Will Yes Bank’s Entry Into Equity Broking Reap Good Returns?

According to the latest media reports, Yes Bank has received a green signal from the Reserve Bank of India (RBI) for setting up an equity broking business. The bank expects to launch this segment during FY13-14. On the back of this news Yes Bank’s share price today closed higher by 0.33 per cent at Rs 382.20 per share. In our opinion, venturing into the broking business will probably help the bank to increase its current account and saving account (CASA) share in the total deposits. To reiterate, the bank has been focusing on retail deposits and wants the share of CASA to increase gradually over a certain period.

For this reason the bank is offering the highest rate of interest at 7 per cent on a daily balance of above Rs 1 lakh in its savings bank account. As on June 30, 2012, the share of its CASA deposits to the total deposits has increased by 540 basis points to 16.3 per cent on a YoY basis. On the broking business front, it seems that the bank is also following in the footsteps of other major banks which already have a presence in the broking business. As, for instance, HDFC Bank (HDFC Securities), ICICI Bank (ICICI Direct), Axis Bank (Axis Direct) and Kotak Mahindra Bank (Kotak Securities). We also have SBI Cap of State Bank of India’s subsidiary, SBI Securities. This is not to say that the performance of these banks’ broking businesses has been very encouraging.

The above table shows us that the broking business of the various banks have been a clear drag. For FY12 all the above banks have seen a decline of around 30 per cent in their profit. Axis Securities, an arm of Axis Bank is a loss-making entity which posted a loss of Rs 9 crore in FY12. This proves that the volatile market environment is not good for the broking business as investors prefer to stay away with a ‘wait and watch’ strategy. Even the other big reputed broking houses have not been performing well in the current environment. And therefore it is quite possible that Yes Bank will also face headwinds in terms of growth.

Meanwhile, the capital market regulator SEBI’s nod to MCX for starting an equity exchange may help the market participants and broking houses for maintaining margins and acquire other benefits. We at Dalal Street Investment Journal believe that banks should focus more on core banking activities rather than catering to additional services which impact their finances negatively. In the case of Yes Bank we will have to monitor the operation of its broking arm before making any further comment. As of now it is in decent shape and available at a price to book value of around 2.71 times, which is slightly on the higher side. We would advise our readers to invest in the scrip in a staggering manner keeping in mind a longer term horizon.