,467 Total Liabilities 991,41 1,9,158 1,329,731 1,624,423 1,981,229 Advances 469, ,33 678, ,43 1,6,53 Investments 429,76 49,54, ,231 77,2 Cash & Bank Balances 4,658 58,917 71,114 81,324 94,85 Fixed & Other Assets 5,628 65,48 79,784 97, ,874 Total Assets 991,41 1,9,158 1,329,731 1,624,423 1,981,229 Source : Company, Anand Rathi Research Anand Rathi Research 7

8 Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI ) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies Rating and Target Price History (as of 18 September 214) Bank Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Date Rating TP (`) Share Price (`) 1 1-Apr-8 Buy Aug-8 Buy Oct-8 Buy Jul-9 Buy Oct-9 Buy Jan-1 Buy Jul-1 Buy Oct-1 Buy Jul-11 Buy Buy Oct-12 Buy Jan-13 Buy Buy Oct-13 Buy Buy Apr-14 Buy May-14 Buy Buy The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. 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