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MOSL: YES BANK (Buy)-FY17 annual report analysis – A much stronger liability franchise-Net stress loans at just ~2.2%

​YES BANK: FY17 annual report analysis – A much stronger liability franchise; Net stress loans at just ~2.2%, despite accounting for divergence

(YES IN, Mkt Cap USD9.4b, CMP INR1401, TP INR2110, 51% Upside, Buy)

• YES’ annual report analysis (AR) suggests strong performance across parameters in a period marred by significant economic challenges. Liability franchise has strengthened significantly, with sustained improvement in CASA ratio to 36.3% (up 820bp), improving deposit concentration ratios, and more favorable ALM profile. This has also benefitted NIM and increased fee income streams.

• The bank has increased its loan market share to 1.7% of the system, while maintaining strong return ratios – RoA of 1.8% and RoE of 20%. YES is consuming capital at a fast pace – steep increase in RWA; recent capital raising (INR49) provides cushion for future growth.

• YES reported ~76bp GNPA for FY16, whereas the RBI estimated 5% GNPA. The divergence was owing to the fact that while rule-based accounting (90dpd) allows banks to classify some accounts as standard, RBI may ask banks to classify accounts with inherent weaknesses as NPAs. From FY17 onwards, reporting of the divergence is a mandatory disclosure in the AR. Bank has fully accounted for divergences in FY17.

• YES remains our top pick among mid-sized private banks, with healthy capitalization (CET1 of 11.4%), strong capital allocation (best in class RoE), and market-leading growth rates (expect at least 2x industry growth). We reiterate Buy, with a target price of INR2,110/share.