How new CEO Ravneet Gill is managing troubles at the new-generation Yes Bank, where there is no end to asset quality surprises and capital levels are inadequate for future growth
"Is Rana Kapoor still part of the bank?," an analyst asked Ravneet Singh Gill, the MD & CEO, who succeeded Kapoor at the troubled Yes Bank five months ago. The query, during a call with investors last month, was triggered by reports that the founder-professional, who had to exit the bank due to asset quality deterioration, might come back as a director. Though the report was denied by Kapoor himself, the 56-year-old Gill said: "He (Kapoor) has no involvement, executive or non-executive, direct or indirect." The bank has, in fact, clawed back Kapoor's bonuses for 2014/15 and 2015/16.
Kapoor may be out but his business calls continue to worry the bank. In the last one year, exposure to big troubled companies such as IL&FS, DHFL, Indiabulls, Jet Airways, Anil Ambani's Reliance Group, Essel Group and Cox & Kings has been creating huge asset quality and capital pressures for the mid-sized bank. Its gross non-performing assets (NPAs) rose from 0.76 per cent in March 2016 to 3.22 per cent in March 2019, while return on assets fell from 1.70 per cent to 0.5 per cent. Profits slipped to Rs 1,720 crore in 2018/19 from Rs 4,224 crore in the previous year. To top it all, the risky portfolio continues to be fairly large, creating potential for further slippages, while capital levels are barely adequate to meet the regulatory norms.
The question analysts are asking is - are there more skeletons in the bank's cupboard (mainly risky/dud loans) that Gill will have to deal with on priority so that the bank does not go down under? And, more importantly, can he keep the bank growing while steadying the ship and keeping it safe in view of the slowdown challenges?
Gill, who joined from Deutsche Bank in India, is struggling with several legacy issues. Right now, he is studying the bank's working and hiring people, while doing firefighting as the operating environment throws up new challenges every day.
But things were not always as bad as this. Kapoor had singlehandedly built assets of Rs 3.71 lakh crore in 15 years. The last transition, after Co-founder and Chairman Ashok Kapur died in the 26/11 terror attack, was without disruption as Kapoor, a former foreign banker, managed the affairs well with focus on high-margin/high-risk corporate lending, unlike star performers such as HDFC Bank and Kotak Mahindra Bank, which focussed on the less risky retail loans. He cut lending deals with many promoters directly without going the consortium way and, in some cases, even got a good collateral. But he had to exit in January this year amid allegations of lapses in governance and compliance. The bank reported bad loan divergences (NPAs reported by it versus those found in the RBI's inspection) not once but twice.
This bank, once a darling of investors, is now in focus for its worsening numbers. The market capitalisation has crashed from close to Rs 1 lakh crore a year ago to Rs 20,000 crore. Kapoor's own wealth (excluding entities) has plunged from Rs 4,000 crore to less than Rs 1,000 crore. Analyst community puts the stressed assets at around Rs 40,000 crore plus
Gill has his task cut out. He has to stabilise the ship, dig out hidden NPAs, if any, do adequate provisioning, raise capital, expand retail and transaction banking and, last but not the least, maintain highest standards of compliance, prudence and governance. He refused to participate in the story because of the ongoing capital-raising plans.
New Pockets of Stress
Gill made a good beginning by being transparent on asset quality. He come out with a figure of Rs 29,000 crore for sub-investment grade or BB and below investments. Of this, Rs 10,000 crore was put on a watch list. But June quarter results surprised the market and analysts as fresh slippages came from outside the watch list. "Should we believe their watch list numbers?" asked an analyst. "The bank is going the Axis Bank and ICICI Bank way, which took more than two years to come out of the NPA mess," research outfit LKP Securities says in a recent report. Ratings agency ICRA, which has downgraded the bank's long-term paper, had put the total gross NPA and sub-investment grade portfolio at Rs 41,558 crore by June 2019.
In the past, BBB used to be a good rating, but today, when the market is seeing downgrade surprises every other day, anything can happen. The economy is slowing down. There is a credit freeze as investors (MFs, HNIs and others) are risk-averse in view of stress in sectors such as auto, real estate, infrastructure and construction. At present, the bank's troubled exposure includes real estate, financial services, media & entertainment and infrastructure sectors. The real estate exposure is Rs 24,000 crore. In fact, 25 per cent real estate exposure is already in the NPA and sub-investment grade book. "The inability to reduce the stressed exposure book or further increase in the same will remain a rating negative," says ICRA. Global ratings agency Moody's has also put the bank's rating under watch.
Gill's another task is improving the provisioning coverage ratio (PCR) from the current 43 per cent. ICICI and Axis Bank, the two big banks that are also facing asset quality issues, have ramped up their PCR. ICICI Bank's PCR is at 74 per cent while Axis Bank's is at 77 per cent.
Much before Gill joined, the management had plans to make Yes Bank into a large bank. This envisaged strong growth with healthy profitability ratios like return on equity and return on assets, lending to higher investment grade companies and expansion of retail and MSME segments. The five-year journey was supposed to end in March 2020. The happenings of the last two years have dwindled the numbers.
The first big hurdle before Gill is raising capital. The bank is desperately short of growth capital due to which loan growth has slowed. While the capital adequacy level is 15.7 per cent, core equity is depleting and stands at 8.6 per cent, close to the minimum regulatory requirement of 8 per cent for the year ending March 2020. "The current capital raising will enable the bank to maintain minimum capital requirements under Basel III norms. However, it would need further growth capital of Rs 2,500 crore to Rs 4,000 crore if advances have to grow by 15-20 per cent in 2019/20," says Anusha Raheja, analyst at LKP Securities.
The bank had drafted a capital-raising plan last year, but the situation turned unfavourable after the stock crashed from a year's high of Rs 404 to Rs 90 (See Capital Challenge). Raising capital at low valuations leads to a large equity dilution and impacts earnings per share and return on equity.
The bank's price to book value ratio is just 0.78, closer to that of many public sector banks. Kotak Bank, which also got the licence around the same time as Yes Bank, commands the highest price to book value of 4.86 times, followed by HDFC Bank at 3.96 times. ICICI and Axis Bank are at 2.5-3 times. Gill has no option but to raise capital to keep the core equity capital above the regulatory minimum. "If a large account slips, there is a chance of capital going down below the mandated threshold," says an analyst.
The bank had planned equity dilution of 10 per cent. The board approval was for raising $1 billion. Last week, the bank finally managed to raise Rs 1,930 crore equity capital from investors like Societe Generale , BNP Paribas amongst others. "We maximised the size to the extent of the 10 per cent dilution limit currently approved by our shareholders," Gill said after the issue. The bank needs more capital for future growth and provisioning for NPAs. "We are factoring in close to Rs 10,000 crore equity capital," says Rakesh Kumar, banking analyst at Elara Capital. If the required capital doesn't come, the bank will have to scale down growth and sell assets in a big way. The biggest casualty of capital shortage is corporate banking, which has a share of 64 per cent in the total loan book.
Retail banking, currently less than 20 per cent of the book, is a focus area for Gill. The bank has a good network of 1,100 branches. But only some of these are profitable. Gill aims to make all branches profitable by 2025. He has spelt out his strategy of empowering the regional management and giving them better control of branches, retail assets and deposits. "If the bank takes longer to build its retail portfolio and increase CASA, it could adversely impact net interest margins," Angel Broking says in a recent report.
The bank will also have to manage regulatory scrutiny. In May, the RBI had dispatched R. Gandhi , a former RBI deputy governor, to the bank's board. Shagun Gogia, daughter of Founder Ashok Kapur, with whom Kapoor had a bitter fight over a board seat, is now a director. "These new appointments will bring some semblance of stability," says a banker. Gill himself has over three decades of experience in a foreign bank where the compliance function gets top priority. In fact, Gill's first set of appointments was in risk, governance and compliance areas. Last week, Gill has announced some top-level changes. Anurag Adlakha has been appointed as group chief financial officer. He comes with three decades of experience in banks like StanChart and HSBC. Raj Ahuja , who was the CFO, takes charge of strategy, planning and projects as group chief strategy officer. Rajeev Oberoi , who came from IDFC Bank, has joined as senior group president, governance and control. The bank now has a new board and management.
But some analysts say Gill managed a comparatively smaller balance sheet of Rs 80,000 crore at the previous job, whereas Yes Bank's balance sheet is Rs 3.71 lakh crore. "The mandate of a foreign bank is also very different from that of local banks," says Kumar of Elara Capital. Lastly, Gill also has to strike a balance with founder families of both Rana Kapoor and Madhu Kapur (Ashok Kapur's wife). The duo recently buried the hatchet but this could be another risk which could flare up.
AXIS Bank: A Brand New Plan
Amitabh Chaudhry, MD & CEO, Axis Bank
Seven months ago, when Amitabh Chaudhry landed at the headquarters of the troubled Axis Bank in Mumbai, the insurance professional came with a simple strategy called 'GPS'. In half a dozen slides, he explained the three broad pillars of his new approach: growth, profitability and sustainability. These are the three parameters that had got derailed as the sixth-largest private bank slipped into the league of the worst-performing private sector banks in terms of asset quality under former CEO Shikha Sharma. The poor performance cost her the job.
Chaudhry has set a target of regaining the bank's past glory as the most consistent bank in terms of performance. His target is to achieve a return on equity (RoE) of 18 per cent by 2022 (7 per cent now). The investing community closely tracks RoE as it is a measure of the returns that a shareholder earns on his investment.
In January, Chaudhry, who started his career at Bank of America in the late '80s, held extensive meetings with business heads at Axis Bank to work out future plans. He was faced with a situation of declining profitability and deteriorating asset quality. "Our strategy for the next three years will centre around three important pillars - growth, profitability and sustainability," he told the management team.
The plan is to improve deposit growth, especially low-cost retail deposits; expand payments and digital initiatives; and scale up subsidiaries. The bank will also change its portfolio mix to ensure a higher share of secure retail assets, which are at present around 49 per cent; this should ideally move to 55 per cent. The bank doesn't want to be left behind in new areas of business such as consumer durables financing. Chaudhry is focussing on high-yielding assets such as personal loans and credit cards; and mid-sized companies, instead of taking exposure in large projects where execution risk is high. Under Chaudhry, cross-selling is yielding results in categories such as credit card and personal loans.
Within the organisation, Chaudhry has made a new reporting structure where apart from wholesale and retail, technology and digital heads will also report to him directly. There are also new hires like the head of retail banking, Pralay Mondal, and Ganesh Sankaran, who has been given charge of the wholesale banking and coverage group. Neeraj Gambhir has joined as head of treasury and markets. "The entire organisational change is aimed at preparing to build the bank as a bigger bank," Rajesh Dahiya, Executive Director - Corporate Centre, Axis Bank, had told BT in an earlier interview.
The purpose is to build a focussed approach towards delivering growth and profitability, and containing risk. Origination and underwriting are a separate function in both wholesale and retail businesses. "This division will prevent any inherent conflict of interest and help maintain a better asset quality trend across cycles," states a research report by financial services firm Motilal Oswal.
Chaudhry also wants to scale up Axis Bank's subsidiaries in the next few years. The sharper focus on products, cost efficiencies and people will help him deliver 18 per cent RoE.
But the going will not be easy. Segments such as home and car loans are very competitive and survival is determined by cost of funds. Retail segments like personal loans and credit cards are growing but are more risky. All this while Chaudhry deals with legacy issues and unprofitable corporate exposures. The organisational overhaul will also take time to stabilise.
ICICI Bank: Stabilising the Ship
Sandeep Bakhshi, MD & CEO, ICICI Bank
Not far from Worli is ICICI Bank's headquarters in the Bandra Kurla Complex. Sandeep Bakhshi, 59, moved here in June last year as the chief operating officer, from the group's insurance arm. His entry was abrupt as Chanda Kochhar, who was heading the bank then, had to exit in January this year amidst compliance issues. She was later indicted for violating the bank's code of conduct.
Bakhshi, who took charge as MD and CEO in October 2018, has set a clear strategy of "risk-calibrated operating profits". Bakhshi, who had earlier worked with V.N. Vaghul and K.V. Kamath, is also decongesting many of the business processes and doing away with the hierarchical system at various levels. Bakhshi is a proven manager, having built the group's general insurance subsidiary from scratch, apart from leading a digitisation drive and a successful initial public offer there.
ICICI Bank has never had it so bad. In the past decade, India's second-largest private sector bank in terms of assets has been hit by multiple challenges. After the retirement of K.V. Kamath, Chanda Kochhar had assumed charge at a time of strong global headwinds. The bank managed to recover quickly, but went on to take big corporate and project financing bets between 2010 and 2012. Asset quality issues started haunting the bank post 2014 after the RBI tightened the norms for recognising NPAs.
Under Kochhar, ICICI Bank recalibrated its strategy to expand the retail business and focus on companies with high credit ratings. In the challenging four years that ended in 2017/18, the bank showed marked improvement on key parameters. Its CASA or low-cost deposits share grew from 39 per cent to 45 per cent; share of retail assets jumped from 39 per cent to 57 per cent; and the overseas loan book shrank from 26 per cent to 12 per cent (a conscious decision).
The former CEO also kicked in a 2020 strategy around 'PCG': preserve, change and grow. Bakhshi has added to this: provision coverage ratio of 70 per cent, net NPAs of 1.5 per cent and consolidated RoE of 15 per cent by 2020. Bakhshi is broadly continuing with the PCG strategy, but "there is much sharper focus on core operating profits and risk-adjusted returns," says Sandeep Batra, Executive Director, ICICI Bank. Batra had earlier worked with Bakhshi at the insurance subsidiary.
The new elements also include deeper penetration of retail assets and decongesting business processes to improve efficiencies and margins. Given the fact that retail assets have grown at 20 per cent-plus and some segments like unsecured loans are growing at a much higher rate, there is a possibility of personal loans and credit cards growing bigger. "The unsecured (loan exposure) is a very small proportion of our overall book. It currently stands at only 8 per cent," defends Anup Bagchi, Executive Director of retail at the bank.
On the liabilities side, the bank faces cut-throat competition for low-cost retail deposits. In corporate loans, which form about 24 per cent of its total loan book, the bank is clearly focussing on the higher-rated corporate and working capital loans, external commercial borrowing, etc. "We will be dealing with big-ticket loans and lower rated projects with a fair bit of caution," says Batra. In the just concluded June quarter, about 88.5 per cent disbursements were to corporates with ratings of A and above.
Insiders say one of the big changes under Bakhshi has been the organisational rejig where he has loosened the hierarchy. At the senior level (business heads), designations have been collapsed and made functional in nature.
Like Chaudhry at Axis Bank, Bakhshi faces the challenges of faster digitisation, expansion of retail into newer areas, and competition from new small finance banks for retail deposits, where a rate war is going on. Corporate surprises, too, have not receded completely. Jet Airways is a recent example.
Rana Kapoor, former MD & CEO, Yes Bank
Rana Kapoor describes himself as a professional entrepreneur and Yes Bank founder. He has always been a mentor to his three daughters. The family has two companies - Morgan Credit and Yes Capital (India) - in which the daughters own the entire equity. These two holding companies have about 6.26 per cent stake in Yes Bank. Both have dozens of subsidiaries into varied businesses.
Morgan Credit is into several businesses with subsidiaries like DoIT Creations, Press2 dry Cleaning & Laundry, Indian School of Management & Entrepreneurship, DoIT Sports Management, Business World magazine, Indian School of Design & Innovation, etc. It had borrowings of over Rs 1,000 crore as on March 2018. There is a loan of Rs 800 crore in the form of NCDs from asset management companies (AMCs).
Varun Kapur of Yes Capital has responded by saying that the company is a core investment company. It has so far pursued two ventures - Art Housing Finance, which is into affordable housing loans; and Art Special Situations Finance, which is a stressed assets NBFC and advisory entity. "Other entities in the Yes Capital and ART Group are all in abeyance," he says.
Yes Capital is primarily into financial services and investment business. It has two dozen subsidiaries and a long-term loan of Rs 700 crore. A big chunk of the loan is in the form of NCDs of Rs 630 crore from AMCs. The major subsidiaries of Yes Capital are ART Capital, ART Affordable Housing Finance, ART Business & Consumer Finance, ART Special Situations Finance, ART Wealth Management and ART Real Estate Finance. The Kapoor family has the right vehicle under Yes Capital to make a comeback in the financial services in a big way. The family has also invested in Pro Kabaddi and Hockey India League.
Both Yes Capital and Morgan Credit depend on dividend from the bank as their primary source of revenue. In the future, these subsidiaries in the promising sectors will need to scale up to generate profits for expansion. The family will have to free up the pledge as Rana Kapoor's and Morgan Credit's holdings in the bank are currently given as security for a loan.