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Yes to ‘YES’ Bank Initiating Coverage YES Bank… Industry Banking Yes Bank, India’s new age private sector bank, is an outcome of the professional entrepreneurship of its Founder, Rana Stock Metrics Kapoor and his highly competent top management team, to BSE Group A establish a high quality, customer centric, service driven, private Indian Bank catering to the “Future Industries of BSE Code 532648 India”. It began operations in May 2004 and has the distinction Bloomberg Code YES IN of obtaining RBI’s only green-field banking license in the past Face Value 10 decade. CMP ` 347 Yes Bank has built a strong management team with experience Target Price ` 395 from foreign banks for each of its business units. It has Potential Upside 14% fructified into a “full service” commercial bank that has steadily built Corporate and Institutional Banking, Financial Markets, Market Data Investment Banking, Corporate Finance, Business and Market Cap (` Crs) 11785 Transaction Banking, Retail and Wealth Management business lines across the country, and is well equipped to offer a range 52 week High/Low 354.90/214.20 of products and services to corporate and retail customers. The Sensex 19983 bank has a network of 158 branches and 200+ ATMs. It aims Nifty 6027 to scale up its branch network to 400+ with a CASA ratio of ~25% by FY12 (currently at 10.5%). Average Volume 560839 Valuation Shareholding Pattern At the CMP of ` 347 the bank is trading at 2.6x FY12E ABV. The bank delivered RoE of over 20% and RoA of 1.6% for FY10. We further expect the bank to deliver RoE of 20%+ and RoA of ~1.5% and NIM of 3% for FY12E. Being comparatively new and promising bank, we value Yes bank at 2.9x its FY12E ABV of ` 134.9 and recommend a ‘Buy’ rating on the stock with a target price of ` 395 giving 14% upside. Key Financials Year Ended March FY09 FY10 FY11E FY12E Source: Company NII 509.3 788.0 1,160.3 1,636.8 Research Analyst Other Income 436.9 575.5 689.7 886.0 Anshuman Jain Net Profit 303.9 477.8 676.6 901.9 [email protected] Ph: 022- 40751515 Extn: 562 EPS(`) 10.2 14.1 19.9 26.6 P/E(x) 33.9 24.7 17.4 13.1 Divya Kant [email protected] P/BV 6.3 3.8 3.2 2.6 Ph: 022- 40751515 Extn: 562 ROE 20.7% 20.3% 19.9% 21.9% ROA 1.5% 1.6% 1.5% 1.5% Date: October 20, 2010 ABV per share (`) 54.7 91.0 108.8 134.9 1 Company Description ` With a balance sheet size of ~ 400b, Yes bank provides banking solutions that are tailor made to suit Indian customers. The main business activity of Yes Bank India involves offering banking and financial solutions for Corporate & Institutional Banking; Financial Markets; Investment Banking; Business & Transactional Banking; and Retail Banking & Wealth Management. The bank offers international standards of service quality along with banking and financial solutions to all its valued customers spread across India. The Bank has adopted international best practices, the highest standards of service quality and operational excellence, with innovative state-of-the-art technology, and offers comprehensive banking and financial solutions to all its valued customers. A key strength and differentiating feature of Yes Bank is its knowledge driven approach, which goes beyond the traditional realm of banking, and helps adoption of a diagnostic and prescriptive approach towards superior product structuring. Furthermore, Yes Bank has a unique business model, where the bank focuses on niche business segments such as infrastructure (power, ports, roads and telecom), food and agri- business, IT, life sciences, and engineering. The Bank identifies sunrise sectors and follows a deep-dive approach to serve customers efficiently. It lends primarily to sectors about which it has a deep understanding and is thoroughly familiar with the inherent risks; these sectors contribute ~80% to its loan portfolio. 2 Investment Arguments Focus on high growth sectors… Following a knowledge driven approach across food and agriculture based sectors, Infrastructure and TMT sectors catering to the north and west of India makes Yes Bank a suitable play to capture the second line of growth (emerging and mid corporate). The diversity of segments gives comfort to the balance sheet to play between specific sector cycles and payoff - scalable growth and higher yields. Building and expanding relationships across customer segments enables the bank to expand the model to include various aspects of banking and financial services such as Advisory, financial markets, banking services and wealth management. Increasing footprint and building Strategic relationships… Yes bank follows a unique hub and spokes model for branch setup. As of FY10, it had 150 branches, of which 92 were hub locations and the rest were spokes. Almost 70% to 80% of its branches are concentrated in North and West. It plans to add 100 new branches, taking the total branch strength to 250 by June 2011. It intends to have a network of 750 branches by FY15. The branches to be set up will function as spokes which have low average cost per branch (~` 30 to 50 lakhs) vis-à-vis average cost of hub which costs ~` 60 to 80 lakhs. Thus the hub and spoke branch expansion will lower set up and operating costs by almost 2/3rd. Furthermore, each branch has been strategically located to cater to select sectors in select economic zones. Also the new rolled out branches would cater to the emerging corporate and retail clients, thereby adding new business to the bank. Cost-to-income ratio of ~36% remains lowest amongst the peers… As against a 44% YoY rise in total income as at end FY10, operating expenses for the bank grew by mere 19.5% YoY. This in turn has enabled the bank to report over 700bps improvement in cost-to-income ratio to 37% (lowest amongst its peer group). Going forward, with rapid branch expansion coupled with employee addition, we expect cost to increase gradually. 3 Gross & Net NPL’s near zero levels…Asset risk remains muted… Despite robust loan book growth, Yes bank has been able to maintain superior asset quality at almost zero levels for the past couple of years. As of 1QFY2011, gross NPA ratio stood at 0.2% and net NPA ratio stood at 0.04% (as against 0.5% and 0.2%, respectively, as of 1QFY2010). While private and public peers continue to report incremental restructuring, Yes bank has reported sequential decline in loans restructured for second consecutive quarter. Restructured advances increased marginally by ` 0.4cr during 1QFY2011, taking total restructured advances to ` 80.4cr at the end of 1QFY2011, and constituting 0.3% to advances. The present level of gross NPA is significantly lower than sectoral averages relative to the bank’s high-yield credit Source: IGSL Research portfolio. However with plans to expand into the retail segment the NPA levels might spike up from the current levels and we expect the bank to report Net NPA to Advances of 0.1% by FY12E Best in class returns ratio… Yes bank enjoys one of the highest return ratios among its peer group largely driven by high share of non interest income in total income and better operational efficiency. With a view to tap the rising credit demand, Yes Bank during the month of December, 2009 had raised over ` 10.4bn via QIP route. This capital raising had resulted in equity dilution of 11.6% of the outstanding equity capital. However, despite this huge equity dilution, the bank has been able to maintain its returns ratio at healthy levels (RoE at 20.4% and RoA at 1.6%). We expect RoE to remain at ~20% levels and RoA at 1.5% levels in coming period. Well capitalized to support its growth plans… Yes Bank maintains a healthy Capital Adequacy Ratio of 20.6% as on FY10. In January this year, the bank augmented its capital base through a Qualified Institutional Placement worth ` 1033.87 Crores by issuing 38.4 million shares at ` 269.50 per equity share. The management has indicated that it won’t raise further equity till end FY11. Source: IGSL Research 4 Diversified fee income… Yes Bank has built the knowledge verticals which have helped it build relationships, thereby enabling it to cross-sell its products and achieve higher non-interest income. Yes Bank's non-interest income is largely driven by commercial banking which includes transaction banking, remittances, retail fees and charges, financial markets (debt capital market and loan syndication) and financial advisory (investment banking and project advisory). The bank has taken various efforts to boost non-interest income, viz. mobile payment initiative which is a prepaid mobile wallet for micro payments. Currently, Yes Bank is only bank permitted by RBI to have mobile payments. The bank has tied up with a leading insurance company for issuance of a wellness debit card, under which it issues debit cards which can be used for health related expenditure at concessional rates at various outlets which have tie ups with Yes Bank. We expect strong growth in fee income (18% CAGR over Source: IGSL Research FY10-FY12) especially in the commercial banking and financial advisory segments. Knowledge banking approach to drive growth… The bank follows unique knowledge based approach that provides customers with well-informed and customized solutions. Knowledge-based approach entails developing expertise in different industries to develop solutions that take into account the unique features of each industry. The key knowledge capital sectors include food and agribusiness, life sciences, media and entertainment, information technology, telecommunications, infrastructure, light engineering, realty, hospitality, healthcare and education.

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