Buy YES BANK (SSKI)

A strong growth story is unfolding at Yes Bank. The bank’s business model
revolves around providing an integrated product offering to clients. Fee income is a
large component of revenues, and is driving improvement in the bank’s RoA.
Expanding geographical coverage and differentiated offerings through sector
knowledge are propelling NII momentum. While the focus is on increasing the low
CASA ratio, tightness in liquidity conditions and rise in domestic interest rates
impart volatility to margins. We expect a 42% CAGR in the bank’s earnings over
FY08-10, driven by strong performance in core income and operating leverage. RoE
is expected to be subdued at ~18% over FY08-10 due to the opportunistic capital
raising strategy. Based on CAP model, we assign a 12-month price target of Rs260
(3.4x FY10E book), a potential upside of ~67% from here.

Strong and well- incentivized management: Yes Bank, the only greenfield bank set up
in India in the last decade, is well-poised to grow driven by the management’s robust
execution capabilities and vast experience. The bank has a headstart on the back of
existing industry relationships of promoters and the management team. Yes Bank
management is well-incentivized and its interests aligned with an ESOP scheme
comprising ~7.6% of outstanding share capital.

On a high growth trajectory: Yes Bank has gained critical mass on the back of an
integrated product offering for customers, strategic focus on cross-selling, expanding
geographical coverage and value-added proposition through sector expertise. Fee income
has registered 91% CAGR over FY06-08, which has led to an uptrend in RoA.
However, the bank’s liability franchise is weak relative to peers given its low share of
CASA in deposits. The unique outsourced technology model lends scalability to the
bank, with operating leverage expected to kick in as scale increases.

Strong earnings momentum, attractive valuations; Outperformer: We expect strong
performance in core income streams and operating leverage to drive 42% earnings
CAGR over FY08-10. RoA is set to improve to 1.5% by FY10, while RoE (average of
18% over FY08-10) may remain modest in the near term due to opportunistic capital
raising. At 2.4x FY09E and 2x FY10E adjusted book, the stock trades at the lower end of
its historic P/B band. Initiating coverage with Outperformer and a 12-month price
target of Rs260 (3.4x FY10E adjusted book).