Yes Bank’s turnaround: Prashant Kumar has a new mission

Mumbai: Last summer, Yes Bank’s board, senior management and 50 or so employees assembled at the five-star Taj Lands End hotel in Bandra, Mumbai. Also in attendance were key institutional customers and individual account holders. The gala event saw Yes Bank’s new logo being unveiled—the well-known red tick was subtly replaced by a soaring red bird, with the tagline Life Ko Banao Rich. It wasn’t a phoenix, but observers could be forgiven for thinking so, given how the lender had risen from the ashes of its earlier mismanagement.

This rebranding followed almost two years of discussions by the board of Yes Bank, now under the aegis of State Bank of India (SBI). Those discussions centred around whether the lender needed new branding or a new name to win back the trust of customers after the Reserve Bank of India (RBI) had to step in to rescue it in March 2020.

The unveiling of the new brand also coincided with the end of a three-year lock-in period for SBI and other financial institutions, which had become major shareholders in Yes Bank under the RBI’s reconstruction scheme. Under that scheme, SBI picked up a 49% stake in the restructured capital of the bank. Together with SBI, domestic investors Housing Development Finance Corp., ICICI Bank, Kotak Mahindra Bank, Bandhan Bank, Federal Bank and IDFC First Bank invested ₹10,000 crore in the beleaguered lender, with 75% of their holdings locked for three years.

[Update: On 9 June, Mint reported exclusively that RBI had given an in-principle approval for up to a 51% stake sale in Yes Bank, clearing the way for a new promoter to step in.]

Despite this dream team stepping in to oversee Yes Bank, the latter’s customers, clients and people at large had serious doubts about its financial viability. At that time, the new-generation private lender’s gross bad loans had soared to 16.8%, way higher than the 5.5% average of other private banks and the 8.2% average of the overall industry, as per RBI data. After providing for these bad loans, the bank had posted a loss of ₹16,418 crore in fiscal year 2020 against a profit of ₹1,720 crore in the previous financial year.

Yes Bank’s liquidity coverage ratio (LCR)—essentially its ability to meet immediate short-term repayments—was as low as 37% of total cash outflow for the following 30 days (a healthy bank will have an LCR of at least 100%). The bank’s deposit book shrank to ₹1.05 trillion at the end of March 2020 from ₹2.27 trillion during the corresponding period a year earlier.

Today, Yes Bank is in a far healthier position. Gross bad loans as a percentage of total loans stood at 1.3% at the end of March 2024, post the transfer of the bank’s non-performing assets (NPAs) to an asset reconstruction company (ARC). The liquidity level is far more comfortable with the LCR at 116.1% and total deposits at ₹2.66 trillion. Icing the cake, Yes Bank reported a net profit of ₹1,251 crore and operating profit at ₹3,386 crore at the end of 2023-24.

The credit for dragging Yes Bank back from the edge goes to SBI veteran Prashant Kumar, who was appointed managing director and chief executive officer (MD and CEO) and the board. The new management took a series of steps to win back trust for the institution.

But Kumar’s job is only half done. While the bank is now on a stable footing, the investors who stepped in to rescue it are getting restive as their lock-in has expired. RBI has forbidden them from selling their shares in the stock market and is pushing them to instead look for a strategic investor, according to a senior official at a private sector bank.

But finding a strategic investor is proving a challenge, as Yes Bank’s numbers need to be far better, especially its bottom line. Analysts and fund managers have not been convinced by the turnaround and believe it will take the bank at least five years to improve profitability.

“Kumar has done a good job. But it will be difficult for Yes Bank to get a strategic investor for multiple reasons. Further, the equity dilution in Yes Bank is too large, which has impacted its return profile, and it needs a much longer period to improve to the industry average,” said Asutosh Mishra, head of research, Ashika Stock Broking. “Given this, along with the current political context of a coalition government, all investors will wait and watch for the next few months before they take any major decision.”

Kumar is no stranger to challenges. After all, he had been entrusted with the job of overseeing the largest rescue package in India’s financial industry back in 2020 after Yes Bank’s erstwhile management put the bank in peril, and delivered. But given that his term ends in October 2025, he will be in a hurry to wrap up this unfinished business.

Yes Bank 2.0

Yes Bank was the last of the new generation private sector banks to get a banking licence in May 2004. The bank began its two-decade-long journey under co-founder Ashok Kapur, whose life was cut short in the 26/11 attacks on Mumbai.

Thereafter, the other co-founder Rana Kapoor took over and turbocharged its growth as a private corporate bank. Kapoor’s tenure was marked by reckless lending to real estate and infrastructure companies, which helped Yes Bank post robust growth numbers quarter after quarter even as the broader industry grappled with rising NPAs.

That apparent dream run came to a halt after an asset quality review under then RBI governor Raghuram Rajan brought to light the huge bad-loan divergence on the bank’s books. Bad loans aside, the RBI was worried about Yes Bank’s governance practices, and Kapoor was denied an extension of his term (he ended up being jailed in March 2020, and emerged only last month, on bail).

Deutsche Bank’s India chief Ravneet Gill was brought in as MD and CEO in March 2019. But Gill’s stint was cut short after the RBI superseded the board a year later to stem the damage to the bank and its depositors. Kumar was thereafter appointed to supervise the resuscitation of Yes Bank.

A good administrator

Prashant Kumar started his career with SBI as a probationary officer in 1983. He has served in many roles, including as the chief general manager of the Kolkata circle from 2014 to 2016, during which time he was instrumental in reducing the extent of frauds. His role at Kolkata became a game changer for Kumar’s career—he was later promoted to the role of chief development officer (CDO). Within a year, he was also given an additional role as chief financial officer (CFO).

“He was the first person in SBI to hold both CDO and CFO roles, both reporting to the chairman directly. Both these roles are quite busy,” said a former SBI official.

“His ability to assimilate things and not get flustered with the task is Kumar’s biggest trait. He is unflappable even if faced with challenges,” said a former Yes Bank senior official. “He could carry employees together. Nobody saw him as a threat. He was not the typical private or foreign banker coming in,” he added.

Kumar also managed to stem the flow of deposits from the bank through extensive customer outreach programmes and also by leveraging existing fintech and supply chain relationships to attract new customers. In six months, between September 2019 and March 2020, Yes Bank had seen a nearly 50% outflow from its deposit portfolio, which shrank from ₹2.09 trillion to ₹1.05 trillion. At the end of March this year, deposits had rebounded to ₹2.66 trillion.

After taking over, Kumar and the board began to de-risk the balance sheet by shrinking Yes Bank’s large corporate portfolio and doubling its retail loan book. During Kapoor’s reign, Yes Bank had seen its loan book grow from ₹55,633 crore in 2014 to ₹2.4 trillion in 2019 through aggressive corporate lending. Of these loans, 60% were given to corporates, including low-rated corporates. After taking charge, Kumar revamped the loan book by giving 60% of the bank’s loans to retail customers and small businesses. The retail loan book, which stood at ₹40,755 crore in 2019, had grown to ₹1.05 trillion by March end 2024.

In December 2022, the bank transferred its ₹48,000 crore bad-loan pool to JC Flowers Asset Reconstruction Company after a competitive bidding process. This was the largest ever sale of NPAs in the banking system. The bank also picked up a 9.99% stake in the ARC, with the option of increasing its stake to 20% subject to RBI approval. The deal helped Yes Bank bring down its gross NPA level to 1.7% of total assets and rid itself of exposure to high-risk borrowers such as ADAG, Cox & Kings, DHFL and Indiabulls Housing. However, the bank is yet to reach the 0% gross NPA that Kumar was targeting.

The last 12 months have been quite fruitful, said Kumar, as Yes Bank has been able to recover ₹3,500 crore from security receipts through the JC Flower ARC. Security receipts are instruments issued by ARCs as a consideration for purchasing distressed assets from banks/NBFCs.

Kumar’s other big focus was on changing the culture of risk, compliance and governance in the bank. Under Kapoor, decisions were taken by an individual and not the management at large, Kumar told Mint. Now, the MD and CEO is not part of the credit committee, and the risk department of the bank reports directly to the board’s risk committee.

Much more needed

While a lot has been accomplished, Yes Bank’s profits have not given investors the confidence to line up. The lender’s operating profit grew just 6% year on year to ₹3,386 crore during 2023-24.

This is one of the areas where Kumar and his team are yet to achieve their targets. While the bank has shown three years of profitability after the rescue scheme was instituted, operational profitability has been weak because of the funds invested in the Rural Infrastructure Development Fund (RIDF) owing to Yes Bank’s shortfall in meeting priority sector lending targets. RIDF is a fund maintained by the National Bank for Agriculture and Rural development (Nabard), to which banks contribute the extent of their shortfall in priority sector lending to agriculture.

Under the priority sector lending rules, a banking entity needs to lend 40% of its adjusted net bank credit to the so-called priority sector or economically weaker sections such as agriculture, micro-enterprises and other economically disadvantaged sections.

According to Kumar, nearly ₹44,000 crore of Yes Bank’s money has gone to the fund, which otherwise would have led to a better return on assets (ROA). Yes Bank’s ROA stood at 0.3% at the end of 2023-24. ROA is a financial ratio that indicates how profitable a company is in relation to its total assets. A lower ROA means that a bank is not able to utilize its assets efficiently. A negative ROA implies the bank’s assets are yielding negative returns.

“I think except for the profitability part, everything has been achieved. And one of the reasons for profitability not getting achieved is also because of the shortfall in our priority sector targets. Because of our own positions, the bank was not able to achieve those things over the last 3-4 years. And today, 11% of our assets are lying in the RIDF,” Kumar told Mint.

“Today, if this money had not been there in RIDF, our net interest margin (NIM) would have been 3% instead of 2.4%. It’s a 70 basis point impact on the NIM, and an almost 40 basis point impact on the ROA,” added Kumar.

Again, while Kumar ensured cost discipline during the initial year of the rescue, that focus seems to have been diluted. Yes Bank’s expenses had surged to 75% by the end of 2023-24. It started offering higher deposit rates to attract more customers, as competition intensified in the space. The bank also increased spending on advertisements, including on becoming the official team India’s banking partner at the Paris Olympics. Operating expenses, too, rose on higher business costs and employee-related expenses, including hiring high-cost employees from other banks.

Moreover, the bank is yet to reach its deposit targets. Low-cost current and savings deposits stood at 30.9% at the end of fiscal year 2024 as compared to the 35% guidance Yes Bank had set for 2022-23.

Immediately, Kumar is focusing on improving the bank’s return on assets (ROA) from 0.3% to 1% by the end of fiscal year 2026 and 1.5% two years hence. But observers aren’t convinced he can pull it off.

Compared to Yes Bank, which has a market capitalization of ₹70,000 crore, IDFC First Bank, with a market cap of ₹55,000 crore, has an ROA of 1.1%. In terms of operating profit, Yes Bank is at ₹3,400 crore, well below Federal Bank’s ₹5,200 crore, IDFC First Bank’s ₹6,200 crore and Bank of Maharashtra’s ₹8,000 crore.

“Yes Bank has to show improvement in profits. We like Federal bank and IDFC First bank in this space,” said Gaurang Shah, senior vice president at Geojit Financial.

Yes Bank’s shares have gained over 6% since 31 March 2020. On Wednesday, they closed at ₹23.81. The bank’s price-to-book value stood at 1.8 times compared to SBI’s price-to-book of 2 times and HDFC Bank’s 2.5 times

Investor hunt

With the expiry of the lock-in period, SBI, LIC, HDFC Bank, ICICI Bank and other shareholders are looking for an exit. Citibank has been given the mandate to find a buyer for a strategic stake sale. Many Japanese banks and middle eastern banks are said to be interested in bidding for the stake. But SBI is looking at a valuation of $9-10 billion for a 51% stake in Yes Bank, and banking experts aren’t convinced the lender is worth that much.

“I think for any financial institution, having a long-term strategic investor is important and good for the bank, be it foreign or domestic,” said Kumar. Over the last six months, he has met with several domestic investors. But the response appears to be lukewarm so far.

“Nobody will come at this price. We have a price-to-book of 2 times with 5% return on equity. I can buy HDFC Bank instead. It’s a long haul for Yes Bank as the business model is constrained. The liability cost is also very high,” said a fund manager with a privately owned fund.

Bankers are also sceptical about the lender finding a suitor. “Yes Bank is at a stalemate. Investors are not convinced to put in money. And the bank cannot be sold to a private equity investor as RBI will not allow it,” said a senior banker aware of the matter.

A job well begun is half done. Kumar has done a remarkable job in stabilizing Yes Bank. But the bank needs the backing of a strong investor and a clear path to get on to a high-growth trajectory.