Yes Bank

The bank has shown tremendous performance in terms of growth in advances. The advances in Q2FY10 grew by ~ 42% YoY to Rs 16300 crore driven by corporate and institutional banking segment. In line with the strong growth in advances, deposits too recorded healthy growth of 35% YoY to Rs19370 crore. The core fee income has also increased on the back of healthy growth in transaction banking and financial advisory segment. There are healthy signs of growth in this segment as a result of improvement in capital markets. Further, improved cost ratios and stabilised asset quality augurs well for the bank.

The bank’s aggressive target to double the branches by 2011 and proposed entry into asset management and broking business make it a good investment bet for 2010. The bank has received the shareholder approval to raise US$250 million while the management indicated that it is likely to raise not less than US$150 million in this fiscal. Hence this may lead to equity dilution of 15% in Q4FY10.

At the current market price, the bank is trading at valuations of 2.5x FY11E ABV and 15.4x FY11E EPS. We value Yes Bank at premium to its peers considering its aggressive plans and strong operational efficiencies. We recommend buying the stock with a price target of Rs 340 (average of 3x FY11E ABV i.e. Rs 330 and 20x FY11E EPS i.e. Rs 350).