Asset quality numbers this quarter are not enthusing at all. What went wrong?
We had anticipated a couple of resolutions in the quarter that went by, which were there in the public space as well, that they would get done. But for whatever reason they haven’t and the overall credit environment continues to remain reasonably challenging. Our sense was that we would see a compression in our BB and below book but that seems to be happening in Q3, as one of the big resolutions should happen in this quarter. So, a couple of resolutions have got delayed, it’s a challenging macro environment and some events happened which were out of our control.
The ones like CCD and Cox & Kings where you have exposure…
Like in the case of CCD, the promoter committed suicide, a fraud happened in Cox & Kings. It wasn’t that the company had issues in terms of business … all of this spilled over.
The way to come out of these issues is to grow the book; but to be able to grow, we need capital. If we need to create value we need to grow, we can’t create value out of consolidation. If we see what is happening in the NBFC sector, the opportunities for a well-capitalised private sector bank are better than ever. As and when we raise capital, we want to participate in that growth.
You have said that you have a binding offer of $1.2 billion and total interests of nearly $3 billion. The capital raising has been long awaited … when will the money come in?
There are two parts to this. The board part of it will happen fairly quickly, the regulatory and shareholder approvals are also required. My sense is, before the end of the calendar year we should be able to get the capital in.
What would be your choice? A large investor holding nearly 30% of the bank or a mix of foreign private equity investors and large domestic names?
It’s a decision that we will collectively take at the capital raising committee of the board. What we want is good partners to work with, we want partners who would strengthen the board and its functioning. And who again will help redefine the standing and image of Yes Bank.
In terms of the one large foreign investor, we just have one example of Prem Watsa being allowed to hold a majority stake in Catholic Syrian Bank. Do you think that is precedence enough for the regulator to allow another such transaction?
It’s very hard to anticipate how the regulator will look at it. Obviously, in exceptional circumstances the RBI has the ability to show regulatory accommodation without having to change the Banking Regulation Act. That flexibility is always there. By and large, RBI has been a very rational regulator.
The September quarter saw a rise in delinquencies and you also doubled your credit cost forecast. Where did the calculations go wrong?
First and foremost, it was important for us to stop being in denial and we have given a guidance on what the credit costs could potentially be. Where we erred? We had baked in a couple of resolutions in credit cost guidance. If you look at the large cases of media company and the housing finance company even what was in public domain, those resolutions should have happened in Q2 and that would have been a big chunk of our BB and below book. Those two resolutions didn’t happen and that got our credit costs a little awry. Also, if you look at cases like CG Power, Cox & Kings, CCD … these were unforeseen and un-budgeted events.
In terms of fresh stress coming in to the banking system, what is the probability of Yes Bank figuring in it?
Let’s look at Cox & Kings, it was a fraud… Altico Capital was brought down by the action of one bank which brought the company down… Look at Cafe Coffee Day, it was a very unfortunate event that happened … you can always say how is it that you manage to get the bullet. I would say it’s a very unfortunate coincidence. It’s always very easy to be wise in hindsight but I would describe it as if a torpedo could hit us and nothing missed us. So, I see this as an aberration rather than a continuing trend.
There is a lot of mistrust about the bank among equity investors. You have been in the bank since March. What can you promise the investors?
That’s a fair point. After we did the QIP in August, I was very clear that the next round of capital raising that we do would be private equity and the reason we wanted to do this was because we wanted to provide external validation. That somebody has come, done a due diligence on the books of the bank and brought in money after that. So the idea is that someone did a nice thorough due diligence, and will make a decision to invest in the bank or not. Hopefully, when private equity comes in, and that too after a very stringent due diligence it should give comfort to the market that you get what you see. And it’s not as if something is lying hidden in the books which could deteriorate tomorrow.
Time is ticking away and markets could get impatient. By when will this money come in?
If I had to provide any philosophical guidance on this, it would be as soon as possible. I just feel that there is such a compelling growth opportunity out there that the sooner we can participate in it the better it is. The other thing is even in the eyes of various stakeholders – the investors, the regulators, the depositors, the clients, if we can demonstrate that the bank has become stronger and stable and more secure it serves everybody’s interest. I would say that we will try to live up to the timelines to the fullest extent possible.
Your earnings in the last two quarters have done little to restore faith.Now that you have $3 billion worth of offers on the table … when you interact with clients do you see them more confident or the fear is still there?
I think the interest that we have got, in a market as tough as this, $3 billion is not a small number. It’s a validation of two things. One, about the trust lines getting restored, and second, I think the investors believe that this is a very good franchise. It needs recapitalisation and if we can get that done quickly, it would be up and running and can punch well above its weight in no time whatsoever. Asset quality is one aspect of it. Investors want to see what is the revenue generating power of the engine and there I think investors are now very comfortable the revenue engine is not impaired.
Troubles still continue with the NBFC sector. Will that add more pressure to your asset quality?
Overall with the NBFCs even in the short term if you can solve the liquidity issue what you really need to address is the asset-liability mismatch and it would be very difficult to address that for a non-deposit taking entity. To that extent I think the sector needs consolidation and some regulatory accommodation.