YES Bank

Investors can consider accumulating the YES Bank stock at the current market price (CMP) of Rs 81.9. The stock has gained 49 per cent from its all-time low of Rs 55 on October 27, but remains a good investment option for investors with a two-three year time frame.

At the CMP, YES Bank is trading at 10.4 times its trailing twelve-month earnings and 1.7 times its latest book value.

The Price-earnings multiple is at a discount to that of bigger private sector peers such as ICICI Bank, Axis Bank and HDFC Bank and is cheap for a bank which has high growth potential.
Growth in advances

While growth rates of the past two years may moderate on a larger base, healthy growth in corporate advances may result in above-industry growth rates for YES Bank. Its loan book is dominated by the wholesale business-corporate advances (58 per cent) and business banking (41 per cent).

A high proportion of core ‘other income’ (43 per cent), negligible exposure to retail advances (0.15 per cent) where there are quality concerns, low NPAs and strong profitability ratios (Return on Assets of 1.4 per cent, Return on Equity of 18 per cent) are investment positives.
Sustained growth

YES Bank has sustained strong net profit (growth 40.5 per cent), advances and deposit growth (53 per cent and 44 per cent respectively) in the September quarter.

This is backed by net interest income growing by 50 per cent, even as Net Interest Margins moderated from 2.88 per cent to 2.80 per cent. Though the yield on advances increased due to the lending rate being increased, cost of funds moderated the margins.

Due to its focus on wholesale lending, the bank has low gross NPA/advances at 0.19 per cent, the lowest among all banks. Slippages, however, cannot be ruled out as the size of the book increases.

Over the next few quarters, even as lending rates ease from current levels, robust demand for credit, liquidity easing measures by the Reserve Bank of India and growth in income from third-party distribution, resulting from branch expansion (now 14 per cent of other income), may help earnings growth.

A favourable equity market over the medium term may also aid income from treasury and financial advisory services.
Key constraint

A higher cost structure, due to a lower proportion of low-cost deposits (9 per cent), is a key constraint for the bank.

However, the bank targets 25 per cent low-cost deposits in the next 18 months, with branch expansion. Increased risk in the loan book, as it expands in size, and a sharp deterioration in the macro environment for companies, are also a risk.