Yes Bank Ltd.

Page 1

Yes Bank Ltd.

RESULT UPDATE

19th January, 2018

India Equity Institutional Research II

Result Update – Q3FY18

II 19th January, 2018

Page 2

Yes Bank Ltd

Addressing asset quality concerns…

CMP

Target

Potential Upside

Market Cap (INR Mn)

Recommendation

Sector

INR 341

INR 381

12%

782,140

ACCUMUALTE

BFSI

Result highlights •Growth trajectory during the quarter continued to remain robust with advances growing 46.5% yoy/15.4% qoq. The growth came across the segments, however, retail stood out posting 101.7% yoy growth. Growth in the corporate segment was 44%. •PPOP at INR 20 bn was up 37.7% yoy/5% qoq. Cost/income at 39.2% was lower yoy/flat qoq on back of digital strides. With further measures to improve productivity and rationalization of headcount, the bank is aiming to bring down the cost/income down by another 150-200 bps in another year or two. •With provisioning declining qoq on back of robust asset quality (credit costs at 18 bps/80-90 bps annualized), PBT grew by 18.1% yoy/8.3% qoq to INR 15.8 bn. 10 bps/11 bps sequential reduction in GNPA/NNPA along with minuscule fresh accretion (of INR 2.5 bn during the quarter) to the total stress level along with quality recoveries coming through provide some degree of comfort. •During the quarter the bank raised INR 40 bn through T2 bonds and another INR 54.2 bn as AT1 bonds. Post this, the bank has enough capital stock to sustain its growth momentum. MARKET DATA

KEY FINANCIALS

Shares outs (Mn) EquityCap (INR Mn) Mkt Cap (INR Mn)

2298

Particulars (INR Mn)

FY15

FY16

FY17

4597

Net Interest Income

34,878.3

45,667.2

57,973.1

80,532.6 1,10,178.7 1,50,722.9

FY18E

FY19E

782140

Pre-provision profits

32,496.2

43,025.0

58,375.2

74,349.1 1,01,660.8 1,38,999.2

20,054.0

25,394.5

33,301.0

39,675.7

52 Wk H/L (INR)

383/265

Net Profit

Volume Avg (3m K)

12806.8

EPS (INR)

48.0

60.4

73.0

17.3

23.8

32.6

BVPS (INR)

279.6

327.8

483.1

110.1

129.1

155.2

ABVPS (INR)

277.5

321.1

459.6

105.7

125.4

152.4

2.9

2.7

3.4

3.2

2.7

2.2

Face Value (INR)

2

Bloomberg Code

YES IN

P/ABV (x) SHARE PRICE PERFORMANCE

54,411.4

FY20E

74,613.2

Source: Company, KRChoksey Research

Strong advances growth cover up for NIM compression

250

NIMs during the quarter came in at 3.5%, down 20 bps qoq. The compression in NIM was partially on account of bank raising Tier I (INR 54.15 bn) and II (INR 40 bn) bonds during the quarter, costing 8.5% as against the bank’s average cost of funds of 6%. While yields did compress too – 9.8% vs. 10.2% during Q2FY18, we believe the reduction in CoF was restricted. Yield compression during the quarter was a result of good quality credit on incremental basis + competition. Going forward, the bank has continued to reiterate its target of 4% NIMs by March 2020. We believe it may be possible for the bank to pull these target ahead of time given their CASA growth trajectory, stored value in SA rates (6% vs. 3-4% industry average) and credit book directionally moving towards retail orientation. Based on our calculated NIMs, we expect an upward trend (+10 bps annually).

190

130

Yes Bank

Jan-18

Jul-17

Jan-17

Jul-16

Jan-16

Jul-15

Jan-15

70

Sensex

MARKET INFO SENSEX

35260

NIFTY

10817

Advances during the quarter stood at INR 1,715.2 bn, growing 46,5% yoy/15.4% qoq. Growth in advances was across the segment with retail segment more than doubling (+101.7% yoy) while corporate segment, aided by strong and nurtured relationships with large corporates, grew by ~44% yoy. While the growth continues to be guided by the retail segment, the bank is also seeing some revival in credit demand from corporates, especially the large ones and also on back of NCLT throwing up good opportunities. The bank envisages a well-placed and conditioned environment for credit growth in near-term which will act as a tail-wind and help Yes Bank continue to outpace industry growth. Business banking stood at 169.8 bn, +36% yoy/15% qoq and MSE segment stood at INR 181.8 bn, +32% yoy/8% qoq. We are factoring in 35% advances CAGR over FY18-20 (up from 27% assumption previously). Also, in order to become self-sufficient in complying with PSL requirements, the bank intends to start generating PSL-complaint retail loans. This will also help in containing the impact suffered on account of PSLC costs. Further, the bank is also seeing pick in demand from micro/small/medium enterprises.

SHARE HOLDING PATTERN (%) Particulars

Dec 17

Sep 17

Jun 17

Promoters

20.04

20.11

20.14

FIIs

43.2

45.51

45.76

DIIs

23.83

24.57

22.88

Others

12.94

9.81

11.23

100

100

100

Total

ANALYST Raghav Garg, [email protected], +91-22-6696 5584

35% Advances CAGR between FY 17 and FY 19E KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

38% NII CAGR between FY 17 and FY 19E +91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com




Page 3

Yes Bank Ltd Asset quality concerns and divergence from RBI addressed; risks seemingly subsiding? Asset quality improved during the quarter with GNPA declining 10 bps to 1.72%/NNPA declining 11 bps to 0.93%. While slippage during the quarter was INR 4.9 bn, fresh accretion to total stress during the quarter was ~INR 2.5 bn (0.15% of advances) which we believe is quite minuscule considering the kind of growth being delivered. GNPA/NNPA stood at INR 29.74 bn/15.95 bn. With respect to divergence identified during Q2FY18, the bank has been able to make progress (one account fully repaid INR 2.8 bn/+recovery of INR 1.3 bn from another/+recoveries of another INR 390 mn). We find comfort in the fact that these recoveries have been quality ones wherein either there has been a management change, projects have resumed operations or asset monetization which was earlier delayed has gone through. The management expects to resolve cases identified under divergence by March 2018. Further, with respect to exposure to sensitive sectors, the bank’s exposure now stands at 7.7% versus 9.3% during Q2FY18. Within the exposure to sensitive sectors, exposure to iron/steel has come down to 1.6% (vs. 2% earlier) and exposure to telecom has come down to 2.1% (vs. 2.3% earlier). In case of power, the entire exposure to thermal/generation which as of today stands all operational. Earlier concerns around the power sector on account of renegotiation of high-priced PPAs have been mitigated to a large extent as SC recently decided that contractual frameworks cannot be disturbed/revoked. Exposure to NCLT stands at INR 1.34 bn, spread over 9 borrowers. Of the total NCLT exposure, INR 0.8 bn is standard and rest INR 12.7 bn is classified as NPA. The bank carries 51% PCR on NCLT list 1/43% PCR on NCLT list 2. On back of robust asset quality, credit costs during the quarter came in at 18 bps (64 bps for 9MFY18/80-90 bps annualized for FY18). While overall PCR currently stands at 46.4%, the management intends to take it up to 60% by June 2018. Other key highlights: •CASA stands at INR 652 bn (+48% yoy/+11.1% qoq), with CASA ratio improving to ~38%. With bank accreting more than a large number of SA customers, we expect the bank to reach its target of 40% CASA by September 2018/43-45% CASA by FY20. •Unlocking of SA rates (by way of reduction; offering 6% vs. 3-4% industry average) will help in expanding NIM; targeting 4% NIMs by by FY20. •Non-interest income during the quarter was strong with corporate banking fee more than doubling (+102% yoy), retail banking fee growing by 35% yoy and corporate trade & cash management fee growing by 54% yoy. •C/I ratio stood at 39.5%, improving 244 bps yoy on account of digital initiatives being taken by the bank. With further rationalization of incremental headcount and digital measures aimed at increasing productivity, the bank is aiming to take C/I down by another 150-200 bps in another year or two. •More than 75% of the corporate exposure is rated A and above, displaying stable risk profile from an asset quality perspective. Valuation & Recommendation: On back of management’s vision of ‘building the finest quality bank in India by 2025’, we expect the bank to deliver on all fronts. Specifically, we expect the bank to maintain a robust growth rate with respect to its advances, aided by retail, and corporate and SME (expected to start picking up by year-end) and deliver reduction in cost of funds through reduction in savings rate coupled with higher share of CASA (CASA + retail TDs to be 70% before FY20). On the asset quality front, post a wide divergence reported in Q2FY18, we find comfort in how the bank has tackled/addressed this issue along with declining GNPAs and minimal fresh accretion to overall stress. How the bank delivers on remedying accounts identified under RBI divergence by June 2018 is something that needs to watched out for; we believe resolution of this pocket of stress will be a big positive. We continue to value the stock at 2.5x FY20E ABVPS, arriving at a value per share of INR 381, offering an upside of 12%. We thus recommend to ACCUMULATE the stock. Q3FY18

Q3FY17

Q2FY18

Y-o-Y

Q-o-Q

Yield on avg advances (%)

9.0%

10.7%

9.9%

-175

-97

NIM (%)

3.5%

3.5%

3.7%

0

-20

CASA (%)

38.0%

33.3%

37.2%

467

83

GNPA (%)

1.72%

0.85%

1.82%

87

-10

NNPA (%)

0.93%

0.29%

1.04%

64

-11

Key Ratios

Provision coverage (%)

46%

66%

43%

-1958

310

Cost to income ratio (%)

39.5%

42.0%

39.2%

-244

39

C/D ratio (%)

100%

88%

94%

1142

577

RoA (%)

1.6%

1.8%

1.7%

-19

-7

Leverage (x)

10.8

12.0

10.1

RoE (%)

17.5%

21.7%

17.1%

-419

41

18.40%

15.60%

17.00%

280

140

Capital adequacy ratio (%) Source: Company, KRChoksey Research


KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com




Page 4

Yes Bank Ltd Income Statement (INR Mn)

Q3FY18

Q3FY17

Q2FY18

Y-o-Y

Q-o-Q

Interest income

50,703

42,134

48,003

20.3%

5.6%

Interest expense

31,815

27,241

29,153

16.8%

9.1%

Net interest income

18,888

14,893

18,851

26.8%

0.2%

Noninterest income

14,223

10,165

12,484

39.9%

13.9%

Total income

33,111

25,059

31,335

32.1%

5.7%

- Employee costs

5,334

4,675

5,628

14.1%

-5.2%

- Other operating expenses

7,759

5,846

6,641

32.7%

16.8%

Operating expenses

13,093

10,520

12,269

24.4%

6.7%

Pre-provision profit

20,018

14,538

19,067

37.7%

5.0%

Provisions

4,213

1,154

4,471

265.2%

-5.8%

Profit before tax

15,805

13,384

14,596

18.1%

8.3%

Tax expense

5,036

4,558

4,569

10.5%

10.2%

Net profit

10,769

8,826

10,027

22.0%

7.4%

Balance Sheet items

Q3FY18

Q3FY17

Q2FY18

Y-o-Y

Q-o-Q

Deposits

17,17,314

13,23,758

15,79,898

29.7%

8.7%

CASA deposits

6,52,579

4,41,264

5,87,246

47.9%

11.1%

Advances

17,15,149

11,70,870

14,86,753

46.5%

15.4%

Total Assets

26,54,320

19,48,280

23,73,941

36.2%

11.8%



Key highlights from Q3FY18 earnings call: •The bank saw robust growth across segments – retail more than doubled (+101% yoy) while corporate grew 43%. •The bank is seeing resurgence in credit markets; seeing new credit demand coming from large corporate relationships. •Quality of credit is improving. •Reasons for NIM contraction: o The NIMs contracted by about 20 bps o 10 bps can be attributed to raising of tier I and II bonds by the bank. o The bank raised INR 54.15 bn worth of AT1 bonds and INR 40 bn worth of tier II capital, costing around 8.5%, thereby impacting NIMs. o The remaining 10 bps could be attributed to security receipts. •The bank continues to maintain its NIM target of 4% by March 2020. •The bank is aiming towards becoming PSL self-sufficient as PSLC costs are another adverse impact the bank is suffering. The bank plans to achieve this by generating PSL-compliant retail loans. •C/I stood at 39.5%. The bank is aiming to improve this to 37-37.5% as a result of further productivity in another year or two. This will be driven by digital initiatives the bank is undertaking. The bank is also being conscious on the employee count. •The bank plans to achieve 40% CASA by September 2018. ANALYST Raghav Garg, [email protected], +91-22-6696 5584






Page 5

Yes Bank Ltd Key highlights from Q3FY18 earnings call (contd.): •On the asset quality, the bank saw marginal improved as GNPA reduced 10 bps to 1.72%. in terms of provisioning, the bank plans to shore up the PCR to 60% by June 2018. o Most of the GNPAs identified on account of divergence are not sticky and will be remedied by March 2018. o Exposure to sensitive sectors has come down from 9.3% to 7.7%. o All of the exposure to power sector is thermal/generation and is operational o Iron/steel is turning around rapidly. o Telecom being de-risked substantially. o Concerns around high-priced PPAs have been addressed after an in-depth review. The risk has been mitigated. SC recently decided that contractual frameworks cannot be disturbed/revoked. Further, the bank is also seeing some recovery in solar power pricing. •More than 75% of the corporate exposure is rated A and above. •Nature of SRs is non-sticky. The bank believes there can be a fair amount of resolution and recovery from these. •Given the trajectory of CASA growth and CASA target of 40% by September 2018/43-45% CASA by FY20, NIMs should improve/reach to 4%. Also, the bank has large value stored in SA accounts/rates as currently its offers about 6% as against an industry average of 3-4%. The bank stated it would unleash this value at some point. •On the corporate front, the bank will continue to growth with the large corporates. •The bank believes NCLT can throw up a lot of opportunities for the credit business. The environment for credit growth is well placed and conditioned. •The bank is seeing pick up in micro/small/medium enterprises. •On capital consumption: o Currently, the CRAR is sufficient o The bank doesn’t see rapid usage of CET1 capital and has enough capital stock to pursue growth. However, it will discuss further capital raising in April 2018. •With regards to repayment by 2 accounts identified as NPA under the RBI divergence assessment: o Repayment in one account came through on account of change in management o In other situations, there has been an operational improvement like in case of a road project and asset monetization which has gotten delayed. •Under IFRS, a portion of fee income (40-50%) maybe subject to amortization. •The bank has begun to raise MCLR rates which going forward could result in better margins.







Page 6

Yes Bank Ltd Amounts in INR Million Income Statement

FY2015

FY2016

FY2017

FY2018E

FY2019E

FY2020E

Interest income

1,15,720

1,35,334

1,64,246

2,14,777

2,88,268

3,89,170

Interest expense

80,842

89,667

1,06,273

1,34,244

1,78,089

2,38,447

Net interest income

34,878

45,667

57,973

80,533

1,10,179

1,50,723

Non interest income

20,465

27,121

41,568

45,708

61,706

83,304

Total income

55,343

72,789

99,541

1,26,241

1,71,885

2,34,027

Operating expenses

22,847

29,764

41,165

51,892

70,224

95,027

Employee costs

9,797

12,968

18,050

24,368

32,897

44,411

Other operating expenses

13,050

16,796

23,115

27,524

37,327

50,617

Pre-provision profit

32,496

43,025

58,375

74,349

1,01,661

1,38,999

Provisions

3,395

5,363

7,934

14,252

19,243

25,982

Profit before tax

29,101

37,662

50,441

60,097

82,417

1,13,017

Tax expense

9,047

12,268

17,140

20,421

28,006

38,404

Net profit

20,054

25,394

33,301

39,676

54,411

74,613

FY2015

FY2016

FY2017

FY2018E

FY2019E

FY2020E

4,177

4,205

4,565

4,565

4,565

4,565

Reserves & surplus

1,12,622

1,33,661

2,15,976

2,47,716

2,91,245

3,50,936

Shareholders' funds

1,16,800

1,37,866

2,20,541

2,52,281

2,95,810

3,55,501

Borrowings

2,62,204

3,16,590

3,86,067

5,41,075

7,62,209

10,35,414

Deposits

9,11,758

11,17,195

14,28,743

18,11,424

24,13,663

31,90,765

Other liabilities & provisions

70,942

80,983

1,15,253

1,21,245

1,53,110

2,03,846

TOTAL LIABILITIES & EQUITY

13,61,704

16,52,634

21,50,599

27,26,025

36,24,793

47,85,526

75,572

82,184

1,95,494

1,55,265

2,09,608

2,32,440

Investments

4,32,285

4,88,385

5,00,318

6,46,937

8,73,365

11,62,199

Advances

7,55,498

9,82,099

13,22,627

17,85,546

24,10,487

32,54,158

Fixed assets

3,190

4,707

6,835

8,202

9,843

11,812

Other assets

95,160

95,259

1,25,325

1,30,074

1,21,490

1,24,918

13,61,704

16,52,634

21,50,599

27,26,025

36,24,793

47,85,526


Balance sheet SOURCES OF FUNDS Share capital

USES OF FUNDS Cash and cash equivalent

TOTAL ASSETS Source: Company, KRChoksey Research







Page 7

Yes Bank Ltd Key ratios

FY2015

FY2016

FY2017

FY2018E

FY2019E

FY2020E

Advances (%)

35.8%

30.0%

34.7%

35.0%

35.0%

35.0%

Deposits (%)

22.9%

22.5%

27.9%

26.8%

33.2%

32.2%

Total assets (%)

24.9%

21.4%

30.1%

26.8%

33.0%

32.0%

NII (%)

28.4%

30.9%

26.9%

38.9%

36.8%

36.8%

Pre-provisioning profit (%)

20.9%

32.4%

35.7%

27.4%

36.7%

36.7%

PAT (%)

24.0%

26.6%

31.1%

19.1%

37.1%

37.1%

Credit/Deposit (%)

82.9%

87.9%

92.6%

98.6%

99.9%

102.0%

CASA (%)

23.1%

28.1%

36.3%

37.3%

38.3%

40.0%

Advances/Total assets (%)

55.5%

59.4%

61.5%

65.5%

66.5%

68.0%

11.7

12.0

9.8

10.8

12.3

13.5

Cost/income (%)

41.3%

40.9%

41.4%

41.1%

40.9%

40.6%

Opex/total assets (%)

1.7%

1.8%

1.9%

1.9%

1.9%

2.0%

Opex/total interest earning assets (%)

1.8%

1.9%

2.0%

2.0%

2.0%

2.0%

NIM (%)

3.0%

3.2%

3.2%

3.5%

3.6%

3.7%

RoA (%)

1.6%

1.7%

1.8%

1.6%

1.7%

1.8%

RoE (%)

19.1%

20.2%

17.1%

17.6%

21.0%

23.9%

Gross NPA (%)

0.4%

0.8%

1.5%

1.3%

1.1%

0.8%

Net NPA (%)

0.1%

0.3%

0.8%

0.6%

0.4%

0.2%

PCR (%)

72.0%

62.0%

46.9%

56.9%

66.9%

76.9%

Slippage (%)

0.2%

0.6%

1.3%

0.3%

0.2%

0.1%

Credit cost (%)

0.2%

0.5%

0.5%

0.8%

0.8%

0.8%

EPS (Rs.)

48.0

60.4

73.0

17.3

23.8

32.6

BV (Rs.)

279.6

327.8

483.1

110.1

129.1

155.2

ABV (Rs.)

277.5

321.1

459.6

105.7

125.4

152.4

P/E (x)

17.0

14.3

21.2

19.7

14.4

10.5

P/BV (x)

2.9

2.6

3.2

3.1

2.6

2.2

P/ABV (x)

2.9

2.7

3.4

3.2

2.7

2.2

Growth rates

Balance sheet ratios

Leverage (x) Operating efficiency

Profitability

Asset quality

Per share data / Valuation








Page 8

Yes Bank Ltd Yes Bank Ltd Date

Rating Legend CMP (INR)

TP (INR)

Recommendation

Our Rating

Upside

Buy

More than 15%

Accumulate

5% - 15%

Hold

0 – 5%

19-Jan-18

341

381

ACCUMULATE

27-Oct-17

310

377

BUY

27-Jul-17

1782

2131

BUY

20-Jan-17

1372

1441

ACCUMULATE

24-Oct-16

1320

1,441

ACCUMULATE

Reduce

-5% – 0

27-July-16

1200

1,302

ACCUMULATE

Sell

Less than -5%

28-Apr-16

940

1,069

ACCUMULATE

01-Feb-16

749

860

ACCUMULATE

30-Oct-15

744

845

ACCUMULATE

23-Apr-15

851

930

ACCUMULATE

13-Apr-15

843

900

ACCUMULATE

15-Jan-15

787

855

ACCUMULATE

7-Jan-15

772

807

HOLD

3-Nov-14

684

730

ACCUMULATE

ANALYST CERTIFICATION: We, Raghav Garg (B.Com, M.Com (Applied Finance)), research analyst author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. KRCSSPL is a registered Research Entity vides SEBI Registration No. INH000001295 under SEBI (Research Analyst) Regulations, 2014. We submit that no material disciplinary action has been taken on KRCSSPL and its associates (Group Companies) by any Regulatory Authority impacting Equity Research Analysis activities. KRCSSPL prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analyst covers. The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable basis, KRCSSPL is not under any obligation to update the information. 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