ICICIDirect: YES Bank - Initiating coverage (Buy: Rs 124, Target: Rs 170)

Price: Rs 124 Target Price: Rs 170 OUTPERFORMER

YES Bank, a new-age private sector bank with a high quality management, has
positioned itself as a knowledge player with a technology-driven superior
business model. We expect earnings, both interest and fee-based, to grow at
a CAGR of 64% over FY07E-09E to Rs 241.4 crore, providing strong visibility
to its robust financial performance. Net interest margins should stabilize
at 2.8-3% over the next two years. We initiate coverage on the bank with an
OUTPERFORMER rating.

Strong growth in advances, superior asset quality: The bank’s credit growth
has been much higher than the average industry growth of 30% mainly due to
low-base effect. We expect it to maintain the momentum with credit growing
at a CAGR of 88% over FY07E-09E to Rs 20,552 crore. Asset quality is
expected to remain impeccable with zero net NPAs.

Impressive earnings growth: Buoyed by the remarkable growth in advances and
rising yield on advances, we expect net interest income to grow at a CAGR of
93% over FY07E-09E to Rs 659.4 crore and fee-based income at a CAGR of 74%
to Rs 254.9 crore over FY07-09E.

Increasing focus on CASA to stabilize NIMs: We expect the rapid ramp-up in
branch network, and subsequent increase in CASA deposits, to lower the
bank’s overall cost of funds. We expect net interest margins to stabilise at
2.8-3% levels over the next couple of years.

Valuation: At the current price of Rs 124, the stock is trading at 3.3x its
FY08E and 2.4x its FY09E adjusted book value (ABV). On a P/E multiple, it is
trading at 15.4x its FY09E EPS of Rs 8.05. Over the next two years, we
expect net income to grow at a CAGR of 77% to Rs 1,102 crore and ABV per
share to rise at a CAGR of 35% to Rs 50.6. Its balance sheet is set to grow
at a CAGR of 80-90% over FY07E-09E, with RoE at 18.4% in FY09E factoring in
a possible equity dilution. Compared to peers in the private sector banking
space, YES Bank is cheaper on a price to book value parameter. It also
scores better on asset quality. With a highly regarded management team, we
believe the bank will be richly valued in sync with HDFC Bank going forward.
With RoE improving, the bank is expected to maintain current valuations and
3.4x its FY09E ABV, gives us a target price of Rs 170, an upside of 37% overa 9-12 month time frame.

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