Yes bank

Stock Opportunities Not-so-Hidden Gems
41

Nothing magical about the fall. Yes has higher leverage than any other private sector bank, so it requires capital to sustain current growth rates. It’s higher cost of borrowing means it lends at higher yields (to riskier borrowers). It has much greater reliance on wholesale funds, which have seen yields go up after RBI measures, so NIMs will be under pressure. As noted above it lends to corporates and ‘somehow’ avoids NPAs. This becomes more difficult as economy heads south. It also has a larger investment portfolio of corporate bonds, which are falling in price due to recent higher yields, so there could be losses in next few quarters if the higher yields stay put.

Low multiples do not mean one is buying value and vice versa.

42

**GOING AGAINST THE HERD **an article which appeared in Outlook Business, May 25,2013 explains how social psychologist Solomon Asch showed that:

1). Most of us suspend belief in our own judgments when confronted by the judgments of a larger group.

2). We find it hard to disobey the orders of authority figures.

These principles are applicable to the stock markets. Today, we stare in disbelief at the fall in price of Yes Bank for various reasons. There are many investors (so called investors) who are panic stricken and rush to sell their shares out of fear. It is at this point one should remember the principle of Warren Buffett: " Be fearful when others are greedy, and be greedy when others are fearful".

The correction in the stock is an opportunity to enter the stock. If one recalls, when the same stock was trading in the range of 500, everyone was ruing at the missed opportunity. Some even bought at higher valuations. Today, when the stock is giving an opportunity to BUY at a very reasonable valuation, fear has set in and everyone around is wanting to exit the stock.

It is only rational investors who make money in the stock markets.

Charlie Munger says it so well" You are looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing"

If you know enough of Yes Bank, then go and BUY

Tony

43

Yes bank seems to be case of bad corporate governance also. After sad demise of company chairman during 2008 Mumbai terrorist attack there is attempt to remove his legacy and wrongful claim on his ownership (case is going on in court). On face of it , it may seems small family dispute among family members for ownership , but it definitely expose board towards their inability to manage a important ownership issue internally. As many famous investors say corporate governance and ethics what separate a great long term sustainable companies from ordinary companies. Also in last decade it was relatively easy ride by private sector banks and they are never really tested for extreme business cycles (proof most of them has almost increase their book size by 5-10 times in last decade). This kind of growth is uncommon in highly competitive segment like private sector banks with large number of players and eventually 2-3 players may emerge stronger and bigger while rest another may fall behind.

44

Hi Manish,

I agree with you on GRUH and REPCO that they are withstanding the current price because of their target customer segment and the collateral security. But DFFL, Indiabulls and LIC whose target customers are more or less similar (retail) and also have similar collateral security. I strongly believe that not only these two factors are helping them in sustaining the profits but also other important factors like Low base, huge moat and also these are currently available in strong hands.

And coming to your other question on WHY yes bank is impacted most when compared to Indus Ind. The answer is quite simple. Indus Ind has diluted their book recently and raised funds for their expansion where as Yes Bank was on the verge of completing this. And because of this recent developments , they would certainly find it difficult to raise the money at higher book value which will eventually impact their growth. Also there is a high chance that they might lendaggressivelyat higher rates to riskier companies feeling that they are lagging behind others in terms growth which would spike up their NPA numbers. So these are all market assumptions and are not certain.

I would say that one should trust the management after all the incredible growth that it has shown in the past despite being the youngest of all. Though it is hard to digest, i would feel that they might sacrifice growth for a year rather than lending at higher rates to riskier customers to fuel their growth. Also with these recent developments , there is some good news as well. The bond yields are going down and so people are now shifting from bonds to Banksbecauseof better deposit rates. This will certainly help them in improving their CASA ratio.

So it is up to the individual if to trust the management capabilities or not.

45

Hi Sandeep. I agree with yr point. Its upto individual to trust mgmt. There is no formula , mobile app which can tell you which mgmt is ethical. RBI actions dont bother me much bcoz once the economy shows signs of revival we can expect policy easing off. However, what bothers me is not being conservative ( refusing to recognize NPA which even a layman like me would call as npa) and sending letters to “selected” shareholders. It is quite a possibility that I am over-reacting and yes bank will bounce back but in present scenario I am willing to miss the upside. I will wait for at least a qtr to get a better understanding.

Thanks R Jain for the insight. It was helpful for a novice investor like me to get a better understanding.

46

Hi Manish,

came across this on twitter, this guy is being followed by many of the stalwarts from this forum

he posted this

[Yes Bank makes >= 50% of profits from treasury i.e. more by trading bonds than banking! Build this fact in your intrinsic value calculation!]

this gives a no to the details given by R Jain

47

Hi Hardtoget,

This is a known aspect. Even IndusInd bank , Indiabulls do generate some part of their profits . I believe this is omething which is common for most of these banks/nbfc’s . ( Not much idea… i may be wrong ) Experts please throw more light on this aspect.

48

Caution is the word.

No matter how good Yes bank is, it is still fairly new in the field. It is listed only in 2005 and hence not even a decade old. Sure, the financials may be good and price may look good too… but, it seems there is more downside. It will lead the slide as the Index slides. The carnage is not over.

49

Hi Hitesh , Donald and Ayush ,

Why you guys are so silent on this one. Do you guys still feel that there is much more downside left to YES BANK. Will the fundamentals of the company be impacted more than any other bank like KOTAK,INDUSIND etc… ?

Please post your valuable analysis and educate us :slight_smile:

50

this is what is a gross analysis of banking industry in india : indian banking industry has two kind of banks : private and public . the public sector banks cause of being promoted by the govt and run by govt servants will always have higher gross and net npas. and the private sector banks run by able promoter and efficient management will have less gross npas and net npas. india is a relatively under borrowed and under leveraged economy and the level of financial penetration is very less. With the RBI autonomy in place and powers in the hand of RBI the banking industry is more or less efficiently regulated and watched. Hence banking esp private sector banks are the dream investment choice for stock market investor. What we tend to forget is the larger picture that once in a while the economy will do bad ,.the mood might be sour and all hue and cry of panic. #this too shall pass# and if we are able to pick few good banks during this cycle : amazing long term wealth will be created.

regards

divyansh

51

My friend had emailed YES bank investor relation contact point, Aparajit, when i was with him, my friend expressed concerned regarding why YES bank sent such email to shareholders and why only to select few?

Aparajit said they had emailed to retail investors because during last AGM investors esp retail investors were concerned that Madhu kapur chapter is affecting banks share performance & there were concerns of impact of RBI measures and bank just wanted to address concern on impact of RBI measure and what analysts think.This has prompted bank to send such email to shareholders, however, they had stopped sending email half way thru as the email wasnt well received.He said bank would refrain from sending such email to shareholders!

I donno how much to trust these well trained investor relation guys and their ‘language’.

Regards,

Augustine

52

what was the content of emails sent by yes bank?

53

This slide in Yes Bank won’t find respite till 225 is touched. It is considered good because of the growth it promises, but growth is not possible due to sluggish economy! This is the case with very many good companies.

Therefore, Excel sheet estimates (DCF or otherwise) are not enough to make investment decisions.

54

Lot of fear and pessimism over Yes Bank price fall. Lot of reasons being given for current low valuations. All these reasons were known to market when stock was trading above 500 for few months. So I don’t agree with reason like “market knows something that we don’t”. Yes bank has always been most to fall and quickest to rise. Check the 2009 price action. It traded at PB of 1 for some time. It’s also riskier compared to other private banks and most volatile too.

As a 3+ years investor in Yes Bank and one following it very closely, I am trying to give some points for fall and my overall thoughts.

This is bad time for banks. specially after RBI regulations. And it’s no surprise Yes Bank stock was hit most.

1). Yes Bank CASA is among lowest in private banking space. Even in CASA, real low cost current accounts are just 10%. The banks depends a lot on wholesale and bulk borrowing.

2). The loan book is almost entirely corporate and SME. Which in current economy is under pressure.

3). It holds lot of bonds/credit substitutes other than SLR securities. If yields remain elevated, there is risk of some MTM losses from Q3FY14 onwards.

4). It’s leveraged a lot and with current price, there is no hope of capital raising.

5). Inter-Promotor feud thats ongoing does not reflect well for bank.

Despite all these negative points, I think the price correction is more than it should have been. But that has always been the case with Yes Bank stock. Despite this hue and cry some investors in panic might think there is nothing good about the bank. The same set of investors were cheering bank at price above 500 and will do so again in couple years.

The bank has following positives

1). It’s trying to grow branch network, retail presence and CASA. It’s going well with CASA mopping and will slowly get into retail lending too. This will help improve overall liability franchise and NIM’s in future.

2). It’s consistently doing ROA of 1.5/1.6% and with it’s high leverage the ROE is above 25% giving enough room for 25% loan book growth.

3). It has shown capability for managing growth for past few years. It sailed well though recession, microfinance crisis and bad economy. So management has to be given some credit for achievements so far.

4). It will raise equity whenever market price permits. That may be 1 year or even 2 years away. But overall we have a 25% grower which can easily grow at this rate for 10 years. It’s a personal choice whether to stomach risk and pick it at cheap valuations or not.

55

Now about some points raised in this thread.

“R. Jain” ji mentioned “It’s higher cost of borrowing means it lends at higher yields (to riskier borrowers).”. - Thats no necessarily true. Look at it’s gross yield on advances. For past 2 years, its around 12-12.5%. Try comparing this with other banks like Kotak and IndusInd. Their yield is much higher. And higher yield does not always turn into more risk. Even IndusInd’s CV portfolio with 17% yield is risky. But cannot be termed as risky just because it yields higher.

Niraj Kumar ji said “(proof most of them has almost increase their book size by 5-10 times in last decade). This kind of growth is uncommon in highly competitive segment like private sector banks with large number of players and eventually 2-3 players may emerge stronger and bigger while rest another may fall behind.”

)- Banking in India is still at low penetration stage and private banks have 2 decades of high growth ahead. Study US or Chinese banking space and you will know what I am saying. With 5 trillion economy, China has 4-5 very large banks that make $20 billion+ profit. India if grows at GDP of 5-8% in next 10-15 years, all banks will have huge scope to expand. Private banks more so because of obvious reasons we are seeing for last 10 years.

On point of 2-3 strong players remaining in banking space. That will never happen. Just have a look at US banking space. 5-6 huge banks coexist with thousands of other mid and small size banks. All of them doing enough business. Banking is not telecom or toothpaste market. Everybody can do well even with competition. And this has been proven world over all these decades.

On Yes Bank making half the profits from treasury - Note that treasury segment includes SLR portfolio which is 25% of deposit base for all banks. Yes Bank also maintains credit substitute portfolio. So its no surprise this segment contributes large chunk in revenues. I am sure other banks too will have large revenues though not as large in % terms from treasury.

Amit Jain ji said “It is considered good because of the growth it promises, but growth is not possible due to sluggish economy! This is the case with very many good companies.”

)- Here its important to have a look at market share of small banks like Yes. Indian banking has assets of 60-65 lakh Cr. Yes bank has just 1% share of this pie. To grow loan book by 25%, Yes bank needs just 15000 Cr ofadditional loans. At overall credit growth of 15% or 9 lakh Cr, this is peanuts. In this economy or even in good times, SBI cannot grow at more than national creditgrowth rate. But smaller banks easily can. Look at HDFC Bank which is doing this for past 2 decades. It is called increasing market share. And private banks have consistently doing that to public sector banks.

1 Like
56

Great analysis Nikhil.

Once again, Really amazed by your understanding of the banking sector and YES Bank which you hold. (For record, Nikhil, a senior member of TED, has a highly concentrated portfolio of 3 stocks and YES Bank is one of them)

I also feel the hue and cry about Yes bank is always more as compared to other banks.(Remember 2008, derivatives issue when everyone was dead against YB, it gives me a similar feeling now). Valuations are very cheap as compared to historic valuations on P/B basis.

I have few doubts:

1.) How long can it grow without raising equity capital? (It generally raises equity at 3-4 P/B which might not be possible for some time now)

2.) Any idea to what scale will the MTM losses on bonds be?

3.) What do you think of IndusInd as compared to YB from a perspective of 2-3 years?

57

Hi Rohit,

Yes bank is around 15% (20% before this fall) in my 4 stock portfolio. And since I hold it, I have ownership bias :slight_smile: . So take my views with pinch of salt. Answering your questions.

1). Yes Bank is currently doing 25+ ROE. This turns into 27.5% possible growth. If you take 20% dividend payout ratio, the possible book value growth without raising equity comes to 22% (more on annualized basis). Note that this is possible loan growth with maintaining Tier I CAR ratio. Other income can change both ROE and this growth rate to +ve/-ve.

2). Management said in their last concall that they have sufficient cushions in their bond folio before MTM losses come about. Their bond book was built over last 3 years when rates were as high as current rates. One interesting learning I got was banks do not report MTM losses unless the bonds market value goes below the purchase cost.

In my opinion, MTM losses for private banks might only come in Q3 FY14 and if RBI reverses regulations afterDecemberthen it will be phenomenon for just 1 quarter.

3). IndusInd is better than Yes Bank on all parameters and hence commands better valuations. It has more retailpresence, existing branch network, more CASA and is well capitalized. Yes Bank iscomparativelyriskier but cheaper bet.

Both banks are at very low valuations currently. Ask this to yourself. A company which has been consistent in growth and risk management for past few years. It can grow at 22% even in current economy and is trading at dividend yield of 2.5% trades at PE of 6.7, PB of 1.45 FY14. It’s risky and volatile too. Are you able to take the risk and jump in? Or just cannottoleratethe price action and would like to stay away and sleep well? It’s an individual choice.

58

Just an additional info. Don’t be fooled by net profit growth of financials. HDFC Bank for example has done 30% PAT growth for several years. But book value growth is just 18% CAGR. And if you check, price has followed book value growth rather than PAT. It does 22% ROE with 20% dividend payout making book growth around 0.8 * 22 ~ 18%.

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59

Nikhil,

Over long term, does not PAT growth converges to Capital Growth?? Then how come PAT growing at 30% and net worth growing at 18%???

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60

Hi Nikhil,

Your analysis is extremely good. Out of curiosity can i ask for your other three portfolio picks …?? only if you don’t mind sharing them here :slight_smile: