MS: Yes Bank Limited | RoA recovery beyond 1% will be gradual; initiate at UW
We expect strong RoA improvement to 1% by F25, helped by higher PPoP margins/lower credit costs as macro improves further. But at 1.6x F24 P/BV, the stock is pricing this in. Beyond 1% RoA, improvement will be tough and gradual as we see much higher competitive intensity in this cycle.
Yes Bank – Moving in the right direction post 2020 NPA crisis: Yes Bank has focused on reducing asset quality challenges by accelerating provisions and cleaning up its balance sheet (organically as well as via asset sales). We expect its gross impaired loans to fall to 9% by end-F23 from a peak of 22% in Mar-20. Further, unlike the previous cycle, the bank has focused on increasing the share of retail on both sides of the balance sheet. Indeed, the share of CASA + retail deposits currently amounts to 48% of total funding (vs. 33% in Mar-20). On assets, retail/SME loans have increased to 66% vs. 44% in Mar-20 (implied CAGR of 23%).
We expect strong cyclical improvement over the next few years: Having cleaned its balance sheet, we expect Yes Bank's loan growth and margin profile to improve as the macro recovery gains pace. We expect loan growth to accelerate to a 20% CAGR in F23-25, vs. 15% in F23 (3% CAGR in F20-22). This, along with an improving share of retail/SME loans (where we project a 25% CAGR in F23-F25) should help offset rising funding costs and drive higher margins to 3.2% by F25, vs. 2.6% in F23. Overall, we expect a core PPoP CAGR of >50% in F23-25, which, coupled with benign credit costs (0.7% average for F23-25), will drive RoA improvement to 1% by F25, vs. an estimated 0.4% in F23. Indeed, our estimates are~20%/35% above consensus for F24/F25.
Valuations, however, at 1.6x F24 book, are already pricing this in, we believe. More importantly, we see limited improvement beyond 1% RoA given high competitive intensity in retail deposits as well as assets. As discussed in our report, India Banks: Retail deposit competition to intensify, we expect the competitive intensity in retail deposits to touch a new high in the current cycle. Yes Bank, with a 116% liquidity coverage ratio (LCR) as of Sept-22, a narrowing deposit spread relative to large private banks, and a relatively high outflow rate (under LCR), will see greater challenges like some other mid-sized private banks, we believe. Further, we expect the competitive intensity on retail assets to build up as well. This will weigh on loan spread expansion over the medium term.
Initiate at UW at a PT of Rs20.5: Our PT implies 1.3x Dec-24 P/BV, which we think is fair in the context of 10% F25 RoE. Current valuations at 1.6x F24 book are already pricing in strong earnings over next few years. Much stronger execution on funding and/or high margin retail assets could lead us to revisit our thesis.
By: via Allies Fin Serve Stock Market
