YES Bank is back from the dead. Now it just needs to stay the course

It is not often that a government bank in India finds itself at the heart of a turnaround story that actually seems to be working. But that is exactly what India’s biggest government-owned lender, State Bank of India (SBI), has set itself to, and is perhaps managing to, do.

Back in March 2020 when an SBI-led consortium took over the beleaguered YES Bank after its board was suspended by the Reserve Bank of India (RBI), few would have imagined that the public-sector bank would be able to spearhead the turnaround of sorts at the private-sector lender that it has managed to do.

But if one looks at the numbers, and how the market has come to react to them, that is exactly what seems to have come to a pass.

Last month, YES Bank reported a 50.17% year-on-year rise in profit after tax at Rs 310.63 crore compared with Rs 206.84 crore in the same quarter last year. YES Bank’s net interest income for the quarter jumped 32% YoY to Rs 1,850 crore. Net Interest Margin for the quarter came in at 2.4%, up almost 30 basis points YoY.

The bank said its non-interest income for the quarter came in at Rs 781 crore. Adjusted for unrealised and realised gain on investments, the non-interest income climbed 35% on a year-on-year basis.

The bank also said it made provisions worth Rs 175 crore for the quarter, which were down 62% YoY and 36% sequentially, aided by a sharp drop in slippages to Rs 1,072 crore from Rs 2,233 crore in the same quarter last year.

Asset quality improved as gross non-performing assets as a percentage of advances fell to 13.4% for the quarter against 13.9% in March and 15.6% in the year-ago quarter.

YES Bank also said last month that it signed a binding term sheet with JC Flowers to form an asset reconstruction company with the objective of selling an identified pool of nearly Rs 48,000 crore of stressed assets.

On July 15, it formed an alternative board, saying it had come out of the reconstruction scheme put together by the RBI and had recommended the appointment of Prashant Kumar as managing director and chief executive officer.

And then, earlier this week, YES Bank said it was raising upwards of Rs 8,900 crore from global private equity investors Carlyle and Advent International, each of whom is acquiring an equity of up to 10% in the lender. It will raise Rs 5,100 crore by issuing equity shares and Rs 3,800 crore via equity share warrants.

The strong results, and the deals with JC Flowers as well as Carlyle and Advent have enthused investors, with its shares touching a one-year high this week.

Just two years back though, the story was very different.

‘Diamonds are forever’

In 2020, YES Bank became the largest private sector bank in India to be bailed out. It almost fell apart like a house of cards, the downfall caused by a heady mix of breakneck growth along with alleged fraud and mismanagement and misappropriation by its co-founder and former chief executive officer Rana Kapoor.

A multi-agency government probe, which included investigations by the Central Bureau of Investigation (CBI), unearthed Kapoor’s alleged collusion in a Rs 466 crore scam that also reportedly involved Avantha Group promoter Gautam Thapar.

But Kapoor remained defiant till nearly the very end. “Diamonds are forever. My promoter shares of YES Bank are invaluable to me,” Kapoor had tweeted on September 28, 2018, nine days after the RBI rejected the extension of his tenure as YES Bank’s CEO.

Kapoor also tweeted that, during the leadership transition, he remained fully committed to the interests of the bank and its stakeholders.

But he seemed to have changed his mind soon enough. By December 2019, Kapoor’s stake in YES Bank was down to zero after the bank’s promoter-run companies, YES Capital and Morgan Credit, sold their 2.04 crore shares for Rs 142.75 crore. And there was perhaps good reason for this change of heart.

‘Negative’ outlook and the big bailout

On November 21, 2019, global rating agency Moody’s cut YES bank’s credit rating citing several problems. Moody’s rating outlook moved to negative from stable.

“Although the bank’s credit fundamentals remain stable, developments surrounding the transition in leadership as well as governance issues are credit negative because they complicate the management’s effective implementation of its long-term strategy. Furthermore, these developments could constrain its ability to raise new capital,” Moody’s said.

Moody’s said it noted “significant” divergence in the bank’s reported asset quality metrics as against the RBI’s assessment of asset quality in two consecutive financial years. It said the divergence in the classification of bad loans between the bank’s and the RBI’s assessment was Rs 4,176 crore as of March 2016 and Rs 6,355 crore as of March 2017.

The bank’s bad loans rose sharply with net non-performing assets (NPAs) rising to 4.35% as of September 2018 from 0.84% a year earlier.

On January 24, 2019, YES Bank announced the appointment of a new managing director, Ravneet Gill, who came with three decades at Deutsche Bank.

But Gill should have known better before taking up the new assignment. Kapoor had left a messy situation, caused by loans that should never have been given in the first place and a complete lack of cohesive management practices.

Gill had to find a bunch of backers who would be willing to pump $2 billion into the Bank. But his efforts came to nothing. On January 10, 2020, Uttam Agarwal—an independent director and head of the bank’s audit committee—quit, raising serious corporate governance issues. In a letter to the Securities and Exchange Board of India (SEBI), Agarwal accused Gill of lack of transparency in sharing updates on fundraising exercises to the board.

On March 5, 2020, the RBI, which is also the banking regulator, fired the board of YES Bank and appointed SBI’s Kumar as the administrator.

The RBI then put YES Bank under a moratorium for a month. Withdrawals from the bank were capped, in what was eerily reminiscent of what had been done to rescue the Punjab & Maharashtra Co-operative Bank. The public confidence in the bank, however, took a nosedive.

On March 13, 2020, the union cabinet cleared the restructuring plan under which SBI was to invest Rs 7,250 crore. Other lenders, too, pitched in with HDFC Ltd and ICICI Bank investing Rs 1,000 crore each, while Axis Bank and Kotak Mahindra Bank announced Rs 600 crore and Rs 500 crore investments.

As of the end of June 2022, SBI holds a 26% stake in YES Bank. The banking major, which is allowed to reduce its stake in YES Bank, said last month it had not taken a call on the matter yet.

One group of investors who had to pay the price for trusting Kapoor & Co were those holding the bank’s additional tier-bonds (AT-I) bonds as well as equity shareholders. On top of that, Rs 8,400 crore worth of YES Bank AT-1 bonds were written off as part of the reconstruction scheme. Since then, those who had invested in these bonds, including retail and institutional investors, which include hassled senior citizens who were mis-sold these instruments as safe assets, have been taking legal action.

On May 3, Kumar told Moneycontrol that the bank will likely raise Rs 7,500 crore in the current fiscal out of the total board-approved capital raise limit of Rs 10,000 crore.

While things seem to be looking up for YES Bank, it is not completely out of the woods yet. Its non-performing assets (NPAs) remain higher than Axis Bank and Federal Bank.

Kapoor, arrested by the Enforcement Directorate in March 2020 for his alleged role in a scam at YES Bank involving dubious transactions between himself and erstwhile Dewan Housing Finance Corporation promoters, remains behind bars.

While Kapoor awaits justice, YES Bank’s investors and customers would hope better days await the lender.