We expect the funding environment for Yes Bank to improve after the return of some stability in the foreign exchange market since mid-September, and especially following RBI’s latest 75-bps reduction in the rate on the marginal standard facility (MSF).
Also, we believe the market has been unduly pessimistic about Yes Bank’s short-term NIM outlook. Further, we expect the bank’s asset quality to stay healthy over FY14-15, despite a possible slowdown in its loan growth. Investors seem concerned that Yes Bank may have to resort to high-cost certificates of deposit to fund its balance sheet since the tightening measures were announced. But the bank has not used this source of funding much in the past couple of months. As it implemented a 25-bps base rate hike on August 1, we estimate any NIM compression for 2Q FY14 will be manageable, at 5-8-bps q-o-q, at most.
Another concern is the perceived mark-to-market losses in the bank’s sizeable corporate-bond portfolio. However, management has stated that the bank’s portfolio is making much less of a loss than the market believes. We cut our net profit forecasts by 10% for FY14 and 8% for FY15 to factor in our expectations of lower loan growth and a flat NIM (vs NIM expansion we assumed previously).
We lower our Gordon Growth Model-derived six-month target price to Rs 532 (from Rs 585), now equivalent to a 2.7x FY14E PBR (previously 2.9x), to factor in the difficult domestic macro climate. However, we upgrade our rating to buy from outperform as we believe Yes Bank will continue to deliver an ROE of 24-27% for FY15, the highest level in our coverage universe.