The new management has started throwing the dirt out of the financial statements of Yes Bank, to make them true and fair.
Whenever a new CEO takes charge of a bank in India, the first thing he does is to clean up the financial statements of the bank, refusing to carry forward the dirt concealed by the earlier management ie. the hidden NPAs, lest he is blamed for them. The new Yes Bank CEO Ravneet Gill did just that. He took charge of the bank from 1.2.19 and the Yes Bank quarterly results for March 2019, show the start of a clean up by him. The Bank has declared a first-ever quarterly loss in its history, of the Rs.1506 crores, largely due to higher provisioning for bad loans. It triggered a plunge in the share price of Yes. Bank, which slumped by 30% in a day. Its share price has now fallen by 50% in the past year alone and with this stunning loss, a further fall of 10-15% in its price is expected, before it stabilises. With this plunge of 30%, Yes Bank’s market capitalisation was eroded by over Rs.16000 cr. in a single day.
This record quarterly loss surprised most market analysts and brokerages, who have sharply downgraded their outlook on the stock, concerned about the poor asset quality and the receding earnings of Yes Bank. They have also predicted a 45% fall in its earnings for the next two years. It has huge exposure to the likes of Jet Airways, ILFS and the struggling Anil Ambani Group and its NPAs have crossed a dangerous level of 8% of its gross loans. The market is concerned about numerous critical issues related to Yes Bank viz. corporate governance, balance sheet transparency, dodgy accounting practices and the huge bad debts hidden in its balance sheet. These were the very reasons why the Reserve Bank had refused to extend the tenure of Rana Kapoor as its CEO and had truncated it to 31.1.2019.
The market may be shocked and surprised by these huge losses declared by Yes Bank, but we are not. To us, the losses were always there in the operations and financial statements of Yes Bank, except that they were hidden in its manipulated accounts as was evident from the inspection of the Bank carried out by the RBI from 2015 till now. Yes, Bank has been a thoroughly mismanaged entity, with questionable accounts and accounting practices and with a very poor culture of corporate governance and compliance. It has been an organisation with scant respect for the law, due to the fact that its ambitious promoter Rana Kapoor manipulated and gamed the system, to perpetuate his malpractices and misdeeds. It has not been a professionally managed entity with his band of boys doing his bidding. Its losses were thus hidden year after year and are now spilling out under new management, unwilling to continue this farce. The surprising issue is that even though the RBI has been aware of such hiding of NPAs by Yes Bank since 2015, it yet let Rana Kapoor continue to be its CEO, instead of holding that he is not fit and proper to be so.
The new management has started throwing the dirt out of the financial statements of Yes Bank, to make them true and fair. But the clean up will take at least 12-18 months time, wherein the new leadership will have to build a professional team of managers, raise capital, and significantly improve its asset quality and profitability. The cleanup and turnaround of the Bank will be gradual because its challenges are too many viz. eroded capital, falling revenue yields, the shrinking base of CASA accounts, sullied reputation, aggressive accounting practices and weaknesses in its retail distribution. It will also need a new business strategy and business model, under new leadership.
The rot runs deep in Yes Bank and you can expect a few more quarters of losses, to clean up the past giant mess. It will need to recognise and provide for stressed assets that it has hidden so far, and will need to change its overall corporate behaviour. The new CEO proposes to immediately raise additional capital of a billion of dollars, shift focus to retail loans and SME loans and adopt conservative accounting practices. His biggest challenge is to build a new team and rid the bank of the dubious Rana Kapoor culture, where professionalism was diluted, and so was accountability and governance, in order to suit his personal interests, while he hobnobbed with Bollywood and the politicians.