Result Update April 28, 2016

Yes Bank (YESBAN)

Rating matrix Rating Target Target Period Potential Upside

Hold | 890 12 months -5%

: :

: :

Sustains healthy performance amid stress...

What’s Changed? Target EPS FY17E EPS FY18E Rating

Changed from | 750 to | 890 Changed from | 69.4 to | 73.5 Introduced at | 93.2 Unchanged

Quarterly Performance | Crore NII NIM (%) PPP PAT

Q4FY16 Q4FY15 YoY Gr.(%) 1,241.4 977.1 27.1 3.4 3.2 20bps 1,225.5 937.5 30.7 702.1 551.0 27.4

Q3FY16 QoQ Gr.(%) 1,157.0 7.3 3.4 0bps 1,149.6 6.6 675.7 3.9

Key Financials | Crore NII PPP PAT ABV (|)

FY15 3487.8 3249.6 2005.4 277.9

FY16 4567.4 4305.6 2539.0 323.6

FY17E 5677.9 5342.5 3089.3 379.9

FY18E 7058.4 6599.4 3919.8 457.5

FY16 15.5 14.7 2.9 2.8 1.7 19.8

FY17E 12.8 12.1 2.5 2.3 1.7 20.3

FY18E 10.1 9.5 2.1 1.9 1.8 21.4

Valuation summary P/E Target P/E P/ABV Target P/ABV RoA RoE

FY15 19.5 18.5 3.4 3.2 1.6 21.3

Stock data Particular Market Capitalisation GNPA (Q4 FY16) NNPA (Q4 FY16) NIM (Q4 FY16) 52 week H/L Net Worth (| crore) Face value DII Holding (%) FII Holding (%)

Amount | 39396 crore | 749 crore | 285 crore 3.40% 915/590 | 13786 Crore | 10 24.3 41.3

Price performance (%) Return % Yes Bank Axis Bank Indusind Bank

1M 7.2 9.8 10.1

3M 34.4 14.1 12.6

| 940

6M 22.0 -7.8 6.6

12M 10.5 -8.9 23.0

Research Analyst Kajal Gandhi [email protected] Vasant Lohiya [email protected] Vishal Narnolia [email protected]

ICICI Securities Ltd | Retail Equity Research

• PAT grew 27% YoY to | 702 crore, above our estimate but asset quality deterioration was higher than previous trend (absolute GNA increase by | 190 crore QoQ to | 749 crore) though overall GNPA ratio seemed healthy at 0.76% of loans. Management indicated that RBI’s asset quality review (AQR) impact has been fully factored in • NII jumped 27.1% YoY to | 1241 crore while other income led by corporate banking fees was up 36% YoY to | 803 crore • Credit traction stays strong at 30% YoY to | 98210 crore with the corporate book (65% of total) rising 31% YoY. Margins were steady QoQ at 3.4% • Restructured assets (RA) declined QoQ to | 524 crore (from | 568 crore in Q3FY16) forming ~0.53% of loans. In Q4, the bank sold an account of ~| 70 crore to ARC under the RA category. There was no asset under SDR or the 5:25 scheme. Credit cost in Q4 was at 16 bps. Full year credit cost at 50 bps while for FY17E guided at 50-70 bps Version 3.0 largely retail focused, credit to grow at healthy 24% CAGR The bank fell short of its Version 2.0 (launched in 2010) targets such as 750 branches, 3000 ATMs, | 1.25 trillion deposit, | 1 trillion credit, 30% retail/SME credit & 30% CASA ratio by FY15. This was due to a slowdown in the economy. However, it still delivered a better performance vs. peers under Version 3.0. Largely, it aims to strengthen the retail presence on both the deposit (targets ~60% of deposits from retail) and credit (targets 45% retail including SME) front. Historically, credit has grown at a brisk pace of 53.9% CAGR in FY08-11 to | 34364 crore while in FY11-16, growth was modest at 23.4% CAGR to | 98210 crore. Going ahead, we expect credit growth at 24% CAGR to | 151324 crore by FY18E. CASA improvement to aid NIMs at 3.4-3.5% On the liability side of the balance sheet, around 45% of Yes Bank’s deposits is wholesale funded that is highly sensitive to interest rates unlike steady retail deposits. However, with a gradual CASA build-up to 28.1%, the bank has consistently managed its NIM well. Factoring in positives from incremental CASA and rising proportion of high yielding assets, we expect NIM at 3.4-3.5% in FY16-18E. Asset quality steady relative to peers On the asset side, large corporates (sales above | 1000 crore) comprise 65% while mid-corporate, SME & retail combined is 35%. Asset quality witnessed pressure but overall remained resilient in Q4FY16 with GNPA of | 749 crore (0.76% of credit) and NNPA of | 285 crore (0.29%). Restructured assets remained stable at | 524 crore (~0.53% of loans). Management did not restructure any asset under SDR or 5/25 scheme in FY16. We factor in GNPA at | 1224 crore (GNPA ratio at 1%) in FY17E. Steady performance in the stressed environment; maintain HOLD In the past five years, the bank consistently delivered 1.5%+ RoA and 18%+ RoE. This is estimated to be maintained in FY16-18E. Though asset quality has remained resilient, given the current business environment, probability of higher slippages cannot be completely ruled out. However, healthy asset growth coupled with improving margins would support earnings ahead. We expect the bank to clock healthy 24% CAGR in PAT to | 3920 crore in FY16-18E. We revise our target price higher to | 890 (| 750 earlier) as we roll over to FY18E ABV of | 458 and assign multiple of 1.9x. The stock has seen a strong rally recently. We maintain HOLD.

Variance analysis Q4FY16 Q4FY16E Q4FY15 YoY (%) Q3FY16 QoQ (%) NII NIM (%)

1,241 3.4

1,234 3.4

803

736

590

Net Total Income Staff cost Other Operating Expenses

2,044 353 466

1,970 363 435

PPP Provision PBT Tax Outgo PAT

1,225 186.5 1,039 336.9 702.1

Other Income

977 27.1 3.2 20 bps

1,157 3.4

7.3 0 bps

36.0

746

7.6

1,568 262 368

30.4 34.7 26.6

1,903 343 411

7.4 3.0 13.4

1,171 160.1 1,011 338.7 672.4

937 126.4 811 260.2 551.0

30.7 47.6 28.1 29.5 27.4

1,150 147.9 1,002 326.0 675.7

6.6 26.0 3.7 3.4 3.9

749.0 284.5

614.4 205.9

313.4 87.7

139.0 224.3

558.6 187.2

34.1 52.0

524

567

382

37.2

568

-7.8

Comments Strong credit growth of 30% YoY along with healthy margins of 3.4% led healthy NII growth Steady NIM QoQ was supported by increase in CASA ratio and CD ratio Strong growth in other income was led by healthy corporate banking fees, which saw an increase of 74% YoY to | 364 crore

Rise in slippages led to higher-than-expected provisions

Key Metrics GNPA NNPA Total Restructured assets

Asset quality witnessed pressure with GNPA ratio increasing 10 bps QoQ to 0.76% while NNPA ratio increased 7 bps QoQ to 0.29% Provisions coverage ratio declined to 62% from 66.5% in Q3FY16 Restructured assets declined QoQ owing to sale of an asset to ARC. Overall, it is at 0.53% of loans

[

Source: Company, ICICIdirect.com Research

Change in estimates (| Crore) Net Interest Income Pre Provision Profit NIM (%) PAT ABV (|)

Old 5,300.2 4,813.9 3.3 2,898.3 375.7

FY17E New % Change 5,677.9 7.1 5,342.5 11.0 3.4 13 bps 3,089.3 6.6 379.9 1.1

FY18E Introduced 7,058.4 6,599.4 3.5 3,919.8 457.5

NII traction to be healthy on healthy credit traction and improving margins Rise in CASA and high yielding assets to support margins improvement

Source: Company, ICICIdirect.com Research

Assumptions FY15 FY16 Credit growth (%) 35.8 30.0 Deposit Growth (%) 22.9 22.5 CASA ratio (%) 23.1 28.1 NIM Calculated (%) 3.1 3.3 Cost to income ratio (%) 41.3 40.9 GNPA (| crore) 313.4 749.5 NNPA (| crore) 87.7 286.1 Slippage ratio (%) 0.7 0.7 Credit cost (%) 0.5 0.6 Source: Company, ICICIdirect.com Research

FY17E 24.0 21.7 31.3 3.4 40.3 1,224.4 565.9 0.8 0.7

ICICI Securities Ltd | Retail Equity Research

FY18E 24.3 22.2 34.6 3.5 40.3 1,663.2 783.1 0.6 0.6

Earlier FY17E 20.4 20.0 27.7 3.1 41.4 581.5 149.0 0.4 0.5

Comments

Credit cost guided in the range of 50-70 bps in FY17E

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Company Analysis Credit to grow at healthy 24% CAGR, SME/retail proportion to rise… Over the years, Yes Bank has grown its credit almost entirely on the back of the corporate sector, which constitutes ~65% of its outstanding credit of | 98210 crore as on FY16. In Q4FY16, the credit book increased strongly by 30% YoY, mainly after witnessing an uptick in the SME and retail segment growth on a YoY basis.

Credit

84396 101437

98210 111720

121780 135986

151324 166171

Q3FY16

FY16

FY17E

FY18E

(%)

83.2

80015 99344

80.5

100 89.6 91.190 80 70 60 50 40 30 20 10 0

87.9

Q2FY16

79666 95316

55633 74192 FY14

Q1FY16

47000 66956 FY13

Deposit

82.9

75550 91176

37989 49152

75.0

FY12

70.2

83.6

Q4FY15

77.3

74.8

34364 45939

180000 160000 140000 120000 100000 80000 60000 40000 20000 0

FY11

(| crore)

Exhibit 1: Credit to grow at 24% CAGR in FY16-18E

CD ratio (RHS)

Source: Company, ICICIdirect.com Research

As on Q4FY16, large corporate constituted 65% while SME/retail constitute 35%. Within the SME/retail category, pure consumption, retail credit is ~9.5% while the balance is SME/mid-corporate credit. We estimate credit will grow at a healthy 24% CAGR to | 151324 crore in FY16-18E aided by faster growth in the SME/retail segment. Exhibit 2: Majority of credit growth contributed by corporate during FY07-16; going ahead, SME/retail proportion to rise | crore Large Corporate Mid corp/SME/Retail Total

FY10 15335 6858 22193

FY11 22370 11993 34363

FY12 22869 15119 37989

FY13 30409 16591 47000

FY14 35216 20417 55633

Q3FY15 45759 20851 66610.0

Q4FY15 48881 26669 75549.8

Q1FY16 54013 25652 79665.6

Q2FY16 54570 25445 80015.1

Q3FY16 56714 27682 84396.2

Q4FY16 63935 34275 98209.9

Source: Company quarterly presentation, ICICIdirect.com Research

The management guided that the proportion of SME/retail may increase from 35% now to ~45% of total credit over the next few years. Being a high yielding segment, it will support NIM, going ahead. Though the recent base rate cut and new base rate calculation methodology can impact margins, higher CASA accretion is expected to provide support to NIMs. Hence, we expect NIM to stay at ~3.3-3.5% in FY16-18E. Exhibit 3: Customer assets to grow at 22% CAGR over FY16-18E SME/retail is expected to grow at a more rapid pace leading to higher margin accretion in FY16-18E

Loans Credit substitute Customer assets

FY13 47000 13357 60356

FY14 55633 14007 69640

FY15 75550 11603 87153

Q2FY16 80015 9500 89515

Q3FY16 84396 9200 93596

Q4FY16 98210 10000 108210

FY16E 98210 11719 109929

FY17E 121780 12422 134203

FY18E 151324 13168 164491

Source: Company quarterly presentation, ICICIdirect.com Research

Along with usual bank credit, Yes Bank conducts its lending business in the form of credit substitute, which is classified under investments in the balance sheet. Here, the bank subscribes to the bond issued by large corporates wherein the interest rate earned is low in the 9-10.5% range lower than Yes Bank’s base rate. The long term strategy of the bank is to gain access to large corporates and enable Yes Bank to generate other fee related business. On the flip side, the book is subject to MTM provision on a quarterly basis unlike usual bank credit. If there is any MTM gain, it will not be accounted and profits can be booked only by selling the investment.

ICICI Securities Ltd | Retail Equity Research

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Going ahead, the management intends to grow its business by usual credit rather than credit substitute for FY16-18E. The average duration of the credit substitute book is 2.7 years. A major portion of the book is hedged by interest rate swaps. We do not foresee any major MTM provision hit ahead. Improvement in CASA to support NIMs Yes Bank has largely been a wholesale funded bank, which makes its liability franchise weak, thereby impacting its NIM. Unlike retail deposits, wholesale deposits are more sensitive to interest rates making them volatile in nature. Hence, Yes Bank tends to benefit significantly if interest rates trend south and is adversely impacted if interest rates trend north. However, the bank has successfully managed its cost of funds and consistently maintained its NIM in the range of 2.8-3.2% in the past five years despite a volatile interest rate scenario. Exhibit 4: Liability franchise steadily strengthening as bulk deposit proportion reduces with increase in CASA (| crore) Total Deposits Current account deposit Saving deposit SA ratio (%) CASA ratio (%) Retail Term deposit Retail Term deposit (%)

FY10 26799 2427 391 1.5 10.5 -

FY11 45939 3934 817 1.8 10.3 6045 13.2

FY12 49152 4888 2504 5.1 15.0 8680 17.7

FY13 66956 6665 6023 9.0 18.9 11082 16.6

FY14 74192 7017 9328 12.6 22.0 14816 20.0

FY15 91176 8499 12580 13.8 23.1 22594 24.8

Q2FY16 99344 8554 16764 16.9 25.5 24973 26.5

Q3FY16 101437 9152 17868 17.6 26.6 25233 27.3

FY16 111720 10925 20418 18.3 28.1 29494 26.4

FY17E 135986 12901 29606 21.8 31.3 35688 26.2

FY18E 166171 15997 41448 24.9 34.6 43896 26.4

Source: Company quarterly presentation, ICICIdirect.com Research

Saving deposits – The bank has struggled to mobilise significant saving deposit till FY12 while it got a major fillip post the saving rate deregulation by RBI in September 2012. The bank offered highest interest rate of 7% on saving deposits with balance above | 1 lakh and 6% on balance below | 1 lakh. Later, the threshold for saving rate was revised upwards to | 3 lakh from | 1 lakh. Effective from November 1, 2015, the bank has revised interest rate at 6% for saving deposits above | 3 lakh. Along with high saving interest rates, the bank has been widening its branch network (number of branches increased from 214 in FY11 to 860 in FY16), which supported strong traction in saving deposits. We estimate a CASA ratio of 31.3% by FY17E. Retail term deposits – Retail term deposits/fixed deposits are steady by nature and less sensitive to interest rates. These deposits constitute 26.4% of total deposit as on FY16. A widening branch network will support the growth momentum of retail term deposits. Bulk/wholesale deposit – We have considered ex-retail deposits as bulk deposits. Its proportion has steadily declined from 76.5% in FY11 to 45.5% in FY16 and is expected to further reduce to 15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head – Research

[email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities Ltd | Retail Equity Research

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