Retail engine revs up but YES Bank has hands full on asset quality

Around the same time last year, the fourth-largest private lender, YES Bank, was placed under moratorium and it was hell let loose for the entire banking sector. Squashing rumours around another forced merger, the banking regulator stitched a never-seen-before rescue plan for YES Bank -- with State Bank of India (SBI) donning the promoter’s hat and seven private lenders, including ICICI Bank and HDFC Limited, swiftly infusing Rs 12,000 crore equity, helping YES Bank exit the moratorium on March 17, 2020, ahead of its one-month period.

Recalling his biggest challenge at that juncture, Prashant Kumar, MD & CEO of YES Bank, says it was to be prepared for massive run-on deposits, including premature closure of deposits. “Whether the IT systems, branches, and employees were prepared to handle the rush was a question,” Kumar narrates. From March 17 to March 31, the bank’s deposit base eroded by Rs 12,000 crore to Rs 1.05 trillion. But that was also the last time it had to battle such a crisis.

Its deposit base as of December 31, 2020 (Q3) had risen to Rs 1.46 trillion, up 8 per cent sequentially, though below a year ago's Rs 1.65 trillion. The confidence is gradually returning, particularly on the retail front, which is reflecting on its loan book. While the overall book is still shrinking as the bank continues to clean up its bad assets, the retail engine is firing up. For the third successive quarter in Q3, pure-retail loans grew sequentially (growth of 19 per cent), while non-corporate loan growth was 10 per cent. The retail-corporate loan mix (48:52) is slowly on the mend and helping the net profit accretion.

While the effort is to get to a 60:40 retail-heavy mix, Kumar doesn’t want to lose sight of any opportunity, with the Budget opening the door for infra-spending. “Approach needs to be granular, irrespective of whether opportunities come from retail or corporate clients,” he explains.

The other important challenge was gathering the employee morale. Now, YES Bank is back to hiring talent in pockets of growth and in cases of attrition. Calling the bank’s talent pool as ‘high-quality’, with the one-year retention tenure (according to the rescue plan) set to end soon, Kumar assures the existing employees will be retained.

In all, he is pleased that investor feedback is turning positive. “No one expected the bank to get back to business in such a short time,” says Kumar.

Suresh Ganapathy of Macquarie Capital adds that there is now a clear demarcation between risk and business, and sales roles and reporting structures have been realigned in a manner that vertical heads report to the board. The MD & CEO of the bank is not on the credit committee. These structural changes are also helping the bank gain the Street’s confidence.

But mending the asset quality remains a mammoth unfinished business. Despite Rs 24,766 crore of provisioning in Q3FY20 (highest quarterly provisions ever by a private bank), the asset quality remains a weak spot because of the pandemic. Without the apex court’s stay on asset classification, the gross non-performing assets (NPA) ratio would have been 20 per cent — the highest among private banks, as against the reported 15.36 per cent.

“The macro-environment is playing the villain,” Kumar states, not only with the pandemic adding to the stress pool, but also stalling the process of loan recovery. Tourism, utilities, and real estate are new pain points to address and given this uncertainty, slippages or loans turning bad can exceed the earlier guidance of Rs 9,000 crore for FY21.

YES Bank’s shareholders recently approved Rs 10,000 crore of equity raise. Though the bank calls it as growth capital, considering its asset quality, analysts at Elara Capital note if cumulative credit cost for FY21 and FY22 is higher than their 8 per cent estimates, the decline in capital adequacy will be higher. “The bank will need to raise fresh capital within six months to augment its capital base”, they add.

Clearly, the asset quality concerns are clouding other positives, and with two more years to go for the share lock-in — imposed in the rescue plan — to be lifted, YES Bank’s stock price may remain a laggard. Analysts at Emkay Global Financial note its risk-reward ratio isn’t favourable, a view shared by many brokerages.

For now, Kumar draws confidence from his across-the-board experience to overcome this hurdle. SBI’s backing has also played a huge role in lifting YES Bank’s image among investors. But how well Kumar’s conviction plays out will be critical for the Street to buy into the bank’s turnaround story.