Asia Pacific Equity Research

29 July 2007

YES Bank Ltd Overweight

Ride the Tiger Rs179.65
27 July 2007
Price Target: Rs233.00

• Strong 1Q08: 1Q results came in on track with continued robust

balance sheet growth and strong fee income making up for
seasonally weaker margins. Reiterate Overweight rating.

• Jul-08 target price upped to Rs233: implying 30% upside.

While the stock has performed nicely, up 33% YTD vs. 10% for
the Sensex, upcoming catalysts include the potential placement at India
a premium, announcement of new branch licenses and the Banks
recovery in margins as the deposit rate cut takes effect AC
Sachin Sheth
(91-22) 6639-3004
• Positive management guidance: In the recent analyst call, sachin.sheth@jpmorgan.com
management reiterated its determination to shore up margins,
maintain growth levels, keep fee proportion close to half of Puneet Gulati
(91-22) 6639-3003
revenues, control costs and maintain superior asset quality - puneet.x.gulati@jpmorgan.com
currently it has zero NPLs.
Karan Uberoi
(91-22) 6639 3002
• Shifting to top gear by 2010E: That’s when they are likely to karan.s.uberoi@jpmorgan.com
reap the benefits of scale with about 200 branches, improvement
in the retail deposit and asset mix, improving cost ratios leading to Figure 1: Share Price Performance
200

a 24% normalized ROE. 190

180
170
160
150
140

• Valuations: The stock trades at 3.3x F09E post-dilution book. We 130

120
110
100
value it at 3.9x based on a 24% normalized ROE using the Gordon 90
80
70
Growth Model. Key risks include significant attrition of top 60
50
40
management or a sharp slowdown in growth.
Dec-05

Nov-06
Aug-05

Apr-06

Aug-06

Mar-07
Source: JPMorgan, Bloomberg
Table 1: Reuters: YES.BO, Bloomberg: YES IN
Rs in millions, year end March
FY07 FY08E FY09E FY10E GDR NA
Net profit 944 1,746 3,121 5,091 52-week range Rs205–79 Reuters
Basic EPS (rep'd) (Rs) 3.4 6.0 10.4 17.0 Market cap US$1.24B Bloomberg NA
Basic EPS growth (%) 53.1 75.3 72.8 63.1 Shares outstanding 280MM shares 52-wk range NA
P/E (basic) (x) 52.3 29.8 17.3 10.6 Free float 33% Ratio NA
BVPS (Rs) 28.1 44.4 54.8 71.8 Avg daily value US$3.7MM Avg daily volume NA
P/BV (basic) (x) 6.39 4.05 3.28 2.50 Avg daily volume 0.33MM shares Current prem (%) NA
ROE (%) 13.9 16.5 21.0 26.8 BSE Sensex 15234 13-wk avg prem (%) NA
Tier 1 ratio (%) 8.2 7.9 7.0 7.0 Exchange rate Rs40.3/US$1 52-wk avg prem (%) NA
P/COPS (basic) (x) 30.0 16.8 9.2 5.6 Performance 1 mth 3 mths 12 mths
DPS (Rs) 0.0 0.0 0.0 0.0 Absolute (%) 4.4 18.4 124.3
Dividend yield (%) 0.0 0.0 0.0 0.0 Relative (%) 0.5 7.6 82.7
Source: Bloomberg, JPMorgan estimates, Company data.

www.morganmarkets.com J.P. Morgan India Private Limited

See page 7 for analyst certification and important disclosures, including investment banking relationships.
JPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision. The analysts listed above are employees of either J.P. Morgan India Private Limited or another non-US
affiliate of JPMSI, and are not registered/qualified as research analysts under NYSE/NASD rules, unless otherwise noted.
Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

Ride the Tiger

Yes reported strong 1Q08 numbers recently –exhibiting continued strength in
balance sheet growth and fees. However, margins did compress 40bps yoy to 2.3%
given not only its relatively higher funding costs but even the impact of higher CRR
balances earning zero interest vs. earlier. Yet, the reported ROA was 1.2% and ROE
17.9%.

While we are adjusting our earnings down about 8% this year and next and 3% in
F2010E mainly on account of lower margins, we are broadly maintaining our ROE
forecasts given a lower amount of equity raising assumed vs. earlier.

We value the stock at 3.9x book as we believe the normalized ROE could be 24% on
1.4% ROA base vs. 1.2% currently as margins recover after a 75bps deposit rate cut
announced by the bank and costs peak out this year as a critical mass of 100 branches
is set up by Mar08. In addition a small, but expanding retail liability and asset book
is likely to help margins further increase to about 3% by F2010E although the
management expects to achieve it this year itself.

Stock catalysts include expanding margins, announcement of 50 new branch

approvals in addition to the 54 already open and 6 about to open and management’s
intention to raise equity at a premium price of Rs225 vs. Rs180 currently that would
be accretive to book.

Highlights of 1Q08 results, management’s conference call

1. There was a sequential slowdown in loan growth to 10% this quarter – this
was mainly due to sell down of Rs 11 bn of loans. Ex- sell down the growth
would have been substantially higher at 28% yoy. The bank however hopes
to increase its securitization activity in the future. We expect 57% CAGR
over F2007-10E in the loan book.

2. With 65% share, the corporate book continues to dominate the loan book,
with SME and retail constituting 34% about 1% respectively. The bank will
continue to focus towards SME segment which should help yields going
ahead.

3. The bank has ventured into retail lending by concentrating on personal loans
and home equity loans given better pricing environment in that segment.
However the bank is in no hurry to increase its retail exposure substantially
since it believes that there could be an increase in credit losses given
seasoning of the retail portfolio.

4. Continued focus towards niche wholesale lending segments supporting high

growth prospects (e.g. agri & food, life sciences, etc).

5. Branch rollout on track with 60 branches expected by Sep07 and 100 by

Mar08. We have assumed a medium term target of 200 by Mar-2010. With
major “hub” branches already setup, the rollout of “spoke” branches is
likely to be quicker.

2
Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

6. For 1Q08, the bank has managed to increase it low cost mix to 6.6%. We
expect a measured step-up of CASA (low-cost) deposits to 9% by Mar08
and 15% by Mar-2010

7. Management hopes to recover margins to to 3% this year – led by an

improvement in CASA mix, likely benefit from new priority sector norms,
repricing of wholesale deposits at lower rates and contribution from the
equity issuance.

Figure 2: Yes Bank: NIM and bottom-line trends

1,400 4.0%

1,200 3.5%
3.0%
1,000
2.5%
800
2.0%
600
1.5%
400
1.0%
200 0.5%

- 0.0%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08

Total Rev enues Operating Profits Net Profits Net Interest Margin

Source: JPMorgan estimates, Company data.

8. Fee Income growth of about 110%. The Bank expects to maintain its fee
proportion at a minimum of 48-50% of revenues going ahead. A key driver
of this would be 3rd party distribution of products particularly its tie up with
Max New York Life and its expanding branch presence. The bank has about
850 personnel dedicated towards selling life insurance policies. Also,
increased cross border corporate deals should help advisory fees going
ahead – the bank was an advisor to Suzlon and Sintex deals overseas this
quarter. The bank is also setting up a debt-capital-management desk which
should boost debt related fees.

9. The bank is also setting up agri-biz fund with AUM of about USD 100mn -
this marks an entry into asset management and will be a source of stable fee
based income for the bank going ahead.

10. Other plans include retail broking in addition to the depository business that
has already commenced. They may also spin off their merchant banking
business into a subsidiary and are examining the issue currently.

3
Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

Table 2: Yes Bank: Fee income split

Non interest income CAGR
% FY06 FY07 FY08E FY09E FY10E F07-F10E
Derivative products sales fees (Financial Markets) 55% 44% 38% 32% 24% 33%
Investment Banking income (Financial Advisory) 31% 32% 35% 35% 35% 67%
Corporate Transaction Banking fees (Trade Finance) 6% 10% 10% 12% 15% 86%
Trading income 4% 4% 2% 1% 1% -3%
Third party distribution and retail 4% 10% 15% 20% 25% 120%
Total 62%
Source: JPMorgan estimates, Company data.

11. Management also plans to have an employee strength of 4,800 by Mar08

implying a close to doubling the strength over last year.

12. They also voiced their intention to keep the bank free of NPLs at least for
the next few quarters.

13. Plans to raise equity of about USD110 mn at about Rs 225 per share soon.

Earnings Adjustments and Outlook

We are adjusting our earnings (EPS) down 8% this year and next and 3% in F2010E
given a margin adjustment downwards from our earlier estimates which we believed
to be a tad aggressive (63bps up).

Table 3: YES Bank: Changes to earnings estimates, F08E-F10E

FY08E FY09E FY10E
Interest Income 10% 11% 8%
Interest Expense 17% 18% 12%
Net Interest Income -5% -3% 0%
Commission, Exchange, Brokerage -5% -10% -10%
FX Income 27% 66% 99%
Core Fees 0% 0% 2%
Capital Gains -50% -42% -46%
Miscellaneous Income 32% 44% 51%
Non-Treasury, Non-Interest Income 5% 3% 5%
Total Non Interest Income 3% 2% 4%
Total Operating Income -1% -1% 2%
Core Revenues -1% 0% 2%
Operating Expenses 9% 6% 6%
Operating Profit -12% -7% -2%
Loan Loss Provisions & Contingencies 0% 18% 31%
Other Provisions 0% 40% 100%
Pre-tax Profit -15% -12% -8%
Tax -15% -12% -8%
Net Profit -15% -12% -8%
Core Operating Profits -11% -7% -1%
EPS -8% -8% -3%

Loans -7% -10% -10%

Assets 12% 4% 1%
Book Value -12% -12% -11%

Ratios
ROE -1.3% 0.0% 1.1%
ROA -0.3% -0.3% -0.2%
Net Interest Margin -0.35% -0.30% -0.07%

Source: JPMorgan estimates

4
Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

Table 4: YES Bank: Earnings Outlook

FY07 FY08E FY09E FY10E
Interest Income 209.0% 140.7% 63.2% 39.9%
Interest Expense 297.5% 140.9% 60.4% 36.3%
Net Interest Income 100.5% 140.2% 70.0% 48.3%
Commission, Exchange, Brokerage 167.1% 100.0% 75.0% 50.0%
FX Income -30.9% 90.0% 70.0% 50.0%
Core Fees 61.7% 97.7% 73.9% 50.0%
Capital Gains 164.0% 33.3% 16.7% 0.0%
Miscellaneous Income 539.7% 25.0% 20.0% 15.0%
Non-Treasury, Non-Interest Income 92.2% 80.3% 65.0% 45.8%
Total Non Interest Income 95.1% 79.2% 64.1% 45.2%
Total Operating Income 97.6% 107.8% 67.3% 46.9%
Core Revenues 96.1% 108.7% 67.7% 47.2%
Operating Expenses 124.7% 124.5% 56.2% 33.0%
Operating Profit 74.0% 89.0% 82.0% 62.8%
Loan Loss Provisions & Contingencies 248.1% 122.1% 100.9% 62.5%
Other Provisions -55.1% 61.4% 40.0% 42.9%
Pre-tax Profit 75.9% 83.8% 78.8% 63.1%
Tax 69.3% 82.4% 78.8% 63.1%
Net Profit 79.5% 84.5% 78.8% 63.1%
Core Operating Profits 76.6% 90.5% 83.3% 63.5%
EPS 53.1% 75.3% 72.8% 63.1%

Deposits 182.5% 100% 45% 35%

Loans 161.3% 85% 50% 40%
Assets 166.7% 91.3% 41.8% 32.9%
Source: JPMorgan estimates, Company data

However, we maintain our normalized ROE forecast given a lower assumption of

equity issuance (at Rs 3.7bn)while maintaining the number of shares proposed to be
raised at 20mn implying current level of market pricing vs. management’s intention
to raise at a premium price of Rs225. Clearly, management has demonstrated their
ability to do this earlier as well when they raised money with Swiss Re at Rs130
when the market price was Rs90.

We are assuming a normalized ROE of 24.2% and a fair book multiple of 3.9x book
resulting in our July-08 target price of Rs233 implying 30% upside. Reiterate
Overweight rating on the stock.

5
 Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

Table 5: YES Bank: Normalised ROE

YES Bank NORMALISED FY2007 FY2008E FY2009E FY2010E
Net Margin (as % of avg. IEA) 3.00% 2.34% 2.62% 2.78% 3.00%
Non-IR/Asset 2.29% 2.49% 2.12% 2.20% 2.35%
Non-IR/Revenues 43.5% 52.6% 45.4% 44.7% 44.3%

Fees/Revenues 35.5% 43.4% 37.1% 36.3% 35.7%

Dealing/Revenues 8.0% 9.1% 8.3% 8.4% 8.6%
Other Rev/Revenues 0.0% 0.0% 0.0% 0.0% 0.0%

Total Revenue 5.26% 4.73% 4.66% 4.93% 5.31%

Cost/Income 49.5% 53.5% 57.6% 53.7% 48.5%

Cost/Assets 2.60% 2.54% 2.69% 2.64% 2.57%

Pre-Provision Profits 2.66% 2.20% 1.98% 2.28% 2.73%

LLP/Loans -0.88% -0.58% -0.63% -0.77% -0.87%

Prov/Writebacks on Sec. 0.00% 0.02% 0.01% 0.00% -0.01%

Pre-Tax 2.13% 1.89% 1.64% 1.84% 2.20%

Effective Tax Rate 34.00% 34.3% 34.0% 34.0% 34.0%

ROAA 1.41% 1.24% 1.08% 1.22% 1.45%

Equity / Assets 5.81% 8.9% 6.6% 5.8% 5.4%

RoE 24.19% 13.9% 16.5% 21.0% 26.8%

Adjusted NAV 79.1

PV of Adj NAV 53.9

COE 14.00%
RFR 8.00%
Equity Prem 6.00%
Beta 1.00

Growth 10.5%

CURRENT PRICE 179.65

Fair P/BV 3.91x

Terminal Value 204.7

Sum of PV of Dividends 0.00
Current Fair Value 204.7 12 Month (July 2008) Fair value = Rs 233
Source: JPMorgan estimates

Key risks to our views include greater than expected management turnover,
slowdown in the sector driven by interest rate spikes and lower than expected branch
approvals from the central bank.

6
Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Client of the Firm: YES Bank Ltd is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company non-investment banking securities-related service and non-securities-related services.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from YES Bank Ltd. An affiliate of JPMSI has received compensation in the past 12 months for products or
services other than investment banking from YES Bank Ltd.

YES Bank Ltd (YESB.BO) Price Chart

Date Rating Share Price Price Target

(Rs) (Rs)
300
17-Apr-06 OW 95.80 -
250 26-Apr-07 OW 153.10 194.00

OW OW Rs194
200
Price(Rs)
150

100

50

0
Jul Oct Jan Apr Jul Oct Jan Apr Jul
05 05 06 06 06 06 07 07 07

Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
Initiated coverage Apr 17, 2006. This chart shows JPMorgan's continuing coverage of this stock; the current analyst may
or may not have covered it over the entire period.
JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Sachin Sheth: Allahabad Bank (ALBK.BO), Bank of Baroda (BOB.BO), Bank of India (BOI.BO),
Canara Bank (CNBK.BO), Centurion Bank of Punjab (CENB.BO), Development Credit Bank (DCBA.BO), HDFC
(Housing Development Finance Corporation) (HDFC.BO), HDFC Bank (HDBK.BO), ICICI Bank (ICBK.BO), Indian
Overseas Bank (IOBK.BO), Infrastructure Development Finance Company (IDFC.BO), Karnataka Bank (KBNK.BO),
Punjab National Bank (PNBK.BO), State Bank of India (SBI.BO), Syndicate Bank (SBNK.BO), Union Bank of India
(UNBK.BO), YES Bank Ltd (YESB.BO)

7
Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

JPMorgan Equity Research Ratings Distribution, as of June 29, 2007

Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 44% 41% 16%
IB clients* 50% 50% 38%
JPMSI Equity Research Coverage 40% 47% 13%
IB clients* 69% 62% 48%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
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8
Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

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Sachin Sheth Asia Pacific Equity Research
(91-22) 6639-3004 29 July 2007
sachin.sheth@jpmorgan.com

Yes Bank: Summary of Financials

Income Statement – Rs mn 2007 2008E 2009E 2010E Balance Sheet Gearing 2007 2008E 2009E 2010E
Loan/Deposit 77% 71% 75% 78%
Margins (% of Earning Assets) 2.34% 2.62% 2.78% 3.00% Investment/Assets 28% 35% 33% 30%
Earning Assets/Assets 96% 97% 98% 99% Loan/Assets 57% 55% 59% 63%
NIM (as % of avg. Assets) 2.24% 2.55% 2.72% 2.96% Customer deposits/Liab. 80% 83% 84% 85%
LT Debt/Liabilities 0% 0% 0% 0%
Net Interest Income 1,714 4,116 6,996 10,374

Total Non-Interest Revenues 1,901 3,428 5,655 8,243

Fee income 1,570 2,800 4,587 6,642 Asset Quality/Capital 2007 2008E 2009E 2010E
FX/Trading gains 330 628 1,067 1,601 Loan loss reserves/Loans 0.0% 0.5% 1.0% 1.5%
Other operating income 0 0 0 0 NPLs/loans 0.0% 0.3% 0.6% 0.9%
Total operating revenues 3,614 7,544 12,651 18,617 Loan loss reserves/NPLs 0.0% 159.4% 158.2% 156.6%
Operating costs (1,935) (4,344) (6,787) (9,030) Growth in NPLs NM NM 180.0% 106.1%
Operating profit 1,679 3,199 5,864 9,587 Tier 1 Ratio 8.2% 7.9% 7.0% 7.0%
Loan Loss Provisions (254) (565) (1,135) (1,843) Total CAR 13.6% 12.3% 11.1% 11.2%
Other provisions 14 10 0 (30)
Exceptionals 0 0 0 0 Per Share Data 2007 2008E 2009E 2010E
Disposals/ Other income 0 0 0 0 EPS (Rs) 3.38 5.82 10.40 16.97
Pre-tax profit 1,439 2,645 4,729 7,714 Dividend (Rs) 0.00 0.00 0.00 0.00
Tax [rate] (493) (899) (1,608) (2,623) Payout ratio 0% 0% 0% 0%
Minorities/preference dividends 0 0 0 0 NAV 28.11 44.39 54.79 71.76
Attributable net income 946 1,746 3,121 5,091 Avg. Shares issued (mn) 280.00 300.00 300.00 300.00

Key balance sheet – Rs mn 2007 2008E 2009E 2010E Du-Pont Analysis 2007 2008E 2009E 2010E

Net Customer Loans 62,897 116,360 178,084 251,587 NIR/Avg. Assets 2.24% 2.55% 2.72% 2.96%
Gross Loans 62,897 116,998 176,312 247,971 Non IR/Total Rev 52.6% 45.4% 44.7% 44.3%
Investments 30,731 73,620 97,945 118,452 Total Rev/Avg. Assets 4.73% 4.66% 4.93% 5.31%
Other Earning Assets 12,928 16,441 21,455 28,965 Cost/Income 53.54% 57.59% 53.65% 48.50%
Average Earning Assets = (A) 73,143 156,808 251,386 345,550 Cost/Assets 2.54% 2.69% 2.64% 2.57%
Total assets 111,035 212,385 301,203 400,194 Operating ROAA 2.20% 1.98% 2.28% 2.73%
LLP/Loans -0.58% -0.63% -0.77% -0.87%
Interbank funding 0 0 0 (0) Loan/Assets 56.97% 55.62% 57.11% 60.49%
Customer deposits 82,204 164,408 238,391 321,828 Other inc:provs 0.02% 0.01% 0.00% -0.01%
Other Interest Bearing Liabilities 13,459 24,661 33,375 41,838 Tax 34.27% 34.00% 34.00% 34.00%
Average Interest Bearing Liab. = (B) 65,207 142,366 230,418 317,716 MI 0.00% 0.00% 0.00% 0.00%
Average Assets 76,331 161,710 256,794 350,699 ROAA 1.24% 1.08% 1.22% 1.45%
Shareholders' equity 7,871 13,316 16,437 21,528 RoRWA 1.38% 1.32% 1.55% 1.88%
Risk Weighted Assets 95,983 167,970 235,158 305,706 Equity/Assets 8.91% 6.55% 5.79% 5.41%
Average Risk Weighted Assets 68,771 131,977 201,564 270,432 ROE 13.91% 16.48% 20.98% 26.82%
Source: Company, JP Morgan estimates