Buy Yes Bank Ltd For Target Rs.720 - Sharekhan

Key points

*   The recent equity capital raising has taken Yes Bank’s CAR to 18% (tier-I CAR to ~14% levels from 9.8%) which gives significant opportunity to the bank to expand the balance sheet (advances book) amid signs of a recovery in the economy. Thus, we expect the earnings growth trajectory to return to 25%-plus range after the cautious growth seen in the past couple of years.

*   In our view there are multiple structural drivers for the margin (a rising CASA ratio, improved priority sector lending, stabilisation in interest rates) apart from leveraging of the equity capital. This should result in an expansion of 20- 30BPS in the net interest margin over the next couple of years. The asset quality of the bank remains among the best in the system.

*  Despite equity dilution we expect the return ratios to remain strong (RoE of about 20% and RoA of about 1.7%) led by a strong earnings growth. We have revised our price target upwards (to factor in the improvement in the margin, lesser than expected dilution in the equity and increase in the book value by 11% for FY2015 and by 22% for FY2016). This has resulted in a new price target of Rs720 (2x FY2016E book value, which is close to its five-year mean valuation multiple). We maintain our Buy rating on the stock.

Price target revised to Rs720

Yes Bank’s stock performance was lagging behind that of its peer banks due to a lower capital base and an ongoing legal issue within the promoter families. Despite equity dilution we expect the return ratios to remain strong (return on equity [RoE] of about 20% and return on asset [RoA] of about 1.7%) led by a strong earnings growth. We have revised our price target upwards (to factor in the improvement in the margin, lesser than expected dilution in the equity and increase in the book value by 11% for FY2015 and by 22% for FY2016). This results in a price target of Rs720 (2x FY2016 book value, which is close to its five-year mean valuation multiple). We maintain our Buy rating on the stock.

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