Yes Bank shares rated ‘Buy’; MOSL pegs target price at Rs 2,110

The recent capital raise of `49 billion (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%+.

YES is available at ~30% discount to private banks like HDFCB, IIB and KMB. Robust BV CAGR of 23% (highest in the system), superior RoEs, strong asset quality and increased balance sheet granularity (higher share of retail loans + CASA roll out) should drive a re-rating, in our view.

We expect YES to bridge the valuation gap v/s peers, and thus, reiterate Buy with a target price of `2,110 (3.3x FY19 BV). YES’ strategy of targeting cash-rich regions (45% of branches concentrated in ~20 districts accounting for 56% of India’s deposit market share) has yielded rich dividends, with 90% SA deposit CAGR over FY11-16.

We believe the CASA target of 40% could even be achieved by 2019 (v/s its stated objective of 2020). YES is expected to transform from a largely corporate lending bank to a welldiversified private sector bank over next five years, with the proportion of branch banking and retail assets increasing to 45% by FY20 from 31% currently.

Technological differentiation and ability to raise its cross-sell capabilities will be the key catalysts. With incremental market share of 3.5%+, low-hanging fruits in retail/SME business and strong corporate relationships, we expect YES to register 28% loan CAGR over FY17-20.