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Yes Bank Event Update

June 3, 2014, Tuesday, 11:04 GMT | 06:04 EST | 14:34 IST | 17:04 SGT
Contributed by Nirmal Bang

Yes Bank has raised $500 mn (Rs 3,000 cr) equity capital to strengthen its capital position. The bank issued 5.35 cr equity shares at price of Rs 550 per share leading to dilution of 12.9%. Yes Bank’s capital adequacy ratio prior to QIP stood at 14.4% with Tier I ratio at 9.8% which was a concern for the bank in the last one year impacting the growth. Post QIP, Capital Adequacy Ratio will increase to ~18% with Tier I ratio above 13%.

- Management now expects to grow @ 22-24% for FY15E. With increase in capital, Yes Bank is well positioned for the next growth cycle in the economy. We have factored in loan growth of 21.7% for FY15E.

- Growth is likely to sustain without any sacrifice to its margins.

- Margins are expected to improve further on account of lower funding cost and higher share of retail/SME loans and increasing CASA share. We expect margins to gradually improve to 3.1% for FY15E from 2.9% in FY14.

- As per the management, asset quality stress in the banking industry may still continue for one-two quarters, but a turnaround can be expected post that. Yes bank has been able to maintain healthy asset quality and even after assuming higher delinquencies in asset quality, GNPA/NNPA ratio would still remain better than most of the peers.

- Yes Bank has been able to maintain healthy provision coverage ratio of 85.1% in FY14 and is also expecting significant recovery (50% of slippages) in FY15E which is likely to keep asset quality well under control.

- Return ratios are expected to dilute from 25% in FY14 to 20.8% in FY15E. However, RoE at 18-20% still stands better than most of the peers.

We believe QIP will address investors’ concerns on lower core equity capital of the bank. Yes bank capital raising plans had got delayed in lieu of tighter liquidity conditions, deteriorating macro-economic environment, increasing interest rate cycle in FY14. However, we have seen a significant run up in the stock price in the last one quarter (+80%) on the back of improving macro economic conditions, declining wholesale rates, easing liquidity concerns and expectation of interest rate cycle reversal.

We continue to remain positive on the bank owing to healthy growth, control over asset quality, higher non interest income, sustainable cost to income ratio and comparatively higher return ratios. We believe that Yes Bank will be able to sustain RoE of 20%+ and RoA of 1.5% for FY15E. We expect PAT to witness CAGR growth of 20.4% over FY14-FY16E. We have revised our estimates for FY15E and FY16E to incorporate higher growth and improvement in margins. As a result our adjusted book value estimates stands revised and thus we have increased our target price from Rs530 per share to Rs646 per share. At CMP, the stock is trading at a PE of 12.15x and 10.10x of FY15E and FY16E EPS and at an adjusted P/BV of 2.04x and 1.77x FY15E and FY16E Adj BV. Considering the recent appreciation in the stock price, we have revised our rating from BUY to HOLD with a target price of Rs 646; indicating further upside of 13.3% from current levels.