ANALYSIS What’s next for Yes Bank as RBI permits Japan's SMBC to set up a subsidiary in India?

YES Bank

• Yes Bank shares up 2.75% after RBI allows SMBC branch conversion to subsidiary.
• SMBC may expand its role in Yes Bank, holding a 24.99% stake
• Focus remains on Yes Bank's management and future leadership decisions

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Yes Bank stock is up 2.75 percent on January 16, reacting positively to Japan’s banking major, Sumitomo Mitsui Banking Corporation (SMBC), getting an in-principle go ahead from the Reserve Bank of India to convert its Indian branches to subsidiary. What this signals is that there could be more to SMBC’s stake in Yes Bank. It may not be just an equity affiliate of the Japanese major and perhaps sets the stage for something bigger, explaining the enthusiasm shown by Yes Bank stock.

An in-principle nod to SMBC to operate as a subsidiary in India, makes it the fourth foreign bank to opt for this working model in the country. The previous instance when a foreign bank received a similar go-ahead from the banking regulator after it picked up controlling stake in a mid-sized private bank – case in point being the recent Emirates NBD – RBL Bank deal. Will SMBC set another example with Yes Bank?

Relevance of subsidiary model

By converting into a subsidiary of a foreign bank in India, SMBC is committing itself for the long term. Broadly in terms of regulations, it’s fairly the same whether as a branch or subsidiary for a foreign bank in India. What it would enjoy is the advantage of local taxes and decision making which would be central in India. Just to put in context, the constant flip-flop in approach that we have seen across foreign banks, starting with BNP Paribas, Barclays and Standard Chartered in the mid-2010 to HSBC, Citibank and now Deutsche Bank, could be questioned by the regulator once set up as a subsidiary of a foreign bank in India.

Flushed with equity in foreign currency, if approached well, subsidiaries of foreign banks may have an upper hand in pricing liabilities and going to the market on deposits. The question is whether as subsidiaries, they can move customers away from HDFC Bank, ICICI Bank and Axis?

That would be the challenge even for SMBC. The upper hand it has is the 24.99 percent stake in Yes Bank and clearly with the nod to become a subsidiary in India coming through, the stage is getting prepared for a larger play. However, unlike the pace of Emirates NDB – RBL Bank deal which was quick to be drawn together, there are many things to consider for SMBC.

Multiple factors at play

Apart from the existing branches in India, SMBC also has a subsidiary of its parent entity (SMFG) operating in the country – SMFG India Credit. Known to be strong in the unsecured retail SME loans segment, the company also owns an affordable housing entity. The business SMFG India Credit operates in could significantly solve the retail-related issues faced by Yes Bank. Simply put, SMFG India Credit can sort out a major balance issue which Yes Bank has been battling with for three years. However, SMFG India Credit roped in a new CEO in August last year and Ravi Narayanan may want to check a few boxes to ensure that his company is actually ready for a deal.

SMBC also has a well-established GIFT City presence.

Therefore, unlike Emirates NDB India, which operated out of only branches, there are complexities which SMBC has to deal with. A consolidation of these entities under one roof could also help address the issue of an open offer in Yes Bank if SMBC should increase its stake beyond 25 percent, though the process could also take time to play out.

Hence, in the immediate 1 – 2 quarters, the focus will continue to remain on Yes Bank and its current management will have to defend the reasons for weak growth like it has been doing for over two years. What could potentially lead to another re-rating in the stock is clarity on who succeeds Prashant Kumar when his tenure ends on April 5, 2026 and what would be the composition of the bank’s CXO club.