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RBI's No to YES: What is the fuss over YES Bank’s CEO tenure?
Publish Date: September 21, 2018
The year 2018 will go down as the year many old guards of Indian private sector banking had to step aside. The news about Shikha Sharma of Axis Bank and Paresh Sukthankar of HDFC Bank is already common knowledge. There is also a cloud over ICICI Bank's Chanda Kochhar. But the surprise was Rana Kapoor of YES Bank.
Yes, the private sector bank may get a new chief executive officer (CEO) in early 2019. The incumbent Kapoor, who is credited with establishing YES Bank’s credentials as a lender, is all set to step down in end-January. The Reserve Bank of India (RBI) rejected an extension of tenure for him. YES Bank’s stock price has reacted negatively. What's happening? We will explain.
What and why
Ending quite a few of months of speculation, the RBI has finally declined the highly debated extension of tenure for the current Managing Director (MD) and CEO of YES Bank. The stock market has not taken kindly to this development. On Friday, 21 September, YES Bank shares closed at over 29% down in a single session.
The turn of events at YES Bank has brought in uncertainty. There is now a big question mark over which internal or external candidates can take on the challenging role at YES Bank. Will there be a strategy shift? If so, what will be its impact? There are also worries related to the lender's capital adequacy ratios. And investors are afraid of the potential impact on earnings, especially from corporate banking fees.
Also read: Bank of Baroda, Vijaya Bank, Dena Bank merger: All you need to know
Lack of info hurts
The markets do not like lack of information. Unfortunately, in the case of YES Bank, there is silence over why the MD and CEO's tenure was not extended. Nobody knows what reasons led the RBI to take this decision. The lack of information may have disturbed shareholders and investors.
It is pertinent to note that the YES Bank board's firm opinion on the reappointment of the MD and CEO did not work. The RBI had asked the board, and the board had reaffirmed its view on giving Kapoor an extension.
The regulator's non-recognition of the board's stand has created discomfort in the minds of investors. So, what locus standi does the board have in suggesting new names? The board is expected to meet on 25 September 2018 to decide the future course of action. If the RBI does not give assent to any names from the current management team, then it does not bode well for the YES Bank board.
Also read: Are the troubles over for the Indian banking sector?
Risks galore
We believe that investors need to be cognizant of various risks.
First, there is limited headroom for the bank to grow. So, raising capital after this uncertainty over the MD and CEO fracas will not be easy. Essentially, this means YES Bank could be left with no other choice than to slow down the pace of growth or raise capital at cheaper valuations. It may help to keep an eye on any chunky company-specific exposures that are not easily identifiable from the outside. These may be aggressively reported later when the regime changes.
Second, Kapoor may be a tough act to emulate. As a founding member of the bank, he has left an indelible imprint on strategy, operations, and execution. Somebody needs to continue doing what he did, and without hitting the core banking operations. It has to be a seamless transition and continuity will count. Any adjustments by the new CEO would carry short- or longer-term costs. After all, new thinking and actions could change the bank's loan mix, risk appetite, and profitability parameters.
Third, any top-level change brings changes at the senior level too. Investors should watch out for attrition of the senior management. As the saying goes, when the general goes, the colonels and majors too defect. Uncertainty at the bank may force high performers to jump ship, or other competitors may swoop in to hire them by taking advantage of the situation.
Also read: 5 things to look for in bank quarterly results
Negative stance
We maintain our negative stance on the bank. We have revised our target price to Rs 250 from Rs 335 previously. This values YES Bank at 1.8 times its book value (2.4 times earlier). We have captured the risks mentioned earlier through a higher cost of equity (14.5%, up from the previous 13.75%) and have moderated the medium-term growth rate. We have also retained our 'SELL' rating.
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