Yes Bank: NIMs to expand 15-20 bps in FY16

Focus on retail franchise and fall in cost of funds to drive earnings growth

YES Bank has got a lot of flak from investors in the past few years for its volatile business model. In the absence of a strong retail franchise, the bank has been heavily dependent on wholesale funds instead of the low-cost current account and savings account funds.

However, analysts are turning positive on the stock, as the bank seems  on the road to de-risking its business model by building a strong retail franchise, though wholesale rates are down 100 basis points since the start of the financial year. The decline in wholesale rates has an immediate benefit for YES Bank, as wholesale deposits account for 30 per cent of  total deposits. Also, the fall in bond yields has a positive impact on its investment book thanks to its surplus SLR (statutory liquidity ratio) securities and substantial corporate bond book, says Sharekhan.

The Street is also betting on the stock because the bank seems to have a comprehensive retail strategy in place, which could boost the bank’s net interest margins by at least 50 basis points and return on assets by 1.8 per cent. Edelweiss Securities, which met Pralay Mondal, head of retail at YES  Bank, says the bank has structural levers in place — investment in retail infrastructure over the past three-four years beefed up with an experienced management team. The bank has identified a five-pronged strategy to build a strong retail franchise.

Given that it cannot be everything to everyone, the bank has identified five customer segments to build a quality franchise. The second piece of the strategy is to focus on branch network but it will be driven by profitability. YES Bank expects to expand its branch network by 15-20 per cent each year.

The third area the bank has identified is a sales-focused approach. Fourth, the bank is seeking to create a strong retail franchise and not only a liability franchise. Finally, it seeks to maintain a leadership position in the segments it enters. The strategy seems familiar, which is why analysts seem to be buying into it.

Sharekhan expects earnings to grow at a healthy 22 per cent a year during FY14-17, driven by an expansion in net interest margins and an uptick in non-interest income. While long-term levers are in place, Antique Stock Broking expects net interest margins to expand 15-20 basis points in FY16 and it will be a key beneficiary once interest rates start declining.

The brokerage maintains the bank has best-in-class asset quality.