For most of the past decade Yes Bank has been the fastest-growing and highest-profile upstart in India; Yes Bank loses shine as India liquidity ebbs and rupee slumps

August 4, 2013 8:14 am

Yes Bank loses shine as India liquidity ebbs

By James Crabtree in Mumbai

For most of the past decade Yes Bank has been the fastest-growing and highest-profile upstart in a new generation of Indian private banks. But in the aftermath of government moves to prop up the nation’s currency, it is gaining a fresh reputation as the biggest loser from India’s new moment of tighter liquidity. Founded in 2004, Yes Bank has expanded rapidly to become the country’s fourth-largest private bank by loans, with after-tax profits growing at an eye-catching compound annual rate of 44 per cent over the past five years – creating an unorthodox image bolstered by the group’s charismatic and publicity loving founder Rana Kapoor.But the Reserve Bank of India’s intervention in mid-July hit the bank’s wholesale deposit-dominated business model particularly severely, wiping more than a third off its shares since, and forcing it to hike lending rates last week – part of an attempt to shift focus and attract new funds from retail investors.

Such difficulties come at a delicate time for India’s banking system, as the RBI considers applications from dozens of organisations for one of the first new private bank licences to be issued in India for a decade, with many of the hopefuls keen to mimic Yes Bank’s heady expansion.

The new environment presents challenges for the bank, too. Yes Bank remains well capitalised, although less so than some private sector competitors such asHDFC Bank, but its relatively small branch network limits its ability to rebalance away from its focus on companies and wealthier individuals.

“The logical conclusion . . . is that it is heading for lower growth on the balance sheet and lower profitability and probably more scrutiny over governance, too,” says Saikiran Pulavarthi, a Mumbai-based analyst for broker Espirito Santo, which downgraded the bank in June.

Governance worries have risen in particular because of an increasingly bitter court dispute between Mr Kapoor and the family of the banker with whom he co-founded the bank, Ashok Kapur, who was killed during a terrorist attack in Mumbai in November 2008.

The disagreement centres on whether Mr Kapur’s daughter deserves a seat on the bank’s board and looks set to drag on in India’s court system, with the latest in a series of hearings due later this month.

Few analysts believe the battle will prove much more than a distraction, although last week a senior figure at the RBI noted that the regulator was watching closely nonetheless.

Mr Kapoor dismisses such concerns, describing the fall in Yes Bank’s stock as an “over-reaction”, pointing to continued strong profit growth and high loan quality that he ascribes to a culture of good governance and careful risk management.

The logical conclusion . . . is that it is heading for lower growth on the balance sheet and lower profitability

– Saikiran Pulavarthi, Espirito Santo

“We had a very good quarter in June, and our asset quality continues to be the finest in the banking industry,” he told the Financial Times. “Yes Bank has taken action by increasing its base rate and also increased some deposit rates . . . [and] we are seeing fantastic traction as far as retail deposit customers are concerned.”

Even so, the institution’s stresses have been greeted with a mixture of concern and quiet schadenfreude within India’s close-knit banking community: the former a recognition of the sector’s growing vulnerability as the country’s economy slows, the latter directed more at Mr Kapoor himself.

“Quite a lot of this is just jealousy about Rana’s brash style,” said one senior Indian banking figure. “But there has always been intrigue in the industry as to how they kept doing so much better than everyone else on things like asset quality, even when times were bad. So people are now watching this closely.”