Yes Bank is an aggressive high potential new generation bank. The recent fall in prices by 28% makes this an attractive entry point for long term investment.

There is an updated report of Yes Bank available at link The Brave Warrior of Indian Banks by JainMatrix Investments includes Q1FY13 results, news updates and FY15 projections.

Yes Bank  – Description and Profile

• Incorporated in 2003, Yes Bank received the only greenfield (Start up/New Bank) license awarded by the RBI in the last 15 years
• Founded by bankers Rana Kapoor and Ashok Kapur, (combined stake 32.6%). Other shareholders are Rabobank 18.20%, AIF Capital (private equity), Orient Global (investment firm), Swiss Re, Khazanah Nasional (Malaysia Govt) all 3.5-5% each.
• It has 185 Branches currently of which 14 were added in Q3 FY11.
• Market cap is at Rs. 9,300 crores, putting it at #12-13 among all Indian banks, and #7 in private sector
• The firm has about 4000 employees, including 970 hired already in FY11

Yes Bank has superior strategies

In spite of over a hundred banks as competition, Yes Bank stands out for the following reasons:

• Seasoned, capable bankers as Management team
• The firm is nimble and agile, and rapidly enters new high potential industries sectors for advisory, loan and banking services
• Focus on Knowledge based approach to lending. Loans exposure is to sectors like Food and Agribusiness, Engineering, Infrastructure & Logistics, TMT (Technology, Media & Telecom) and Healthcare.
• There are four business verticals in the bank: a) Corporate & Institutional Banking b) Commercial Banking c) Business Banking-SME d) Retail Banking.
• The business focus was Corporate banking till now and on select sectors while providing the entire value chain in those niche sectors. Having achieved some scale, the bank is now widening focus into SMEs and Retail.
• Aggressive Retail growth plans will help increase low cost CASA deposits, and increase margins. The RBI has granted license for 91 additional branches, so the total may increase to 250 by June ’11
• Mistakes are made, but it learns from these, and exits fast (example – in 2007, there were a lot of complaints against complex foreign exchange derivative products sold to SMEs, that turned loss making. There were litigations against Yes Bank (and several other banks too). All these have been resolved.
• Growth has been organic, and may remain as such. The executives believe that for Yes Bank, organic growth comes at a lower cost compared to available banking assets

Stock evaluation, performance and returns

• It’s IPO in July 2005 was priced at Rs 45. It was 31 times oversubscribed. The maiden dividend was paid in 2010.
• At CMP of Rs 277 today, the stock has shown a 33% annualized return over the last 6 years! (See Fig 1)
• Income and Profit too have grown steadily (Fig 2)

Fig 1 – Yes Bank stock performance (click to enlarge) Source: JainMatrix graphics

Fig 2 – Quarterly income and Profit have grown steadily over the last 5 years Source: JainMatrix graphics

• NII – the difference between Interest from Loans and Cost of loans – has grown at 41.5 % annually over the last 5 years. This is phenomenal, and indicates good margins
• NII plus Other Income – Add to this income from fee based services like investment banking, advisory services, etc –  have grown at 37%

Fig 3 – Price and PE Graph (click to enlarge) Source: JainMatrix graphics

• After IPO, made at a high valuation, the PE stayed high for a few years (fig 3). The patient investor got rewarded in 2008-2011 period, where the share price rose rapidly.
• There has been a recent fall, the PE now is low at 14.4 and this gives investors another opportunity to enter

Fig 4 – Price and EPS Graph Source: JainMatrix graphics

• EPS (adjusted for equity dilutions) growth has been 36% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows an amazing parabolic rise. I would say it is a great company just achieving critical mass of size, brand and reach.
• PEG is at 0.4 – indicates underpriced status, a very good investment opportunity
• RoE is at around 20% – healthy statistic.
• Price/Book is 3.08, this is fair for a mid sized fast growing bank.
• Gross and Net NPAs are at 0.23% and 0.06%. This shows remarkable credit assessments and good processes
• CASA ratio stands at mere 10.1% as on Q3FY11. This is low by general banking ratios, but this is being addressed aggressively.

Opinion, Outlook and Recommendation

• India is an underbanked country. The RBI is actively encouraging new banks, and vast swathes of Rural India remain unbanked. The potential for Yes Bank to grow is large.
• At the same time, competition in urban areas is high, due to presence of public sector, private as well as MNC banks.
• RBI expects average industry growth rate to be 20% during FY11.  Yes Bank is expected to grow at a far faster rate than industry. It has well-defined, sustainable growth strategies in place.
• Yes Bank will grow at 35-45% in terms of Profits and NII + fee Income for the next 5 years. With this trajectory, Yes Bank will join the ranks of large well managed private banks like HDFC Bank and Axis Bank
• The fall in share price by 28% from the Nov 2010 peak to date has made current valuations attractive
• However a look at the graph of DMA of the stock (fig 5) shows that the stock stays for long periods of time above or below the 200 DMA. It recently went below the 200DMA, so my advice is to wait for the stock to go above this before investing.
• However retail investors can start to Invest systematically.

Fig 5 – Price and DMA chart (click to enlarge) Source: JainMatrix graphics

Risks:

• High competition
• High interest rates and increased Costs – particularly employee costs
• Execution risks in rapid bank branch growth
• Current weakness may mean a period of falling prices before the appreciation resumes (fig 5)

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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