In the June quarter, the private lender reported a 91 per cent decline in its net profit to Rs 113.76 crore from Rs 1,260.36 crore a year ago. The quality of assets deteriorated — the gross non-performing assets (NPAs) as a percentage of total loans rose to 5.01 per cent from 3.22 per cent in the March quarter and after setting aside money or provision, the net NPAs rose to 2.91 per cent from 1.86 per cent. The addition in the pile of bad loans had been Rs 6,230 crore in the June quarter.
The real shocker was its March quarter earnings — the first-ever quarterly loss of Rs 1,506.64 crore as it had to make huge provision to take care of bad assets. But for a Rs 832 crore tax write-back, the loss would have been much higher. Total provisions in the March quarter rose nine-fold to Rs 3,661.7 crore from Rs 399.64 in the year-ago quarter and almost seven times of the December quarter. Other highlight of the March quarter was a sharp drop in fee income.
That trend continues but there are pointers from which the analysts could take heart. For instance, the retail deposits have grown, signifying that the customers have not lost trust in the bank. The retail advances have grown over 43 per cent year-on-year; they account for more than 60 per cent of the incremental growth in advances. As a portion of the overall loan book, the retail book is still small compared with other private lenders but it has grown from 14 per cent to 18.3 per cent in past one year. Even though the fee income is sharply coming down, the revenue earned from the sale of others’ insurance products has risen. The fee income will never be the same again as Gill is refraining from booking it upfront, as had allegedly been the practice earlier, and shifting focus from corporate to retail loans.
The rise in bad loans is mostly from those accounts (worth Rs 10,000 crore) which have been under the watch list of the bank and the larger chunk of its sub-investment exposure. In that sense, there is not much of a negative surprise. In the past, we had seen rising bad loans in other private lenders from accounts that were not identified as stressed.
However, there are concerns. One of them is the relatively low provision coverage ratio — 43.1 per cent. It was 60 per cent, two years ago; and 55.3 per cent a year ago. The low-cost current and savings account or CASA also dropped by 5 percentage points — from 35.1 per cent of overall deposits in June 2018 to 30.1 per cent in June 2019.
The biggest concern is over capital. Indeed, its overall capital adequacy ratio is 15.7 per cent and the Tier I capital is 10.7 per cent but the core capital or the so-called common equity Tier I or CET1 is down to 8 per cent. This, according to a Credit Suisse report, equals 35 per cent of the bank’s bad loans. It can sell down assets but that’s not a solution to the problem.
In August 2012, in a speech at the Lee Kuan Yew School of Public Policy in Singapore, Vikram Pandit, former CEO of Citigroup, had said: “To me it is clear in hindsight that, crisis or no crisis, Citi had to be restructured. The crisis was the catalyst but the need was there… When I became CEO in December of 2007, figuring out what to do was the easy part. I knew we had to get back to the basics of banking... I assembled a core team… We immediately began raising capital. Since year-end 2007, we’ve added more than $140 billion to our capital base… And we changed the structure by identifying what businesses were core and which were not core to our strategy and historic strengths…And our risk management function has been completely overhauled…”
In 2009, the Citi stock was on the verge of becoming a penny stock. Pandit brought back the bank from the graveyard. YES Bank
is in no way comparable with Citibank but Gill’s challenges are similar. In an interview with this paper in June, he had pegged the total capital requirement for the bank at little north of $1 billion. He has also said that ideally he would not like to dilute equity at “such a low price” but he would do what needs to be done in the best interests of the bank.
That’s the right approach. He has nothing to lose as he is not the promoter of the bank. He must raise as much money as he can, keeping his eyes closed at what price the capital is coming. Gill exudes confidence on envisaging the credit losses that the bank may have to book but can he guarantee that there aren’t any more skeleton in the closet? Will the investors get excited if YES Bank
needs to come to market again, after a year? Citi was bailed out by the US government through its Troubled Asset Relief Program; Warrant Buffet stepped in to rescue Goldman Sachs and Merrill Lynch. Gill needs to identify the White Knight for YES Bank.
Running a bank without sufficient capital is akin to driving a car without fuel. Even a BMW X7-owner doesn’t have any choice but to garage the car if it runs out of fuel. A great franchise is useless if a bank doesn’t have sufficient capital.
Enjoying the backing of the regulator, Gill has identified the core problems, ring-fenced the banks from “influencers” and is in the process of building a new team. Now, he needs to play a Vikram Pandit for YES Bank.
The columnist, a consulting editor of Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd