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MOSL: YES BANK (Buy)-Re-rating led by diversification and balance sheet granularity-Robust capitalization | 2x+ system growth

​YES BANK: Re-rating led by diversification and balance sheet granularity; Robust capitalization | 2x+ system growth | Best-in-class return ratios

(YES IN, Mkt Cap USD10.3b, CMP INR1565, TP INR2110, 35% Upside, Buy)

The recent capital raise of INR49b (30% of December 2016 net worth) has added ~300bp to Yes Bank’s (YES) CET1 ratio (~13%). With an incremental market share of 3.5%+, aggressive roll-out of retail/SME products and strong corporate relationships, YES is expected to register loan CAGR (FY17-20) of 28% – at least 2x of system loan growth.

YES has increased its branch strength at a 32% CAGR and SA deposits at a 90% CAGR over FY11-16. The CASA ratio increased from just 11% in FY11 to 33% in 9MFY17. The 2020 CASA target of 40% could be achieved a year in advance, led by YES’ strong branch expansion plans (2.5x in three years) and roll out of a complete product suite for corporate/retail customers.

YES has maintained pristine asset quality (GNPLs less than 1%) in a challenging environment, despite clocking strong loan growth. This speaks well for its credit appraisal systems, given that the bank has achieved loan/PAT CAGR of 23/28% over FY11-16.

Robust loan growth, NIM expansion (~20bp led by higher CASA and share of retail loans) and rising fee income contribution are expected to drive a 27% PAT CAGR through FY20. This will see RoA improving to ~2% (v/s 1.8% currently) and RoE being maintained at 20%+.