YES Bank HOLD. Not out of the woods yet; Asset quality remains a key monitorable. Institutional Equity Research. January 30, Target Price Rs788

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1 January 3, 216 CMP* (Rs) 748 Upside/ (Downside) 5 Market Cap. (Rs bn) 314 Free Float 78 Shares O/S (mn) 419 YES Bank Not out of the woods yet; Asset quality remains a key monitorable YES Bank reported profit marginally higher than our estimate primarily due to strong growth in corporate banking fees along with healthy growth in core fee income and NII. Other Income grew by 39% yoy and 2.7% qoq to Rs7.5bn led by 63.3% yoy and 73.1% qoq increase in corporate banking fees. Slippage came in high at Rs2.8bn (annualized ratio of 1.4%) v/s Rs1.5bn (.7%) in 2QFY16 and Rs.7bn (.4%) in 3QFY15. Non performing investments (NPI) increased by 36.6% qoq to Rs661mn, which now stands at ~8% of the debenture and bond portfolios. However, headline gross NPA grew at relatively lower rate by 13.7% qoq to Rs5.6bn, which is lower compared to peer banks with higher corporate exposure. We have turned cautious on the bank s asset quality due to ongoing RBI s evaluation as it has comparatively higher exposure to corporate in their loan as well as bond portfolio. Hence, we downgrade the stock from BUY to with a revised Target Price of Rs788. Share price 1 mth 3 mth 12 mth Absolute performance (15.3) Relative to Nifty (.2) Shareholding Pattern Sept 15 Dec'15 Promoter FII DII Others Year Stock Price Performance Management Commentary ff The bank has not fully recognized loan impairment according to ongoing RBI s evaluation and hence we may witness higher loan impairment in 4QFY16E ff Management has clarified that they have not carried out any restructuring/ refinancing under SDR and 5:52 scheme in 3QFY16 as well as during 9MFY16. The bank has also not done any sale to ARC and has not witnessed any deterioration in its standard restructured loan book during 3QFY16. As a result, the bank lowers its guidance for FY16E credit costs to 5bps from earlier 7bps. Outlook and Valuation While YES Bank has delivered relatively better performance on asset quality front compared to its peers with higher corporate exposure. Our calculation indicates that total corporate exposure of Yes bank stood at ~7% of the non SLR interest earning assets (Loan Book + Non SLR/Gsec Investments). Hence, we have turned cautious due to its relatively higher exposure to corporate on both loan as well as bond sides. We have introduced FY18E estimates for the bank and expect PAT of Rs31.3bn and Rs37.6bn in FY17E and FY18E, respectively. We expect some negative surprises on asset quality and profitability in next 2-3 quarters; hence downgrade the stock from BUY to with a revised Target rice of Rs788 (implying 1.7x FY18 AdjBV) Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Note: * CMP as on January 29, 216 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Key Financials FY15 FY16E FY17E FY18E NIII 34,878 44,773 54,757 65,618 PPP 32,496 41,929 5,385 59,663 PAT 2,54 25,692 31,282 37,579 EPS (Rs) P/E (x) Adj. BV (Rs) P/Adj. BV (x) Gross NPA Net NPA Avg. ROA Avg. ROE Research Analyst : Asutosh Kumar Mishra Contact : asutosh.mishra@relianceada.com 1

2 January 3, 216 Upside/ (Downside) 5 Risks to view ff Major slowdown in the economy may impact the business growth and asset quality of the bank ff Competition is intensifying in both corporate and SME segments, which could be a major concern for the bank Exhibit 1: Income Statement Analysis 3QFY16 3QFY15 % yoy / bps 2QFY16 % qoq / bps 9MFY16 9MFY15 % yoy / bps Interest on Advance 24,21 2, , ,643 58, YoA - Calculated (11) 12.1 (32) (58) Income on Investment 8,852 8,887 (.4) 8, ,968 25, Interest on Balances (57.1) Others Interests , (12.6) 1, Interest Earned 33,761 29, ,772 (.) 1,51 84, Interest Expended 22,191 2, ,688 (2.2) 66,799 59, CoF - Calculated (92) 6.7 (14.6) (64) Net Interest Income 11,57 9, , ,253 25, NIM - Calculated NIM - Reported NA NA NA NII as % of Oper. Income (28) 64.2 (34) ,29 Core Fee Income 2,634 2, , ,56 6, Fee Inc. as % of OI (3) 14.2 (41) Non Core Fee Income 4,827 3, , ,587 8, Non core fee Inc. as % of OI Total Other Income 7,461 5, , ,93 14, Other Inc. as % of OI Operating Income (OI) 19,31 14, , ,754 39, Core Operating Income 14,24 11, , ,191 31, Employees Expenses 3,426 2, , ,44 7, Employees Expn. as % of OI (11) Other Operating Expenses 4,18 3, , ,136 9, Other Opert Exp. as % of OI (117) 22.9 (127) Total Operating Expenses 7,534 5, , ,576 16, Cost to income Ratio (74) 41. (138) Operating Profit (OP) 11,496 8, , ,77 23, Provisions and Conting. 1, , ,498 2, Pro Burden as % of OP Profit Before Tax 1,17 7, , ,272 21, Tax Expenses 3,26 2, , ,899 6, Effective Tax Rate (76) Net Profit 6,757 5, , ,374 14, EPS

3 January 3, 216 Upside/ (Downside) 5 Exhibit 2: NIM improved marginally due to 2bps qoq reduction in CoF v/s 1bps qoq decline in YoA Exhibit 3: Strong growth in NII was led by healthy growth in loan book along with improving NIM , 12, 1, 8, 6, , ,.5.. NIM COF YoA NII (LHS) NII as % of Avg. Assets Exhibit 4: Other income growth was led by strong growth in corporate banking fees income Exhibit 5: Opex grew 6.5% qoq v/s 1.2% qoq growth in operating income resulting in 138bps improvement in C/I ratio 8, 7, 6, 5, 4, 3, 2, 1, , 7, 6, 5, 4, 3, 2, 1, Other Income OI as % of Operating Income Operating Expenses C/I Ratio Exhibit 6: Provision expenses grew by 42.3% qoq to Rs1.5bn as the bank reported relatively high level of fresh slippages in 3Q Exhibit 7: PAT growth was led by the strong growth in core operating income 2, 3 8, 45. 1,8 1,6 1,4 1,2 1, , 6, 5, 4, 3, 2, 1, Provision Expenses Provision as % of OP PAT (LHS) Growth YoY (RHS) 3

4 January 3, 216 Upside/ (Downside) 5 Exhibit 8: Balance Sheet Analysis (Rs bn) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 qoq% / bps ytd % / bps yoy % / bps Net Worth Deposit , Savings Deposits Current Deposits CASA Deposit Term Deposit Investments (2.1) (.5) Advances Total Business 1,949 2,133 2,172 2,233 2, Avg Int. Earning Assets 1,136 1,221 1,285 1,344 1, (as per Reported NIM) Risk Weighted Assets 97 1,35 1,251 1,168 1, CAR (6) Tier I Capital (6) (9) Exhibit 8: Loan book growth was led by 39.2% qoq increase in consumer book and 3.9% qoq increase in corporate banking book Exhibit 9: CASA deposits grew by 45.1% yoy and 6.7% qoq led by 64.1% yoy and 6.6% qoq growth in current deposits (Rs bn) (Rs bn) (2) 1.9 (.4) Incremental loan disbursement (LHS) Adv. Gr. qoq (2.) (2) (4) (2.6) Incremental Deposit Mobilization (LHS) Deposit Gr. qoq (RHS) (2.) (4.) Exhibit 1: Loan Book Analysis 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 qoq% ytd % yoy % Corporate Banking 457, ,87 54, ,73 567, Business Banking (Medium) 95, ,325 16,752 16,42 17,183.7 (5.4) 12.5 Micro & Small Enterprises 59,946 91,415 9,819 9,417 89,46 (1.1) (2.1) 49.2 Consumer Bkg (Urban & Rural) 53,286 61,951 58,953 57,611 8, Exhibit 11: Loan Book Analysis (% Break Up) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 qoq bps ytd bps yoy bps Corporate Banking (1) 25 (15) Business Banking (Medium) (6) (23) (16) Micro & Small Enterprises (7) (15) 16 Consumer Bkg (Urban & Rural)

5 January 3, 216 Upside/ (Downside) 5 Exhibit 12: Asset Quality Analysis 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 qoq% ytd % yoy % Gross Non Performing Assets 2,787 3,134 3,683 4,914 5, Fresh Slippages 67 1, ,466 2, Net Non Performing Assets ,67 1,586 1, GNP Ratio NNP Ratio NPA Coverage Ratio (1.8) (7.7) (13.5) Restructured Gross Loans 1,77 3,819 5,671 5,671 5, Restr. Loan as % of Adv (4) Exhibit 13: Strong growth in low risk weight segment resulted into relatively lower growth in RWA Exhibit 14: Well capitalized to support future growth opportunities (Rs bn) (5.) (1.) (6.6) (5.) (1.) Incremental RWA (LHS) RWA Gr. qoq Total CAR Tier I Exhibit 15: GNPA increased during the quarter as the bank partially recognized GNPA based on stressed account review conducted by RBI Exhibit 16: Higher slippages along with relatively higher write-off resulted into increase in net NPA 1,4 1,2 1, (2) (4) (1.) (2.) (1) (2) (2) (4) (6) Incremental Gross NPA (LHS) Gross NPA Gr. qoq (RHS) Incremental Net NPA (LHS) Net NPA Gr. qoq (RHS) 5

6 January 3, 216 Upside/ (Downside) 5 Exhibit 17: Relatively lower provision as compared to fresh slippages resulted into lower PCR Exhibit 18: Major proportion of fresh slippages were from stressed accounts reviewed by RBI

7 January 3, 216 Upside/ (Downside) 5 Profit & Loss Statement (Y/E March, Rs mn) FY15 FY16E FY17E FY18E Interest Earned 115,72 134, , ,766 Interest Expenditure 8,842 89,84 12,571 12,148 Net Interest Income 34,878 44,773 54,757 65,618 Fee Income 19,765 23,899 27,338 32,581 Non Fee Income 7 2,6 4,88 4,779 Other Income 2,465 26,499 31,426 37,36 Net Operating Income 55,343 71,271 86,183 12,978 Core Operating Income 54,643 68,672 82,96 98,199 Employee Expenses 9,797 13,3 15,896 19,234 Other Expenses 13,5 16,313 19,92 24,81 Operating Expenses 22,847 29,343 35,798 43,316 Operating Profit 32,496 41,929 5,385 59,663 Provisions and Contingencies 3,395 4,421 5,5 5,979 Profit Before Tax 29,11 37,57 45,336 53,684 Taxes 9,47 11,815 14,54 16,15 Profit After Tax 2,54 25,692 31,282 37,579 Balance Sheet (Y/E March, Rs mn) FY15 FY16E FY17E FY18E Capital & Liabilities Capital 4,177 4,195 4,195 4,195 Reserves Total 112, , , ,179 Net Worth 116,8 137, , ,374 Deposits 911,758 1,84,993 1,291,141 1,562,281 Current deposits 84,994 15, ,114 16,134 Saving deposits 125, , ,45 285,116 Term Deposits 7, ,45 929,622 1,117,31 Borrowings 262,24 291,24 338,24 385,26 Other Liabilities & Provisions 7,942 79,284 1, ,422 Total Liabilities 1,361,74 1,593,56 1,893,792 2,265,282 Assets Cash & Cash Equivalents 75,572 96, ,58 14,299 Investments 466,52 496, , ,78 Advances 755, ,78 1,115,266 1,36,625 Fixed Assets 3,19 3,633 3,944 4,714 Other Assets 61,392 74,899 9,627 11,565 Total Assets 1,361,74 1,593,56 1,893,792 2,265,282 Risk Weight Assets 1,35,256 1,24,2 1,44,11 1,797,823 7

8 January 3, 216 Upside/ (Downside) 5 Per Share Data and Valuation Y/E March FY15 FY16E FY17E FY18E No. of Shares (mn) Earnings Per Share (Rs) Book Value / Share (Rs) ABV/Share (Rs) Dividend Per Share (Rs) Price/ Earnings (x) Price/ BV (x) Price/Adjusted BV (x) Key Assumptions Loan Growth Deposit Growth RWA Growth Slippages Ratio Cost of Fund Yield on Fund NIM Other Income Growth Cost to Income Ratio Average Credit Cost Effective Tax Rate Growth Rate Net interest Income Other Income Operating Profit Provisions Expense (6.1) PAT Risk Weighted Assets Yields / Margins Cost of Funds (CoF) Yield on Advance Yield on funds Net Interest Margin (NIM) Balance Sheet Ratio Credit / Deposit Ratio Incremental C/D Ratio Investment-Deposit Ratio CASA Ratio

9 January 3, 216 Upside/ (Downside) 5 Asset Quality Gross NPA/Gross Advances Net NPA/Net Advances Provisioning Burden as % of PPP Provisioning Coverage Ratio Slippage ratio Provis. Exp. to Avg. Advance RoA Tree Analysis NII / Avg. Assets Core Fee / Avg. Assets Core Rev. / Avg. Assets Ope. Exp. / Avg. Assets Cost to Income Emp. cost / Avg. Assets Oprt. Exp. / Avg. Assets Core OP/ Avg. Assets Trading & Ot/ Avg. Assets OP/ Avg. Assets Provisions / Avg. Assets NPA prov. / Avg. Assets PBT / Avg. Assets Tax / Avg. Assets Effective Tax Rate RoA Leverage (x) RoE Capital Adequacy Ratio Total CAR Tier

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