Investors have been chasing banking stocks in recent times for reasons ranging from a plausible economic recovery to the recent easing of norms governing lending to infrastructure projects.
While the fortunes of the sector will turn along with the economy, it will be gradual and banks with strong fundamentals will lead the pack. YES Bank is one such steady performer. The bank’s earnings grew 24 per cent in 2013-14 and it has a healthy RoE (return on equity) of 25 per cent.
Looking ahead, YES Bank is well capitalised to ride the next leg of growth. The bank recently raised ₹2,942 crore ($500 million) through qualified institutional placement (QIP). This has helped it increase Tier I capital to over 13 per cent from 9.8 per cent as of March 2014. And it will help the bank continue to grow above the industry rate, as it has in the past, over the next two years. YES Bank delivered loan growth of 18 per cent in 2013-14, while the industry grew by 13-14 per cent. This growth was driven by its SME (small and medium enterprise) and retail loan portfolios, which now constitute 21 per cent of the bank’s total loans, up from 18 per cent last year. A lower base and focus on these portfolios will continue to drive the bank’s 19-20 per cent loan growth over the next two years. The stock is currently trading at two times the one-year forward adjusted book value, lower than its long-term historical average of 2.3 times. Investors with a two- to three-year horizon can buy the stock at current levels.
YES Bank now has a sizeable and scalable business, a decade after being awarded a banking licence. As of end-March 2014, the bank’s balance-sheet stood at a little over ₹1-lakh crore, with a loan book of about ₹55,600 crore. On the funding side, the bank has been able to improve its low-cost CASA (current account savings account) ratio substantially, from 15 per cent in 2011-12 to 22 per cent in 2013-14.
After the deregulation of interest on savings accounts from October 2011, YES Bank was the first to offer differentiated rates, thus increasing its share of savings accounts significantly. In 2013-14, the bank saw its CASA deposits surge 29 per cent, led by 55 per cent growth in savings deposits.
In 2013-14, the bank was able to maintain a steady net interest margin (NIM), at 2.9 per cent, despite volatility in interest rates. Incremental growth in CASA deposits will continue to aid margins. YES Bank is targeting a CASA ratio of 25 per cent by the end of this fiscal year. This, along with a focus on the high-yielding retail loan portfolio, should provide headroom for the bank to improve margins.
Contrary to the industry trend, YES Bank has been able to maintain stable asset quality. The bank’s exposure to stressed sectors, such as power, infrastructure and metals, is low. While lending to large corporates forms 63 per cent of its loan book, the bank has a well-diversified portfolio with maximum exposure to any sector capped at 5 per cent.
Also, the bank primarily lends to corporates for working capital rather than project financing, which minimises the risk. Gross non-performing assets stood at 0.31 per cent of loans as of March 2014. Restructured loans are very low, at 0.18 per cent of the total loans. And the bank’s provision coverage of 85 per cent lends comfort.