great analysis on yes bank… agree about it being highly volatile high return kind of stock. It needs a lot of cool and conviction to buy and hold yes bank with the kind of swings it is showing.
A question for you:
Putting aside market caps how does hdfc bank stack up against yes bank in terms of kind of risk/return.
I will put up my view and solicit your views.
I feel with a CASA of 44% as compared to around 20-25% (not too sure about this) and 29% of indusind, HDFC should have a lot of cushion in a possible high interest regime.
Plus I feel hdfc bank CASA should be seen in terms of interest rate paid to its customers— zero to current account holders and something like 4% to savings account holders— blended should come to 2.5% or at most 3%… Now this is a bank which has CASA at around 2.5% as compared much higher rates being paid by both yes (savings interest rate paid 7%) and indusind (savings interest paid 6%).
This is a probable reason why it has not fallen (less than 20% from top for hdfc bank) to the extent of indusind (30% from top) or yes bank (50% from top).
Returns going forward might be skewed depending upon market perception but I guess in this kind of markets hdfc nearer to 600 seems a safer bet. HDFC Bank seems like an all weather bank.
Nikhil - In banking few bad deals can ensure closure and hence the quality of loan book should be the first screening criteria and only then one should look at other valuation parameters. If you speak with people in banking circles, you will realize that reputation of Yes Bank is an aggressive bank that’s ready to bet on relatively risky deals. In the current market environment this can be a recipe for disaster.
Mr Deepak Parikh of HDFC expressed his opinion about family feud in Yes bank. While himself he always vouch for professional management in his own companies here he seems to be in favor of family for Yes bank. Two links below about the issue:
You are absolutely right on HDFC Bank in current environment. If I have to buy a bank stock with new cash, HDFC Bank becomes first choice. The low cost nature of HDFC Bank reflects in their NIM on 4.2%. IndusInd does around 3.6% while Yes Bank 3%.
Plus HDFC Bank is known to manage risk very well and has proven it for 2 decades. One can almost predict HDFC Bank EPS/Book values for 3-4 years ahead easily. I think this predictability, sound business and risk profile gives investors good sleep. It’s a good buy around 600.
Only point to remember is over long term HDFC Bank will grow book at rate of 20%. We should not expect 25-30% returns here. Butreturns can be enhanced by investing in times like this.
Agree with your views as well. Yes Bank is an aggressive bank and every investor of it should know the risk. Still, I don’t believe it’s management deals with risk blindly. They have managed to take calculated risks so far. And Indian situation is not like mortgage burst in western economies which can take banks down. Even there for example in US, a primarily mortgage financier like Wells Fargo has come out well from recession.
Judging quality of loan book is very difficult for investors. We have to trust management here.
All in all my view is if you hold Yes Bank, this is not the time to sell it. You can even buy it depending on risk profile. Just the price action does not make it bad investment. Once market recovers again, one can choose to sell it at higher valuations.
This is a little complicated thing and confuses me too. Straight way to look at it is you have to take out dividends part from net profits. So with 20% payout ratio of HDFC Bank book value growth automatically becomes (1 - 0.2) * 30 = 24%.
Now one more thing comes into picture. If bank dilutes equity, The PAT grows as usual in that year. But number of shares increase and this reduces EPS growth. But usually capital raising is beneficial for banks and it increases book value per share. The additional capital when employed generates higher net profit. You also have to consider increasing share number doe to ESOPs. For example I am giving HDFC Bank numbers below. From 5 years FY08 to FY13 it raised equity twice.
FY08
Book Value - 11497 Cr,PAT - 1590 Cr
FY13
Book Value - 36214 Cr, PAT - 6726 Cr
PAT CAGR = 33%, Book Value CAGR = 25.79%, EPS CAGR in same period = 25.80%.
In the end, numerically the book value can grow at rate of ROE * (1 - Payout). Any equity raised is a bonus. But even a small change in ROE can change PAT growth number substantially. For example HDFC Banks ROE in FY11 was 18%, FY12 20% and FY13 22%. To keep PAT growth at 30% it’s ROE will have to be increased or it needs new capital.
Thank you Nikhil for your above explanations, very useful for newbies like me! I have few questions, not specifically for you but anyone with insight pls feel free to jump in.
I see Kotak generate better NIM ( 4.6-4.8%) than HDFC Bank with lower CASA ratio? is it becausehighertrading gains or because of CV portfolio where bank can charge more interest (not sure if banks can charge more for CV clients). Also kotak commands higher valuation than most pvt bank expect HDFC Bank…is because of quality of bank or just because FIIs flocked into Kotak and valuation sky rocketed?
Also im wondering why people here(even most indianbrokerages) are moreinterestedin Yes Bank/IndusInd Bank than kotak, is it because of higher valuation of kotak that kept indian investors away or better prospects of Yes Bank/ IndusIndattracted investors towards them?
Sorry for bombarding with questions, all these days i was trying to understand the rationale for my above question.
I don’t track Kotak bank actively. So I can just give some basic answers.
Higher NIM - Don’t know the exact reason but the higher yields on the loan book could be the reason. Portfolio’s like CV generate 15-16% yield. Higher in case of used CV, used car loans etc. So for Kotak it could be composition of their loan book. Need to check research reports for getting right answer.
Higher Valuations - You are looking at standalone valuations of Kotak which seem very high. Take a look at consolidated PAT/Book value. Kotak has other businesses like Insurance, MF etc. On Consolidated basis valuations are reasonable.
Kotak bank is a sound and well managed bank. Uday Kotak is a great banker and the quality of bank is next to HDFC Bank and can be compared with IndusInd. It’s a good choice for investment too.
And Other Income was 1250 Cr. (This is a gross number, after deduction of Expenses and Taxes it becomes a part of Net Profit).
So we see that in Yes’s Net Profit, the Treasury Gains were a significant portion. Almost 50%.
Hence, one could conclude that it was hugely depending on Treasury Gains, which will be elusive for another year or so till currency stabilizes; RBI will make sure of that. This will hugely impact its numbers in the coming quarters.
Market is definitely reacting to this.
Moreover, the chart is showing mad bearish momentum akin to the proverbial Falling Knife, which one should not attempt to catch.
Irrespective, of how good one may think the quality of the stock is, the investor must let the price settle/consolidate. This may happen near 200 levels or even at issue price. Let the market decide.
To an investor, price of purchase is very important. I am sure you will agree. With that said, I could buy Union Bank at Rs.80 and end up being getting better results in the next decade than Buy Hdfc at Rs.600. (I am taking much liberty of assuming that Union bank, despite a stacked up NPA, won’t go bust).
I know a handful of fellow investors who assumed eternal and incessant growth in Infosys and have not earned a penny for half a decade. Investors in HuL tasted a similar medicine post 1999, stretching all the way till 2011!
So, once the business quality is ascertained as good, probably not best, I get drawn to the discount I am getting on the price. Hence, it feels HDFC is too expensive at CMP.
However, I plan to buy HDFC in 400 levels allocating the maximum percentage of my portfolio.
400 levels happens to be low of 2011… and a logical price tag as per the prevailing economic conditions. I have discussed this in another thread in detail. Please grace the thread with your response.
what about the earnings that hdfc bank has earned in between 2011 -2013. in stock market v always follow prices , when stock rises v follow it ,n fall v follow it n say n will buy ii @ X level… though price is imp but no one can catch the bottom
It’s pleasure to get your insights. I thought on your point on Yes Bank’s treasury income anjd tried to do some number crunching. Note that all numbersare very rough. This is how YB categorizes Treasure segment.
"Includes investments, all financial markets activities undertaken on behalf of theBank’s customers, proprietary trading, maintenance of reserve requirements andresource mobilisation from other banks and financial institutions. "
It includes SLR gains and credit substitutes. It also includes majority of it’s other incomes from activities like debt syndication etc. YB segment results for FY13 show treasury profit (before tax/provisions) of 1509 Cr. Corporate banking profit was 1568 Cr.
So far it supports your 50% income from treasury thesis. Now lets take average credit substitute folio bank managed over FY13 at 10,000 Cr (number is 12-13K Cr in the FY end). Also take approximate SLR at 25% of 56,000 Cr deposits (ended FY with 67 K Cr). The SLR comes to 14,000 Cr. Added number of SLR + credit substitutes = 24,000 Cr. Applying banks 2.9% NIM the net income it generated from this folio comes to around 700 Cr.
This income is NOT generated through any trading activities. This leaves us 800 Cr of income which is about 25% of banks pre-tax profit. This too includes activities like debt syndication, fee income for FX positions and other debt related services.
So all in all we cannot just write-off banks operations as treasury dominated. One more point to consider is the other income we see in P&L statement comes from all 3 categories like corporate/retail & treasury. So other income of 1257 Cr being 36% of net income of 3476 Cr for FY13 does not tell the whole story.
So here I contradict your view that coming quarters will be heavily impacted. Lets see YB’s numbers for remaining of FY14 to confirm.
By the way banks have another new avenue of treasury operations after RBI action. They borrow from MSF at 10.25% and invest in short term 3-months CD/T-bills which were going at 12%+ rate. Just an example of how they generate gains even in tough times.
Regarding comparison of Infy/Wipro at height of 1999-2000 valuations will not be fair. Infy was trading at 100-200 PE then. In 10 years after that Infy grew profits by 10-12 times. It was investor who invested at insane PE of 200 is at fault. HDFC Bank is trading at 15 PE and 3 PB at CMP. Which it rarely traded at in 10 years timeframe.
Another reason for assuming HDFC Banks growth is we already have an SBI in same sector which is 4 times larger company. And sector itself is growing. We also have history of very long term growth in banking sector from US/Europe with us. IT in comparison was rising sector in 90s.
We cannot predict how low markets will take the price but HDFC bank at current valuations is a great investment candidate. Had I leveraged some part of my folio, HDFC Bk would be first choice to put that money. But it’s personal preference.
I understand from your write-up that the non-interest gains of Yes Bank were not entirely from treasury gains. However, it is preferable to invest in a Bank (or any other company) which generates revenues from core-operation, in this case Interest Revenue… else it gets a little doubtful to me as I have to rely on a limited skill-set.
Regarding HDFC I feel downside is inevitable. The economy is correcting in general. The profits are bound to reduce and most importantly FIIs are highly likely to take money out of India, given the state of affairs.
I am not saying that HDFC will not go lower than 400, I very well could. But, a correction to Rs.400 would be a convincing investment opportunity for me.
This is my first post on this forum, and boy I am glad to be here!!! Needless to say, the quality of discussions is outstanding and incomparable to other forums… I am an investor in Yes Bank since the last 12 months, with a thesis on betting on a quality lender in an helpful interest rate scenario and for 10 months saw that thesis play out. However the price action of the last 2 months was a kind of shocker. I have recently added to my position and substantially reduced my cost and my analysis of causes of the recent price action is as follows:
The banks dependence on short term funding and RBI’s recent dollar defence
The extent of its MTM losses in Q2
Its need to raise capital due to low cap adequacy
The ongoing board drama
I would like to analyse each one of these individually
It is undeniable that the bank has relatively high dependence on short term markets. However the question to ask is if this strategy to RBI to keep short term rates artificially higher will continue forever. I certainly dont think so. Especially now when the rupee has run up by 10% already. Additionally, the bank has the highest % of base rate linked advances amongst its peers and can pass them thru, however this argument is rendered slightlytheoretical as its a free market and consumers would move on to another lender. But I see a long term benefit of this short term shock, now the bank will seriously spend some time to build a more stable liability franchise and try reducing dependence on short term markets.
A lot has been said about MTM losses. RBI has already recognized the issue and has allowedinter-quarteraccounting jugglery for FY14. The bank has a slightly larger problem over others as its has focused on credit substitutes. These will impact profitability in two ways - it traditionally sold them down at lower yields, which is not possible under current scenario and the book itself will be marked down as some of its advances are quoted. I am yet to finish my research on this whole MTM loss situation but what I have read from secondary research is that at 8.4% g-sec yield, its in ‘no profit no loss’ situation right now.
The bank has amongst the lowest cap adequacy amongst peers and is due for a capital raise. The management has ducked behind their RoE claiming RoE>growth so we are ok… The biggest risk to this is any hit on RoE will make the cap adequacy look ugly and you would be forced to raise money at an even worse time. The management has to wake up to this real big risk. The recent price action makes it very difficult for it to raise any capital without diluting existing shareholders at such low valuations. I think most shorts have taken conviction from this fact that the bank will have to raise in FY14 and have tried to pre empt and profit from that situation. I think the way out is a rights issue and I am hoping the board announces this quarter.
The board drama is ridiculous. I dont understand how anybody is to gain from a board war. If I were Rana Kapoor I might as well give that board seat away and not have another distraction on my hands. If the RBI rejects the current nominee, I wont be surprised if the next nominee from their side is Mr Parekh himself
Overall, if one looks beyond all the smoke, you will see a quality lender, with low NPAs, caught in a whirlwind of small problems which have all come together. Does that warrant a 50% drop in share price? The bank generated 1300crs of PAT last year, my rough calculation shows atleast 1100cr this year and thats only on account of MTM and NIM compression. Both will not reoccur from FY15 onwards where it should be back on its normal growth path. I am hoping this scare of FY14, helps management to further strengthen strategy and start thinking about issues slightly differently.
Also in all of the above I have not discussed interest rates, well that is anyone’s guess. I think the macro is bad enough not to warrant a rate cut for whole of FY14 atleast so no help can be expected from that front.
Excellent analysisstockpicker123. Would like to comment on few points.
When ROE drops, it does not make capital adequacy look ugly. CAR is dependent on overall asset book verses capital. ROE in indicator of growth. The drop in ROE forced lender to drop loan growth accordingly. So if ROE drops from 25 to 20, bank can just reduce loan growth and CAR will remain same. Axis bank did this for past 2-3 years before raising equity few months back. Point to be noted is drop in ROE can force expansion and growth but cannot and will not force capital raising at lower valuations.
My take is bank will generate profits of 1500+ Cr in FY14 itself. The growth could drop temporarily but thats not a big reason to worry if you are in for long term.
This period should teach management to reduce aggression which is not good in banking space. They would also learn importance of quality lending which HDFC Bk benefits from.
I think slowing down growth because you are under capitalized is a sin in banking, especially for a young bank like Yes bank.
I concur with your point on management aggressiveness, that certainly needs to come down. however I don’t think they have been aggressive on lending, SBI, other PSUs, Axis etc are masters at that. the issue here is aggressiveness on funding and disregard for ALM mismatch and capital adequacy.
In the current circumstances, where capital is generally scarce, I would shore up my defences… however today price is a big deterrent and therefore I think a rights issue could still work. Even a 200-300crs rights issue will suffice for the time being without diluting anybody, assuming R.K. has enough money to bring in…
