Yes Bank Explained: About to be Acquired?

Did you know that when Yes Bank was established in 2004, its main focus was on corporate banking? In 2010, corporate banking contributed to around 63% of the bank's total revenue. This became one of the main reasons for its rapid growth in its initial years.

But somewhere along the way, the bank's reliance on corporate loans became a vulnerability. It faced severe asset quality issues, which made the bank rethink its “relying on corporate banking strategy."

Enter- Retail banking! Which now contributes to more than 40% of the bank's revenue.

The new and reformed strategy worked, earning the bank revenue of ₹14,153.29 crore in FY 2023-24. Currently, the bank’s presence has grown so much that it has attracted acquisition interest worth ₹41,850 crore from Sumitomo Mitsui Banking Corporation (SMBC). SMBC is looking to buy a 51% controlling stake in Yes Bank. A move approved by the Reserve Bank of India (RBI).

This is shocking because:

• Regulatory Concerns: The RBI has traditionally shied away from foreign entities holding a majority stake in Indian banks.
• Ownership Norms: The Banking Regulations Act 1949 mandates that promoters reduce their stake to 26% within 15 years. This complicates SMBC's desire for permanent 51% control.

A question comes to mind, "If Yes Bank is doing so well, why did the RBI allow this?

It seems like Yes Bank needs saving once again. Will SMBC be the saviour?

What's Happening With Yes Bank?

SMBC, one of the largest financial institutions in Japan, is trying to acquire a controlling 51% stake in Yes Bank. That’s valued roughly at ₹41,850 crore.

Why? Because SMBC has been trying to increase its presence in India.

Akihiro Fukutome, the global CEO of SMBC came to India recently to talk to the key stakeholders of Yes Bank, including the Reserve Bank of India (RBI) and the State Bank of India (SBI). It might be a done deal.

In 2021, SMBC entered India by owning key Non-Banking Finance Companies (NBFCs). Some of them include Fullerton India Credit Company, later renamed SMFG India Credit Company or SMICC.

SMBC holds a 100% stake in this company, which in turn holds SMFC India Home Finance Co. Ltd.

Coming back to Yes Bank, RBI approved the sale of its 51% stake, giving SMBC the green light to acquire it.

While SMBC has started conducting due diligence on this acquisition in addition to getting regulatfory approvals, the 'fit-and-proper' status is still pending.

Currently, SBI holds a 23.99% stake in Yes Bank, which it acquired in the rescue mission during the 2020 crisis. But since the three-year lock-in period is over, SBI is looking to reduce its holding in the bank.

SBI can sell its stake to SMBC or other potential investors and free up its resources (maybe rescue other struggling banks).

You must be wondering, “Why is the deal still on hold?”

Well, that’s because there are still concerns about the ongoing legal battle regarding the write-down of Yes Bank's Additional Tier-1 (AT-1) bonds worth ₹8,415 crore in March 2020.

The Bombay High Court had ruled in favour of retail bondholders, allowing them to reclaim their investments. However, Yes Bank, the RBI, and the government have appealed the decision, and the matter remains sub-judice in the Supreme Court. SMBC’s acquisition of YES Bank’s controlling stake solely depends on the outcome of this case.

Besides SMBC, Japan’s Mizuho Bank and Emirates NBD had also shown interest in acquiring a stake in Yes Bank. Mizuho, however, has exited the race due to its preference for a smaller stake without board representation, avoiding the open offer requirement under Indian law.

Yes Bank’s Foundation Story

In 2004, Rana Kapoor and Ashok Kapur founded Yes Bank. Their vision was to create a private sector bank that provided high-quality services to both individuals and corporate clients with the help of technology-driven solutions.

They had faith in the fast-growing Indian economy and the growing need for new-age banks to help fill the gaps in corporate banking and financial services. This faith fuels their vision of Yes Bank. Additionally, the founders’ mindset for business helped the bank separate itself from competitors.

It saw growth early on, and a great part of it was thanks to its strategic partnerships. Rabobank, a global financial services provider, became one of its early investors offering through its subsidiary Rabo India Finance. This gave the bank a better standing in the global market and allowed it to cement itself in the Indian industry.

While most banks at the time focused on retail banking, Yes Bank’s initial focus was on corporate banking. For those of you who don’t know the difference between the two:

1. Corporate Banking is focused on providing financial services such as loans, treasury services, and trade finance to businesses and corporations.
2. Retail Banking provides basic financial services such as savings accounts, personal loans, and credit cards to individual consumers.

This helped the bank set itself apart from peers like HDFC Bank. Its total loan book grew 26-fold from ₹761 crore in 2003 to ₹2,03,534 crore in 2018. The reason for this growth was its corporate-focused lending strategy, especially in the real estate, infrastructure and emerging markets sectors.

In 2008, Ashok Kapur died in the Mumbai terror attacks, and this left Rana Kapoor as Yes Bank's sole promoter. This led to disputes regarding ownership and control of the bank, leading to government issues and later regulatory challenges. However, the bank persevered, and by 2018, it had become India's 4th largest private-sector bank.

But, its troubles were far from over. The bank’s asset quality and lending practices came under extreme regulatory scrutiny. Its corporate lending strategy, which once led to competitive advantage, now led to piling up of Non-Performing Assets (NPAs).

And cue the 2020 crisis.

Apart from the rising NPAs, the bank also faced governance failures, leading to loss of investor and depositor faith. The bank was placed under a moratorium in March 2020 as part of the Reserve Bank of India (RBI) intervention, and a plan to restructure it was initiated to help stabilise the situation.

Rescue came in the form of capital; The State Bank of India (SBI) and other financial institutions bought a huge stake in the bank and restructured its debts. This also included the write-off of Additional Tier-1 (AT-1) bonds, which was quite controversial.

Yes Bank started recovering by 2021, and SBI gradually reduced its holdings in the bank. By 2023, RBI approved the sale of up to 51% stake in the bank, allowing foreign investors to buy in.

The Yes Bank 2020 crisis is another cautionary tale of the risks that come hand in hand with aggressive growth strategies gone wrong. Much like Byju’s. However, now the bank has a new CEO (Prashant Kumar) and is on the way to rebuilding its profitability.

Yes Bank's Business Model

Let us take a look at Yes Bank’s business model.

1. Deposits:

• Its primary source of funds is deposits from customers, with a strong focus on low-cost Current Accounts and Savings Accounts or CASA.
• The bank’s deposit base increased to ₹2.66 lakh crore in FY2023-24, showcasing a Year-on-Year (Y-o-Y) increase of 22.5%.
• This growth was supported by nearly 17 lakh new CASA customers as well as a 23% rise in CASA balances. A clear sign that the bank’s customer acquisition and retention strategies were succeeding.
• Its CASA ratio saw a minimal change and went up to 30.9%. This means that the bank is continually focusing on keeping a healthy Net Interest Margin or NIM by attracting low-cost deposits.

2. Borrowings:

The bank also borrows money from the bond market, trade loans, bilateral and syndication loans, and Medium Term Notes or MTN borrowings. It raises funds via interbank limits for global treasury operations and manages cross-border trade through Nostro and Vostro accounts. It uses these borrowed funds to finance its operations and maintain liquidity.

• Yes Bank’s total borrowings were a whopping ₹79,940.9 crore as of March 2024, a 3.2% increase from ₹77,452 crore in March 2023.
• The reasons behind the increase were domestic borrowings rose by 0.9% at ₹67,754.7 crore, and international borrowings increased by 18.3% to  ₹12,186.1 crore
• The increased borrowings are a sign of the bank’s strategy to diversify the sources of its funds in the Indian as well as the global market.

Now, moving on to how the bank uses customer interaction channels to maintain its healthy deposits and borrowings:

Customer Interaction Channels:

Apart from the prime business segments of Yes Bank, here are some services which sets the bank apart:

a. Digital Onboarding & Service Digitalisation: This initiative makes sure that all its self-service channels are available 24/7. Providing better customer experience and reducing onboarding time. 

b. Modernised Super-App (iris): It is a mobile banking application. It uses APIs, microservices, as well as digital workflows to help the bank reach and service a broader consumer base and improve customer interaction.

c. SME Transformation: This agenda is aimed at providing more value to SME clients with the help of an easy onboarding process, servicing and partner integration.

d. Central Bank Digital Currency (Digital Rupee): The bank quickly brought new users to help contribute towards the vision of a digitally-equipped economy. Ultimately, it plays a huge role in the digital currency initiative by RBI.

e. Transaction Processing Hub (TPH): It centralises all the payment systems of the bank. This makes it easy for the bank to handle payments in huge volumes and helps with sending and receiving money for different types of customers.

f. Branch Banking and Physical Presence: The bank has a widespread presence. It has over 1,200 branches & ATMs and 51 regional offices across 28 states & 6 Union Territories. Additionally, it also operates internationally, with an IFSC Banking Unit (IBU) in Gujarat International Finance Tec-City (GIFT) and a representative office in Abu Dhabi.

g. Major Offices: Eight of its major offices operate in India, including its registered office at Yes Bank House in Mumbai.

h. Rebrand: In May 2023, the bank decided to rebrand itself and changed the interiors of its branches. The purpose of this rebrand was to provide a better experience to all its users. Additionally, it also focused on expanding the branch in top deposit clusters in India at a rapid speed.

i. Product & Services: It includes the products offered by the bank as its primary operation, such as retail liabilities, assets, business banking, credit cards, merchant services, and third-party products. The bank offers these through its branch network.

Yes Bank's Revenue Model 

Let us have a closer look at how Yes Bank earns money through various segments:

1. Retail Banking:

It provides various types of financial services to individuals. These services include lending money to people (loans), allowing them to deposit their money, wealth management, and digital banking services. As you can see in the infographic below,  the entire segment is divided into different categories, such as credit card loans, personal loans, home loans, etc.  

It contributes to 42.78% of the bank’s revenue, amounting to ₹14,153.29 crore. This showcases that the bank has a wide reach and that it is quite successful in offering its services.

2. Corporate/Wholesale Banking:

It is similar to retail banking, but instead of individuals, these services are aimed at corporate clients, SMEs and institutional investors. This segment helps fulfil the varied needs of corporate entities.

It contributes to 30.71% of the bank’s total revenue, amounting to ₹10,164.24 crore. This showcases that the bank is capable of efficiently delivering financial solutions to corporations.

3. Treasury & Risk Management:

It makes sure that the bank’s financial resources, liquidity and risk are managed effectively. It offers products such as foreign currency transactions, forwards, remittances, etc. It also offers online solutions like the YES Forex Dealing Platform and the FX-Retail Platform.

It contributes to around 22.82% of the bank’s total revenue, at ₹7,552.39 crore. This means that the bank can manage and optimise its resources efficiently.

4. Other Banking Operations:

This segment includes para-banking services such as merchant banking and third-party product distribution. It only contributes to 3.69% of the bank’s total revenue, amounting to ₹1,219.71 crore. However, it provides additional sources of income that are complimentary to the primary activities of the bank.

The segment also includes income from the bancassurance business, which was ₹691.75 crore in March 2024.

Yes Bank's Financials

Have a look into the bank’s financial performance and health.

After the 2020 crisis, the main focus of the bank’s management has been to improve its financial health and to recover its profitability. The turnaround plan by Prashant Kumar (CEO) has been instrumental in helping the bank recover. As you can see in the infographic above, the bank's Return on Net Worth or RONW improved from -75.6% in March 2020 to -10.4% in FY2021.  

Its Net Interest Income, or NII, has been rising from ₹6,794 crore in March 2020 to ₹8,079 in March 2024, despite the drop to ₹6,490 in March 2022. This shows that the bank’s core lending business is getting stronger.

Additionally, the bank has maintained a steady asset turnover ratio ranging between 0.09 and 0.07 from March 2020 to March 2024.

The bank has shown that it can recover from the 2020 crisis, with a steady growth in its revenue, from ₹22,424 crore in March 2022 to ₹32,961 crore in March 2024.

Its profitability is also improving, as its interest spread has widened from 5.9% in March 2022 to 6.5% in March 2024. This is a sign that the bank is managing its lending and borrowing rates better.

The Capital Adequacy Ratio or CAR of the bank peaked in March 2023 at 18% but has since decreased to 15.4%. Despite the fall, the CAR is well above the regulatory requirement and looking much better from the COVID-19 level, which was 8.5%.

Yes Bank's Competitors: Peer Comparison

Currently, Yes Bank is India’s seventh-largest bank in terms of market capitalisation. Additionally, it is also a leading mid-cap private sector bank.

As you can see from the infographic above, compared to its peers, the bank’s Price-to-Book ratio is the highest at 1.72x. This means that the value of the bank’s stock reflects that the bank may be facing challenges in managing its bad loans and in recovering its financial health.

Its Return on Assets (ROA) is 0.34%, which is quite low compared to its peers. This may mean that the bank's assets are not earning enough returns.

Its Return on Equity (ROE) during the last five years is -10.37%. This is a clear sign that the bank is facing challenges in recovering its profitability. It may be due to the substantial losses it suffered during the 2020 crisis. However, its peers have no such challenges and have maintained positive and strong ROEs.

Over the past 5 years, Yes Bank’s sales growth has been -1.4%. This is a sign that its business is declining and that it is having trouble regaining its market share. A negative sales growth is concerning, especially when its peers have seen an average sales growth of 21.85%.

The Bottom Line

That’s it, folks! Yes Bank’s 2020 crisis shook it to its core. However, with Prashant Kumar at the helm, its operations may be stabilising. Even its financials have seen noteworthy improvement. While challenges remain, Yes Bank's current trajectory points toward a focus on profitability, credit quality, and sustainable growth.

But is it enough to keep SMBC interested? Only time will tell!

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Finology Insider and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.