The Hindu Business Line : Yes Bank: Book profits

At its current price of Rs 187, the Yes Bank stock has provided annual average returns of slightly more than 100 per cent since its IPO priced at Rs 45 in July 2005.

Investors may book profits on their holdings of the stock at current levels. Further exposures to this stock may be moderated and can be balanced with other core banking stocks such as HDFC Bank or Axis Bank.

The stock is currently trading around 35 times its estimated FY 08 earnings and almost 55 times its FY 07 earnings. These valuation multiples place the Yes Bank stock above that of established companies such as HDFC Bank or Axis Bank and do not seem sustainable.

Wholesale bank

Yes Bank follows a business model which is structurally different from that of HDFC Bank or Axis Bank. It is pre-dominantly a wholesale bank on both sides of its balance sheet. Corporate advances constitute almost the entire loans portfolio while wholesale borrowings — meaning higher value deposits (of Rs 15 lakh and more) as well as borrowings from wholesale market participants such as mutual funds — account for 95 per cent of its liabilities base. This balance sheet structure elevates the overall level of risk in the core banking business (in terms of interest rate, maturity mismatch and credit risks) and may not be conducive to medium term earnings stability. The earnings stream would be more vulnerable to adverse market events such as an economic slowdown, interest rate shocks or a vitiated credit risk environment.

The bank’s performance so far has not manifested any of these negative externalities. Most key banking parameters — advances, deposits, income (both interest and non-interest) and earnings — have all exhibited more than 100 per cent growth in recent quarters.

There is also no non-performing asset on the balance sheet as on date. It is clear that the bank has coasted along with the overall strength in the economy and has been able to build fairly impressive business numbers in just about two years of operation.

However, the key risks to the sustainability of this performance arise from the structural make-up of the bank’s business and the resultant balance sheet in an adverse macro-environment. Investors can consider taking fresh exposures in this stock on evidence of a move towards a more balanced business model.

T.B. Kapali