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Yes Bank CEO Ravneet Gill on raising $2 billion, investors, promoter stake and growth opportunities

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YES Bank Managing Director and CEO Ravneet Gill exclusively talks to CNBC-TV18’s Nisha Poddar on the granular details of the bank’s fundraising plans announced on November 29. After a marathon meeting of eleven hours, YES bank’s board increased its fundraising target to $2 billion and announced the names of the interested investors, including Hong Kong-based SPGP Holdings, which is backed by Canadian family office of Erwin Singh Braich.

After a marathon meeting of eleven hours, the Yes Bank board on Friday increased its fundraising target to $2 billion and announced the names of the interested investors, including Hong Kong-based SPGP Holdings, which is backed by Canadian family office of Erwin Singh Braich.
With a binding term sheet of $1.2 billion, other investors guaranteed to buy shares include Citax Group, which has offered to invest $500 million, GMR Group, Rekha Jhunjhunwala and Aditya Birla Family Office. Yes Bank is yet to disclose the name of a top-tier US fund house that has committed $120 million investment in the bank. The lender requires approval from RBI to go ahead with the recapitalisation. In an exclusive interview, Yes Bank managing director and CEO Ravneet Gill discusses with CNBC-TV18’s Nisha Poddar on the granular details of the bank’s fundraising plans. Edited excerpts:
Q: After a marathon board meeting of more than 11 hours, you have come with a decision. My first question and the market would like to know that you had set out on this capital raising plan with $1.2 billion of decision and that has been approved by the shareholders, now you have upped your target to $2 billion. What was the requirement for this?
A: First and foremost $1.2 billion had actually been approved by the board. But if you look at the increase in the authorised share capital that happened in the board meeting of August, at the current market price, it enables us to raise a lot more.
What has changed between then and now in terms of the $1.2 billion becoming $2 billion is if you see the way the financial services right now are in the country, the opportunity that exists private sector banks today, has become much broader. I think the path forward has become much clearer and much longer. We thought that if such an opportunity does exist, won’t it be better to capitalise ourselves even more than what we had initially set out to do and then monetise this big growth opportunity that lies ahead of us?
I also think in terms of providing more comfort to our various stakeholders that the bank is on a stronger and more stable footing, that messaging would be important. So I would say that if there is one takeaway that the market should have from this board announcement is the fact that there is $2 billion of capital available to the bank.
Q: Why at this valuation immediately, $2 billion, are you foreseeing any risks on your balance sheet?
A: No. I think one can always say that could you have raised the money at a higher valuation? or the fact that could you have staggered this that you need not have done that.
The point is first and foremost if you stagger the capital, I think the overhang remains. The market knows that you are going to be coming back for capital and I think in some ways, it doesn’t serve the best interest of investors to begin with.
Second, I have always maintained as have my other colleagues on the management team, that more capital is better than less and quicker than later. First and foremost priority for the bank should be creating a very high degree of comfort for depositors, clients or the regulators. If you look at it from a franchise standpoint, this serves the interest of the franchise much better than to do it in a staggered basis simply because you think you could have raised it at a higher valuation.
Q: The other way of looking at the staggered fundraising plan could be that first infuse the capital, show the growth momentum for a few months or maybe a year and then raise at a higher rate when there is a little more confidence and comfort in the bank as well. But the bigger question about the massive fundraising plan in one shot is that the valuations could be below your adjusted book value. So that could be seen as a desperate attempt?
A: If you look at it from the point of view of this capital raise, it comes with a one-year lock-in. It comes at a premium to the current market price.
How?
A: If you look at what Sebi's floor price formula, there is a difference in for a six months average vis-à-vis what the current market price.
If you look at it a little differently, the investors are willing to pay a premium to the market and are willing to get locked-in for one year, what greater endorsement would you want to look for? Currently, to me, that seems to be such a strong validation of the direction in which the bank is headed.
Q: You have an equally good side of the argument. I will also dwell a little more on the valuation bit and the point that I raised about the book value. Yes Bank shares are trading below the adjusted book value, which works out to about Rs 85 per share. You had done the last QIP at around Rs 83 per share and now if you are saying that $1.2 billion would be given to one investor, not more than 25 percent, a very easy back-calculation means that a price of about Rs 78 odd is what you are planning to do this entire trade-in. That is below your adjusted book value. How will you defend your position on that because you will be raising $2 billion at below book value?
A: Let us look at it a little more objectively. If you have arrived at a price of Rs 78, I think what that represents is six months average, which is as per the Sebi formula. That is number one.
Number two, you have made the point that right now Yes Bank is trading at below book, I think the fundamental reason why Yes Bank is trading below book today is that there is a belief that the bank is not fully capitalised. My sense is that if we have to trade at a multiple to the book, the fundamental fix for that is capital. Once the capital comes into the bank, you will see that the bank will start to trade at a multiple.
Q: Now let us shift to the regulators’ point of view. Would you at all be looking at a dispensation from Sebi on the pricing formula of six months or two weeks average, have your investors given you a lower valuation expectation given the requirement of the bank at this point?
A: Clearly, the investors who have come in understand the fact that they will need to come in at whatever is the pricing formula and the guidelines around pricing.
Clearly, the binding offers have come at that value. If some dispensation was to come subsequently, that is a bonus but their investment decision has not predicated on that. They very clearly recognise that there is a pricing formula out there and in a preferential allotment, if there are more than five investors then you need to look at it from the point of view of six months average.
That is the basis on which it is going if at all there is any dispensation available from Sebi then it is good for the investors.
Q: Will you be asking for a dispensation? Let us put it like that.
A: No. I don’t think right now we feel that need to do that because like I said these investors have come in at the six months average and I think they are happy to go with that.
Q: Six months average it is, around Rs 78 it works out at this present time and that is the likely valuation in which the entire USD 2 billion trade has to happen?
A: As things stand, that is exactly the way it is.
Q: If we look at the back-calculation, if that is the price at which you are doing this particular trade then post adjustment, your new investors will end up holding little over 40 percent stake in the company. But your dilution is to the level of 71 percent.
A: No, you need to look at it a post-money basis. From a post-money basis, the dilution is much lower.
So pre-money, yes it is much higher but given the fact where the bank’s current market cap is, add another $2 billion to that then this is closer to 50 percent in terms of dilution.
Q: So post adjustment, it is coming around...
A: Post-money it is working out to a dilution of that level.
Q: Of 40 percent as per my calculation the entire $2 billion with one large investor with about 25 percent.
A: That is right.
Q: That is the composition.
A: Yes.
Q: Now, let us focus on the investors as well. first of all, the background of the biggest fund provider Erwin Singh Braich as well as SPGP Holdings, how well do you know them and what do you think about the fit and proper report of these investors when it comes to the Reserve Bank of India (RBI) because RBI plays a very critical role and has to give the approval to your fundraising plan?
A: That is right. As you know that the term sheet came a long back and another point that I would just like to make is that yesterday they extended the term sheet till December 31 and some of the questions that came back to us was that will the decision take till December 31, that is not the case. We have a board meeting coming up on 10th and the final allotment will be done in that board meeting.
We have also added that as far as this particular bid is concerned that we are in discussions with the investor, which are likely to conclude quickly. Those discussions are precisely around creating a framework, creating a roadmap, which will facilitate the application to RBI and for the RBI to take a view. I would not want to at all pre-judge what RBI has to say in the matter. We have not had a discussion with them yet. So yesterday there was some speculation that RBI’s initial response is negative, all I can say is that it is still a speculation, we haven’t had a conversation with RBI yet.
However, the discussion that we talked about in the release yesterday was precisely around this point in terms of how do we create the framework, how do we create the right path forward for the regulatory approval to get facilitated.
Having said that, obviously, we have had multiple conversations from multiple sources in terms of the background of the investor, their wherewithal, the ability to be able to bring up the investment of that magnitude, I would just say that the market should not be in such a hurry to pull that trigger on that. I think both these investors will be coming out with media releases shortly explaining the situation, also in terms of how they plan to meet the investment and I think in all fairness we should give them that opportunity.
Q: Has the bank got the comfort and the board of directors of Yes Bank got the comfort of the money availability with these investors to put in that large amount?
A: On the basis of the evidence that has been provided to us whether it is in terms of references, whether it is in terms of documentation, we do generally believe that both parties have the ability to be able to make the investments for which they have made offers.
Like I said that, let us just give them a little bit of time to come out and also disclose to the market more broadly in terms of what the plan forward is and how quickly do they think they can make these investments.
Q: Their articulation on this strategy is also going to be so important. They are going to hold a 25 percent stake in a private bank in the country, that could be seen like a backdoor entry into the banking space as well. How do you handle that and second, what are the control positions as well as board seats that are the requirements of this transaction?
A: First and foremost, what we should be very clear about and I am talking about this particular instance, this is a listed company and it is a regulated entity on top of that. So will we be entering into the shareholder’s agreement with them which gives them certain rights etc? To be absolutely honest, neither investor has asked for any special rights. They have asked for board representation which is a matter for the board to discuss.
Q: How many?
A: We haven’t got down to that. It is for the board to really take a call on that and then we will run that pass the regulator as well but there are no special rights that either of these investors have asked for.
The second thing is that we should bear in mind that there is always a possibility that your economic ownership in a bank is much higher but your voting rights are restricted or curtailed. I have to say that both these investors are really positioning themselves as long-term financial partners and not looking for any control or any management rights so to speak. So it has been a very collaborative process.
I will also like to make another point here since we are on the subject. Given the fact that this is a preferential allotment, in many ways, it constrain the kind of investor that we could bring on board and when I say constrained, let me just give you a little sense on that. First and foremost, if you look at the mutual funds (MFs), they will struggle with the one year lock-in so there is a constraint over them.
Second is that there were lots of funds which came and made very strong expressions of interest (EoI) and then what really became a constraining factor there was a regulation that if you have sold the stock in the last six months then you cannot qualify for a preferential allotment. So many of these funds who wanted to participate in this equity raise, got ruled out simply because they had sold the Yes Bank stock in the last six months. That is one part in terms of how it restricted the investor community.
The second, which is a very critical point is that at the end of the day when the family offices come in, there are two-three points, which we need to be very mindful of. First and foremost if these people have successful, it is because they have built successful businesses. Number two is they are putting their own money on the thing. So it is not as if that – it is third party money that they are investing. The third is that why do we believe that their due diligence is of lesser quality or lesser intensity or less incisive than that of private equity. These guys are putting their own money and I am sure they have done enough due diligence around the bank to be able to make that decision.
My own fundamental belief very firmly is that if you look at global financial services, I don’t think there is a more compelling opportunity than private sector banks in India.
Q: You took on the point of the restriction when it comes to the quality book as far as the investors are concerned. Some of the funds as you rightly pointed out have probably traded in the share and they couldn’t participate in this preferential allotment of shares. My second point is that having covered the private equities space very closely I have been in touch with several private equity investors and have got the information that the types of Advent, TPG Capital, Carlyle and many others have been in discussions with the banks over the last few quarters for an investment. None of them fructified, why?
A: I don’t want to go into individual names, out of the names that you took in terms of which are the private equity that looked at the bank, I think couple of points we should be clear about. So the first and foremost point that each one of them came away was that if you look at it on a go forward basis the revenue generation engine of this bank is absolutely intact and they thought that once it is fully funded this bank could compete on even terms with pretty much anybody else. They really liked the quality of the people that they met, our technology platform, and I think as far as our asset quality issues are concerned I think those are well documented, there is no secret to that. So they went in to it with a very clear view in terms of what they were contending with.
The key issue there was that in many of these cases either the process was taken too long and we were committed to be able to communicate to the market that by the end of November we will put an end this whole discussion and the second issue also is that in some cases I think there was an expectation in terms of what was their influence on the bank, on the strategy and all that where they may not have been a full meeting of minds. So I think it is not as if any of those conversations ended inconclusively. I think it was question of that this discussion needs to go little further and maybe a little down the line they maybe an opportunity for us to work together.
Q: How you are going to utilise this USD 2 billion and what is your strategy for getting more confidence in future as you just spoke about?
A: Coming from the point that you made in the previous question that you asked I think what we should understand really is that this is a point of transition and transformation as far as the bank is concerned. Once the capital is in the whole narrative around the bank changes. What we have done really is for now two and a half quarters we have basically consolidated. We have tried send liabilities, we have tried to bring down our asset book, tried to accrete capital organically and we went from 8 percent to 8.7 percent in the last quarter. We now think that the India macros have bottomed out, we definitely believe that there is a pick up from here which will obviously open up more growth opportunities for financial services players and given that outlook and that optimism about the future that is a very big driver in terms of from going from USD 1.2 to 2 billion.
In terms business strategy, we have articulated right at the end of the quarter four of last year that we want to build a bank where the revenue streams are much more balanced. There is a good mix between wholesale and retail and we will continue to focus on more, granular more flow businesses.
Q: In the last quarter you have definitely gone down on wholesale and tried to up the retail businesses well so that strategy will continue. But overall when you talk about the asset quality if we are bottomed out economically do you think more recoveries are also going to kick in? I was tracking Zee Entertainment -Essel Group recovery process and that has really happened which has given a lot of faith to the overall market. In your book do you see more recoveries or do you foresee more holes coming in because of some new risks? I ask you again because you have upped your target at a below book value price of valuation to really raise capital and therefore it shouldn’t be seen as a desperate move by the bank?
A: If there was a desperate move by the bank, we could have raised a lot more capital a lot earlier at lower pricing and we held firm and we said we will do the hard yards, do the right things and even if that is more painful we will accrete capital organically. Now we thought that the opportunity was right in terms of the macros turning around, in terms of I think our growth prospects looking a lot better and so that is the time when we raised capital. In terms of the resolution process we have seen DHFL moving forward, you talked about Zee and I think there is a lot of commitment on the part of all the stakeholders in financial services as well as the government to make sure that the resolution process starts. I think nothing will change the narrative around financial services and the overall confidence of the market than the whole resolution process. So we definitely see a quicker uptake in that in terms of more resolutions happening and which is good news for banks because that will then start adding to recoveries.
Q: DHFL going to IBC does that give you more confidence?
A: What was troubling about DHFL was the fact no decision was being made. There the company had put out a draft resolution plan which the banks were broadly in line with, but for whatever reason and I am not even sure about all those reasons there was an expectation that would have got done in the last quarter for whatever reason it didn’t get done our sense is now that it has gone into IBC and there is a very clear unanimity between the banks in terms of what the book looks like and what the resolution should look like I think we will make good progress on that.
Q: While we were just about to limp back to normalcy and things were stabilising in the NBFC space, Altico happened, then PMC happened, do you foresee any big risk? Very recently Macquarie has written a report on Indiabulls Group and that exposure and risks to many banks including yours?
A: I keep saying this repeatedly that the entire discourse and the way we talk about the financial services system has to be a little more restrained and more responsible. It is a business build on trust and all of should actually contribute to building and strengthening that trust. We have talked about different classes of investors. We have PMC Bank, which was a cooperative bank, then we are talking about NBFCs and then, of course, there are the commercial banks.
Do bear in mind that the level of supervision and the way these entities get regulated is very different from one another. I think it is misleading in some ways to talk about all of them in the same breath. People are free to speculate. If the entities that you talked about for different reasons have experienced some pain and some headwinds, but to try and think in terms of what is the prognosis for any of these entities based on all the speculation I think that would be little premature. I think many of these institutions will come back.
Q: By when do you think this fund will be infused into your balance sheet and second of course in the last quarter gone by we have seen higher slippages, we have seen lower loan growth, lower advances, lower deposits how is the capital fundraising really going to impact your overall performance and by which quarter do you think things will start looking much more positive because of the infusion?
A: I think based on the fact that there were slippages and that there was no resolution that had happened, we had provided guidance that we were increasing our credit cost by 125 basis points. I think that is done and locked away. I think the key in terms of reducing the balance sheet size was clearly from the objective of being able to shore up capital. Once capital comes in from outside I think it really puts us on the front foot. There is nothing that stops this organisation to - from virtually overnight moving into a growth mode. It is not that as if the whole organisation is introspective and in a defence mode. I think businesses have been allowed to go ahead and do what they are best at, and a very small team within the bank really focus on the stabilisation around asset quality etc. Once the capital comes in I think it is all systems go.
Clearly, in this environment, we would still want to grow in a very deliberate and a very well-considered fashion. But I think given the dislocation that has happened in the broader market, I think the growth opportunities for the bank will be outstanding.
Q: What are the growth opportunities that you are talking about? Let us look at the positive aspects and what is the kind of performance positivity that you are expecting and by when?
A: If you look at sections of the financial services market, there is dislocation that has happened in NBFCs, then the public sector banks are merging and have their own set of challenges, so there will be lots of very interesting refinancing opportunities. There are very good retail portfolios out there which you can potentially acquire inorganically. Finally, just a point which is worthy of note is that Yes Bank has essentially been the wholesale bank, it has continued to grow at a fairly fast pace at a time when private sector capex was not happening. Once that capex cycle returns, I don’t see how many competitors who will be as well-positioned as the bank is to be able to ride that wave.
Q: The promoter entity Madhu Kapur stake is at only 8.34 percent right now and whoever comes in will be higher than that. is the promoter status also going to change with this?
A: I think the promoter status has nothing to do with the level of shareholding. Those are two completely separate issues and that stays as it is. The only point I will make is that if you talk about the larger shareholder of the bank today, they are completely supportive and on-board of the fact that the bank needs capital and more capital the better and they are fully supportive of this raise.

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