After the huge parting that took place between Yes Bank Ltd’s assessment of its Non- performing assets (NPAs) and that of RBI for two simultaneous years, investors feared a repeat in the audit for FY18 as well.
It was almost a foregone conclusion that Yes Bank had more skeletons to hide in its closet. “There is an interim inability to address the gap between perceived asset quality worries and headline stress ratios,” analysts at JM Financial Institutional Equities had said in a note in mid-2018.
So, it’s clearly an understatement to say that the lack of any bad loan divergence came as a huge surprise. The audit of the private sector lender’s books by the central bank showed that Yes Bank has recognized all toxic assets and provided for them for FY18. Stock market investors looked most surprised, what with Yes Bank shares rising more than 30% on Thursday.
There are two key takeaways for investors. One, Yes Bank has amended its ways and its new chief will have a fairly clean book to work with. Ravneet Gill, who takes charge as CEO of the bank next month, will have no legacy pain. Gill, of course, will have to contend with delinquencies that arise from business as usual. However, investors will test him for that and not for the remnants of former head Rana Kapoor’s performance.
Indeed, for investors, the gross NPA ratio of 2.1% as of December can perhaps be taken at face value and the fact that the bank has provided for exposure to Infrastructure Leasing and Financial Services Ltd (IL&FS) and other pain points should also give comfort.
However, this clean chit report also throws up a question as it puts a question mark on the regulator’s decision to demand a change in leadership. A Mint story dated 29 October 2018 has said that RBI had found serious lapses in the functioning of Yes Bank. What were the serious lapses? One way of looking at it is that the regulator perhaps reacted to the previous year’s bad loan divergences and found it appropriate to punish Kapoor, even if after a long gap.
As brokerage firm Jefferies India Pvt. Ltd said, “We believe it is time for the RBI to increase transparency on decisions that have a significant impact on minority shareholders.”
Be that as it may, investors can rejoice that the bank has got not just a new chief, but a clean balance sheet vetted by the regulator as well. Two big overhangs are now done with and analysts noted that, from here on, the stock would truly reflect the bank’s performance.
Under Gill, it is hoped that Yes Bank would deliver the same high growth it did in the previous regime, but with an added measure of prudence.