Event update: Yes Bank (Underperformer) - Management uncertainty to continue post Board meet

Outcomes of today’s Board meet. 1) Board has appointed an internal search committee to find Rana’s successor 2) Board will request RBI to extend Rana’s term to at least Apr-30, 2019 against the current Jan-31 and if possible to Sep-30. The release says that extension upto April is required so that Rana can be present for the finalization of full year results. Extension upto Sept-30 is required to ensure that the statutory AGM process can be completed and to also ensure a smooth handover to the new CEO. Effectively, YES has asked for CEO tenor of at least 7.5 months but if possible even a year against the current term of 4.5 years.3) Board will request RBI to approve appointment of Rajat Monga and Pralay Mondal as EDs on the Board.

RBI unlikely to review tenor: RBI takes a decision on CEO re-appointment after a thorough analysis of all factors. As such it is unlikely for RBI to change its decision on the tenor. Also RBI communicated the decision only last week and nothing has changed at YES in the last one week for RBI to change its decision. The reason that the CEO needs to be around for finalization of accounts may not go down well with RBI. Finalisation of accounts is the role of the accounts and finance team, not the CEO. RBI wants banks to have broad-based teams with separate managers responsible for important functions. This reason goes against RBI’s broad basing principle.  

Madhu Kapur and RBI both have to approve Rajat Monga and Pralay Mondal as EDs: The Board has requested RBI’s approval for making Rajat Monga and Pralay Mondal executive directors of the Board. Madhu Kapur, the other promoter of YES Bank started a legal battle with Rana Kapoor in 2013. As per the judgement of the High Court on this case in 2015, the appointment of any director to the Board of YES Bank has to happen with the joint consent of both promoters – Rana Kapoor and Madhu Kapur. There are media reports that Madhu Kapur has written recently to the Board to conduct a forensic audit for loans sanctioned by YES Bank. Given that recent letter and her earlier law suit of 2013 against Rana Kapoor, we believe it will be hard to get Madhu Kapur’s approval for these two appointments. Also even if Madhu Kapur approves, RBI will do its own fit and proper check on these two managers.

Reiterate Underperformer: We reiterate our Underperformer on YES as today’s board meet has done nothing to address management uncertainty. We believe RBI’s feedback on the tenor extension request and the forthcoming divergence report are two key risks to monitor. Our TP is under review.  

Not known whether Rana’s successor will be internal or external: YES will now focus on succession planning. Left to the bank, the first preference would be an internal candidate, most likely Rajat  Monga.  But the new candidate has to be approved by RBI. It is likely that RBI insists on an external candidate.

It is important to recognize the risks and not be carried away by rumours: There are many rumours about Mr Rana’s successor. There are reports that Mr Paresh Sukthankar who has resigned from HDFC Bank could be roped in. To the best of our knowledge, Mr Sukthankar is likely to take up a job for a social cause and unlikely to join a competing bank. There are also rumours that Kotak Bank can acquire YES Bank. We believe Mr Uday Kotak’s business philosophy of granular lending is very different from YES Bank’s current loan composition. As such we see such a merger as highly unlikely. We believe it is important to recognize the impact of Mr Rana’s absence on YES Bank’s earnings.  Till there is complete clarity on the successor, we would avoid getting into the stock. In our view, one key reason for Mr Rana not getting a 3-year tenor is divergence. His successor will have to tweak the corporate lending strategy to eliminate divergences and divergent lending structures in the future, which may lead to slower growth in loans and fees for some time.