After nearly two years of gloom and doom, the mood at YES Bank’s corporate office at Santa Cruz, Mumbai, is happy and vibrant. Increments, salary hikes and promotions handed out recently are keeping employees motivated.

With the recent round of fund raising coming without much of pushbacks, cutting corners on valuations, and more importantly, not having to scout for multiple backups, the employees are convinced that the worst may be over for the bank.

This conviction is flowing from the top. Prashant Kumar, YES Bank’s MD and CEO, is gung-ho, and terms the ₹9,000 crore of equity infusion from private equity giants, Carlyle and Advent, as confidence capital.

What’s assuring is that, unlike the earlier round of fund raising in July 2020, which was forcibly deployed towards remedying the bad loan mess, this money will propel growth. After all, if the bank’s gross non-performing assets (NPA) is set to shrink from 13.45 per cent in the June quarter of FY23 (Q1 FY23) to 2 – 2.5 per cent after the sale of toxic assets to an asset reconstruction company, the asset quality isn’t going to be the top-of-mind worrying factor for the bank, thankfully after nearly four years of struggle.

The bank partnered with JC Flowers ARC for auctioning these assets and has identified ₹48,000 crore of bad loans. The process is expected to fetch a little over ₹11,000 crore and may conclude in a month or so.

But will the confidence capital and the ongoing sale of assets to the ARC suffice to put the bank back on track?

The answer is a resounding yes from Kumar. He has addressed the elephant in the room — undoubtedly the bad loans. But he needs to make the pachyderm stand on its legs to move forward. That would mean taking care of four things — improve the bank’s profitability, its return ratios, loan growth and bring stability in terms of its human resources.

Net interest margins a laggard

What materially distinguishes a private bank from a government-owned one is the former’s ability to generate top-quartile profitability. Measured as net interest margin(NIM), most private banks clocked NIM upwards of 4 per cent in Q1. Public sector banks have also been fast catching up and operate at over 3 per cent NIM now, as against, less than 2.5 per cent until FY20. Comparatively, YES Bank’s NIM at 2.4 per cent in Q1 is a big laggard. Freeing up the bank’s asset quality after the sale to the ARC may bump up margins by 30 – 40 basis point, but that’s not enough.

There are two components to profitability — pricing of loans and cost of liabilities. Kumar is betting on the second to improve the margins through rating upgrades for the bank. “Capital is one ratio which is very important not only in terms of how you are being placed in the system, but also how the rating agencies see you,” Kumar had told BusinessLine in an interview earlier this month.

Terming the capital infusion as a re-rating event, he says that this could open a lot of business opportunities, largely in the form of bulk deposits, from large corporates, public sector entities and the government. “They would otherwise not want to deal with a bank where the rating is weak,” he emphasizes. The cost of bulk deposits is at least 50 – 60 basis points lower than the rates offered to retail depositors. Total cost of deposits stood at 4.8 per cent in Q1, and cost of funds at 5.1 per cent. “Rest of the banks operate at 4.25 per cent cost of funds. So, this would come down in 1 – 3 years,” says Kumar, again betting on a re-rating.

A Moody upgrade

Moody’s upgraded its rating in the bank from positive (B2) to stable (Ba3). Yet, the critical point here is that when most banks operate at AA and above, the re-rating story needs to play out faster for Kumar to keep up with the targets.

Assuming a case of NIM improvement by 50 bps in FY23, it still may not lend support to the overall return profile of the bank.

At 0.4 per cent return on assets in Q1, Suresh Ganapathy of Macquarie Capital, says, while the return profile may improve over the next few years, it won’t be without challenges. He expected ROA to increase to 0.8 per cent in FY25 from 0.5 per cent expected in FY23, while the return on equity is also projected at subdued levels of seven per cent in FY25. “A double-digit ROE could happen only beyond FY25, and that is too far looking into the future,” he adds.

Given how private banks have staged a strong comeback after the pandemic, and are racing past the 1 per cent ROA mark, even if YES Bank ups its game by FY24, its chances of outdoing the pack seems limited.

If Kumar must prove any of these assumptions wrong, his only bet is on loan growth, now projected at 14 - 15 per cent in FY23. He aims at beating the market to deliver growth, “but we will not unnecessarily take any risk just to play the league table,” he cautions.

After all, the bank cannot afford another asset quality mess, and that too from its newly built retail and SME book now which account for 60 per cent of total loans.

Kumar is left with a tightrope walk. If he pushed the pedal on growth, the asset quality engine may give way. If his focus is to keep quality intact, growth must be calibrated.

“There’s already quite a lot of sales pressure which people at the bank aren’t used to. The eye on compliance has also increased a lot and people are finding it tough,” says a former employee of the bank. Having faced unprecedented attrition till mid-2021, the ship is just about stabilising. The bank is adding resources across functions to take the pressure off people and meet the targets.

In short, Kumar has ticked the essential boxes, which has accelerated the engine just as much.

This may keep the interest in YES Bank alive from an industry and investors’ perspective in the next two years.

But, what next? This depends on Kumar’s ability to take it to the top gear, which is the real challenge.

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