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.

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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.

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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. About 80% of the bank's advances are into the knowledge sectors.

The management intends to add few more sectors under the knowledge banking domain in-order to widen its loan portfolio. The bank leverages the experience and knowledge of its management team to offer customized financial products to its clients. This helps bank to build strong customer relationships and also to cross-sell products more effectively. Going forward, the bank would continue to focus

Source: IGSL Research loan growth in its specialized segments. 5

Shifting focus to high yielding SME and retail segments for further loan growth… Despite having strong growth plans in the corporate segment, the bank plans to enter retail segment (in secured segments viz auto, housing) in limited way. Currently, the bank's exposure to retail sector is minimal. With increase in the number of branches the proportion of retail loans and micro SME loans is likely to expand. As of FY10 the bank had ~150 branches in more than 100 locations across India and ~120+ ATMs which is expected to double in the next couple of years. In our view, extensive branch expansion will strengthen the liability base and add significantly large number of customers.

CASA Deposits…to pick up in next 2-3 years Yes bank's proportion of low cost CASA deposits is amongst the lowest in the sector as the bank has relied on wholesale deposits to ramp up loan growth. Further, with relatively lower branch count (most of the branches being new) and location of branches in urban locations impacted the CASA mobilization.

However, post the branch expansions, CASA has been progressing at a stable percentage of total deposits. As of FY10, CASA stood at 10.5% of total deposits. However, we expect CASA share to rise, as the bank aims to achieve its ambitious branch target of 250 by Jun ’11 and 400 by FY12. The bank already has 91 new branch licenses from the RBI and plans to open 100 new branches across India. An improving CASA share is likely to support NIMs at 3% levels.

We factor in 3%-4% increase in CASA every year led by Source: IGSL Research branch expansion and effective utilization of existing branches. The management expects bank's CASA deposits to increase to ~25% by FY12E.

Stable NIMs to sustain…expected to hover at ~3% levels… Net interest margin of the bank has remained stable around 3% over the last couple of years despite volatility in the interest rates. Bank's NIM consistently remained above 3% in FY10 and is further expected to remain stable in the rising interest rate scenario as large proportion of loans (~80%) are on floating rates which would nullify the increase

Source: IGSL Research 6

in funding costs. Further, increase in CASA deposits (led by branch expansion) will protect margins around the same levels.

Favorable asset-liability duration ~80% of Yes bank’s advances are on floating basis and are of less than one year tenor. Therefore the re-pricing of the same is in line with the re-pricing of deposits. Hence, when rates inch higher, advances get re-priced sooner, thereby helping maintain its net interest margin, which remained stable in the range of 2.8% - 3.0%.

Investment Concerns

Difficult to retain Corporate Clients… Over 70% of Yes bank’s loan book belongs to the corporate

clients. With the implementation of base rate, retaining

corporate client base may prove to be a key challenge for the

bank.

Retail expansion might put asset quality under pressure… Currently, Yes Bank’s asset quality is the best among private sector banks, with Net NPA % to net advances of 0.06%. However, with increasing exposure to the retail segment, NPAs can increase. We believe, Net NPAs as % of Net Advances to rise marginally from 0.06% in FY10, to 0.1 %+ by FY12E. In addition, 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.

Low share of CASA ratio as compared to other private sector banks… Source: IGSL Research Low CASA ratio of 10.5% as of FY10 is one of the key concerns for the bank. Yes bank’s CASA ratio is the lowest amongst listed private sector banks, considering it to be the youngest bank in this space. However with expansion of branch network, focused strategies to capitalize on relationship banking, targeting professionals will lead to CASA improvement. The bank’s management has set a CASA target of 25% by FY12E.

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Valuation: At CMP of ` 347 the bank trades at 2.6x FY2012E Adjusted book value of ` 134.9. RoA is likely to remain strong at ~1.5% and increased leverage will drive RoEs to ~20%+ in FY11 and FY12E. We believe Yes bank with robust advance book growth and steady NIMs (at 3%) will result in strong earnings growth. The capital adequacy ratio for the bank stood at ~20% resulting in cushion for growth in advance book.

With unique business strategies and knowledge driven approach, Yes bank could be a key beneficiary of the rising credit demand. Hence, we value the bank at 2.9x FY12E Adj. BV of ` 134.9 and arrive at a target price of ` 395, which would give 14% upside and recommend ‘BUY’ rating on the stock.

Sector view:

We expect the banking sector to be amongst the strongest performers over the next couple of years, with at least 20% credit growth for the sector as a whole, driven by strong GDP Indian economy set to grow at 8.5- prospects, reasonable (although rising) domestic interest rates 9% for FY11… and increasing capital inflows from abroad. In our view, the expected increase in interest rates will not affect the banking sector negatively, as it will be outweighed by the improvement in credit growth and fee income coupled with a sharp ....we believe that growth reduction in NPA losses as economy revives. opportunities for Indian banks are immense….. With the economic growth picking up pace and the investment cycle on the way to recovery, we believe that growth opportunities for Indian banks are immense. The revived credit off take (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself.

We expect loan demand to pick up rapidly in the current financial year as industries will need more funds to expand operations in an economy forecasted to grow more than 8.5 % in this fiscal year. Moreover retail businesses of the private banks will do well going forward on the back of demand pickup in mortgage loans, car loans and personal loans. Thus we expect strong core operating performance by the banking sector driven by robust loan growth, stable NIMs, along with strong rise in core fee income. 8

Yes bank has been a major outperformer Stock price has moved steadily over the in the recent market scenario… period of time…

Index Comparison Price Movement

Source: BSE Source: BSE

Cost to income ratio to stabilize at ~38%... ROA to remain at elevated levels….

Source: IGSL Research Source: IGSL Research

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CASA ratio, low due to short history, set to Provision Coverage to remain about the 80% improve going forward… mark...

Source: IGSL Research

Source: IGSL Research

Yes Bank has well diversified Liability EPS on y-o-y basis shows a rising trend, which Franchise… depicts a healthy future growth…

Source: IGSL Research

Source: IGSL Research

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Profit and Loss Statement ` Crs Particulars (Year end – March) FY08 FY09 FY10 FY11E FY12E

Interest Earned 1,304.7 2,001.4 2,369.7 3,950.2 5,458.7

Interest Expended 974.1 1,492.1 1,581.8 2,789.9 3,822.0

Net interest income 330.6 509.3 788.0 1,160.3 1,636.8

Other Income 360.7 436.9 575.5 689.7 886.0

Net total income 691.3 946.2 1,363.5 1,849.9 2,522.8

---Payments to/Provisions for Employees 202.41 218.02 256.89 339.1 457.8

---Other Expenses 138.8 200.5 243.3 328.4 459.8

Total Operating Expenses 341.2 418.6 500.2 667.5 917.5

Operating Profit before prov. & Cont. 350.1 527.7 863.3 1,182.4 1,605.2

Total Provisions 43.6 61.7 136.8 170.0 250.0

Profit before Tax 306.5 466.0 726.5 1,012.4 1,355.2

Provisions for Tax 106.46 162.07 248.75 335.8 453.3

Tax Rate (%) 34.7 34.8 34.2 35.0 35.0

Net Profit 200.0 303.9 477.8 676.6 901.9 Source: IGSL Research

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Balance Sheet Data ` Crs

Particulars Year end - March FY08 FY09 FY10 FY11E FY12E

Share Capital 295.79 296.98 339.67 339.67 339.67

Reserves and surplus 1023.1 1327.2 2749.9 3356.3 4182.1

Net-worth 1318.9 1624.2 3089.6 3696.0 4521.8

Deposits 13273.2 16169.4 26798.6 40197.8 56277.0

Borrowings 986.21 3701.68 4749.08 5461.4 6280.7

Other Liabilities and Provisions 676.6 1405.47 1745.32 2190.38 2694.16

Total Capital and Liabilities 16982.4 22900.8 36382.5 51545.6 69773.6

Balances with RBI and banks 1627.57 1922.71 2673.25 3804.90 4452.95

Investments 5,093.71 7,117.02 10,209.94 13,751.19 18,519.83

Advances 9430.3 12403.1 22193.1 32180.0 44408.4

Fixed and other assets 830.87 1457.97 1306.2 1809.5 2392.4

Total Assets 16982.4 22900.8 36382.5 51545.6 69773.6

Source: IGSL Research

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Financial Valuation and Ratios

Operating Ratios FY08 FY09 FY10 FY11E FY12E Book Value (`) 44.6 54.7 91.0 108.8 136.1 P/BV 6.3 3.8 3.2 2.6 6.3 Adjusted BV 44.3 53.3 90.6 108.1 134.9 EPS 6.8 10.2 14.1 19.9 26.6 PE(x) 51.3 33.9 24.7 17.4 13.1 Net Interest Margins (%) 2.8 3.0 3.0 2.9 3.0 Profitability ratios (%) FY08 FY09 FY10 FY11E FY12E ROAE 19.0 20.7 20.3 19.9 21.9 ROA 1.4 1.5 1.6 1.5 1.5 Other income/Net income 52.2 46.2 42.2 37.3 36.1 Interest Expended/Interest Earned 74.7 74.6 66.7 70.6 70.0 Cost to Income Ratio (%) 49.4 44.2 36.7 36.1 37.0 Asset Liability Profile (%) FY08 FY09 FY10 FY11E FY12E Advances/Deposit ratio 71.0 76.7 82.8 80.1 78.9 Investment/Deposit ratio 38.4 44.0 38.1 34.2 32.9 Gross NPA to Advances 0.1 0.7 0.3 0.4 0.5 CASA Ratio 9 9 11 15 16 Net NPA to Advances 0.1 0.3 0.06 0.08 0.1 Provision Coverage Ratio (calc) 20 52 78 79 80.5 Capital Adequacy Ratios (%) FY08 FY09 FY10 FY11E FY12E Tier I 9.1 9.5 12.8 10.2 9.3 Tier II 3.7 7.1 7.8 6.9 6.1 CAR (%) 12.8 16.6 20.6 17.2 15.5 Growth ratios (%) FY08 FY09 FY10 FY11E FY12E Net interest income 92.9 54.1 54.7 47.3 41.1 Advances Growth 49.9 31.5 78.9 45.0 38.0 Deposits Growth 61.5 21.8 65.7 50.0 40.0 Operating Expenses 76.3 22.7 19.5 33.5 37.5 Net Profit 112.0 51.9 57.2 41.6 33.3 Source: IGSL Research

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Peer Comparison ` Crs

Yes Bank Axis Bank Federal Bank HDFC Bank ICICI Bank Kotak Bank Profit and Loss Interest Earned 2369.7 11638.0 3673.2 16172.9 25706.9 3255.6 Interest Expended 1581.8 6633.5 2262.4 7786.3 17592.6 1397.5 PAT 477.8 2514.5 464.6 2948.7 4025.0 561.1 Balance Sheet Capital 339.7 405.2 171.0 457.7 1114.9 348.1 Reserves Total 2749.9 15639.4 4519.4 21061.8 50503.5 4137.0 Deposits 26798.6 141300.2 36058.0 167404.4 202016.6 23886.5 Borrowings 4749.1 17169.6 1546.8 12915.7 94263.6 6140.5 Investments 10209.9 55974.8 13054.7 58607.6 120892.8 12512.7 Advances 22193.1 104343.1 26950.1 125830.6 181205.6 20775.1 Total Assets 36382.5 180680.5 43822.3 222556.9 363866.8 37436.3 Financial Ratios Credit-Deposit (%) 82.8 71.9 72.3 72.4 95.0 94.6 Inv. / Deposit (%) 38.1 39.6 36.9 37.9 53.3 54.7 RONW (%) 20.3 19.2 10.3 16.1 8.0 13.3 Total CAR (%) 20.6 15.8 20.2 17.4 19.4 20.0 % of NNPA 0.06 0.36 0.48 0.30 2.12 1.73 Return on Assets 1.6 1.7 1.2 0.0 1.1 0.0 Tier I Capital (%) 12.8 11.2 18.4 13.3 14.0 16.1 EPS (annualized) 14.1 65.8 27.2 67.6 36.1 16.2 Book Value 91.0 394.6 270.4 472.2 460.1 227.2 Other Inc/Tot Inc 42.2 25.5 14.6 19.1 22.5 18.4 Source: IGSL Research

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Peer Group Analysis

Yes Bank scores on healthy asset quality…. We believe with this healthy capital cushion Net NPAs to net advances ratio amongst the best in (CAR of 20.6%)… YES Bank is well placed to the industry…at almost 0% levels… ride the next growth phase…One of best CAR (%) amongst private peers…

Source: Company, IGSL Research Source: Company, IGSL Research

Per Employee Ratios ` Crs More than 1% holdings (FY10) Business/Emp Profit/Emp Name of the Shareholder % stake Yes Bank 15.27 0.16 Bank of Rajasthan 5.70 -0.03 Rabo Bank International Holding* 15.9

City Union Bank 6.51 0.06 HSBC Financial Services 4.28

Dev.Credit Bank 5.15 -0.05 Titiwangsa Investments Mauritius 4.11 Federal Bank 7.50 0.07 Orient Global Tamarind Fund 3.04 HDFC Bank 5.90 0.06 American Funds Insurance Series Growth ICICI Bank 10.29 0.12 Fund 3.88

IndusInd Bank 8.37 0.07 Commonwealth Equity Fund 1.12 Karnataka Bank 7.27 0.03 Deutsche Securities Mauritius 1.72 Karur Vysya Bank 7.89 0.08 Small Cap World Fund 3.64 Kotak Mah. Bank 4.87 0.07 South Ind.Bank 7.71 0.05 Stiching Pensinoenfunds ABP 1.07 * On June 22, 2010, Rabo Bank exited 11% stake Source: IGSL Research selling 37.3mn shares at average price of Rs266.16 per share.

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For Any Queries please feel free to contact our Institutional Team Names Designation E-Mail Id. Contact Nagji Rita CMD - - Sales Ravinder Kasliwal Head Institutional Sales [email protected] 40751565/66 Dealing Shiv Damani Institutional Dealer [email protected] 22723797 Vinit Rita Institutional Dealer [email protected] 40751565/66 Rashda Ainapore Institutional Dealer [email protected] 40751565/66 Research Anshuman Jain Research Analyst [email protected] 40751515 * 562 Divya Kant Research Analyst [email protected] 40751515 * 562 Pankti Shah Research Analyst [email protected] 40751515 Sheetal Nirmal Research Analyst [email protected] 40751515 Denil Savla Research Analyst [email protected] 40751515 Sanjeev Haria Research Analyst [email protected] 40751515 Sibayan Banerjee Technical Analyst [email protected] 22723797 Ashok Patel Technical Analyst [email protected] 22723797 Madhu Patel Technical Analyst [email protected] 22723797

Disclaimer

Inventure Growth & Securities Ltd has prepared this Document. The information, analysis and estimates contained herein are based on Inventure’s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only

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