Yes, again on top

With a sharp eye out for poorly-served customers and on cross-selling products, YES Bank comes out ahead among mid-tier peers for the second year running. Sustaining the pace could be tough, though.

In April this year, Greenko Group, a Hyderabad company with big ambitions in green energy, received a call from a bank it had never done business with. Somak Ghosh, YES Bank’s President for Corporate Finance and Development Banking, wanted to talk about Rs 40 crore debt that Greenko needed to set up and expand its hydro, solar and wind power assets.

Mahesh Kolli, Greenko’s Joint Managing Director and President, was open to the pitch. Sure, YES Bank was a lender with less than five years in the business but the potential borrower, which started in 2006, was even younger and could use all the help it could get to grow its Rs 95-crore revenues. Ghosh, 42, and team, after listening to Greenko’s needs, suggested something even more grand: raise Rs 450 crore through a mix of equity and debt to finance 400 mega watt (MW) of fresh capacity in place of the initial 100 MW. This month, Rs 225 crore from a private equity financier, Global Environment Fund, will be sewn up by placing 25-30 per cent equity. Greenko, advised and assisted by YES Bank, will raise a similar amount in debt from a consortium of banks to refinance loans (of multiple tenors, varying interest rates and different securities) from 14 lenders in an effort to streamline finances.

Kolli’s company is set firmly on a new growth trajectory. To be sure, there will be risks but the short term looks healthy for Greenko: New power stations in the country have buyers queuing up to buy electricity at Rs 6 a unit (compared to Rs 3.50 to Rs 4 each for long-term rates). “YES Bank was able to understand all our needs and strategy,” says Kolli. The way he sees it, other banks are good at asset-backed lending while investment bankers just excel at placement of equity.

For YES Bank, the deal morphed from a vanilla Rs 40-crore debt deal to fully underwriting a Rs 75-crore loan, syndicating another Rs 150 crore debt, helping arrange private equity, converting foreign inflows into Indian currency, and advisory fees. At the end of it all (some time in mid-2010), the Mumbai-based bank would have made a few times the income it would have earlier.

That 180-degree business view and an obsessive focus on outsourcing non-core functions are at the kernel of a business model that has India’s youngest bank racing ahead. For YES Bank, founded by Rana Kapoor after almost 25 years at the likes of Bank of America, ANZ Grindlays and Rabo Bank, the approach has always been to deliver what Ghosh calls “superior client value” to customers while keeping in mind the best for the company. This is done by selling multiple financial products and services to each client. Kapoor, Managing Director and Chief Executive Officer (CEO), reckons any bank can sell up to nine products (from debt to payroll management, wealth management to investment banking support) to its customers, and the key to pricing competitively is how well a lender engages in such cross-selling.

The fleet-footedness that comes with youth gets deals sealed fast. “It is one of the banks where decisionmaking is very quick,” says B. Hariharan, Group Director (Finance) at Avantha Group, a paper-to-engineering business group headquartered in the capital New Delhi. He should know. Ballarpur Industries, the group’s flagship, was YES Bank’s first customer and received a Rs 20 crore loan on August 23, 2004—two days after the bank began operations (on a Saturday). Other Avantha Group companies, too, now do business with Kapoor’s bank.

The increasing faith and diversity of clients—YES Bank has customers ranging from Havells to S. Kumar’s, from Wipro to Suzlon— is reflected on the lender’s books. Kapoor, 52, expects assets to touch Rs 28,000 crore end of this fiscal year. Its income was Rs 2,438 crore and net profit over Rs 304 crore in the financial year ended March 2009 on assets of Rs 22,900 crore. The bank, which got listed in 2005, is still in investment mode and yet to pay dividend to its shareholders, though at a $1.6 billion (Rs 7,680 crore) market capitalisation, it ranks ahead of peers such as IndusInd Bank and ING Vysya Bank.

YES Bank NPAs, short for nonperforming assets or those loans on which interest has not been paid for three months, was 0.33 per cent compared to private banks’ average of 1.21 per cent, its profit per employee was Rs 11.38 lakh compared to average of Rs 5.30 lakh, according to Indian Banks Association data. It helps that YES Bank took an early decision to outsource technology and recently farmed out management of all its automated teller machines, or ATMs. Result: it has half the number of people in its back office operations (measured as percentage of total workforce) compared to legacy rivals.

In the years ahead, Kapoor, who is built like a football fullback, wants to step on the pedal even harder. In the “version 2” of his bank’s flight, he says, the plan is to grow assets six times to Rs 1,50,000 crore by 2015 (equivalent to a compound annual expansion of 35 per cent ), 750 branches (from 126 today) and 3,000 ATMs (from 200). The profile of borrowers too, he expects, will change with the target for small and medium enterprises (SMEs) set at 20 per cent of YES Bank’s business. Other parts of what Kapoor calls “branch banking”, including retail banking and wealth management, could make for another one-fifth of the bank’s assets. Branch banking today is at a tiny 6 per cent.

If the plans seem to border on the wild (the Indian banking industry is expected to grow its assets at 17-18 per cent, or half the projected growth rate at YES Bank in the years to 2015, according to Reserve Bank of India), Kapoor doesn’t show any signs of doubt. “From April 2010 to March 2015, we are positioning the bank for an upturn in the Indian economy in, say, the middle of this period, when a return to 8-10 per cent (economic) growth is expected,” he says. “Don’t forget, India is still an unbanked country.”

So, until March 2012, the focus will be on SMEs and “emerging corporates” (as Kapoor calls companies with around Rs 100 crore revenues), which together with a deep understanding of certain sectors such as agriculture, life sciences and renewable energy will be, Kapoor believes, a key differentiator. In the next phase—fiscal 2013 through 2015—the plan is to reach out to the retail segment and consolidate a pan-India presence. (Kapoor scoffs at suggestions that his is a regional bank.) For retail, the plan is to, says Rajat Monga, the bank’s Group President (Financial Markets) and Chief Financial Officer, offer all types of products which include auto and home loan, stock broking and, at a later stage, asset management.

That journey into retail, the holy grail in banking given that the cost of such deposits is typically the lowest for a lender, will be tough for YES Bank, a yet-to-be-accepted brand on scale, predicts an analyst. “It makes sense to go into retail. But it will be difficult to have customer acceptance of the bank compared to large size banks,” says Vaibhav Agrawal, an analyst with Angel Broking.

Kapoor, who together with his family owns 16.6 per cent of YES Bank, concedes to that shortcoming in brand recall. If there is one mistake the bank made in its early years, he says, is that it “did not invest in the brand because; honestly, we did not have much headroom in budget”. He is making up for lost time, spending Rs 5 crore this fiscal year, taking advantage of relatively inexpensive advertising rates offered by media channels buffeted by an economic slowdown.

Another weak link in the YES Bank strategy could be the high share of non-interest income the bank has. In the first half of the current fiscal year, the lender reported half of its Rs 1,366 crore income from businesses such as investment banking, financial advisory and distribution of mutual funds and insurance policies. But analysts are also not too concerned over this skew (non-interest income is just 26 per cent for Axis Bank and 19 per cent at IndusInd Bank). “(The) YES Bank DNA is in corporate finance and this is their strength. This should not be a concern,” says Ajay Parmar, Head of Research, Emkay Global Financial Services.

For the YES Bank CEO, who counts HDFC’s Deepak Parekh and (friend) Sunil Mittal of Bharti Enterprises as contemporary role models, the biggest risk before his institution is one of continuing to execute well. For that to happen, the bank needs to let the reasons of its initial success—a driven team of entrepreneurs that swears by performance but is as aware of the need to mitigate risk—seep into each one of its 2,700 and fast- growing staff. Just as it has, for instance, in the words of Adhitya Sanghi, Managing Director, Investment Banking, “institutionalised personal relations” of top team members with clients over the last five years.

To get this human resources piece of the jigsaw fit right, YES Bank is relying on a two-pronged plan: attract talent from every industry under what it calls the YES PEP (short for professional entrepreneurial programme) initiative and reaching out to India’s top 50 universities to market the bank’s brand and make hires. By 2012, says Kapoor, the aim is to make YES Bank “the best bank to work for”.

On the larger canvas, the YES Bank CEO hopes that a “professionals-owned home country bank” structure will see it sailing through. Some 12 per cent of the bank’s fully diluted equity is owned by its staff—way ahead of its nearest rival, ICICI Bank, which is less than 5 per cent employee-owned. With no newcomers on the horizon and foreign-owned banking biggies licking wounds back home, that may turn out to be the silver bullet in Kapoor’s armoury.