Vault Matters | Can a Sumo wrestler play kabaddi? That’s SMBC’s real challenge with Yes Bank

Yes Bank may have retained its strong brand presence, but that is barely helping the bank make a significant headway in the retail market.

There’s a sigh of relief at State Bank of India (SBI), Yes Bank and Sumitomo Mitsui Banking Corporation (SMBC). While SMBC picking up 24.99 percent stake in Yes Bank mainly from SBI and other investors was a well thought through deal, it still had everyone on tenterhooks.

That it would progress at jet speed has pleasantly surprised everyone, not just the three major names involved, but even the banking fraternity at large. Especially, when the murmur around the same time last year was that potential Japanese investors have backed off from Yes Bank. No doubt then, that the excitement around SBMC's entry into the banking space as a serious player is warranted.

Growth pangs 

But if one were to think through this from SMBC’s lens, it would be fair to assume that the challenges have just started. Yes Bank was India’s fourth largest private bank when it collapsed in March 2020. Today, it may have come off all the bad loan issues and governance concerns, but it has slipped to seventh position in the pecking order, in terms of loan assets.

Yes Bank may have retained its strong brand presence, but that is barely helping the bank make a significant headway in the retail market. A detailed look into its financials suggest that while it may be a private bank, some of the key parameters such as return on assets, return on equity, profitability and cost ratios resemble that of a public sector bank or maybe even a notch lower than the best run entities such as SBI and Bank of Baroda. In a bid to turn cautious on corporate loans, the bank's foothold has diminished over time in this segment. In short, growth has been Yes Bank's single most important challenge for two successive fiscals and continues to be so.

From friends to competitors 

How can SMBC then reshape the fortunes of Yes Bank? If I was SMBC’s representative on Yes Bank board, this question might give me sleepless nights, not ones pertaining to managing the textbook regulatory requirements.

It is assumed that foreign banks focus more on cross-border trades and relationship with their home companies operating in India. With Japan having a 30 percent plus share in India’s infrastructure play and a slightly lower but yet significant ties in some of the manufacturing capabilities, corporate book should not be a tough cookie to crack for SBMC.

But here’s the catch.

It’s exactly this segment which SBI will bank on- it’s already doing so. Known to operate at the lowest quartile of cost of funds, can SMBC match the game?

Thus far, SBI has been SMBC’s friend as it had to see the Yes Bank transaction go through.

When SBMC will enter the ring as a competitor, hopefully by the next fiscal, friendship will be forgotten. Yes Bank may have the equity muscle of SMBC. But for that to stay intact, it will have to return ample profits. Yes Bank is an equity-method affiliate of SMBC group and SMBC. That means, SMBC and SMBC group can own significant but not controlling ownership interest between 20 – 50 percent of voting rights in Yes Bank. Technically, this permits SMBC to cut its losses in future.

Easy entry, tough exit

But considering the circumstances under which it has been given an entry into Yes Bank, SMBC practically has no way out. The sumo wrestler has to learn kabaddi, to prove that it is serious banking contender in India and is here for the long haul. Simply put, it has to make Yes Bank work. It does not have the leeway enjoyed by Citigroup, Deutsche Bank, Barclays, BNP Paribas, HSBC, Standard Chartered and many more who scaled back businesses, when India didn’t fit their global jigsaw.

Like the Hotel California song goes, the entry may have been easy but exit is almost not an option.