Private sector lender Yes Bank Ltd. returned to profit in the April-June 2019 quarter but reported poor asset quality, as the bank new chief executive Ravneet Gill continued to clean up the lenders books.
The bank’s gross non-performing asset ratio rose to 5.01 percent from 3.22 percent in the previous quarter. The net NPA ratio rose to 2.91 percent from 1.86 percent in the January-March period. In absolute terms, bad loans rose 53 percent to Rs 12,092 crore.
Moreover, the bank still has a Rs 10,000 crore watchlist of potentially stressed loans. It also has a book of over Rs 29,000 crore in below-investment grade exposure, which has risen due to two large financial firms being downgraded this quarter.
BloombergQuint spoke to CEO Ravneet Gill. Edited excerpts below:
The entire industry has gone through a clean-up cycle. But they have seen their asset quality troubles peak and come off. Yes Bank seems to be starting the clean-up process only now?
It is not a starting-off of the process as far as we are concerned. This quarter represents the peaking of our book of BB-rated and below exposure. From here on, we will see that book going in one direction, which is down. So, we see contraction in the BB and below rated book in upcoming quarters.
When you say that other banks went through a situation like this, the distinction you need to make is that for many of them, it was cyclical issue. The resolution cannot happen till the time cycle reverses. For us, I don’t think that is the issue.
If you look at our book, it is not that there is heavy exposure to a particular sector or industry. There are a handful of concentrated exposures which are facing liquidity issues and not solvency issues. So, the reversal of this can happen quickly. We feel that each of the resolutions, when they happen, will provide material upside. I expect two or three large resolution to happen this quarter.
Then maybe the mistake was on certain groups. We know that at least a couple of these groups are facing promoter-level stress. How easy will that be to resolve?
In hindsight, you will always say it was a mistake but if you see when these exposures where assumed and rating of the counter parties, they where fine. They were all in good health. Post September, after what happened to IL&FS and the NBFC sector, we have seen tightening of credit markets. Refinancing has become tougher and some of these groups have taken the brunt of it.
It just so happens that timing for each of them was the same. To that extent, you can start checking in terms of underwriting rationale behind it. I don’t see that as a big issue. It is a timing issue.
If you see the underlying assets, which these companies have, those are very good. The resolution here does not need to happen in terms of a reversal of fortunes of company per se, which could be a medium to long term event. Here, the resolution could happen on back of asset monetisation, it can happen on basis of stake sale or change of control or ownership. That is what is happening in many of these names. To that extent, I don’t think the recovery process should be protracted.
So, the focus is on the BB and below book, which is at 9 percent right now. What will it come down to?
If you see the composition of BB and below book, it has very few names. So, each of these names which sees resolution will bring the book down significantly. Over the next few quarters, we see this book contract very significantly.
But are we confident that the stress will come from BB and below-rated exposures. Couple of these names could have been in the A-rated category and that is 41 percent of your book.
Let me draw a distinction. As far as the increase in the BB and below book from Rs 23,000 to Rs 29,000 crore is concerned, it comes effectively on the back of two names and these are two large financial services companies. Here, we don’t have loans; we have bonds or NCDs. These in any case get marked-to-market.
Even if you go back to last quarter and look at the treasury line, you will see the mark-to-market on these loans. So, it is not like these were names which were not known, or which have suddenly cropped up. It is just that the level of mark-to-market impact has gone up based on the rating downgrade.
But the entire slippage has come from the BB and below book. Not all of it comes from watch list that we put out.
The reason for putting out the watch list was very clear. We were going to approach investors for equity and we looked at names where there were imminent payments. We thought that cash flows could not support those and we thought it was prudent to be able to be transparent with investors that these names could slip.
The subsequent slippages which may have happened did not only happen from the watchlist but happened from the BB and below book and the watchlist was derived from BB and below book. So, we ring fenced the names which we could potentially face stress.
As far as these two financial services names are concerned, the mark- to-market hit has gone up based on the rating downgrades.
Even from A-rated pool, which is large, is there an assessment being made on the risk?
When we talk about asset portfolio of Yes Bank, one of the things which comes up is the real estate book which is roughly around Rs 24,000 crore. About 25 percent of that is fully captured in BB and below book and in terms of NPAs which we have. On the balance 75 percent, the slippages are absolutely minimal.
When I look at the overall investment-grade corporate book, our SMA-2 pool of accounts is overdue by 60 days, is Rs 404 crore. Given how large the asset book is, Rs 404 crore is a very marginal number. Accounts in the SMA-1, which is over 30 days overdue, are more dynamic so it is harder to tell. But SMA-2, which points towards potential slippages, is fully captured.
There is one group, where the exposure is very large, almost 40-50 percent of CET-1.
It is difficult to speak publicly on client information. But we don’t deny that it is a large exposure. But it is a well collateralised exposure. We don’t feel that concerned with regards to the size per se.
What is the kind of collateral you have on this account?
It is mainly large functional revenue generating assets. This is bilateral lending and the collateral is charged to us. This is a bilateral process between us and borrower, in terms of resolution, too.
Would you expect resolution to fructify in the next two quarters?
If you look at one particular borrower, which you are talking about, some of the exposures which are collateralised to us are large. So, the timeline for that will be longer. But for two of the other large exposures, which we have, I expect the resolution to happen this quarter.
So, are you adjusting to RBI’s large exposure framework for some of these groups?
One of them is relevant from an LEF perspective.
You have used up some of your contingent provisions so you didn’t have large provisions but provision coverage ratio is still low at 43 percent.
What we used out of contingency provisions is for those asset which have slipped from the watchlist and whatever was usual slippages we provided for it incrementally. We always said that our medium-term plan is to get to PCR of 60 percent. We are conscious that last quarter our PCR was 43 percent and we will not go below it. We held PCR at that level.
There are some concerns about the stress against which there is no provision. Credit Suisse puts that as the net NPA number, plus what is left on the watchlist, plus what is BB and below. If you take all that, un-provisioned exposure is relatively large?
The watchlist was drawn from the BB and below book. It is wrong to see the watchlist and BB and below book separately. The watchlist has been drawn from the BB and below book. It is a subset of it. The reason to put the watchlist out was to be able to transparently and proactively show investors where we thought there will be slippages.
On our part, it was a move for prudent accounting and to become even more transparent, tell people ahead of time where we are seeing potential weaknesses.
In the minds of many, the watchlist seems to be independent of the BB and below book, which is not the case. It has been derived from the BB and below book and the entire slippage which has happened this quarter has come from BB and below book itself.
What percentage of the BB and below book is in the watchlist?
Last quarter, BB and below book was Rs 23,000 crore and now it is Rs 29,000 crore and the balance came from two financial services names. But the watchlist was Rs 10,000 crore and roughly about 50 percent of BB and below book was the watchlist.
We are assuming you have scanned all aspects of the books for any other stress that could emerge?
One of the commentaries was why were the two financial services names not part of the watchlist? There is a very simple reason for it. The watchlist was drawn and contingency provisioning was made against it. The two financial services names were not loans. Those were investments.
So, we could not have taken provision against those in the traditional sense but the mark- to-market of that is reflected in the last quarter and that is ratings driven. There is no subjectivity in terms of decision which banks make, in terms of quantum of provisioning or whether or not to provision. So, that was already being captured in treasury line in terms of mark-to-market. So, there was no need to put it into the watchlist.
And that is the reason why this exposure is not reflected in credit cost?
It was always there. When we talk about credit cost of 125 basis points then mark-to-market was always away as it moved up and down dynamically based on ratings.
How much uncertainty do you foresee in your capital raising efforts from asset quality concerns? Are investors comfortable that you have seen what is there to be seen and decided how to deal with it?
Absolutely.
Apart from asset quality, Investors have also seen that at the end of the day, these are concentrated exposures. Upside to that is that each resolution materially improves your upside. So, investors see that equally. In some of these cases, the resolution seems to be imminent.
I don’t think there are any fundamental concerns with respect to investors. They have seen our book, quality of our portfolio, what the investment book looks like. And if one of resolution comes through, it will be great, and it will show direction of travel. But they realise the complexion and granularity of book.
I guess the concern is that resolution at the system level has not been seemless...
It is a fact but neither of these is actually a systemic resolution. None of this is going to the NCLT. In some cases, there could be larger groups of lenders but it is between the lenders and borrowers, it is not as if there are other agencies involved, which prescribe a certain resolution format.
What is the vintage of this chunky exposure that was built up? Has it happened over the last three years when Yes Bank continued to grow very fast although the environment was throwing up some red flags?
I think it is a relation initiated over a period of time and steadily built up. It wasn’t that we saw a sudden spur or anything. These are legacy exposures which have been on books for some time and over a period of time were built up.
How soon could the capital raise be completed? You said it is a second quarter event, but it is becoming problematic as CET-1 is at 8 percent?
Nobody is more mindful of this CET-1 than we are. We realise that there is a big market opportunity there. The competitive landscape is reasonably benign. We know how we can go full throttle on the back of capital. We are not raising capital for building up buffers or cushions to take incremental provisioning, etc. Our pre-provisioning operating profit can look after that. We are solving for growth and we are wanting to grow. In terms of capital, I am confident that this is a Q2 event.
There will be a large equity dilution involved in that capital raise at this stock price.
If you want to raise capital at this valuation, then it means larger dilution. All the stakeholders of banks are very clear that it is in the best interest of bank.
We have enough interest from private equity and public market players. It could be either/or. It could also be a combination of the two. It could be more than one tranche or more than one tranche as well.
If you get capital in Q2, what will be your full-year growth?
For Q1, we were in capital conservation mode. When you are looking at capital optimisation, then you are churning your book a lot. Our wholesale book de-grew, although the retail book was up. If we raise capital in this quarter, which I am confident about, we could go into high teens in terms of growth for this year. I think the market opportunity is there to be taken.
This quarter you have also seen fall in the CASA ratio.
It is very important to see the fine print on this one.
If you see our retail term deposits, it went up. So it doesn’t represent lack of confidence in bank, otherwise our retail term deposits wouldn’t have grown. A lot of our savings deposits converted into term deposits, which shows that investors and depositors have long-term confidence.
But given the fact that we were in capital optimisation mode, and we did rationalise our corporate lending, some of the corporate current accounts which sit with the bank moved on, which is always tied to the level of credit that you are willing to provide to many of these corporates.
If you look at it from a retail liability standpoint, it remains a very robust franchise.
How is your strategy on the retail liability side changing in terms of rates because you also want to bring down cost of funds?
At some point of time, when we were growing on the asset side, we were a little generous on rates that we were offering. For the medium term to long term, the solution is a structural change in terms of bringing down cost of funding. It will mean having a very robust sustainability strategy.
One of the key pillars of our retail strategy is the liability business. But you can’t do liabilities on a standalone basis. You need to have a retail asset class too. That is where it will provide a buffer to the liability strategy. We are now making our liability strategy very granular. It has gone down to every single of the 100 branches. It is being looked at, market opportunity, client segment, proposition and pricing and analytics are all built into it.
We have designated branches because those catchment areas are very rich in current accounts. It is a very granular strategy. It is driven bottom up. It is beginning to reflect in terms of complexion of our liability profile.
We have seen significant churn at the board of the bank. What is going on?
There were two resignations. In one case, the individual wanted to pursue his interest in academics. He had expressed that desire to the board a lot earlier. But given that there was transition, he was asked to stay back which he did. The other board member who resigned wanted to pursue other interests which he could not do as a director of bank. That’s why he stepped out. The timing may look strange, but I don’t think we need to read between the lines. The board is completely stable and aligned. No issues with respect to it.
What is the role of the RBI appointee on the board? That sparked concern as it is a rare move?
I agree that it is a rare move. The provision which governs the appointment of additional director of RBI on the board of a bank is only one provision and it covers everything. Markets misread what the RBI was trying to achieve. The coming of R. Gandhi, given that he was Deputy Governor of the RBI’s Department of Banking Regulation was to be able to provide that expertise, depth and add to management abilities and functioning of the board, which is exactly what he is doing. We find him to be very constructive and knowledgeable.
At the management level, how much change are you making within the bank?
If you look at the management quality of Yes Bank, it is top class. You don’t have to change just because a person is a carrier of legacy.
What we have to strengthen significantly is the control and regulatory function. We have brought in very senior people. We have a new head of compliance and governance. We have a new head of financial management and strategy. We are in the process of hiring a chief operating officer.
In businesses, we have looked for gaps where domain expertise and skill gap existed and have selected people in a focused fashion.
We will continue to hire wherever we think we need. If we want to get into new client segments or industry or new products, if that means having to bring talent to be able to make sure that we are able to do that in a sensible and profitable fashion, we will do it. As it happens in most organizations, it should be a more dynamic process and as you go along you keep strengthening management.
Any qualitative changes on the risk management side?
We have made changes. The delegation between the board credit committee and management credit committee, we have changed metrics on it. In terms of structured finance business, we are choosing more cash-flow based lending rather than asset-backed lending.
There are certain sectors of the economy which have faced headwinds. We want to reduce our exposures going forward or grow in a very calibrated fashion. These are the primary levers that one has put in place. Other than that, it is business as usual.
What will the bank look like when you are done with the cleanup?
The bank has been very strongly asset-led in the past. If there is one structural change that I would like to make it is to be able to build on the cost of funding and for that we need to be lot more liability focused. A lot of articulation of mine, in terms of growing the transaction banking business, growing retail business is to drive the liability initiative. That is the fundamental structural change. Following that your earnings profile will look a lot more balanced than it does currently.
If I look at the market opportunity, it plays into it. We should map our footprint to real opportunities. If that means over a period of time, you are changing your focus, then so be it. That’s what organizations do.
The one thing, which we didn’t touch upon, but I think is very fundamental and which I hold myself accountable for, is the digital space. I feel that whether it is the analyst community, investors community or press, we are underestimating the change that will come in the financial services on the back of technology. Banks will become technology companies with a banking license. It will be worth the while of markets to be able to understand and comprehend that in that space we have very unique strengths. As the landscape changes on the back of digitisation, I think there is hardly any player in the market which has the ability to harvest and harness that change, either in terms of size or speed that Yes bank has.
We are not taking it for granted. We continue to invest in it and make sure that we have very good resources attached to it. All the statistics seem to suggest that we are reinforcing digital leadership in this space. It will have profound impact on the liability and asset business.
Watch the full interview below:
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