Yes Bank is amongst the youngest prominent Private Sector Banks in India and many of you might have noticed its recent Television Ads being shown on several channels including Business News channels. Started by a group of extremely experienced Bankers led by Mr. Rana Kapoor, Yes Bank always aimed at becoming one of the best Private Sector Banks backed by a very strong Technology Platform. Its journey over the last 5-6 years has been exactly as per what Mr. Rana Kapoor had projected it to be. Yes Bank has now grown at a rapid pace to become one of the most respected Banks in the country.

In the initial formative years, Yes Bank focused on corporate and institutional Banking business. It launched new Branches at a measured pace just to have a presence in all the important cities where small to medium sized organisations were present. Yes Bank provided innovative services to help small & medium sized organisations grow their business. Yes Bank virtually partnered them by offering Banking services as well as Financial Advisory services. As the organisations grew, so did their relationship with Yes Bank. Yes Bank’s strong Advisory-based Banking services has helped the bank maintain healthy levels of fee-income over the years. Yes Bank took more than 3 years to reach the figure of 25 operational Branches. The Branch Network increased at a faster pace over the next 3 years to reach a figure of 150 operational branches as of now. And now the Bank is aggressively getting into the retail Banking business and increase its Branch Network by nearly 100 new branches in just 1 year.

Yes Bank’s Financial Performance has been proof of its calculated yet superior growth performance over the years. Yes Bank’s Total Income has multiplied over 10 times from a level of Rs. 290 crores in FY’2005-06 to a figure of Rs. 2945 crores in FY’2009-10. During the same period, its Net Profit has multiplied almost 9 times to reach a figure of Rs. 478 crores last fiscal. Thanks to its strategy advantage, Yes Bank has managed to post vastly superior growth rates even during the last 12-18 months, when the global economy has seen several challenges. Its superior performance has been reasonably well rewarded by Global investors with handsome recovery in valuations after the huge crackdown it saw during the October’08 collapse. Have a look at the following charts:

As you can see from the above charts, Yes Bank’s Financial Performance has been strong and the progress has been steady. Yes Bank has continued to post robust growth rates even after the Economic crises situation between October’08 to March’09. Yes Bank has posted a strong growth of 21% in its Total Income and a much stronger growth of over 57% in its Net Profit over the last 12 months on a Y-o-Y basis. Yes Bank’s share price and hence its Market Cap and Valuation had taken a very bad beating during the crises period. But thanks to its continued growth in Business performance, its Market Cap recovered smartly post March’09 and is now above what it was before the crises period. Look at its P/E Ratio. The Ratio had fallen to about 5 at the end of March’09, but has risen to about 19 by June’10.

In my previous report I had compared HDFC Bank and Axis Bank. Both of them are more than 5 times larger than Yes Bank. Being smaller in size Yes Bank has the potential to grow at a faster pace than both HDFC and Axis Bank for many more years. In terms of quality of growth as well as assets Yes Bank is in no way inferior to the two larger Banks. Hence Yes Bank deserves a valuation on par with the best in the industry. HDFC Bank is currently commanding the highest P/E Ratio of over 30 and I feel Yes Bank too deserves a P/E Ratio of between 25 to 30 levels. Now lets try to estimate its 12-months Fair Value Price Target. Yes Bank posted a Net Profit of Rs. 477 crores in April’09 to March’10 period. We can safely expect it to grow by about 40% over the next 12 months to reach a figure of Rs. 665 crores. At a P/E Ratio of 25 to 30, its Market Cap should rise to be in the region of Rs. 16,000 to 20,000 crores over the next 12 months. This should translate into a share price of around Rs. 475-500/-. That means a potential appreciation of upto 80-85% over the next 12 months.

 

HDFC Bank and Axis Bank are No. 2 & No. 3 Banks in the Private sector. In terms of Stock Market performance, HDFC Bank has always been valued at nearly twice that of Axis Bank. The same holds true even today. But the Question is: Is HDFC Bank doing business that is double that of Axis Bank ? Both these banks started operations in the year 1994, after the Government of India allowed new private banks to be established. Both of them have been backed by large Financial Institutions. As the name suggests, HDFC Bank’s promoter is HDFC, which is India’s largest Housing Finance Company. Axis Bank was formerly known as UTI Bank, because it was once majorly promoted by Unit Trust of India. Even today, the Specified Undertaking of the UTI, i.e. SUUTI is still amongst the largest shareholders of the Axis Bank. Both the Banks are run by independent professional & aggressive managements.

To compare the operational size of the two Banks, HDFC Bank has spread its Branch Network to over 1700 branches and 4300 ATMs. HDFC Bank has done 2 acquisitions in the last few years which has helped it reach this figure. On the other hand Axis Bank has done pure organic expansion to reach a figure of over 1000 Branches and over 4400 ATMs. Both the banks have growing their business at a rate higher than industry average and the growing Indian economy has helped several Banks in their growth plans. Over the last 5 years, both the banks have seen their Total Income and Net Profit multiply between 6-7 times. But it is interesting to see the gap between the two Banks. Five years ago, i.e. in FY’2004-05 HDFC Bank’s Total Income was 60% higher than Axis Bank, while its Net Profit was almost 100% higher. But in FY’2009-10, the gap in Total Income is just 28% and the same in Net Profit is just 17%. Over the years the gap is narrowing because of Axis Bank’s superior growth performance.

Now it is interesting to study their recent performance and their corresponding valuations. I have summarized the same in the following charts:

1) HDFC Bank Progress Analysis :

 

 

HDFC Bank’s 12-months Total Income & EBITDA flattened and has seen a gradual decline over the last few quarters mainly because of changes in interest rates over the last 12-18 months. The business volume has registered healthy double digit growth. It is reflected in the strong growth in its Net Profit. HDFC Bank’s 12-months Net Profit has risen by over 40% over the last 5 quarters. But the even more interesting factor to watch is the valuation HDFC Bank enjoys from the market. Before the October’2008 collapse, HDFC Bank always enjoyed a P/E ratio of somewhere around 30. Now look at the P/E Ratios graph. Over the last 5 quarters, the P/E ratio has been steadily climbing and has now reached over 30. What does this mean? An expansion in P/E ratio in subsequent quarters means the share price has been rising faster than the Bank’s Profit growth. After looking at HDFC Bank’s charts, it will be interesting to compare it with Axis Bank’s charts.

2) Axis Bank’s Progress Analysis :

Axis Bank’s growth story has been better than HDFC Bank’s growth for the past 5-6 years. And it has not changed over the last 5-6 quarters as well. Axis Bank’s Net Profit has jumped over 50% in the last 5 quarters, substantially better than HDFC Bank’s performance. Even the Total Income & EBITDA performance has been marginally superior. But inspite of superior Financial Performance, Axis Bank has always traded at a discount to HDFC Bank’s valuation. Look at the P/E Ratios graph. Eventhough Axis Bank’s P/E Ratio has improved substantially over the last 5 quarters, at 20 it is still way below the P/E Ratio enjoyed by HDFC Bank. Does this make sense? Axis Bank’s Financial Performance is superior. Axis Bank is not far from overtaking HDFC Bank to become India’s No. 2 Private Sector Bank, either in terms of Total Income or Net Profit. So, there is no major size advantage with HDFC Bank. Considering all this, I think it is time the valuation ratios also change in Axis Bank’s favour. Either the P/E ratio enjoyed by Axis Bank should rise or HDFC Bank’s P/E ratio should come down. The latter is unlikely to happen, hence in all probability, it will be Axis Bank’s P/E ratio that will rise faster in the coming quarters. That means Axis Bank’s stock should substantially outperform HDFC Bank’s stock in the coming few quarters.