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Citi Research
YES Bank (Buy)
CMP: ₹1,556.45
Target: ₹2,015
We expect YES Bank to deliver a strong loan growth of 28 per cent CAGR over FY17-20E. It has made significant investments in people, branches and products and this should drive retail and SME growth. Liability side levers could see NIM expansion of 40-50 bps over the next three years. This coupled with strong fee income franchise and stable asset quality should result in 25 per cent earnings CAGR over FY17-20E.
NIM expansion driven by liability levers — Among corporate heavy banks, we believe that YES Bank will deliver better NIM due to lower funding costs.
Valuation: We now value YES Bank using two-stage Gordon growth model (cost of equity 13.5 per cent, normalised RoE 20 per cent, growth during stage-1 20 per cent, steady state growth 4 per cent) giving us FY19E P / Adjusted BVPS multiple of 3.2x.
Risks: Downside risks include higher slippages from corporate book and inability to lower deposit rates.
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