Yes Bank Ltd’s profit after tax for the March quarter rose by a better-than-expected 45.2% compared with the year-ago period. Some of the concerns about the bank have been whether it will be able to keep up its rapid pace of growth, and its low level of current and savings bank deposits, which was expected to lead to higher cost of funds.
Also See | Earnings affirmation (PDF)
But the bank has been able to maintain net interest margin at 2.8%, the same level as that in the previous quarter. Advances have grown by 54.8% year-on-year (y-o-y), setting the stage for a strong 42.7% growth in net interest income. Non-interest income growth, however, was much lower at 16.6%.
The other issue is that the proportion of low-cost current and savings accounts (Casa) to total deposits isn’t increasing fast. Casa was 10.3% of total deposits at the end of March, only a marginal increase from 10.2% at end-December. Also, Casa was 10.5% at end-June. Perhaps Yes Bank’s aggressive branch expansion plan will help it increase its Casa ratio.
What about growth? Operating profit growth was 35.4% y-o-y in the fourth quarter, against 44% y-o-y in the third, so there’s some deceleration. Y-o-y growth in advances has also been slowing. During its conference call last January, the bank management talked of a loan growth target of 60% for fiscal 2010-11 and a deposit growth target of 72-75%. They achieved 71.4% growth in deposits and 54.8% growth in advances.
The proportion of bad loans continued to be negligible, although some analysts, rather perversely, treat that as a negative, because they can only go up from here.
The Yes Bank scrip quotes at three times its 31 March 2011 book value. Analysts have compared it with some of its peers and have concluded that it is undervalued.
But Yes Bank is a wholesale bank, with corporate and institutional banking accounting for 65% of its loan portfolio. That exposes it to more risks, especially in a comparatively high interest rate environment.
At the same time, it’s also true that the bank has so far managed rather well during a difficult period. But the higher risk profile should mean a lower valuation compared with the more retail-oriented banks.