Yes Bank has gained critical mass on the back of an integrated product offering for customers, strategic focus on cross-selling, expanding geographical coverage and value-added proposition through sector expertise.
Its business model revolves around providing an integrated product offering to clients. Fee income is a large component of revenues, and is driving improvement in the bank’s RoA.
Expanding geographical coverage and differentiated offerings through sector knowledge are propelling NII momentum. While the focus is on increasing the low CASA ratio, tightness in liquidity conditions and rise in domestic interest rates impart volatility to margins.
Earnings and Valuation
We expect a 42% CAGR in the bank’s earnings over FY08-10, driven by strong performance in core income and operating leverage. RoE is expected to be subdued at around 18% over FY08-10 due to the opportunistic capital raising strategy.
The recent correction in the stock price in the wake of the negative news flow pertaining to the derivative segments, coupled with a general weakness in the banking space, offers an attractive entry point into the stock. The stock currently trades at the lower end of its historical P/B band.
Based on CAP model, we assign a 12-month price target of Rs260 (3.4x FY10E book), a potential upside of clost to 67% from the current levels.