No banking gloom for YES Bank

Only loan growth grew slower than expected, can be attributed to weak macro environment

Private sector lender YES Bank not only put up a good show for the quarter ended September 30, but its numbers were also ahead of Street expectations. Strong growth in non-interest income, stable margins and healthy asset quality were the key highlights. Against expectations of net interest income (NII) of Rs 640 crore and net profit of Rs 345 crore, YES Bank posted an NII of Rs 672 crore and net profit of Rs 372 crore, up 28.2 per cent and 21.2 per cent, respectively, year-on-year. Though profit growth was partly added by one-offs, the overall performance was good, with the bank doing well on asset quality and net interest margins (NIMs). The only exception was loan growth, slower than expected and can be attributed to the weak macro environment and the bank’s focus on profitable growth.

The stock closed up 3.8 per cent at Rs 372 against a flattish BSE Sensex and Bankex. Trading at 1.9 times FY14 estimated book value, the valuations appear reasonable, given its average one-year forward price/book ratio is two times. Given the sound fundamentals, good return ratios and healthy growth prospects, most analysts remain positive on the stock.

The key concern remains its lower Tier-I capital ratio of 9.5 per cent, which means the bank will have to raise capital to comply with the Basel-III norms. Most of its private peers have over 10 per cent Tier-I ratio. The management, however, remains confident of maintaining its growth, as it is deploying capital judiciously.

Vaibhav Agarwal, banking analyst, Angel Broking, says, “The bank’s strategy of protecting margins than chasing loan growth appears to be good, given the circumstances. However, its Tier-I capital needs to be beefed to meet the Basel-III norms”.

During the quarter, loan growth (up 13.6 per cent year-on-year) came in lower than analysts’ expectations of 20 per cent and was its lowest in five quarters. The management attributes this slower growth to a cautious lending approach. Jaideep Iyer, deputy chief financial officer, says, “We are being prudent in our growth and not wanting to grow the book aggressively. Though we expect loan growth in the high teens for FY14.” Towards this end, the management is focusing on increasing exposure to current clients than aggressively acquiring new ones.

This strategy seems to be working well as the gross and net non-performing assets (NPAs) remain negligible at 0.3 per cent and 0.04 per cent, respectively. The bank did not see new restructuring in the quarter as the repayments trend improved.

The NIMs remained unchanged at 2.9 per cent from a year ago. Siddharth Teli, banking analyst, Religare Capital Markets, says, “We believe the margins are close to bottoming out. Given the bank is better placed to pass interest rate rises, its margins are expected to improve.” The management expects to maintain margins between 2.8 and 3.0 per cent.

A robust 61.2 per cent surge in its non-interest income (to Rs 446 crore) was led by one-time gains of Rs 112 crore on interest rate swaps. These helped offset the impact of an Rs 113 crore charge towards depreciation on its bond portfolio. Deposit growth was strong at 29.2 per cent year-on-year, while the current and savings account ratio at 20.4 per cent was better than 17.3 per cent in the September 2012 quarter. It was slightly higher than 20.2 per cent in the June quarter.