Retail strategy is working for YES Bank

Credit quality strong, despite rising yields

In the fourth quarter, YES Bank has done well on all parameters which indicate the health of a bank. The ratio of current account and savings account (Casa) deposits rose to 15 per cent from 12.6 per cent in the third quarter. This has been driven by a sharp 108 per cent jump in savings deposit balances, now five per cent of total deposits. The bank has been aggressive in raising interest rates on savings accounts after the Reserve Bank of India (RBI) deregulated these. The higher rates have obviously helped.

Term deposits continued to drag even in the last quarter, visible in the modest overall deposit growth of seven per cent. Low Casa levels had been impacting the bank, as it remained focused on wholesale banking till recently. A high Casa ratio means the bank had access to lower-cost funds and with expansion of its retail business, the Casa ratio has seen improvement. As in deposits, lending to retail and small & medium enterprises (SME) has grown rapidly. According to Enam Securities, although the loan book growth remained slow, SME and the retail book saw continued growth of 68 per cent year-on-year (y-o-y) and 27 per cent sequentially. This segment now accounts for 18 per cent of the total loan book, compared to 15 per cent in the December quarter. Loans to large companies have remained generally muted. This is an indication that the bank’s decision to focus on the retail segment under its Version 2.0 is working. According to Emkay Global, a higher retail book would ensure comfort on margin management. Albeit, concerns on non-performing assets cannot be ruled out.

Given that operational metrics look robust, profitability and margins have benefited. The yield on advances has also improved, while cost of funds has remained flat even in a challenging environment. Anish Tawakley of Barclays Capital explains: “Yield on advances in Q4 FY12 was 12.5 per cent (up from 10.7 per cent in Q4 FY11). This was high, compared to HDFC Bank (11.5 per cent) and IndusInd Bank’s corporate segment (11.7 per cent). Yield increase was driven by a greater share of retail lending. Credit quality remained solid, despite high yields.” Unlike the banking sector at large, YES Bank’s asset quality looks robust. As a result, its provisioning requirement is low. This has helped the bank maintain its net interest margins at 2.8 per cent. Thus, it is not surprising that the bank’s Q4 net profit has jumped 34 per cent y-o-y to Rs 272 crore.