Rana Kapoor, managing director and CEO, of the bank speaks to Priya Kansara about his growth plans. The Yes Bank stock trades at a price to book value of 4.7 times and 3.5 times for FY07E and FY08E respectively.

How is your branch expansion coming up?

By March 2007, we target to have at least 50 branches from our existing 24 branches. In aggregate, we have licenses for opening 60 branches, all of which will be operational by June 2007. We plan to have 100 branches by FY08 and 250 branches by 2010.

Why are the bank뭩 branches concentrated in the North? Is the region-wise mix expected to change?

Our branch network is skewed more towards the northern region due to the agricultural belt and the region being fairly deposit-rich. It has been observed that banks, which operate mainly in the North, have better CASA (current and savings accounts) and thus low-cost deposits.

However, we also have substantial presence in the West, especially Maharashtra, Gujarat and Goa.

Going ahead, for our organic growth, out of the first lot of 60 branches, almost 50 per cent of our branches will be in the north, 30 per cent in the West and the balance in the South and East.

Do you have plans to open international branches?

Right now, we want to build a very strong Indian and high quality home country model. That means we must be able to run at least 100 branches efficiently and effectively.

But in the life of the bank, we will embark on high density global Indian locations like the Middle East and Singapore in the first phase till 2010, and after that as we get more solid and strong, we will embark in the other markets meaningfully as well.

What is the expected deposit and advances growth in the next two years?

In the next two years, we plan to grow our deposits and advances (on a lower base) in the range of 75-100 per cent.

Your CASA is quite small right now. What is your strategy for achieving higher share of low cost deposits ?

We have a two-year old CD (certificate of deposit) programme of Rs 1000 crore, which is rated favourably by rating agencies. Our CD costs are relatively lower than corporate deposits (by at least 0.5 per cent).

Since inception, it has been a very good source of fund for the bank. We are planning to take it to a minimum of Rs 1500 crore and may even got up to Rs 1700 crore.

However, in percentage terms, we are reducing our dependence on CDs, as was seen in the last quarter where our deposit growth (excluding CDs) was 35 per cent (q-o-q).

We want to bring our CASA ratio to 10 per cent by March 2007 from around 5 per cent now. Thereafter, every year we will increase it by 5 per cent to take it to 25 per cent by March 2010. One of the strategies to achieve this is our branches.

Besides, our ATM network, Internet and mobile services will also help. Our two national centralised processing centres will help build capacity and ease the burden on branches. We have specialised team for deposit generation. We are the first bank to launch the 8 per cent deposit.

Which businesses will be your growth drivers?

Corporate and institutional banking (C&IB) business is our bread and butter today contributing 70 per cent of our business.

Our second division, business banking, consisting of two units, namely emerging corporates (with a turnover of Rs 100-750 crore) and SME (small and medium enterprises), is going to be one of our dominant businesses over the medium to long term.

Our third division, retail and wealth management banking, which is under development, is going to be the key value driver in the long term (by 2010, it will our Number 1 business driver). All three should contribute equally to the bank뭩 business and product mix.

In terms of sectors, we have a knowledge banking strategy where we want to be the benchmarking bank in agri, life science and textiles among others. We target sectors which are less cyclical and where India is building a competitive advantage.

Non-conventional energy is also an emerging and promising sector for us. However, we want to maintain a balance among the sectors.

What뭩 your view on real estate sector exposure since RBI has been giving warning signals for funding the sector?

Real estate forms about 8-9 per cent of total advances and we lend to various residential and commercial projects. As a strategy we do not plan to exceed beyond 10 per cent.

What makes you enter new businesses like retail broking and micro finance when you are still emerging as a banking entity?

While the highest emphasis is on building the mother bank, there are certain very strong product linkages to complete a total proposition. Today, retail broking is seamlessly integrated with and is a very essential component of a wealth proposition.

As far as micro finance is concerned, a huge part of the population is not serviced. Banking does not reach about 51 per cent of agri-India and 74 per cent of rural (non-agri) India. There is a huge opportunity in urban and semi-urban India, and definitely in rural India, which is partly addressed by moneylenders and partly unserviced.

Though the ticket size is small and volumes are high, the business has good internal rates of return.

However, it requires low cost transactional platforms, smart technologies and special human skill sets. We hope to scale this business meaningfully by April 2008. It will also help us fulfill our priority sector lending at a respective pricing.

How will your business mix affect the net interest margins (NIMs) in future?

Our NIMs are expected to be in the range of 2.7-3 per cent for the next year and a half (3 per cent by March 2008).

However, once our retail strategy starts penetrating deeper and CASA starts stepping up, we expect NIMs to be higher at 3.5 per cent by 2010. The increasing share of SME and retail assets will also contribute to higher margins.

Between interest income and non-interest income, what is your focus likely to be since the latter also contributes significantly to your total net income?

We will focus on both simultaneously. Our long term strategy is that non-interest income should not fall below 40 per cent by 2010 and 45 per cent by 2008. We have maintained the share at 50 per cent in the past few quarters.

Around 45-50 per cent of our non-interest income is non-credit based services like advisory services, third party distribution and payments.

This will also help improve our RoE (return on equity) and RoA (return on assets). We want the RoE and RoA to be 22-24 per cent and 2 per cent respectively by 2010 on a normalised basis. This will happen if we have high fee content.

What are your initiatives for improving your capital adequacy ratio (CAR)?

As on September 2006 quarter, our CAR is 12 per cent with Tier-I capital at 10 per cent. We raised Rs 180 crore lower Tier-II capital.

We also issued shares worth Rs 120 crore on a preferential basis to Swiss Re. We plan to raise another $90-100mn (Tier-I and Tier-II), which will take our CAR to 15 per cent by March 2007.

Allright sir. However, it currently enjoys a PE of 50 I assume. So, a PE of 30 would be safe for next 2 years at least. Just to keep some margin of safety. However, I could be wrong.

 Thanks Vipul,

For initiating discuusion on YES Bank.

I am holding Yes Bank just after the public issue. Vipul has given a detailed discussion and interview on the subject. Rana Kapoor is a professional Banker. The promoter is Robo Bank.The Bank is on solid grounds. The Bank is having a capital adequacy of 12 which is acceptable. The Bank is in its infancy and moving in the right direction. In Banks which are growing rapidly in credit front should have a bigger capital for maintaining capital adequacy, and that is the reason why Yes Bank is liquidating capital  and is a good sign. The equity now given is at 120/- which is more than the market rate. Apart from that the NPA is very low. One point which I wanted to mention is that the Bank is having only big corporate advances and big certificate of deposits, where NIM is very low. They are having less than 10% of retail advances and deposits in their portfolio. It is the retail deposits and advances which are crucial for earnings as the deposits are with less interest and retail advances are given with more interest. Yes Bank has to aggressively go for retail deposits and lending. They have also realised this and going for branch expansion. They have licenses for 60 Branches for this financial year. The low NPA also speaks high about their competency in advances.

We have discussed the business and operations of Yes Bank. While the story looks good over the longer term investors should understand that the price reflects all that for the time being. But the beauty of holding such companies is that as time passes by the earnings increase and the stock looks cheaper again. I am betting on the same set of events to unfold itself into Yes Bank.

Using the PE would not be the appropriate way to value Banking stocks. The better way would be to look at the Price to Adjusted Book and the RoE (This is the mother of all tools).

The RoE is on the lower side but the once the Bank sets up its customer base and is able to create a set of depositors it should start earning on fee income which is the best a Bank can do. Fee income comes with lowest or rather no risk and adds directly to the bottomline.

Thank you Reetesh for the link. Appreciate it. One thing I have to ask generally everyone though. Why are we assuming that Yes Bank WILL SELL itself to any bank or be taken over by any bank, without just continuing to grow itself independently? Curious?

Update: YES BANK appoints Dhaval Oza from SBI

Hehehe!

SEBI'S new ruling in regards to delisting an exitsing company bodes well for small shareholders. Even if YES BANK gets acquired by a bigger bank, it may not just be able to delist on its own whim. The minority shareholders it seems will have a strong say. Here is the video link. Maybe Vipul ji or Basant ji, you guys can throw in some light on thism after viewing the video or text report. Both links there on the page:

Yes Bank is getting ready for raising capital again. They would be selling some part of equity for the samee...again! Plan is to raise 150 million USD by March 2007.

Uhmm, not till now. The problem is until next 1 year I cant sell any more stocks, else I shall have to pay capital gains tax. So whatever I look into, has to be a year from now. I shall look for a more than 50% CAGR(for 2-3 years) company 1 year from now and shall post this question in Nov, 2007 I guess. LOL!

Nice to see support to my conviction on YES Bank. Now those people who said that comparision with HDFCs are not correct, they will get minority feeling.

No matter what you say, but you should also look at base at which HDFC Bank is growing and base of YES Bank, it is a NO comparision in my sense.. YES Bank is 2 year old bank...

Reetesh,  your all argument accepted but fact of the matter is this...Yes bank is ranked 3rd by business world.

I agree with you Vipul ji, but I would tend to be on reetesh's side on this one. HDFC is number one, despite ite sheer size. If Yes Bank can do the same when it is at HDFC's size(as of today), it will be a gr8 day. As I said earlier, if Yes Bank can stay put at or better its current position for next 2 years, that in itself would be a great thing.

The stock has been a 20 bagger but the bank has grown far more then that over the past 10 years.

The best choice is to use the capital efficiently -  http://www.theequitydesk.com/forum/forum_posts.asp?TID=119 - Increase RoE  . The biggest multibaggers have high RoE whether it is Infosys, Wipro, Hdfc bank, Pantaloon etc.

Yes Bank ranked 1st on Efficiency.

Thanx vipul for the update and also starting the topic.

Yes Bank – Can we say “YES” to it ?

Yes Bank is new generation private sector Bank promoted by Mr Ashok Kapoor and Mr Rana Kapoor. Both are seasoned Bankers with International Banking Experience. Robo Bank of Natherland is also one of the promoters. Rabo Bank is is the only AAA rated Bank in the world. Yes Bank was given license by RBI to operate in India from 24.05.2004. They opened their first Branch in Mumbai sometime in September-2004. So the result as on 31/03/2005, shows its operation for only six months. The first full year result was available on 31/03/2005. The result of first six months of FY-2007 have been declared and hence taken for consideration. Further, it is also not prudent to compare Yes Bank to HDFC Bank, ICICI Bank and UTI Bank, as they were all were given license in 1994 and they started operations from that year. So they were already 10 years older than Yes Bank. Only Kotak Mahindra Bank was given license to operate in 2003 and so around 18 months elder to Yes Bank. So KMB can be compared to some extent. But again strictly speaking KMB was not a new Bank. Kotak Finance was converting its Branches to new KMB Branch. The same infrastructure was used for converting that into a Branch, which saves a lot of expenditure and hassles. However I have tried to take a realistic view of the situation as Yes Bank is comparatively younger and needs a lot of space to grow.

I have devided the report into two sections, one taking non-financial factors into consideration and the other taking financial factors into consideration. Since I do not have knowledge in technicals, I have avoided giving a view on technical aspects of it. I have tried to be simple in my narration and in case of doubt open for questions.

NON-FINACIAL  ANALYSIS OF YES BANK

1. A key strength and differentiating factor of Yes Bank is its knowledge based approach to Banking. It has taken the best technology available in the market. Flex cube, Cash Tech, Finn One are the best available software in their respective fields. It uses Port Wise – Secure Internet Banking application software and Yes Bank is the first Bank in India to deploy this two factor authentication to enhance customer security.

2. It has a great parentage. Both Ashok Kapoor and Rana Kapoor are seasoned Bankers. One of the promoters Rabo Bank of Netherland is the only AAA rated Bank in the world.

3. Yes Bank is the first Bank to implement RTGS (Real Time Gross Settlement System)  put forward by RBI in India. It’s a scheme where instant credit can  be given to a customer’s account from another account across the differwent Banks in the Banking system. This is in real time. It is also one of the first Banks to implement NEFT (National Electronic Fund Transfer)  a technology driven settlement system implemented by RBI.

4. It is one of the pilot Banks selected by RBI to implement the Cheque Truncation System on a pilot Basis in National Capital Territory of Delhi. This is a paperless, image based, fully automatic clearing system which is to be implemented in all metros after its implementation in Delhi in 2007. It has taken the cheque truncation software from NEWGEN, which is also one of the best available in the market.

5. Two ex-Deputy Governors of RBI are advisors to the Bank.

6. It always takes the best professionals in the higher cadre. Many of ex-SBI professionals have joined Yes Bank.  Though there are a couple of top level attritions recently, it still recruits the best. Recently it appointed Mr Varun Tuli as President, Business Banking, who has served earlier in American Express Bank. He also served in Bank of America, where he was awarded “Chairman’s Eagle Pin award” which is the highest recognition in Bank of America Globally.

7. It has started recently 7 AM to 11 PM Banking (in competition with 8-8 Banking of ICICI Bank. It has startrd in its Andheri Branch, which will be followed in another dozen Branches shortly.

8. They have 24 Branches as on date. The management has committed to take the count to 50 by 31/03/2007 and 60 as on 30/06/2007.

9. The bank also planning to add Insurance product  and Demat services soon.

All the above factors are positive factors for investment in Yes Bank.

FINACIAL  ANALYSIS OF YES BANK.

1. Business.  Yes Bank has cornered  total deposit of 663 crore in FY 2005 (only six months) and 2910 crore for FY2006. Out of this deposit 539 crore is inter bank deposit after which the deposit comes to 2371 crore. There is a growth of more than 250% in deposit. After  the first 6 months of FY2007 it has total  deposit of 4330 crores, which is a increase of 1959 crore, which shows that at this rate it will again show an increase of approx 200% in deposit for FY2007. This the highest conseceutive growth in deposit for any private sector Bank. Compared to this KMB had a deposit base of 177 crore in the first year and 257 crore in the second year of operation,.

Similarly as far as advances are concerned  Yes Bank has advance figure of 761 crore in FY 2005 and 2407 crore in FY 2006. This also shows a growth of more than 250%. As on 09-2007, Yes Bank has a advance portfiolio of  3730 crores. Advances has grown by 55% in half year, which may cross 100% in  the year end. Again a stellar growth. KMB had a advance portfolio of 1004 crore in the first year. This is high because they took over the loan business of Kotak Finance. IN the end of second year of operation  KMB had a loan portfolio of 1241 crore which was only a 20% addition.

Compared to that Yes Bank has performed very well in increasing the business of the Bank. Growing of Business is very important for any business, but it should increase profit also to that extent. We will see later whether Yes Bank could increase profit to that extent.

2. Income.  Income from Banks come from different sources. In Intt Income Banks earn Interest on its advance portfolio. Banks also get Income from its Investments, Trading, fx transactions, commissions, discounts, underwriting and other Misc sources. All these are grouped under Non-Intt Income. A good Bank should earn as much Non-Intt Income as Intt Income. Segmentwise analysis of income is also possible, but it will be too detail for now. During Q12007 the non intt income was around 53% for Yes Bank of the  total Income . But in Q2-2007 it has come down to 48%. Management has promised to keep it at more than 50% in third and fourth Q result. The %age of Non-Intt Income for Yes Bank is very high and that is a big plus for the Bank. For HDFC bank in the Q1 and Q2 -2007 there is a negative income from Treasury which has brought down the non-Intt Income. But for Yes Bank it is very healthy.

3. NIM- This is otherwise known as Net Interest Margin. This is one of the very important ratios which determines the profitability of the Bank. NIM is the difference of Intt earned and Intt paid divided by Avg business. For a good bank it should be more than 3.5. For YesBank it was 2.7 forQ1-2007 and it was 2.9 for Q2-2007. If we compare this with HDFC Bank it is 4.3%. ICICI Bank also has around 4% . The lower NIM shows that the Bank is getting deposits at a higher rate and advancing loans in a lower rate.  The average cost of funds for Yes Bank is 6.5% for Q1 and 6.7% for Q2. It ‘s yield on advances is a dismal 9.75% forQ2.  This is a weak point for the Bank. The Bank has to get better rate on its advances and it should increase its retail lending. If we check the composition of Advances, we find that its loan portfolio consists of 70% of loans to Corporates and 30% of its loans to SME. Generally loans to corporates are given in a lower rate and SME loans bear a higher rate of intt. Management should try to increase the % of SME loans.

4.  Capital Adequacy Ratio- This is a measure to show that whether the Bank has adequate capital to recover from the risks associated with Banking Activities. As per RBI guidelines, the commercial Banks should have at least CAR of 10. More the better and stronger the Bank. For Yes Bank Q1-07 it was 14.28 and in second quarter it became 11.98. Though it can not be said to be excellent, still this is not bad for a growing Bank. As the Bank has raised Lower Tier-II capital of 150 crores, in October CAR will increase in Q3-2007.

5. CASA Deposits.- CASA deposits are Current Account and Savings Account Deposits. These are the bulk of low cost deposits. More of these deposits in a Bank, more will be the NIM of the Bank and less will be cost of funds. This will result in more profit for the Bank. Though there is no agreement on its proportion,  a ratio of 40% of CASA to total deposits is a must for  a good Bank. HDFC(54.9), ICICI and UTI Bank maintains a proportion of around  50%. In case of Yes Bank it was 11% for Q1-2007 and has come down to 5.5% for Q2-2007. Such a rapid swing of CASA %age shows that the Bank is mostly relying on bulk deposits with special rate of Intt. This is a highly disturbing feature for Yes Bank. Unless they open more Branches and get more retail deposits, their profit is not going to rise. This is the reason, why the NP is not growing in the same proportion as the growth in business. The Q4 should show increase in CASA %age positively.

6. The net profit from Q1 to Q2 has increased marginally from 16.88 crores to 21.49 crores resulting an EPS of 0.63 to 0.80.  This marginal increase is due to the above reasons which the Bank has to address.

7. NPA (Non-Performing Asset)- The best part of Yes Bank is its nil NPA. Though they have made a higher provision of 11.33 crores in Q2-2007 over the 4.20 crore made in Q1, they could contain the NPA to nil level. This shows that the quality of advances they have made is of good quality.Net NPA to net advances is0.16% for HDFC Bank, 2.2% for ICICI bank, 0.17% for Kotak Mahindra Bank and 1.2% fot UTI Bank. Nil NPA of Yes Bank is definitely a plus.

8. Though a lot automation is there,  the Establishment expenses of Yes Bank is higher than other peer group Banks. Consequently profit per employee is lowest in Yes Bank at 3.06 lacs where as it is 9.39 lacs for HDFC Bank, 12.0 lacs for ICICI Bank, 10.25 lacs for KMB. 

9. As on Q2-2007 they have invested 1478 crores towards SLR requirement.  Out of this 603 crores od security are kept in Hold to Maturity (HTM)category, 782 crore kept in Available for Sale AFS category 93 crores for Hold for Trading. As around 40% of security is kept under HTM category, they are taking a calculated risk, which will not drastically affect

       affect profit in future.

At this point of time Yes Bank has to grow fast. They have to open 26 Branches by 31/03/2007.Thus they will be needing a lot of resources for Branch expansion and asset allocation.For increasing the capital base, they have allotted 12 crore shares @ 120/- to a swiss Re-Insurance Company. They have also raised Tier-II capital of 180 crore in Nov 2006. As they have give more advances in future they will also have to increase the capital very often,  inorder to maintain a CAR of more than 11.  However they need to be watched carefully about their future results. As many weak points are there which they need to improve and the share price has gone up substantially , buying at this stage may not be prudent. However  for a newly opened Bank , all these things are common, but how the Bank improves its figures is a million dollar question.

Ok sir, thanks very much. But with all the expansion plans etc., Yes Bank would be just a 3-bagger, you think?? Just curious!

Good stocks do not come cheap everytime and when they are cheap no one is willing to bid for them.HDFC Bank is being termed as pricy by almost all brokerages for over 12 years now yet it remains that way. SO we may argue about Rs 164 or Rs 146 but the point is it is always better to pay for 6 months of earnings in advance (buy good companies) then worry about whether the company would be able to show growth in earnings.

Om Shivaya,

I had been to a meeting today organised by IBA (Indian Bank's Association) for IT execeutives. I was nominated by our Bank to the meeting. Among the speakers was one Mr Kalra, IT Head of Yes Bank.He was before joining Yes Bank was working for a Bnak in Australia.

Hmmm! Well Shashi sir, about the integration of Flexcube and Nucleus...yes it does make sense. Flexcube is the Core banking product and Nucleus is leader in Retail and Loan segment so yes, Nucleus and Flexcube will have to be integrated.

Yes Bank has declared its third quarter results. The company's net profit was up at Rs 25.1 crore (Rs 251 million) versus Rs 14.5 crore (Rs 145 million).

Rana Kapoor, MD & CEO of Yes Bank stated that they are expecting to maintain NIM at 30% and other income at 50% of total income.

Yes bank is looking at USD 75-100 mn of capital raising. The NIM has improved to 3% versus 2.9%, comments Kapoor who feels that timely PLR increases ensured NIM expansion. The number of branches of Yes Bank is to increase to 100.

Kapoor stated that the RoE is at 14.1%, while its CAR was at 14.3% and CASA at 7.2% versus 5%.