Another quarter of strong performance January 20, 2017 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 Rating BUY Price Rs1,347 Target Price Rs1,595 Implied Upside 18.4% Sensex 27,309 Nifty 8,435 (Prices as on January 19, 2017) Trading data Market Cap. (Rs bn) 569.9 Shares o/s (m) 423.0 3M Avg. Daily value (Rs m) 3297.5 Major shareholders Promoters 21.85% Foreign 42.63% Domestic Inst. 23.14% Public & Other 12.38% Stock Performance (%) 1M 6M 12M Absolute 14.1 16.8 97.8 Relative 10.5 18.5 86.3 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 98.2 90.7 8.2 2019 124.4 113.8 9.3 Price Performance (RIC: YESB.BO, BB: YES IN) (Rs) 1,600 1,400 1,200 1,000 800 600 400 200 0 Jan 16 Mar 16 Source: Bloomberg May 16 Jul 16 Sep 16 Nov 16 Jan 17 Yes Bank s Q3FY17 performance continue to be on a strong foot on strong loan growth, stable NIMs and lower credit cost leading to strong PAT growth of +30% YoY. CASA franchise continued to improve partly helped by demonetisation and expect some CASA to remain in the bank. Valuations at 2.8x FY18E & 2.3x FY19E P/ABV looks attractive with significantly better growth & better asset quality holding up. We have increased our business growth assumptions and lowered credit cost, leading to 3 5% increase in earnings for FY17E/FY18E. We maintain BUY with increased PT of Rs1,595 (up from Rs1,318) based on Sep 18E ABV (rolled over from Mar 18E). NII strong but fees slightly weak: NII growth was strong at 30% YoY on back of robust loan growth of 38% YoY. Fees were slightly tepid mainly from slowdown in corporates & trade, while other income was driven by strong treasury gains. Bank was able to improve its margins by 10bps sequentially to 3.5% as some benefit accrued from lower cost of funds. We expect margins to be stable at 3.5% despite relatively higher rates offered by Yes on its SA balances as the competitive intensity remain high. Pick up in fee income will be key monitorable in next few quarters. Loan growth led by corporate book; slight effect of demonetisation on retail: Demonetisation slightly affected the retail & SME piece especially in MFI & Micro SME which saw de growth, but overall loan book growth of +38% YoY was led by strong growth in corporate book (up 42% YoY & 8% QoQ). Bank saw loan mix tilting towards corporate to 69% mainly as bank has been incrementally buying PSLCs for PSL shortfall rather than asset buying in retail PSL, but management expects this phenomena to be a steady feature till own sourced PSL grows. Slight deterioration in asset quality on lower recovery/upgrades: GNPL/NNPL increased marginally by 2bps/0bps to 0.85%/0.29% respectively with slightly improving PCR to ~66% from 65%. Credit cost was 40bps for 9MFY17 lower than the guidance of 50bps (lower in Q2). Slippages were comparatively lower at Rs1.26bn but recovery/upgrades were also lower. The Bank did not see any material addition to the other stressed assets like 5/25, restructured except for one account in SDR. Key financials ( Y/e March) 2016 2017E 2018E 2019E Net interest income 45,667 58,838 75,452 94,937 Growth (%) 30.9 28.8 28.2 25.8 Operating profit 43,025 56,910 71,608 90,741 PAT 25,394 33,160 41,547 52,612 EPS (Rs) 60.6 78.6 98.2 124.4 Growth (%) 17.6 29.8 24.9 26.6 Net DPS (Rs) 10.0 13.0 17.9 22.0 Profitability & Valuation 2016 2017E 2018E 2019E NIM (%) 3.03 3.14 3.22 3.29 RoAE (%) 19.9 21.8 22.6 23.8 RoAA (%) 1.68 1.77 1.77 1.83 P / BV (x) 4.1 3.4 2.8 2.3 P / ABV (x) 4.3 3.4 2.8 2.3 PE (x) 22.2 17.1 13.7 10.8 Net dividend yield (%) 0.7 1.0 1.3 1.6 Source: Company Data; PL Research Q3FY17 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q3FY17 results Robust PAT growth led by strong NII and business growth P&L (Rs million) Q3FY17 Q3FY16 YoY chg. Q2FY17 QoQ chg. Interest Income 42,316 33,761 25.3 40,944 3.4 Interest Expense 27,241 22,191 22.8 26,482 2.9 Net interest income (NII) 15,075 11,570 30.3 14,462 4.2 Other income 9,984 6,436 55.1 5,887 69.6 Total income 25,059 19,031 31.7 23,340 7.4 Operating expenses 10,520 7,534 39.6 9,481 11.0 Staff expenses 4,675 3,426 36.4 4,334 7.9 Other expenses 5,846 4,108 42.3 5,147 13.6 Operating profit 14,538 11,496 26.5 13,860 4.9 Core operating profit 14,538 10,471 38.8 10,868 33.8 Total provisions 1,154 1,479 (22.0) 1,617 (28.6) Profit before tax 13,384 10,017 33.6 12,243 9.3 Tax 4,558 3,260 39.8 4,228 7.8 Profit after tax 8,826 6,757 30.6 8,015 10.1 Balance Sheet Deposits 13,23,758 10,14,372 30.5 12,80,238 3.4 Advances 11,70,870 8,43,962 38.7 11,02,162 6.2 Profitability ratios Yield on Advances 10.9 11.5 (60) 10.9 Cost of Deposits 6.6 7.1 (50) 6.8 (20) NIM 3.5 3.4 10 3.4 10 RoAA 1.8 1.8 1.8 RoAE 22.3 20.5 180 21.4 90 Asset Quality Gross NPL (Rs m) 10,059 5,586 80.1 9,167 9.7 Net NPL (Rs m) 3,425 1,872 83.0 3,230 6.0 Gross NPL ratio 0.9 0.7 19 0.8 2 Net NPL ratio 0.3 0.2 7 0.3 Coverage ratio 66.0 66.5 (54) 64.8 119 Business & Other Ratios CASA mix 33.3 26.6 670 30.3 300 Cost income ratio 42.0 39.6 239 40.6 136 Non int. inc / total income 39.8 39.2 64 38.0 180 Credit deposit ratio 88.5 83.2 525 86.1 236 CAR 16.9 16.1 80 15.0 190 Tier I 12.2 10.9 130 10.1 210 January 20, 2017 2
Q3FY17 Concall Highlights: Assets & Liability franchise: Assets Outlook Will continue to showcase higher growth Retail/SME assets Demonetisation has had some effect on MFI book and business banking. Collections in MFI has been +90% throughout but has seen de growth. Retail disbursements were strong in October, while Nov (post demonetisation) saw some decline but December was the strongest (Rs10bn). In SME book, Micro SME has seen higher impact from demonetisation, while medium SMEs grew reasonably well especially in December 16 and large SME saw some slowdown. Management is confident that disbursements in SME will improve further in Q4FY16 as they have seen pick up in January. Corporate assets Corporate book seeing good opportunities from financing the M&A deals and its International Banking Unit (in GIFT city; book of Rs55 bn) has seen strong loan growth. Yes also have also started buying PSLCs which is expensed out in P&L compared to earlier manner of buying of PSL assets reflected in the Balance sheet. The change in the manner of buying PSLCs has now shifted loan share towards corporate. Liabilities CASA growth has been strong due to demonetisation, while also regular addition of customer acquisition was seen. Is in process of reviewing interest rate (effective from Feb 17) on SA balances which is currently at 6% & 6.5% but not decided on threshold rate. Believe that once the CASA reaches 40%, want to move the SA rates in line with peers. NIMs/Funding cost: Margins improved 10bps sequentially to historical high of 3.5% from higher benefit on cost of funds, with strong loan book growth supporting yields. Average rate of SA remains at slightly above 6%. Fees/Treasury/Opex/Branches: Fees/Treasury Fees was slightly softer mainly from corporate trade & banking fees, while in retail, trade remittance fee was slightly soft but saw strong accretion in other segments. Bank booked Rs1.2bn of treasury gains during the quarter. Branches/Opex/Employees Other opex continues to be high as Bank has been buying PSLCs which is accounted in other opex. Bank saw impact of Rs270mn in Q3FY17 and this would become more of a permanent phenomenon till they build in their own PSL book.. January 20, 2017 3
Asset quality: Impaired assets Witnessed incremental slippages of Rs1.27 bn in Q3FY17, while the reductions were lower by Rs373 mn. Restructured book remained steady at 0.43% of loans and has not seen any additions. SDR book saw one account getting added (from Construction) of Rs1.6bn taking outstanding to Rs1.94bn while 5:25 refinancing continues to stand at Rs1.03 bn. Outstanding SRs stands at 0.22% of loans. Credit cost Credit cost for Q3FY17 was 8bps (32bps annualised ) much below their guidance of 50 60bps. Exhibit 2: Loan growth continues to remain strong ~38% YoY despite demonetisation 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Loan Growth YoY Customer Assets growth YoY 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Exhibit 3: Loan book growth mainly contributed by corporate & retail Advances Break up Q3FY17 Q3FY16 YoY chg. Q2FY17 QoQ chg. Corporate Banking 8,06,729 5,67,142 42.2 7,48,368 7.8 Commercial Banking 3,64,141 2,76,820 31.5 3,53,794 2.9 Branch Banking 1,25,283 1,07,183 16.9 1,17,931 6.2 Retail 1,00,695 80,176 25.6 94,786 6.2 MSE 1,38,163 89,460 54.4 1,41,628 (2.4) Total 11,70,870 8,43,962 38.7 11,02,162 6.2 January 20, 2017 4
Exhibit 4: Share of mix tilted towards Corporate book Corp & Insti Banking Biz Banking Retail MSE 10.6% 11.3% 10.6% 13.0% 12.1% 12.9% 11.8% 7.3% 7.2% 9.5% 10.8% 9.4% 8.6% 8.6% 14.1% 13.3% 12.7% 11.1% 11.0% 10.7% 10.7% 67.8% 68.2% 67.2% 65.1% 67.5% 67.9% 68.9% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Exhibit 5: Fx and retail fees continue their strong growth but subdued in trade & CMS Trade & CMS Fx, Debt & Cap Mkt Corp Fees Retail Fees Exhibit 6: Gen Bank and interchange fees saw good growth while trade & remittance lacked growth Trade & Remit Processing Fees TPPD Interchg Inc Gen Bank Fees 18% 21% 26% 25% 23% 20% 23% 20% 24% 22% 42% 43% 35% 38% 36% 51% 45% 45% 31% 35% 17% 15% 16% 18% 25% 14% 14% 22% 34% 32% 23% 20% 23% 20% 16% 15% 18% 12% 12% 10% 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 as % of retail fees 26% 12% 18% 20% 21% 18% 18% 17% 20% 23% 8% 14% 11% 18% 18% 24% 19% 21% 22% 31% 24% 16% 25% 19% 15% 12% 17% 13% 13% 10% 11% 14% 9% 12% 12% 14% 9% 14% 11% 11% 36% 37% 29% 35% 34% 35% 32% 40% 34% 27% 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Exhibit 7: Margins improved sequentially by 10bps 3.7% 3.5% 3.3% 3.1% 2.9% 2.7% 2.5% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 NIM (%) Exhibit 8: CASA continues to grow strong with both CA & SA growing at +60% 37% 34% 31% 28% 25% 22% 19% 16% 13% 10% 7% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Low Cost deposits(%) January 20, 2017 5
Exhibit 9: Loan loss provisions came off to 40bps lower than guidance Exhibit 10: Gross NPAs saw slight uptick on lower recovery/upgrades 1.0% Credit Cost 1.0% Gross NPA (%) Net NPA (%) 0.8% 0.8% 0.6% 0.6% 0.4% 0.4% 0.2% 0.2% 0.0% 0.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Exhibit 11: We slightly increase our estimates to factor in strong business growth, strong other income (higher treasury) and lower credit cost assumptions (Rs mn) Old Revised % Change FY17E FY18E FY17E FY18E FY17E FY18E Net interest income 58,576 73,369 58,838 75,452 0.4 2.8 Operating profit 55,154 68,026 56,910 71,608 3.2 5.3 Net profit 31,963 39,113 33,160 41,548 3.7 6.2 EPS (Rs) 76.0 93.0 78.6 98.2 3.4 5.6 ABVPS (Rs) 389.2 462.7 395.7 474.5 1.7 2.5 Price target (Rs) 1,318 1,595 21.0 Recommendation BUY BUY Exhibit 12: We increase our PT to Rs1,595 from Rs1,318 on back of revised estimates and as we roll over to Sep 18E ABV from Mar 18E ABV PT calculation and upside Fair price EVA, Rs 1,593 Fair price P/ABV, Rs 1,597 Average of the two, Rs 1,595 Target P/ABV (x) 3.0 Target P/E (x) 14.3 Current price, Rs 1347 Upside (%) 18.4% Dividend yield (%) 1.3% Total return (%) 19.7% January 20, 2017 6
Exhibit 13: RoAE tree Return ratios to move up led by margins RoAE decomposition (%) FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Interest income 9.51 9.60 9.59 9.44 8.98 8.86 8.72 8.65 Interest expenses 7.07 7.03 6.98 6.59 5.95 5.73 5.50 5.35 Net interest income 2.44 2.57 2.61 2.85 3.03 3.14 3.22 3.29 Treasury income 0.10 0.26 0.35 0.06 0.22 0.35 0.07 0.14 Other Inc. from operations 1.19 1.20 1.30 1.61 1.58 1.68 1.96 1.95 Total income 3.73 4.02 4.26 4.51 4.83 5.16 5.24 5.38 Employee expenses 0.72 0.76 0.75 0.80 0.86 0.95 0.97 0.99 Other operating expenses 0.69 0.79 0.93 1.06 1.11 1.18 1.22 1.25 Operating profit 2.32 2.48 2.58 2.65 2.85 3.04 3.05 3.15 Tax 0.71 0.72 0.68 0.74 0.81 0.36 0.37 0.38 Loan loss provisions 0.14 0.25 0.35 0.28 0.36 0.91 0.91 0.94 RoAA 1.47 1.51 1.55 1.64 1.68 1.77 1.77 1.83 RoAE 23.07 24.81 25.02 21.33 19.94 21.75 22.62 23.75 Exhibit 14: Yes Bank One year forward P/ABV trends 3.5 P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD 3.0 2.5 2.0 1.5 1.0 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 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 January 20, 2017 7
January 20, 2017 8
Income Statement (Rs m) Int. Earned from Adv. 97,115 124,579 161,451 200,373 Int. Earned from Invt. 35,082 38,044 40,216 45,752 Others 3,138 3,581 2,711 3,110 Total Interest Income 135,334 166,204 204,378 249,235 Interest expense 89,667 107,367 128,927 154,299 NII 45,667 58,838 75,452 94,937 Growth (%) 30.9 28.8 28.2 25.8 Treasury Income 2,606 5,500 NTNII 24,515 32,470 47,463 60,277 Non Interest Income 27,121 37,970 47,463 60,277 Total Income 162,456 204,175 251,841 309,513 Growth (%) 19.3 25.7 23.3 22.9 Operating Expense 29,764 39,898 51,306 64,473 Operating Profit 43,025 56,910 71,608 90,741 Growth (%) 32.4 32.3 25.8 26.7 NPA Provisions 4,979 5,794 7,580 9,542 Investment Provisions 25 Total Provisions 5,363 6,667 8,656 11,023 PBT 37,662 50,243 62,952 79,718 Tax Provisions 12,268 17,083 21,405 27,106 Effective Tax Rate (%) 32.6 34.0 34.0 34.0 PAT 25,394 33,160 41,547 52,612 Growth (%) 26.6 30.6 25.3 26.6 Balance Sheet (Rs m) Par Value 10 10 10 11 No. of equity shares 421 423 423 385 Equity 4,205 4,230 4,230 4,230 Networth 137,866 167,032 200,294 242,725 Adj. Networth 135,021 163,016 195,528 237,655 Deposits 1,117,195 1,441,182 1,833,183 2,291,479 Growth (%) 22.5 29.0 27.2 25.0 Low Cost deposits 313,428 475,590 623,282 808,892 % of total deposits 28.1 33.0 34.0 35.3 Total Liabilities 1,652,634 2,097,429 2,591,754 3,173,355 Net Advances 982,099 1,335,655 1,696,282 2,120,352 Growth (%) 30.0 36.0 27.0 25.0 Investments 488,385 528,465 607,017 703,200 Total Assets 1,652,634 2,097,429 2,591,754 3,173,355. Quarterly Financials (Rs m) Y/e March Q4FY16 Q1FY17 Q2FY17 Q3FY17 Interest Income 35,283 38,623 40,944 42,316 Interest Expense 22,869 25,457 26,482 27,241 Net Interest Income 12,414 13,166 14,462 15,075 Non Interest Income 8,028 9,005 8,879 9,984 CEB 5,454 5,870 4,853 5,549 Treasury 1,163 2,023 2,992 3,077 Net Total Income 20,443 22,171 23,340 25,059 Operating Expenses 8,188 9,103 9,481 10,520 Employee Expenses 3,528 4,074 4,334 4,675 Other Expenses 4,659 5,030 5,147 5,846 Operating Profit 12,255 13,068 13,860 14,538 Core Operating Profit 11,092 11,045 10,868 11,461 Provisions 1,865 2,066 1,617 1,154 Loan loss provisions 1,315 1,150 Investment Depreciation Profit before tax 10,390 11,001 12,243 13,384 Tax 3,369 3,683 4,228 4,558 PAT before EO 7,021 7,318 8,015 8,826 Extraordinary item PAT 7,021 7,318 8,015 8,826 Key Ratios CMP (Rs) 1,347 1,347 1,347 1,347 Equity Shrs. Os. (m) 421 423 423 385 Market Cap (Rs m) 566,519 569,887 569,887 518,079 M/Cap to AUM (%) 34.3 27.2 22.0 16.3 EPS (Rs) 60.6 78.6 98.2 124.4 Book Value (Rs) 328 395 473 574 Adj. BV (100%) (Rs) 317 396 475 575 P/E (x) 22.2 17.1 13.7 10.8 P/BV (x) 4.1 3.4 2.8 2.3 P/ABV (x) 4.3 3.4 2.8 2.3 DPS (Rs) 10.0 13.0 17.9 22.0 Dividend Yield (%) 0.7 1.0 1.3 1.6 Profitability (%) NIM 3.0 3.1 3.2 3.3 RoAA 1.7 1.8 1.8 1.8 RoAE 19.9 21.8 22.6 23.8 Efficiency Cost Income Ratio (%) 40.9 41.2 41.7 41.5 C D Ratio (%) 87.9 92.7 92.5 92.5 Business per Emp. (Rs m) 180 208 229 249 Profit per Emp. (Rs lacs) 21.8 24.8 27.0 29.7 Business per Branch (Rs m) 2,399 2,539 2,582 2,582 Profit per Branch (Rs m) 29 30 30 31 Asset Quality Gross NPAs (Rs m) 7,490 10,974 13,644 15,810 Net NPAs (Rs m) 2,845 4,016 4,766 5,070 Gr. NPAs to Gross Adv. (%) 0.8 0.8 0.8 0.7 Net NPAs to Net Adv. (%) 0.3 0.3 0.3 0.2 NPA Coverage (%) 62.0 63.4 65.1 67.9. January 20, 2017 9
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 53.5% 30.7% 15.8% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. R Sreesankar (B.Sc ), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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