Feb 27, 2013, 04.27 PM | Source: CNBC-TV18

Banking licence: Consolidation to take time, says Yes Bank

Rana Kapoor, Founder & CEO of Yes Bank believes there are diverse opportunities in the banking and financial landscape of our country and therefore, the new banking licenses must set up differentiated business models to cater to under-served areas.

Given the opportunity to diversify the banking and financial landscape in our country, new bank licensing will have to have differentiated business and financial models

Rana Kapoor

Founder, CEO

Yes Bank

Q: Strictly opportunistic because why would you want to invent the wheel and the guys who are getting the licence could be big conglomerates and could get in Rs 15,000 crore a year?

A: Banking is a primary business, it cannot be an additional business. So what I mean by that is that one has to be into this business on a day to day, hour to hour basis literally because the risks are only compounding, they are only heightening. Yes, private houses have the pockets, they will need management teams and it is not unlikely that some of the private banks maybe attractive opportunities because they have basic governance in place, they have too many engagements in place. Therefore, some of the older private sector banks could be attractive targets.

Q: If four-five new banks are given the license as has been expected or some sources indicate, what will be the impact on incumbents like you all, more so in the near term? Would you see a lot of pressure in terms of employee retention which could hurt you all? And generally in the near to medium term, what is the impact that you see on the industry?

A: The opportunity as I mentioned is to diversify the financial landscape and really tap what is financially excluded or underpenetrated. Even the bank population in the country is approximately 40-45 percent. It is also very underpenetrated especially when you compare it to other Asian countries.

If you look at Yes Bank which is the last private sector bank to be licensed and commissioned in 2004, in just nine years we have become the fourth largest private sector bank with a balance sheet of Rs 90,000 crore with about 7000 people right now, 700 plus ATMs and 400 plus branches. The fact of the matter is that despite a fairly proven track record through good and difficult times, we do not even have 1 percent market share.

It has taken us nine years of two shifts a day to get to just about 1 percent. So it is a very high road for any new private sector bank, whether it is a conversion or whether it is a green field license. And in the business of banking you cannot be in Formula One. There are too many twists and turns.

Q: At any point in time you have only that many trained bankers, so would your margins be under pressure because your wage will has increased?

A: Once you build a good risk culture, you build a good institutional HR DNA that people identify with. There are good HR policies and owner, manager, partner kind of sentiments that collect together. It is very difficult to dislodge that. Every executive today has the ability to get into an entrepreneurial situation all over again.

There will definitely be some erosion and most banks will face that pressure. We also hired from competitive banks when we set up but, the fact of the matter is that we didn’t have any impact on what we considered to be competitive banks. They have done equally well. So I don’t think there is any adverse impact.

The market is large enough and broad and deep enough to absorb more players and it will be a good step as and when it crystalises.

Q: It is just that this time it could be qualitatively different?

A: Qualitatively it has a lot to do with business models.

Q: How would the return ratios of these new banks be if someone starts by going into only unbanked areas, may be tier III IV going all the way down to tier VI? What would the return ratios in your estimate be just as a reference?

A: If a new bank comes in with comparative advantage of non-legacy it may depend on it. Two, technology costs have come down very rapidly ever since we started nine-ten years ago. So a lot will depend on how innovative the product offerings are, how creative technology applications are and the cost of transactions are.

One of the areas where Indian banking has tremendous scope to improve and I hope the new banks create a paradigm in that respect is to really reduce cost structures. And that is a very important factor for ensuring that productivity and efficiency ratios of these banks are as good as some of the other private sector banks.

Q: Your results have been analysed and everyone has put a buy on your stock. But let me look at the next 4-5 quarters, in the last quarter of FY13 and the quarters of FY14 net interest income (NII) growth was 37 percent, profit growth was 35 percent, net interest margins (NIM) grew 10 basis points, gross and net non performing loans (NPL) came down by about 25 percent, will this be the picture for the next four quarters or do you think that the inevitability of the slowdown, the pressures of fiscal contraction will cast some pressure on this pace of growth and the quality of the asset?

A: We are being cautious not only because of the more recent past but, for the last two years because the risk signals, the red flags have been in the system pretty much from the middle of the fiscal 2011-12. It has only got heightened in 2012-13.
I must say that the developments of the last six months or so are somewhat promising and encouraging. That does not mean that the system has been derisk because there is a fair amount of de-bottlenecking to be done on project implementation, certainly in terms of trouble shooting, some of the infrastructure sectors creating more enabling provisions for such sectors. But, fact of the matter is that the credit environment was also analysed by Reserve Bank of India in its strength and progress annual report very recently. That credit interest rate risk as well as liquidity risk in India is fairly resilient.

If one looks at the overall net NPA position of Indian banking, it is around 1.4 percent for the entire banking system put together.

Yes Bank stock price

On November 30, 2015, Yes Bank closed at Rs 766.50, up Rs 4.60, or 0.60 percent. The 52-week high of the share was Rs 910.00 and the 52-week low was Rs 590.00.

The company's trailing 12-month (TTM) EPS was at Rs 53.74 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 14.26. The latest book value of the company is Rs 278.65 per share. At current value, the price-to-book value of the company is 2.75.

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