YES Bank turns to retail, SME biz to regain market position

At a time when talks are hinging on highly leveraged banking names that are fuelling market nervousness, YES Bank is hoping to regain its market position and is looking to enter the consumer and retail segment. YES Bank, with its high exposure to the corporate segment is among the highly-leveraged banks. Corporate loans constitute about two-thirds of the bank’s portfolio.Speaking to CNBC-TV18, Rana Kapoor, MD & CEO of YES Bank, says that the bank is looking to shift its focus to retail and small and medium enterprise (SME) segments. The bank currently has 35 percent of its business in retail and SMEs.Kapoor expects bank’s SME share to grow to 55 percent in a year. By 2020, the bank is aiming for 45 percent involvement in retail segment and hopes to become third largest player. Discussing the risk in commodities and infrastructure sector, Kapoor says the bank’s exposure to steel is around 3 percent in small and medium size credit. He does not see any risk in infrastructure or its related sectors like cement. Kapoor says de-risking of economy is underway with improvement in risk profile of large and medium-sized companies. He says Reserve Bank's 5/25 scheme will help in re-organising capital requirements in stressed sectors over a period of time. He expects stressed sectors, especially commodity sector, to bounce back in coming 12 to 18 months. With major banks like HDFC Bank, Axis cutting their base rates, Kapoor says he expects more rate reductions within next 90 days. Yes Bank is not a consumer lending bank, and hence reduction in retail rate cuts will hardly impact its consumers, he added.Below is the transcript of Rana Kapoor's interview with Latha Venkatesh on CNBC-TV18.Q: We have just got this press release that you are planning to deepen your retail and business banking and to that end, there has been a restructuring. Can you take us through what exactly you have restructured in the bank?A: This restructuring is to add more focus to our retail banking initiatives. As you know that more recently, we have accelerated our retail, small and medium enterprises (SME) business banking platforms under the leadership of Pralay Mondal and we are seeing a critical momentum building up in these businesses. We have registered -- there is a significant almost 9,000 out of our total more than 12,000 Yes Bankers are now deployed in retail banking businesses and they are fairly well.Q: You are stepping into the retail space or rather deepening your presence primary at a time when competition has gotten hotter. Yesterday we had HDFC Bank cutting its base rate to 9.30, do we see a similar action from you?A: It is a little bit early for us because we believe that there is still a risk and reward ratio wherein we can maintain rates for a while. But in the medium-term, give or take the next 90 days or so, we do see further reduction in interest rates.We have seen a shift already happening on the deposit side with the long-term deposit rates hovering at 8 percent and below which is a reduction of almost 1.5 percent compared to one year ago.Therefore, I think the overall market conditions are indeed favourable for further transmission of lower rates in the economy starting the deposit rates and gradually moving towards lending rates as well.Q: But you stand at 10.5 as base rates? That is quite a distance isn’t it, to be an effective retail competitor?A: We are not exactly today a consumer lending bank. We are predominantly a liability seeking banking institution.On the asset side our predominant focus today is micro SME lending and in that business 10.5 is fairly competitive pricing and we, as I mentioned to you, will be relooking at our rates. We did reduce 0.25 percent about two months ago and there is a case building up for further reduction.Q: You said that you are largely SME and MSME lender, do you see any stress in those sectors? When we last spoke with Mrs Bhattacharya, Chairperson of State Bank of India (SBI), she was saying that stress is reducing in the large corporates and mid-corporates but it has not reduced in the SME segment of the economy. How is the experience at your end?A: It has been interesting that SME and micro SME has got particularly a new lease of life because the e-commerce boom in our country is engaging a lot more with the SMEs and micro-SMEs and we find that the sellers for example, if Snapdeal has 200,000 sellers, they are predominantly SME businesses which have seen their margins improved because of e-commerce reducing the overall supply chain impact so from their production shocks they are literally going to the consumers.Q: Can you give us the break up, how much are you exposed to large sector, how much to midcap, how much to SME and how much to retail and how will these percentages look a year down the line when you have deepen retail?A: For June quarter we are approximately 35 percent in retail banking and SME banking and within that, SME banking is 20 percent so that is a large share of our branch banking businesses. We are steadily going to introduce credit cards, affordable housing finance, mortgages. So, probably in a year's time we have seen this SME and retail participation brought to maybe about 55 percent but our objection is to bring the retail businesses, the entire composite, to about 45 percent or so.Q: That is coming at a time when you perhaps have a lower number of branches than most other banks, Kotak started with you but with ING Vyasya their number of branches is vastly more than yours and then now you have this huge competition from deep pocketed conglomerates who have got payment bank licenses. Will not this become tough and more importantly will this not come at an expense on margins, your retail thrust?A: Basically if you analyse branches, there are 53 cities in the country which have a population of more than a million people. There are 465 cities which have a population between 100,000 and a million people. These are cities which are still very starved of banking products.Q: Would you be tying up or trying to buy up any bank, any inorganic moves from you anytime soon?A: As a relatively young bank, our biggest strength is execution of our focused strategies. So, what can be best is to execute with quality filters, proper focus on segmented industry sectors and most of all to build consistent quality of human resource (HR), which in the business of banking is a hugely important investment. So, we have a slightly different strategy because the strength of our management team is to build businesses from the inside.Q: As head of The Associated Chambers of Commerce and Industry of India (ASSOCHAM), you have a bird’s eye view of Indian industry as well. And as you say, you are only a 35 percent in small SME and retail and the larger part of your books, 65 percent is with large corporates and midcaps. There was recently that UBS report, which was saying that you have a larger exposure to infrastructure and probably commodity related companies. Do you see any stress at all developing in this? Just because you have lent to them does not mean that they have to be stressed loans, but do you see any stress developing?A: We have discussed this issue when I came to your studio last time as well.Q: Things have gotten worse. I mean the amount of steel dumping and then the five percent Chinese devaluation, you stand at a vantage point and you will be able to tell us whether the infrastructure and particularly the commodity sectors, the core sectors including steel and cement are going through greater stress now in the last one to one and a half months.A: Iron and steel is going through a lean patch. But, infrastructure and infrastructure adjacent sectors including cement are not doing so badly. I think the economy has been rebalanced over the last twelve months. There are improvements in the risk profile of many of the large and mid-corporates. Many of them are raising capital, plus disinvesting non-core assets, the overall delisting of the economy substantially underway.Two years ago, I would have been more concerned. But towards Q3 of 2015, I would say that overall, systemic risk has come down and the overall situation is much better. If you compare 2015 with the same period to 2013, all macro indicators without exception are all significantly better than the same quarter July-August 2013. All system indicators without exception are much better two years later. The only thing that needs to accelerate further is the reform expectations in the economy. And that is one big issue. If that gets going, we are looking at a seven and half to eight percent gross domestic product (GDP) in our country very soon.Q: It is reassuring coming from you since you, both as head of a chamber of commerce and as a bank would be better placed to put your finger on the pulse of these large industries. I understand you have a three percent exposure to steel. Do you see steel sector having seen the worst or can it even get worse?A: The three percent we have is basically, there are only two credits, which given our size are small to medium size credits which are certainly well collateralised. The rest of our steel exposure is in the form of bonds to AA plus AAA rated steel companies. And my colleague Rajat Monga has also on record on your channel just a few weeks ago on this particular issue.Q: So, you would not worry about these companies? A: In the sense that these are at the end of the day, as long as there is preservation of economic value, which means the assets are very difficult to replicate. The help they need is 5:25 which is going to reorganise their cash flows over longer tenures, but there should be a fair amount of collateral to loan value embedded in these assets. Once there is an improvement in the cycle, the growth cycle in the economy, let us say 12-18 months, with some lag effect. These companies will bounce back. Q: That is very positive to hear from a person who would know this industry well. A: I think it is a game of patience.Q: There is that with infrastructure industries. To just end where we began, in your retail thrust, would you say that given that you have decided to deepen your retail presence, both on the asset on the liabilities side, but considering that it is coming at a time when competition is really hotting up because of payment banks, because of new small bank licences that are going to be announced sometime this month. And because of increased retail thrust from the public sector banks themselves. Should we expect that Yes Bank’s margins a year down the line or 24 months down the line is definitely going to be trimmed compared to your current margins?A: We set up a bank 11 years ago and last week was our 11th anniversary. We have worked on average 12-15 hours a day over the last 11 years. And we have grown at a compounded annual growth rate (CAGR) in excess of 35 percent in an 11 year period. Amazingly, despite that we only have one percent market share. The point is that Yes Bank which has toiled over the last 11 years has acquired only one percent market share. So, new banks are welcome because end of the day, the entire inclusion brings in symbiotic flows into the system and therefore banks will also gain, all kinds of banks but these investments in new payment banks will take a long time because they have a very long gestation to it. We are already a payments bank. We already are a small bank because the nature of our business encompasses all of this. So, it is not like this is going to be like a very fierce competition. On the contrary, there will be synergies that we will capture with payment banks.