Stock Pick From The Banking Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a prominent private sector banking player.

Here Is Why:

• It has the best asset quality among its peers in the banking space.
• It also enjoys stable margins and is showing decent business growth.
• Good profit growth and the stock’s availability at fair valuations adds further strength.

The government’s change in attitude in the month of September 2012 has cheered the markets, and the broader indices appreciated by almost eight per cent following the actions on the policy front. During the same period, the BSE Bankex surged by almost by 14 per cent, signalling the interest of the market in this sector. Banking is highly correlated with the overall economic direction, and as the economy starts improving, this sector is among the first to be positively impacted and vice-versa.

We believe that the banking space is showing good strength and would probably continue to do so going ahead. This is why we have selected YES Bank as our Choice Scrip recommendation. Factors that go in favour of the bank is that it has the best asset quality in the banking space, is posting a decent business growth coupled with stable margins and is also available at a fair valuation.

Currently, asset quality is an area where most banks are facing serious headwinds. As already mentioned, YES Bank has the best asset quality among the other banking players. As on 30th June 2012, its gross NPAs stood at 0.28 per cent while its net NPAs stood at 0.06 per cent. The Net Interest Margin (NIM) of the bank has been stable at 2.8 per cent, which is commendable.

The profit of the bank has increased despite higher provisioning, which stood at Rs 30 crore for the June quarter of 2012 against Rs 1.51 crore during the same period last year. YES Bank’s Provision Coverage Ratio (PCR) stands at 78.3 per cent, which can be considered as very decent, indicating that the bank would be able to maintain its better asset quality going ahead.

As on 30th June 2012, its Capital Adequacy Ratio (CAR) stood at 16.53 per cent, with the Tier 1 CAR standing at 9.7 per cent (including the June quarter profit), which should be considered as good. The Cost to Income ratio of the bank increased by 210 basis points to 39.5 per cent on a YoY basis. This was after the bank expanded its branch and ATM network. We believe that the ratio is at an appropriate level and the bank is operating in an efficient manner.

YES Bank is witnessing decent business growth. As on 30th June 2012, its total deposits increased by 15.2 per cent to Rs 50208 crore and the total advances grew by 16.4 per cent to Rs 38533 crore. For the June 2012 quarter, its Net Interest Income (NII) increased by 33 per cent to Rs 472 crore while the net profit also grew by 34 per cent to Rs 290 crore on a YoY basis.

YES Bank was the first among its peers to deregulate the savings account interest rates. Currently, it is offering an attractive rate of seven per cent on a daily balance of above Rs 1 lakh for its savings bank accounts. It did this after it had improved its CASA by focussing on retail deposits. As of 30th June, 2012, the CASA ratio of the bank stood at 16.3 per cent against 10.9 per cent during the similar period last year.

YES Bank has recently received a green signal from the RBI to start its equity broking business. However, this would not have any material impact in the near term. The stock price recently touched a 52-week high of Rs 406.80 per share. It is currently available at a trailing PE multiple of around 13x and its Price to Book Value is around 2.7x, which looks decent given the financial strength of the bank. One could invest in this scrip with a long-term horizon to garner better returns.