Attention Yes Bank Shareholder: Good News! Should Others Buy Now?

Yes Bank has successfully reduced its Gross NPA ratio from a concerning high of 16.8% in FY2020 to a much healthier 1.6% in FY2025.

Yes Bank. The name evokes a rollercoaster of highs and lows in the Indian banking sector. Following the recent announcement on May 9th of Sumitomo Mitsui Banking Corporation's (SMBC) acquisition of a 20% stake, market sentiment has seen a noticeable upswing. The share price jumped almost 10%, hinting at a potential turnaround story. But is Yes Bank truly on the path to a full-fledged comeback?

Let's unpack the narrative.

To understand Yes Bank's current position, we need to rewind a bit. For about five years, the share price largely fluctuated between ₹20 and ₹30. However, the bank had previously experienced a spectacular run, with its stock price soaring at a Compound Annual Growth Rate (CAGR) of over 50% between May 2014 and September 2018, delivering an impressive absolute return of 550%. So, what triggered the subsequent downturn?

The Trouble

The troubles began to surface around September 2018 when the Reserve Bank of India (RBI) declined to extend the tenure of Rana Kapoor, the then-CEO, beyond January 2019. This news sparked an initial selloff in the market. The underlying issues, however, ran deeper than just leadership concerns.

Over the preceding years, Yes Bank had engaged in aggressive lending practices, extending substantial loans to a number of financially stressed and poorly performing corporate entities. Prominent examples included companies like Jet Airways, which eventually faced a complete shutdown, and DHFL (Dewan Housing Finance Corporation Ltd.), which went through a major financial crisis. These risky lending decisions had begun to take a toll on the bank's asset quality, and the RBI's refusal to extend Kapoor's term likely signaled growing regulatory discomfort with the bank's practices. The situation worsened in October 2018, as RBI reports confirmed the significant underreporting of these burgeoning bad loans by the bank. This revelation severely eroded investor confidence in the management and the bank's financial stability, further driving down the share price.

In March 2019, the bank's board, with RBI approval, appointed Ravneet Gill as the new CEO. This move initially helped to restore some investor trust, leading to a temporary recovery in the share price. However, the optimism proved short-lived. The Q4 FY2019 results, released in May 2019, painted a stark picture of the bank's financial health. The Non-Performing Assets (NPAs) were alarmingly high, indicating significant stress on the bank's loan portfolio. From that point onwards, the bank's story has largely been one of struggle and recovery efforts.

A crucial lifeline came in 2020 in the form of a capital infusion led by a consortium of banks, with State Bank of India (SBI) at the forefront. This, coupled with management restructuring and a strategic shift in business focus towards more profitable and less risky areas like retail banking, has enabled Yes Bank to stabilize and, encouragingly, post rising profits since 2023.

The Recovery

A key part of Yes Bank's recovery strategy has been a concerted effort to diversify risk. The bank has actively pursued several strategies, including:

1. Selling stressed assets to Asset Reconstruction Companies (ARCs) to clean up its balance sheet.

2. Expanding its services to rural India and Micro, Small & Medium Enterprises (MSMEs), which are generally considered less risky lending segments compared to large corporate entities.

These efforts have yielded positive results. Yes Bank has successfully reduced its Gross NPA ratio from a concerning high of 16.8% in FY2020 to a much healthier 1.6% in FY2025. This level is now broadly in line with that of other mainstream large banks, indicating a significant improvement in asset quality.

To put Yes Bank's situation in perspective, it's helpful to consider other banks that have faced crises in recent years. Punjab National Bank (PNB) encountered a major fraud incident, while Lakshmi Vilas Bank (LVB) struggled with high NPAs due to risky corporate lending. PNB has managed to regain some investor confidence, with its share price recovering to near pre-pandemic levels, although it remains below its all-time high. In contrast, Lakshmi Vilas Bank was wholly acquired by DBS Bank India, leading to its delisting. This acquisition set a precedent for a foreign entity to completely take over an Indian bank.

FDI History

It's worth noting that foreign interest in the Indian banking sector is not entirely new. Two decades ago, the Dutch financial services group ING acquired a substantial stake in Vysya Bank, leading to the formation of ING Vysya Bank. This was a landmark merger, being the first between an Indian and a foreign bank. However, ING Vysya Bank was later merged with Kotak Mahindra Bank in 2015, ending its independent existence.

Road Ahead

Returning to Yes Bank, SMBC's investment signals the Japanese conglomerate's growing interest in the Indian banking industry. Market experts suggest that SMBC may be keen to further increase its presence in the sector, subject to regulatory approvals from the RBI.

In conclusion, Yes Bank's journey has been marked by significant challenges and ongoing recovery efforts. While recent developments, such as SMBC's stake acquisition, offer a glimmer of hope, the bank's long-term success will depend on its ability to sustain its improved asset quality, maintain profitability, and navigate the competitive landscape of the Indian banking sector.

Disclaimer: This content is for educational purposes only; please conduct your own research and consult with a qualified investment advisor before making any investment decisions.