Yes Bank reported better than expected resulted in Q4’09 with net profit increasing 24.2% y-o-y to Rs801.1 million primarily led by robust growth in Net Interest Income (NII). However, the Bank reported muted non-interest income due to sluggish capital market.
As expected, during the quarter, the gross NPA ratio increased 24bps q-o-q to 0.68% and the Bank restructured loans of 0.24% of total loan book. This was primarily led by slippages in the corporate loan portfolio.
However, as a conservative measure, the Bank increased its total provisioning by 57.6% q-o-q to Rs32.2 million leading to a coverage ratio of 51.5%.
For FY10, our base case assumes a gross NPA ratio of 1.5% as the Bank has a large exposure in corporate, institutional, and SME banking, where the probability of a sharp spike in NPAs is greater due to large-ticket loans.
Yes Bank has been able to maintain an above average RoE on account of high proportion of non-fund based income (more than 50% of the total net operating income).
During the quarter, non-interest income declined 16.6% y-o-y and 53.6% q-o-q to Rs897.6 million, mainly due to de-growth in capital market related income. However, the Bank showed a sequential improvement in income related to financial advisory and transaction banking services.
Outlook and valuation
We expect the improvement in non-interest income, as we believe the markets have bottomed out and Bank will see recovery in its non-fund based income. Hence, for Q1’10, we expect the non-interest income to increase by 30% y-o-y.
We have valued Yes Bank by using the three-stage Discounted Equity Cash Flow model.
Our target price of Rs. 83, assuming a 16.24% cost of equity and an 11.4% terminal growth rate, indicates a potential upside of 5% over the current prices.
Further, the stock is trading at forward P/B multiple of 1.2x, the lowest in its history. Therefore, we upgrade the stock from Sell to HOLD.