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Yes Bank was a growth story, will continue to remain so, says CEO Ravneet Gill

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Yes Bank reported a whopping Rs 1,506 crore net loss for the March quarter as against a profit of Rs 1,179 crore in the year-ago period as provisions soared over nine-times.

Yes Bank was a growth story, will continue to remain so, says CEO Ravneet Gill
Under a new head after the forced exit of its promoter-chief executive Rana Kapoor, Yes Bank reported a whopping Rs 1,506 crore net loss for the March quarter as against a profit of Rs 1,179 crore in the year-ago period as provisions soared over nine-times.
Higher provisions for possible reverses, including a massive Rs 2,100-crore contingency reserve, was the prime reason for the massive loss, the bank said. The heavy quarterly loss crimped the full year profit at Rs 1,720 crore as against Rs 4,224 crore in FY18.
Had it not been for a Rs 831-crore write-back, the private sector lender would have reported higher losses for the quarter.
An almost 10-times spike in provisions to Rs 3,661 crore from Rs 399 crore in the year-ago period led to the massive hit on the bottomline. This includes a contingent provision of Rs 2,100 crore.
Ravneet Gill, MD and CEO, Yes Bank and Rajat Monga, senior group president - financial markets, Yes Bank, discussed the Q4 results and the road ahead.
Gill denied management reshuffle plan and said the bank is looking at diversifying and sustaining healthy business growth by growing retail and SME sectors.
Watch the video here:
Edited Excerpts:
Your guidance on your return on assets (RoA) is that it will turn to one percent by FY22. Now that is a distance. Is that a conservative guidance, is it possible that you will get it even earlier?
Gill: The guidance that we have been providing is that by March 21, which is two years from now, we will be an RoA of 1 percent and then we are headed towards an RoA of 1.5 percent over the next 18-24 months beyond that. Do bear in mind that this does not factor in any recoveries that we make along our way and which would lead to further RoA expansion.
For some reasons, this messaging got lost and the question that you asked in terms of what went wrong in Q1 – I think it is very important to understand that the bank did make an operating profit in Q1. They were exceptional one-off items so there was in some cases a fee reversal there, some other one-offs and then I think as a management team, what we decided was that we will go out there and engage with our various stakeholders in a spirit of transparency and that is the basis on which we took the contingency provision.
First and foremost the Rs 10,000 crore on which we have taken the contingency provision, there is a watch list, it is not a stressed book as it has sometimes been made out to be. The second part of it is that even if I look at the contingency provisioning, I feel very comfortable on that which is in terms of what could be the potential loss that we take on that haircut. It would be very different from the provisioning that we have talked about.
How much?
Gill: For all you know some of these assets may not even slip, to begin with.
How much of the Rs 10,000 crore is giving you that much comfort? I will tell you what my suspicion was – a large part of it is exposed to the Essel and the Anil Dhirubhai Ambani Group (ADAG), how much of this?
Gill: The issue that has to be taken into account is that we have made a very clear disclosure in terms of what are the assets, which are BB (Bulge Bracket) and below. One thing was to have left it with the market’s interpretation in terms of what they make of it. Second one was to more proactively go there and transparently share, what is our assessment of that portfolio. In many of these cases, we are absolutely aware of asset sales that may be happening, stake sales that may be happening, other liquidity events that may be happening which could completely change the credit profile of many of these counter parties.
Your provisioning for that is only Rs 2,100 crore, correct?
Gill: Yes.
You are saying that is enough.
Gill: As of now – I can absolutely say that I feel very comfortable. We have given a credit cost guidance of 200 basis points (bps), 80 bps of that has been absorbed upfront and we are saying that if we look at the incremental 120 over the balance here, that will absolutely make sure that any slippages that happen will get taken care of. So I think the important thing to recognise is that this is not just an estimate. I think what has happened is that in the past, banks have given guidance in terms of what could be the potential slippages and then the final slippages have been much higher. So don’t paint us by the same brush. We feel very confident that the guidance that we have provided of 200 bps is fine.
One basis point is a hundredth of a percentage point.
The other thing which I would like to talk about also is the whole discussion around the growth story ahead of Yes Bank. Do bear in mind that like, I said there was an operating profit for the quarter but because of the one-offs, we reported a loss. People talk about the structural finance business of Yes Bank, for whatever reasons don’t talk about our transaction bank which is growing in the 30s, our retail bank which is growing in the high 30s and where we can see sustained momentum as long as we can keep feeding those businesses.
So overall if you look at it from the point of view of our different business, the key businesses that Yes Bank has, I would feel very comfortable and confident about what the future growth prospects of the bank are.
Coming back to RoA even this RoA of 1 percent by FY21 is quite low, what is inhibiting further RoA recovery and what kind of recoveries would you expect over the next 18-24 months which will add to the RoA?
Monga: If you look at a few changes that are underlying in terms of this RoA, one is also a change in fee accounting policy. So we have taken a conservative approach to amortise fee income. What happens is if you are booking fee upfront versus when you are amortising the amortisation will take a while before it aggregates. So the RoA which has and most institutions, our peers continue to recognise that fee on an upfront basis.
So we are saying that we want to discontinue that. It is also something which International Financial Reporting Standard (IFRS) would have sort of mandated in any case. So we are let us say we are more ready for IFRS in the process and others would have had to also go through that change. One part is the underlying fee amortisation, this fee was also an important contributor to our let us say historic RoA. It will comeback, it will comeback in a manner that it will be more sustainable, it will be coming back in the manner that is also more granular.
I spoke to some private equity and market guys, if you guide for an RoA of 1 by April, I mean everybody went with FY22 because it is the end of March FY21 then your RoE barely gets to double digits probably 10 or 12 percent, at that level will you be able to raise capital effectively? You will get capital only at a demanding cost?
Monga: Capital is not necessarily something which we will want to look at and the structure of capital that we want to raise is not something that is looking at 6 months, 9 months out.
Are people ready to wait for 3-4 years and RoE doesn’t get to - even if I look at 1.5 we are not getting to RoE of 18-20 anytime soon so do you have that much patience?
Monga: There will be all types of capital that is available. Maybe you have to speak to the broader market to get a sense. There is short-term capital available, there is long-term capital available, there is medium-term capital available, there is also structured capital available, so it is all forms of capital which are available. If you look at a little bit of what we are let’s say, undergoing, we are trying to also come to RoA which will get much better multiples. Because the earning quality is going to be far higher. In fact, it might be better than most peers in terms of quality of earnings. Quality now that we can debate that if you want.
Q: You said that this Rs 10,000 crore is not stressed assets it is actually a watch list can this number be higher? Can you assure investors that there is no further recognition of stress or provisioning, can this number get inflated?
Gill: I told you earlier the 200 bps guidance that we have provided, I am absolutely certain that this will not slip. If anything the final guidance that comes in or the final results that come in are tighter than this. This for us was really a very conservative way of looking at it. I think one of the thing which also needs to be understood by the market whether it was the directional trends with respect to earnings, whether it is directional trends with respect to recognition, whether it was in terms of balance sheet and the provisioning.
I think this quarter also represents a philosophical shift where we want to go there into the market show that we have become more conservative, more prudent, the disclosures will be much greater. I think in some ways right now if I look at the response we are getting penalised for that, so just the fact that we have been a little conservative in terms of estimates and guidance and should not be held against that.
The point that Rajat made with respect to that fact that we want to make our earnings more granular, more predictable, more sustainable and more scalable because if you look at just the structured finance business by itself the scalability and the predictability of the business is not there. So what we want to do is we basically want to change that. Also in many ways, we want to improve our capital structure and that is not going to happen unless we have a very clearly defined liabilities strategy and from which perspective retail becomes very important.
The bank grew its book by almost Rs 1 lakh crore in the last 4-5 quarters. It was Rs 1.4 lakh crore book maybe 6 quarters ago and now it is Rs 2.4 lakh crore book. Whenever you grow so aggressively, I think one quarter it was 40 percent; I cannot remember but it was a fairly aggressive growth. Normally 18 months down the line you see trouble because you have grown too fast, your ability to do diligence is not there. You are 7 weeks into the bank. Do you fear that this aggressive growth can…
Gill: I would make one exception there. If you see the growth that happened over the past one year or so. It was a time when the public sector banks started to face certain headwinds because of Prompt Corrective Action (PCA).
It was also the time when Indian industry went through its worst patch.
Gill: It did but the point is that the market opportunity got vacated and India remains such an underpenetrated market from the credit perspective and that there was a real opportunity for the bank to grow. So do bear in mind that a lot of our private sector banking peers were very focused on retail and Yes Bank was very corporate focused and one way to look at it is that did you accumulate a lot of…
The structured finance kind of book?
Gill: I do not feel concerned about that. On the contrary, the way to look at this is that at a time when private sector investment was not happening. Corporate growth was not there but it was Yes Bank as a corporate bank grew at that time. So when the cycle turns, I would say the bank will be better geared to be able to monetise and harness that tailwind than a lot of other banks.
I will come to that in a bit. Let me get through Rs 10,000 crore that Sonia was asking you. You provided Rs 2,100 crore and you say that you are absolutely comfortable that you may not have to provide more. If I take that as 50 percent provisioning then you are saying not more than Rs 4,000 crore will slip?
Gill: If you look at it from the point of view of a guidance of 200 bps out of which 80 has already factored in. So what you are saying that more than Rs 5,000 crore will slip – that is a number that I am absolutely telling you that we are comfortable with.
But you also will have to move your provisioning towards 70 percent at some point in time?
Gill: We have a very clear plan that over the medium-term we will increase our provision coverage ratio (PCR) to 60 percent.
There were rumours that you are going to be moving out of Yes Bank. You want to make any statement on that?
Monga: Luckily no.
Gill: Let me make this clear. One publication carried an article saying a revamp of senior management. The next day we sent a very strong rejoinder to that. I am out there, telling you right now that as far as the senior leadership of the bank is concerned, not only I am satisfied with them, I am very happy with them. One of the upsides of the bank is the quality of management that we have and I would love to have the stability of the senior management that we have.
Coming to the grain of that management which was their ability to look at structured finance, there were always high return products that they got into corporate but they were also high risk and now the risk is coming out. Can you change that grain and become like one of those HDFC type of bank which only look at high risk retail?
Gill: I am very clear in my mind that the basic DNA of Yes Bank is a corporate bank and we don’t want to change that. So I have repeatedly said there is no intention on our part to gravitate towards becoming a retail bank, absolutely not. What we are saying is that we want to diversify our revenue streams so that they become more granular, they become more predictable.
Now when you say that can the mindset change, we are not seeding new businesses, it is very important to understand. If you see between our transaction bank and between our retail bank, the revenues from those two businesses themselves are in excess of Rs 5,000 crore. Those are very significant businesses.
Let me explain to you what are we trying to look for. What we say is that even on the corporate book that we run, we want a larger share of transaction bank, we want to deepen those relationships, we want to mind those relationships in a much more comprehensive fashion. The idea is not to go away from the whole corporate finance and the structured finance business, which remains a very big USP of Yes Bank and it would be an absolute shame to lose that risk-taking ability and capability.
So on the margin front, how do you plan to improve margins? This time the net interest margins (NIMs) were the lowest in 17 quarters or so, if you are going to be lending to higher rated corporates, what is the plan with respect to margins?
Gill: When we talk about higher rated corporates, there are two-three things we need to bear in mind. First and foremost, the thing that we talked about in terms of the upfront fee getting amortised over the life of the loan, what that will do is that it will take away any temptation to strip the coupon, which will help you with your net interest income (NII). That is number one.
Number two is that if you have more cross-sale that is in addition to financing, you also have trade finance, you have fx and all of that, I think the overall returns on the relationship and the capital deployed will go up more significantly.
The third thing is right now, do bear in mind that in terms of cost of funding, we are a little wider than a lot of our peers unless we have a very clear granular strategy around retail and we can have a very clear strategy around liabilities, we would not be able to bring down the cost of funding.
The flip side of that is that today if we are 125 bps-150 bps wider of competition, think of what incremental profitability we could generate by every 50 bps of reduction on the cost of funding on our existing book. Forget the growth, even on the existing book, what could be the incremental profitability that would accrue if we can bring down the cost of funding. So one of the big drivers for us to become more granular and the businesses that we have articulated as part of the new strategy is also that. That we have to bring down the cost of funding, we have to improve the risk perception outside the bank for the ratings to improve and then overall bring down our cost of capital.
Everyone knows how difficult it is to raise deposits, low-cost deposits and in your case, it has been falling, so for NIMs, everyone speaks about data mining, even non-banking financial companies (NBFC) guys are speaking about data mining for the longest time, it is not yet yielded that much in terms of returns because your competition also is going to do that, your savings accounts still pay 7 percent to get people to come to your bank, what is the NIM forecast for FY20 itself?
Monga: Just a small correction, our pricing of savings account deposit rates now ranges between 5 percent and 6.25 percent. So progressively, the interest rates also play a role in the economy.
The State Bank of India (SBI) chairman told us he is not able to reduce deposit rates, it is at that stage?
Monga: I thought the move to floating rate pricing and repo rate cuts subsequently on savings accounts rate has also reduced the effective cost of rates. So since we discussed that, we do have that tool in terms of when we think it is optimal to be able to reduce pricing on savings accounts. I think that will be a function of also how we are looking at the front book growth strategy of savings account book and also how we are looking at the stability of the back book. You have been tracking us, so we have had a fairly high growth trajectory in the last three-four years, which means that our demands on the current account savings account (CASA) has also been high to be able to keep the book balanced matched and stable.
So the trajectory of growth need not be that high as we look into the future and therefore the strategy on savings account pricing also will follow. So it should be expected that our pricing on savings accounts will gradually come down. So that will be an input into pricing. The input into pricing on NIMs also would be on how we are looking at the asset side. We are the fastest to half a million credit cards in the Indian business. It is a very good portfolio performing very well. Also lowest on delinquencies. Can we not increase the share of that business, it also brings more margins, consumer side of retail lending is something that we are going to add in the portfolio so our book is currently – the retail book, the SME book is performing exceedingly well.
You were there when the bank grew from Rs 1.4 lakh crore book to Rs 2.4 lakh crore book in all of 4-5 quarters, aren’t you worry that growth normally should throw up some problems 15-18 months down the line?
Monga: I appreciate, this is conventional wisdom that is applied to banking. We just have to contextualise it. I will ask you a reverse question, if you look at growth in banking, are you more worried when banks are financing Greenfield projects or are you more worried when banks are financing more as in various situation. So if you look at the last two years, when we have grown, Greenfield activity was – if I may say substantially limited to renewable energy and we have worked in renewable energy. So about 3-4 percent of a portfolio is about renewable energy but I think the portfolio is performing fine. In fact, it is encouraging.
I told my team of reporters and researchers to double the sectors they cover then I immediately see that there may be slips in the way they covered, it is quite an aggressive book.
Monga: We have more than doubled our books. In this period retail has grown 120 percent in one year and 100 percent in the second year and retail has had serious investments from our side. so five years ago, if I go, we were practically absent from the retail lending business and today we have a Rs 70,000 crore book in the retail business and a well-performing book. So this is a book, which has grown well, we have not taken any form of sophistication of risk in retail banking, we have built the core book, it has very good management which is running it and we are super confident in terms of taking it forward as well.
The reason we are persisting is the market, the preopening rates have just kicked in and look at the first trade, Yes Bank is down almost about 10 percent so there are definitely concerns on the street. In terms of growth capital, is Yes Bank constrained for growth capital now and in terms of a timeline what are we looking at?
Gill: Two things – I was just looking at the ticker, it said that there could be slippages of Rs 5,000 crore from the Rs 10,000 crore thing. I didn’t say that. I said Rs 5,000 crore total slippages. It wasn’t from this, so when we are providing guidance of 200 bps, it is for the entire book, including the normal slippages, it is not the fact that 5,000 slips out of 10,000, so that needs to change.
So the issue really is that do we need growth capital with where our CET-1 right now is, I think absolutely right but we just don’t go out and raise capital regardless of the price. I think we also have the flexibility in terms of being able to churn our portfolio, we did a very significant job of that during the last year and if I look at the corporate book, I think there is significant ability that we have in terms of creating capacity so that a faster-growing businesses could continue to get funded and we could continue to grow those books.
So yes, ideally speaking sooner than later but if we need to wait it out and churn the book in the meantime to make sure that we continue to grow and we continue to strengthen our ratios then we will wait it out.
How much freedom is the board giving you? Shagun Gogia is also on the board and I am sure representatives of those who own the capital like Rana Kapoor’s representatives will also be on the board, do you have a free hand. Let us assume hypothetically you found more troubled assets than you are now judging. Will the board give you a free hand to identify them?
Gill: I think the board is taking a very pragmatic and a very enlightened view on this. The clear view that we want to put the bank on a stronger footing, the clear thing that we need to engage with more transparency and more trust, the fact that if there are problems, we need to recognise that, have full disclosure. Therefore, to answer the question in terms of freedom, one was when we changed the whole philosophy around how we go about disclosures and provisioning – that went to the board obviously, goes without saying; our new strategy in terms of building a more sustainable, more predictable, a more granular book that went to the board which was somewhat of a departure from what we were doing previously, the board approved that. Therefore, I think the board is much geared towards doing things which are in the best interest of the bank and not necessarily to serve the individual interest.
The board meeting went on till 7 pm on Friday (April 26), we were expecting the results from 4 pm. We were worrying whether you have a contentious board?
Gill: No, not at all. We had a lot of good robust discussion around issues and people had views.
Monga: We spent three hours on strategy in that board meeting.
Gill: So that is one of the reasons why the board meeting went on for as long as it did.
To summarise from an investor’s standpoint although you are trying to build a more stable asset book over the years. Is it safe to say that Yes Bank is now going to enter an extended makeover phase where there will be a subpar return profile at least for the next few years?
Gill: Not at all. If I had to summarise the messaging that we would want to convey is Yes Bank was essentially a growth story that growth story remains absolutely intact. Like I said that do bear in mind that the loss that we reported in Q4 was essentially because of one-offs.
We do not see this as a recurring thing; reversal of fee or the contingency provisioning that we do. So many of our businesses are currently growing at 30-40 percent. Therefore, we will continue to be a growth story. We do not think we are even taking a pause. All we are saying is that in terms of our earnings profile we want them diversified so there should be a good mix between wholesale and retail although we will continue to remain a corporate bank. There is no question about that and for people to be able to make an assessment in terms of how scalable is the model, how derisk is the model – that is what we are trying to convey, but during this time we do not plan to take a pause.
We will continue to grow in mid-20s and we will continue to generate RoEs which are in the high-teens. So on that we have absolutely no concerns whatsoever. So Yes Bank was a growth story, will continue to remain a very strong growth story.
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