Yes Bank -
Commendable 4 yr Performance Record
Step 1: quick-check stock analysis
March 23, 2009 Yes Bank presents a remarkable record if we look at its 4 yr performance record. Consistent improvements, year on year - leading to industry-best figures on RoE (18.34%), cost-efficiency (29.5%) with the lowest NPAs (0.09%). And we haven't even mentioned its stupendous growth record! There's hardly anything to fault at first glance, atleast. So why is the Yes Bank stock languishing at ~1x Book Value??
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Strong Capital BaseA strong capital base is the number one issue to consider before investing in a lenderYes Bank has its Capital Adequacy ratios at 13.6 percent much above the mandatory 9 percent requirement stipulated by RBI. Its great to see very low Gross and Net NPA (Non-Performing Assets) levels. FY08 Gross and Net NPAs stand at 0.11% and 0.09%, respectively. Financial Leverage in FY08 is down to more conservative levels of around 13 times, after seeing a high of 14x in FY07 from 7x in FY06. (An average bank has a Financial Leverage of 12x as compared to 2x or 3x for a company) These metrics are the defacto standards for gauging bank profitability. Generally investors should look for mid to high-teen returns on equity. It is easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, which can be unduly risky over the long term. For this reason, it is good to see a high level of return on assets as well. For Banks a top RoA is in the 1.2 to 1.4 percent rangeThere are only three levers for boosting ROE -Net Margin, Asset Turnover and Financial Leverage. While Net Margins have fallen from the highs of 19% in FY06 to about 12% levels comparable to other banks like HDFC Bank, it is the high asset turnover of 0.12x, and comparatively higher financial leverages that have seen Yes Bank recording the industry-best RoE of 18.34% in FY08. Only HDFC Bank and SBI have somewhat comparable RoEs. Net Margins have remained in a 12 percent range over last 2 years, but Asset Turnover ratios have seen consistent improvement leading to again industry-best Return on Assets ratio at 1.42% -comparable with the best in the business, HDFC Bank. Efficiency RatioThe efficiency ratio or cost to income ratio, measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better)Yes Bank presents a remarkable record on cost-efficiency. From a high of 83% in FY06, Operating costs as a percentage of Total Income has progressively come down, year on year, to 29.5% in FY08 -guess what, again a industry-best figure. Only Axis Bank comes anywhere near. Net Interest Margins (NIM)Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.Net Interest margins have been generally consistent, around the 3 percent mark. FY08 has shown NIMs coming down to to 2.74 percent - the only parameter where a leading bank like HDFC Bank (NIM over 4%) beats Yes Bank handsomely. Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthYes Bank has been growing at a scorching pace for the last 4 years, albeit on a much smaller base. This shows in the overall growth track record of over 225 percent CAGR over 4 years. Interest Income has grown at over 252 percent CAGR, while Fee Income has galloped over at 168 percent CAGR. This has seen Yes Bank crossing milestones of Rs. 200 Cr Net Profit in FY08. What is also commendable is that Interest Income as a percentage of Total Assets has been steadily rising. FY08 levels are at 7.72% beating HDFC Banks 7.6%. Corrspondingly the dependence on Fee Income has been steadily coming down. Because a bank’s balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.Yes Bank is currently (Mar 23, 2009) trading at 1.04 Book Value, historically at its lowest levels in the last 4 years. Similarly on a price-to-earnings measure too it is quoting at less than 5x TTM earnings, again historically the lowest levels in 4 years. Overall verdict There might be big concerns on derivatives exposure or other contingent liabilities, that is not reflected in this snapshot. However, definitely worthy of further investigation and closer scrutiny, as it seems a very good prospect. If interested in Private Bank stocks in the Indian stock market, its time to get to
quick-check stock analysis step 2: Private Banks Peer Comparison
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Return from Yes Bank 4yr Performance Snapshot to India Stock Market
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