Fresh investments with a two-year horizon can be considered in the stock of YES Bank. Even in tough economic conditions, the bank managed reasonable growth with negligible non-performing assets and low proportion of restructured assets (0.53 per cent of the loan book).

Collateral-based lending, coupled with focus on short-term working capital loans, made sure that there were not many slippages for the bank. The bank has already provided amply for loan exposure with lower ratings, which may minimise the impact on profitability in case of a sharp rise in slippages.

At current price of Rs 334, the stock price discounts FY14 adjusted book value by about 1.7 times. The price-to-earnings multiple is 7.9. For a bank that is expected to witness earnings growth in excess of 20 per cent in the next few years, the valuations look attractive. On a relative basis, it is trading at a discount to IndusInd Bank and HDFC Bank.

As a small bank interested in adding to its deposit base, YES Bank is a beneficiary of savings rate de-regulation. The bank witnessed significant inflows into savings accounts within five months of de-regulation. Rollout of branches, which grew from 150 in March 2010 to 356 in March 2012, will also help garner more retail deposits. Branch expansion (the bank aims to take its network to 900 branches by 2015) will not only improve the deposit inflows but will also aid its plan to increase penetration into retail loans.

The bank has launched various retail loan products. YES Bank plans to increase its high yielding retail (secured) and SME loan portfolio to 30 per cent of its book by 2015 from the current 18 per cent.

In the short-term, the bank will benefit from a fall in short-term rates (by more than 2 percentage points). Any rate cut or liquidity infusion from hereon will further reduce its cost of borrowing especially given that more than half of its deposits and borrowings mature in a year's time. The stickiness of yields on investment book will also aid the margins when the cost of funds decline. The bank has invested heavily in non-SLR securities such as debentures.

Strong fee income growth and low cost-to-income ratio in spite of aggressive rollout of branches are the other key positives for the bank. The bank has capital adequacy of 17.9 per cent as of March 2012.

(This article was published on June 16, 2012)
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