, Yes Bank Book Profits.
Yes Bank: Book = profits
At its current price of Rs 187, the Yes Bank stock has provided annual av= erage 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 leve= ls. Further exposures to this stock may be moderated and can be balanced wit= h other core banking stocks such as HDFC Bank or Axis Bank.
The stock is currently trading around 35 times its estimated FY 08 earnin= gs and almost 55 times its FY 07 earnings. These valuation multiples place t= he Yes Bank stock above that of established companies such as HDFC Bank or A= xis Bank and do not seem sustainable.=20
Wholesale bank
Yes Bank follows a business model which is structurally different from th= at 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 partici= pants such as mutual funds — account for 95 per cent of its liabilities bas= e. This balance sheet structure elevates the overall level of risk in the co= re banking business (in terms of interest rate, maturity mismatch and credit= risks) and may not be conducive to medium term earnings stability. The earn= ings stream would be more vulnerable to adverse market events such as an eco= nomic slowdown, interest rate shocks or a vitiated credit risk environment.= =20
The bank’s performance so far has not manifested any of these negative ex= ternalities. 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.=20
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 e= conomy and has been able to build fairly impressive business numbers in just= about two years of operation.=20
However, the key risks to the sustainability of this performance arise fr= om the structural make-up of the bank’s business and the resultant balance s= heet in an adverse macro-environment. Investors can consider taking fresh ex= posures in this stock on evidence of a move towards a more balanced business= model.=20
T.B. Kapali
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Thanks and Regards,
Bhavin Yogesh Me= hta.
