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.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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