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YES Bank's road ahead: Will investors say yes to Gill’s plans?

For the first time in 15 years, shareholders of Yes Bank saw the chief executive officer’s chair being occupied by someone other than Rana Kapoor at the annual meeting. At the same time, a member from the family that was fighting Kapoor for a seat at the high table for about a decade, Shagun Gogia, at last had her dream fulfilled.

Equity investors, among the biggest gainers from the lender since it floated on stock exchanges in June 2005, are probably the worst placed among the investors of all private sector banks this year with the share turning volatile and losing 60% in value. With yields soaring high, bond holders are a worried lot. Life has changed for all stakeholders at Yes Bank.

From a time when everyone from Rabo Bank to Goldman Sachs lined up seeking a pie of the Yes Bank share, the management is chasing investors to convey to the world that it is worthwhile investing in it and they could ride the Indian growth wave.

Investors are saying ‘No’ to Yes Bank. UBS cut its target price. HSBC downgraded the stock. Macquarie has raised questions about the governance standards at the lender, which was touted as the modern day bank to fulfil the dream of a young generation. There’s a crisis of confidence.

“For a new CEO who has been on board for seven weeks (at that time), we aren’t convinced that the magnitude of the problems that exist at the bank has been fully grasped,” says Suresh Ganapathy, analyst at Macquarie, an investment bank.

Yes Bank was thrown into turmoil in August when the Reserve Bank of India rejected the board’s proposal to have the sixth three-year term for Kapoor, a member of the founding trio. Ever since, the lender has been facing rebellion with at least five directors resigning from the board and the chairman of CEO selection committee exiting.

Ravneet Gill, a former chief executive at Deutsche Bank, India, has been brought to put the house in order. The smooth talking wild life enthusiast, who used to land in a game reserve at every long weekend, has been busy meeting investors across the globe non-stop since March to raise funds for the bank. He has a task, a rather Herculean one.

The priorities are “management and board stability... second is asset quality,” says Gill, who targets to raise more than $1.2 billion in equity capital. Investors look for it to raise capital and at the same time worry about the dilution of profitability.

“Our key concern at Yes Bank is low capital ratios,” says Sumeet Kariwala, analyst at Morgan Stanley. “If this amount were to be raised, we estimate that CET 1 would improve to ~11%, which would still be lower than most private banks. Moreover, at current prices, a $1.2 billion capital raise implies dilution of ~30%.”

YES snip 1

THE CURRENT STATE
Gill got into the clean-up mode in the first quarter increasing non-tax provisions to Rs 3,662 crore, more than nine times the Rs 400 crore reported a year earlier resulting in the lender reporting a first ever loss. He also guided for higher credit costs in the rest of the fiscal.

In his presentation to analysts, Gill said the bank will henceforth “align with regulations and governance” without giving up on the bank’s aggressive nature.

But market has a different view of the bank.

UBS Securities analyst Vishal Goyal expects the bank’s credit cost to increase to 200-225 basis points in the next two years, higher than the management’s 125-basis points guidance. One basis point is 0.01 percentage point.

“We think asset quality is a key concern, given its relatively high exposure to non-investment grade corporates,” says Goyal of UBS. “The street often underestimates NPA cycles and we believe the extent of NPA risk is still not fully priced in the stock. We believe consensus earnings are still high, and that second-order effects of asset quality deterioration on incremental growth/margins are not fully factored in by the street.”

The bank stock halved to Rs 115.35 per share on June 14 from Rs 237.40 on March 1 when Gill took charge.

But Gill says all may not be well at the bank, but most of them are.

“Currently, our numbers are not being trusted,” says Gill. “It is a question of once bitten twice shy. It has nothing to do with our numbers. They have seen lightning strike twice, and the normal tendency is if it has struck twice, it can strike a third time. The understanding around the issue has to be more nuanced.”

In the March quarter, Yes Bank’s sub-standard book went up three times to Rs 20,000 crore from Rs 6,000 crore. It could shock anyone. But the bank argues it is different unlike peers who saw a regular climb. It may be just the exposure to three or four accounts such as the Anil Dhirubhai Ambani Group and Dewan Housing that actually led to the surge. So the chances of its recurrence may be less.

“We aren’t convinced that full cleanup has been done,” says Macquarie’s Ganapathy. “Going by the experience of other banks, it at least takes four quarters to recognise the problems and engender a full clean-up.”

THE CHALLENGE
The most difficult task for anyone in the world of finance is restoring confidence when there’s little trust. Money begets money. If investors have to trust a bank, it has to start with an investor investing money which shows he has a skin in the game.

At the peak of the global financial crisis, Warren Buffett stepped in with a cheque book to fund Goldman Sachs. When Axis Bank was in trouble with piling bad loans, Bain Capital came up with ‘confidence capital’ which brought in others subsequently. Something similar has to happen at Yes.

While Gill is yet to succeed in bringing in the capital, some top investors such as Apax Partners, Advent Capital and even TPG are said to be conducting due diligence on the lender. It is not clear as to which one of them would take the leap of faith, but someone is essential to make life comfortable.

“Private equity is an external validation that somebody has looked at stuff which is not in public domain,” said Gill. “It becomes a source of long-term capital and in some ways they can bring governance best practices by virtue of having invested in companies.”

While investors may be looking at the books of Yes Bank, there is speculation that there is a possibility that the book value they assign may be a lot lower than what is publicly available. “If Yes Bank is not able to raise equity, they will have to cut down on lending to ensure that their Tier I capital ratio does not drop sharply,” says Lalitabh Srivastawa, AVP research at Sharekhan, a unit of BNP Paribas. “But that would mean lower growth and profitability, which is a negative especially when a bank has high NPAs.”

ORIGINS AND DISPUTES
Yes Bank was born in 2003 when three former bankers came together to capitalise on the opportunities that a fledgling liberal economy threw up in a state-dominated lending market.

Ashok Kapur, Harkirat Singh and Rana Kapoor sowed the seeds of the bank with a little help from Rabo, then the only triple A-rated bank in the world. The name of the bank was chosen to reflect the optimism and drive the founders had.

All the three had a background of working for ANZ Grindlays. But Singh made a bitter early exit in favour of Kapur and Kapoor, who are related by marriage.

“They definitely conspired and teamed up to oust me from the venture,” Harkirat Singh told ET in an interview in 2013. The executive role was under dispute even before the venture took off, which Singh expressed when he quit.

“This decision is further evidence of a lack of mutuality of the objectives of the bank as envisioned by me,” Singh said in a release in April 2003. “I have, therefore, decided to withdraw as a promoter of this new banking company. I value my reputation above everything else.”

A decade later, the lender was in the midst of a bitter legal battle between the late Ashok Kapur’s daughter Shagun Gogia and her uncle and CEO Rana Kapoor over jointly nominating a director to the board.

Dismissing her demand, Kapoor said at that time that Yes Bank was not “Kapur ki hatti”, while Gogia declared it a “modern-day Mahabharat”.

Now, Gogia is on the board of directors after reaching a settlement early this year, but Kapoor is out.

Both Kapoor and Gogia declined to be interviewed for this story.

EXPECTATIONS MANAGEMENT
The different financial targets that Gill has spelt out in different interactions have raised worries whether numbers are thrown just to calm investors’ nerves or are they for realRs Also, does Gill enjoy the confidence of colleagues on the board.

“Confusing guidance befuddles us,” says Macquarie’s Ganapathy. “In the analyst meet held on April 26, a 1% ROA target was given, to be achieved in three years. Subsequently in media interviews, it was changed to 1.5%... Clearly the communication has gone awry. Are they being dictated by the bankers as to what to say once they realised that market hasn’t taken well their 1% ROA guidance in 3 years and hence the subsequent flip-flopRs ”

Other than its finances, Gill has other issues to handle too. Although the RBI has nominated R Gandhi, a former deputy governor, to Yes Bank’s board, it still needs two more hands to replace Ajai Kumar and Mukesh Sabharwal, who quit this month.

“Ravneet Gill is on the look-out for a new COO, CFO, risk officer ... when the new team is in place, you will see its impact in the way the bank grows and how it will be perceived,” says a director, who did not want to be identified. “The street has been excessively negative about the bank, it is all speculation, if the bank’s asset quality was not revealed to the fullest, you think the RBI nominee on the board would have kept quietRs ”

Also, for a total clean-up, the bank also needs to reorganise the various committees of the board such as credit committee, nominations and remuneration committee and the audit committee.

While Kapoor is itching to get back to the institution that he ran for 15 years, there appears to be resistance.

“If you look at it from the point of view of being the largest shareholder, it is in his interest to see a stable board and a stable institution,” says Gill. “I don’t see him doing anything that will destabilise that.”

For his part, Kapoor has declared that the current management has his full backing.

“I reiterate that I have fullest confidence and conviction in the management under Ravneet Gill’s leadership and the board of directors,” Kapoor said in a tweet. “Yes Bank is an embodiment of Indian professional entrepreneurship and ongoing ‘Hanumanian’ efforts will overcome this transitional phase. The leadership team, MD & CEO Ravneet Gill and the board of directors have my fullest support.”

Kapoor has said Yes to Gill, for now. What about investors?

(With inputs from Shilpy Sinha)


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