Reinitiate ‘buy’ on Yes Bank with TP of Rs 464

Yes Bank offers an excellent opportunity to play the theme of structural improvement in profitability vs peers. Not only is the growth opportunity fairly abundant given Yes Bank’s smaller but growing balance sheet, even the retail opportunity on both sides of the balance sheet is likely to drive a 20bps improvement in RoA to 1.9% and 500bps increase in RoE to 23% over the next two years. In contrast, its stock valuations remain muted at 2.4x P/ABV and 13x P/E – this despite a solid stock return of 24% CAGR over the longer term (11 years) and even in the shorter term – 23% CAGR over three years – similar to HDFC Bank’s performance. We reinitiate coverage on Yes Bank with a BUY rating and a target price of `464 implying a 48% upside. With a 2% loan market share within the system, Yes Bank offers considerably high growth prospects given: a) its increasing ability to lend to larger corporates, b) continuing focus to expand its retail franchise (retail loan mix at just 12% vs peers at 40-55%), c) refinancing opportunities including NCLT cases, and d) PSU banks giving up market share. It is therefore no surprise that Yes Bank’s incremental loan share is running at 5.7% — much above its outstanding share of 2%. We estimate a 30% CAGR in loans over FY18E-FY20E. Yes Bank’s retail loan mix is at just 12% of loans vs peer levels of 40-55%. CASA mix is 38% vs peer levels of 43-50%. Hence, margins, RoA offer considerable scope for expansion as its retail lending strategy rolls out with a slew of products, CASA mix continues to expand with its increasing footprint, products, cross-selling and superior returns offered. We look for RoA to expand by ~20bps to 1.9% and RoE to 22.5% by FY20E. Reducing SA deposit pricing gradually, greater origination of priority sector loans and rising lending rates will likely help a 13bps rise in NIM up to FY20E. Fee business is likely to gain from an increasing retail presence as well as greater penetration to large corporate businesses. Operating expense ratios are likely to remain flat as expansion is focused on spoke branches with major hubs already set up.

Yes Bank