(My Original Blog Post: -*http://www.onlineequitycalls.com/2008/12/deutsche-bank-puts-hold-on-yes-bank/)
RESEARCH: Deutsche Bank
CMP: RS 61
Deutsche Bank believes that Yes Bank’s recent severe underperformance relative to the market and the banking index has factored in most of the concerns about its asset quality, margins and fee income growth and has upgraded the stock to ‘hold’0.
However, it has reduced the target price to Rs 55 and cut earnings by 11-17 % for FY09-11 . The major concerns are: asset quality due to large exposure to mid-corporate group and commercial real estate; margins due to weak funding franchise; and a sharp slowdown in non-interest income growth due to relatively high dependence on capital market-linked activities.
The target price of Rs 55 is based on a single-stage Gordon growth model with a price-to-book value (P/BV) of 1.0x, arrived by using a blended return on equity (RoE) of 15.5%. The key upside risk to Deutsche Bank’s hypothesis is a sharp recovery in loan growth accompanied by a rise in margins.
The key downside risks are higher-than-expected deterioration in asset quality and stagnation of branch network due to unavailability of branch licenses , which can pose a challenge for Yes Bank.