Margin Pressure From Slow Retail Growth Expected, But Technological Advances May Enhance Profitability

Key Takeaways

• Investor concerns over retail asset growth and competition could pressure margins, affecting the bank's earnings and pricing power adversely.
  
• Strategic digital investments are promising but may face operational challenges, delaying significant revenue gains and earnings growth.
  
• Yes Bank's strategic efforts in profit growth, deposit strengthening, technology adoption, and asset risk management are expected to enhance future profitability and operational efficiency.

Catalysts

Engages in the provision of banking and financial products and services primarily in India.

• There could be investor concerns about potential pressure on net margins due to a slow pace of retail asset growth, which impacts higher-yielding loan segments. This could negatively affect earnings if the recalibration towards profitable retail loans takes longer than expected.
  
• The bank is expecting ongoing recoveries and resolutions from its security receipt portfolio even beyond FY '25, but this may create uncertainty in forecasting future earnings if recoveries do not materialize as expected or slow down unexpectedly.
  
• The tight competitive environment in the corporate lending market could exert pressure on loan pricing, which may adversely affect revenue growth and net interest margins as maintaining growth may require sacrificing pricing power.
  
• Although Yes Bank's technological investments and growth in digital initiatives are strategic, such as the launch of new apps and payment solutions, there could be operational challenges in realizing significant revenue gains rapidly, impacting earnings growth projections.
  
• Despite the improvements in deposit growth and CASA ratios, the benefit from improved net interest margins may not be realized immediately due to potential lag in the impact of reducing RIDF deposits, thereby affecting short-term profitability.

Yes Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yes Bank's revenue will grow by 20.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.0% today to 21.4% in 3 years time.
• Analysts expect earnings to reach ₹51.1 billion (and earnings per share of ₹1.65) by about January 2028, up from ₹21.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹30.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 27.2x today. This future PE is greater than the current PE for the IN Banks industry at 9.6x.
• Analysts expect the number of shares outstanding to decline by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.79%, as per the Simply Wall St company report.

Yes Bank Future Earnings Per Share Growth

Risks

• Yes Bank has demonstrated five consecutive quarters of sequential expansion in net profit and a significant improvement in operating profit growth, indicating successful execution of its profitability improvement roadmap. This could potentially stabilize or improve earnings.
  
• The bank has strengthened its deposit base with a 14.6% year-over-year increase and improved CASA ratios, which could contribute positively to lowering the cost of funds and improving net interest margins over time. Such improvements could enhance future earnings.
  
• Yes Bank is significantly reducing its RIDF deposit balances, which previously weighed down its net interest margins. The expected reduction of these balances below 5% over the next 2-3 years could lead to improved margins and increased profitability.
  
• The implementation of best-in-class technology solutions, like the new IRIS Biz app, and the strategic push in digital payments are enhancing customer engagement and operational efficiency, which could eventually lead to increased fee income and revenue growth.
  
• Strong recoveries and resolutions, especially from security receipts, contribute to reducing asset quality risks and improving the bank’s balance sheet, potentially leading to lower future credit costs and better net margins.

Valuation

• The analysts have a consensus price target of ₹16.55 for Yes Bank based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹238.6 billion, earnings will come to ₹51.1 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of ₹18.81, the analyst's price target of ₹16.55 is 13.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.