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Yes Bank Case Study

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YES BANK

We initiate coverage on YES BANK with "SECTOR OUTPERFORMER" rating and STRONG BUY recommendation.

CMP: Rs 308

TARGET: 496 (FY 2012)

YES BANK is the only Greenfield license awarded by the RBI in the last 15 years, associated with the finest pedigree investors. YES Bank received a license to commence operations in May 2004. Mr Ashok Kapur and Mr Rana Kapur, who have been at the helm of Rabo India, have promoted the bank. The bank has positioned itself as a bank with corporate and institutional focus and for affluent sections in the personal banking segment. It has adopted the globally recognized Six Sigma and ISO service standards. Bank has managed to maintain a zero NPA portfolio and plans to focus on mortgages and loans against shares and personal loans. It also focuses on generating fee income from third party distribution and by mobilizing low cost deposits. The bank has maintained its capital adequacy ratio at 16.43%. Corporate advances comprised 70% of the total advances, while medium and small segments totaled 30%.

Yes provides all banking and related services such as Corporate and Institutional Banking, Financial Markets, Investment Banking, Corporate Finance, Treasury operations, Branch Banking, Business and Transaction Banking and Wealth Management business to corporate and retail customers.

Since its inception, Yes has been remarkable in all its operational metrics like consistent improvements in the Advances and Deposits leading to stellar growth in the Top as well as Bottom-line coupled with one of the best figures for RoA, RoE and Cost-efficiency and at the same time maintaining one of the Lowest NPA's throughout the Indian banking industry. With a 171-branch network and 200 ATMs in operation today, the bank plans to expand to 250 branches by June 2011. Expansion of retail franchise will also boost the fee income opportunities, even as Yes Bank is improving its foot print in core areas such as transaction banking, loan underwriting and financial advice. The bank is also reviving its plans for higher retail lending and increased financing to SME sector, predominantly in the sunrise industries. This may help the yield on advances of the bank. Currently, around 90 per cent of the loans are to companies, with a focus on large and mid companies.

PERFORMANCE REVIEW:

Business

The advances book and net profit of Yes Bank grew by a compounded annual growth rate of 52 per cent and 71 per cent over the period FY07-FY10. For the half year ended September 2010, the advances growth was 86.3 per cent while net

CHART 14: SHAREHOLDING PATTERN OF YES BANK

(Source: economitimes.indiatimes.com)

profit growth was 57.8 per cent. The bank's good net interest income growth (72.8 per cent) did not translate into equivalent profit growth, owing to a steep decline in treasury income. Fee income grew by 51% YoY to INR 1.1billion led by a strong growth in the transaction banking business (71% YoY) and financial advisory business (50% YoY). Third party distribution income revived during the quarter posting a growth of 70% YoY to 117 million. During Q4FY10, financial market segment showed strong traction with a growth of 133% YoY leading to 69% increase in overall non-interest income. With addition of new branches and pick up in the economy, fee income is expected to grow at a healthy rate (32% CAGR over FY10-12). Despite strong growth in business volumes, the cost to income ratio remains stable at 36.3%. However, given the strong traction in earnings cost to income ratio is expected to be capped at 40 % levels.

TABLE 2: KEY FINANCIALS OF YES BANK FROM 2005-2010 WITTH ESTIMATES FOR FY 2011 & FY 12

(Source: Annual reports of YES BANK 2005-10)

Year Mar 05 6-Mar Mar 07 Mar 08 9-Mar 10-Mar Mar 11 E MAR 12E CAGR

Interest Earned 29.98 192.8 587.61 1,304.68 2,001.43 2,369.71 3193.66 4304.09 34.77

Other Income 18.2 99.81 200.71 360.68 458.93 581.15 737.71 831.36 26.94

TOTAL INCOME 48.18 292.61 788.32 1,665.36 2,460.36 2,950.86 3931.37 5135.45

Interest expended 11.85 104.72 416.26 974.11 1,492.13 1,581.76 2015.64 2568.53 27.43

NET INTEREST INCOME 18.13 88.08 171.35 330.57 509.3 787.95 1178.02 1735.57

OPERATING EXPENSES 19.39 47.72 99.89 163.13 254.2 355.46 526.83 780.81 48.21

PROVISIONS 21.27 50.12 117.47 202.41 218.02 256.89 289.41 326.05 12.66

TAX -1.82 29.07 49.26 106.46 162.07 248.75 368.56 492.54

DEPRECIATION 1.25 5.66 11.07 19.23 30.1 30.26 31.2 32.4

TOTAL EXPENSES 51.94 237.29 693.95 1465.34 2156.52 2473.12 3231.64 4200.33

PBDIT 7.52 194.77 570.96 1299.82 1988.14 2338.51 3115.13 4028.59

PBIT 6.27 189.11 559.89 1280.59 1958.04 2308.25 3083.93 3996.19

PBDT -4.33 90.05 154.7 325.71 496.01 756.75 1099.49 1460.06

PBT -5.58 84.39 143.63 306.48 465.91 726.49 1068.29 1427.66

PAT -3.76 55.32 94.37 200.02 303.84 477.74 699.73 935.12

CHARRT 15: GRAPHICAL REPRESENTATION OF GROWTH IN TOTAL INCOME (2005-2012E)

CHART 16: GRAPHICAL REPRESENTATION OF GROWTH IN PROFITABILITY (2005-2012E)

CHART 17: GRAPHICAL REPRESENTATION OF GROWTH IN INTEREST INCOME (CAGR 34.77) AND OTHER INCOME (CAGR 26.94) FROM 2010 TO 2012E

CHART 18: SECTORAL DISTRIBUTION OF ADVANCES

Core non-interest income (which excludes treasury) covers almost 91 per cent of the operating costs which means majority of net interest income directly flows into the pre-provisioning profits. The credit-deposit ratio of the bank, as of September 2010, was a relatively healthy 75.8 per cent. Net interest margin was at 3 per cent for the September

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