YES Bank: Beating the odds - Buy

The past year has been challenging for the banking sector to say the least. The fall in credit growth and sharp rise in bad loans due to the RBI’s asset quality review led to record losses and steep erosion in capital for many public sector banks. The Centre’s demonetisation move has only made matters worse. While banks’ coffers have been brimming with deposits, cash crunch in the economy has dampened growth prospects, leaving banks with little scope to deploy their excess surplus. While it is still early days to gauge the impact of demonetisation on businesses and hence on banks’ asset quality, there is likely to be near-term pain.

In times of uncertainty, it is best to stick with sound banking stocks that have a good track record of delivering steady loan growth, healthy profitability and stable asset quality.

YES Bank continues to deliver robust earnings growth, with well-rounded performance across various parameters. Strong traction in loans, healthy deposit growth, improvement in margins and stable asset quality have kept its performance in good stead.

At the current price, the stock trades at 2.4 times the FY18 book value, higher than its three-year historical average of about 2.2 times. The stock has been re-rated significantly due to its robust and consistent earnings performance. With an expected earnings growth of 25-28 per cent over the next two years, the stock still offers a good buying opportunity for investors with a two- to three- year time horizon.

YES Bank has been delivering loan growth at 25-26 per cent for many quarters now. The anaemic levels of growth at the overall sector level have mattered little to this mid-sized private lender, with growth in the large corporate, retail and SME segments on a strong footing.

The new marginal cost of funds-based lending rate (MCLR) framework introduced by the RBI last year has helped the bank offer competitive rates and tap into opportunities in the large corporate segment. The bank though is cautious on the mid-corporate segment. The corporate book contributes the chunk — 67.9 per cent of total loans.

As of September 2016, the bank’s loans grew 37.7 per cent year-on-year, resulting in a 30.5 per cent growth in its core net interest income and 31 per cent rise in net profit.

Going ahead, loan growth will be driven by SME, the large corporate segment in which the bank is building its presence, and retail portfolio (which is seeing increased focus). The loan book is likely to grow at over 25 per cent over the next two years.

YES Bank’s strong run had led to concerns about the bank’s ability to raise the requisite capital to fund growth in the coming quarters. More so, because the bank last year had to defer its QIP (Qualified Institutional Placement) plan to raise $1 billion.

But the bank has recently raised ₹3,000 crore through additional tier-I bonds. This should help fund its growth for the next 12-18 months. Also, the approval for raising $1 billion through QIP is valid until June.

The bank’s ROE which has been in the 18-25 per cent range in the last couple of years has kept the growth in capital intact through internal accretion. This should continue to keep loan growth in good stead. In the September quarter, the ROE stood at 21.4 per cent.

Aside from the strong growth in loans, improving low-cost current account savings account (CASA) ratio continues to aid margin expansion. The bank has been able to grow its CASA deposits at over 40 per cent annually over the last five years. Continuing to grow its retail deposit base, the bank grew its CASA by a robust 53 per cent year-on-year as on the September quarter.

Despite the strong growth in loans, YES Bank has been able to keep bad loans under check. Its gross non performing assets (GNPA) as a per cent of loans are still lower than most private banks — below 1 per cent of loans over the past five years.

The bank’s GNPA as a per cent of loans was 0.83 per cent as of September 2016, more or less steady with the June quarter figures. The bank’s restructured book fell to 0.46 per cent of loans, from 0.71 per cent during the same quarter last year.

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