Goldman Sachs sees 30% upside in Yes Bank on strong fundamentals

NEW DELHI: After moving in a range so far in the year 2013, Yes Bank Ltd can rally 30 per cent from its June 18 closing price of Rs 475.45 on the back of strong fundamentals and expansion strategy, Goldman Sachs said in a report.

The global investment bank has maintained its ‘BUY’ rating on the stock and has raised its target price to Rs 620, representing 30 per cent upside from current levels.

“Axis Bank has the potential to grow its assets and profits faster than the industry given lower base, sound expansion strategy, and product focus,” Goldman Sachs said.

"We expect Yes Bank to expand its loan book by 26% CAGR and PAT by 24 per cent CAGR in FY13-FY16E," the report added.

Yes Bank trades at 2.4X/1.9X PBR and 10.3X/8.2X PER in FY14E/FY15E, which the investment bank considers fairly attractive given above-peer PAT growth of over 24 per cent, RoA and RoE of 1.6 per cent and 26 per cent average (FY14-FY16E).

Management is of the view that the worst is over of the private sector bank, although there is no visible turnaround or improvement in the situation.

Competitive dynamics have remained reasonable and pricing trends have been favorable despite the backdrop of risk aversion.

The investment bank expects the margins to improve for the bank given significant reduction in rates for debt market.

However, this will reflect gradually from 2Q as the 1Q margin will likely be impacted by lower yielding priority sector loans and the high cost of borrowing in March 2013.

“Overall margin for FY14 and FY15 should improve in our view as bulk borrowing costs are down 100bps over last one year, and CASA for the bank will increase to 25% by FY15 from 19% now, added the report.

Goldman highlights key takeaways from the recent management meet:

(1) Yes Bank is on track in garnering CASA (38% CAGR FY13-FY16E) and creating ground work for retail asset as it builds a stronger liability franchise and doubles its network by FY15.

(2) Focus on productivity, value/account, and cross-sell (from 2.5X to 4X target) should ensure profitable growth.

(3) New area of growth, business banking, targeted through branch network.

(4) On corporate side, focus is on refinancing activity; knowledge based and collateralized lending and fee income likely to reduce risks.