We believe that Yes Bank is ideally positioned for strong margin/RoA improvement, coupled with steady loan growth, on the back of an easing liquidity environment, its recent capital infusion and a better corporate asset-quality cycle. Its recent forays into retail and SME should add to its loan growth and we expect a 22% CAGR for loan growth over FY14-17E. We expect an improving margin trajectory (up 30 bps over two years) and expect RoA improvement of 15 bps to 1.7%. We raise our estimates (+6% for FY16E/17E) and TP to INR 700. The recent stock price correction makes a good entry point. Valuations at 1.8x FY16E P/B are at a discount to peers. Retaining Buy.
Strong growth and improving margin trajectory
With strong capital in place, we expect Yes Bank to increase its pace of loan growth compared to the last 2-3 years. Apart from its core corporate presence, we expect its increasing focus on SMEs and retail to add to the growth. We expect loan growth at a 22% CAGR over FY14-17E. Along with this growth, we expect margins to improve by 30bps from current levels, with about 15bps coming from its recent capital raising and another 15bps on account of an improving CASA franchise, along with relatively higher SME/retail yields.
Attractive valuations; perception on franchise to improve on diversification
Yes Bank trades at 1.8x FY16E P/B and 10.5x FY16E P/E for a likely RoE of ~20%. We believe that as its CASA franchise improves along with its retail and SME diversification, investor perception about Yes Bank being only a corporate/wholesale-focused entity should improve. In the next three years, we expect the increasing reliance on its core income coming through margins and granular fees to improve, and the proportion of treasury/investment fees to decline/grow very marginally.
Source : Sachin Murdeshwar