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The stock of YES Bank presents a good buying opportunity in the troubled banking sector. Healthy prospects for retail lending, good return ratios and high asset quality make the bank a preferred exposure to the sector.
YES Bank is expected to deliver over 22 per cent growth in earnings for the next two years, helped by strong loan growth, and improving net interest margins (NIMs). The stock is now trading at 1.9 times its estimated book value for next year, much lower than its historical average of 2.5 times.
Despite the lull in credit offtake, YES Bank delivered a loan growth of 24 per cent in 2012-13, while the industry grew by 14 per cent. A small size and room to ramp up retail loans (now at just 18 per cent of the loan book) will drive its loan growth in the next two years.
In 2012-13, yields on loans increased by 20 basis points to 12.4 per cent in 2012-13, as the bank derived benefits from the increase in base rates the previous year.
Following the deregulation of interest on savings accounts from October 2011, YES Bank was the first bank to offer higher rates and was able to increase its share in savings accounts significantly. Its savings deposits stood at Rs 6,023 crore in 2012-13, up seven-fold from the previous year.
The bank’s current account savings account (CASA) ratio increased from 15 per cent in 2011-12 to 18.9 per cent in 2012-13.
The substantial increase in low-cost deposits has reduced its cost of funds to 8.6 per cent in the 2012-13 year from 8.8 per cent in the previous year.
YES Bank has further headroom for market share gains in saving deposits, as it offers the best rate of seven per cent currently. The CASA per branch is low at Rs 30 crore and offers scope for improvement too.
This bank will also be a key beneficiary of the falling interest rates in wholesale deposits in the current year, with more than 60 per cent of its deposits from this segment. This will aid lower cost of funds.
In 2012-13, the NIMs increased by 10 basis points to 2.9 per cent. While lending rates may come under pressure, lower cost of funds may improve NIMs.
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