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Yes Bank's Q4FY18 results (Upgrade to Neutral) - A strong quarter

Q4FY18 results

• YES Bank's PAT of Rs11.8bn grew 29% yoy and 10% qoq, higher than the consensus estimate of Rs11.2bn.  Amidst rising NPLs for other banks, asset quality for YES improved with gross NPLs falling 12% qoq to 1.3% versus 1.7% qoq.
• Strong loan growth and strong growth in corporate fees were the key earnings drivers. Loans grew 54% yoy and 19% qoq driven by strong growth in both consumer and corporate banking.  NIM fell 10 bps qoq and 20 bps yoy to 3.4%. NII grew strongly at 31% yoy and 14% qoq. Sequential growth in savings deposits slowed to 4% qoq (9% in 3Q) possibly because of rising rates which made depositors switch to term deposits.
• Non-interest income grew 13% yoy and was flat qoq. Corporate, trade and cash management fees grew strongly at 104% yoy and 56% qoq while forex/capital market fees declined 23% qoq and 27% qoq.
• Asset quality improved as slippages declined 23% qoq and GNPAs declined 12% qoq to 1.3% from 1.7% qoq. YES Bank does not have a big pool of SDR/S4A/restructured stress loans, so slippage from this pool was low at Rs282M and was from an SDR account. The CEO mentioned that the bank has scanned all loan exposures of higher than Rs1bn and did not find any material amount that will require a consortium level resolution as outlined by RBI's new debt code of Feb 12. 
• CET1 stood at 9.7% versus 10.7% in 3Q and 11.9% in 1Q.
• The CEO guided to at least a 30% loan growth for FY19 and FY20 and indicated that the bank will not shy away from a higher growth. There will always be some lead lag in income and loan growth but the CEO is confident that in FY19/20 the PAT growth will be in line with asset growth of 30%. Credit cost for FY19 will be 60 bps while provisioning cover will expand to 60% over the next 2quarters. The CEO also highlighted that they have 30-45bps cushion in margins from the higher rate on savings deposits offered by YES. Over time YES can cut savings rate and reap the benefit. NIMs will expand to 4% by FY20E.

Valuation and view

We upgrade our target price to Rs340 as we roll over base to FY20E and increase our target multiple to 2.2x from 2x. We change our recommendation from Underperformer to Neutral. While we view 4Q earnings of YES Bank as exceptionally strong, we see the forthcoming divergence report (expected in 2QFY19) and RBI approval for the re-appointment of the current CEO as key near term risks. The last two divergence reports were negative. While management is confident that after learning from the past two divergences, forthcoming divergences would be negligible, we still flag it off as a key risk. YES Bank will raise fresh equity in FY19E.