Four-year-old Yes Bank Ltd does not seem to be affected by the slowdown in industry. Its net profit for the quarter ended June rose by more than 50%, buoyed by higher fee income and cost controls. There has been speculation in the market on a possible stake sale, but Rana Kapoor, the bank’s managing director and chief executive officer, who also holds a 6.74% stake in the lender, says he is in no hurry to sell his holding.
In an interview, Kapoor said the bank would look for a strategic partner in late 2010. Edited excerpts:
You seem to be looking for a buyer for the bank and cashing out.
I have not sold a single share of Yes Bank. There has never been an intention to sell the bank because we are still going through a strong phase of growth. The objective is to build a bank with the finest quality.
Growth path: Yes Bank’s Rana Kapoor wants to create a network of 250 branches by 2010 across the country. Photograph: Don Emmert / AFP
It is expected to take another two years to reach that stage when we will become a comprehensive domestic bank with a network of 250 branches. At that stage, we would welcome a strategic partner to globalize the bank. Our model will flourish in its entirety by September 2010.
We believe that by 2010 there will be more clarity on permitting significant foreign investment in Indian private banks. That will be the apt time to make a strategic partnership.
The Reserve Bank of India has expressed its concerns on some banks growing faster than the industry. How do you plan to manage growth and maintain profitability?
Building a bank from scratch is a Herculean task. The market impulses currently suggest cautious and prudent growth. Nevertheless, there are opportunities for growth and it is possible (to achieve) with derisking (portfolios) and base management tactics.
A bank is a dynamic organism and it is constantly evolving. We can’t expect the good times to continue for ever. As your denominator grows, the percentage growth starts normalizing. Over all, we expect to sustain our profitability at 42-45%.
In a high interest rate environment, how do you maintain your margins?
Indeed, we need to protect our margins. We have somewhat been able to demonstrate that in both March and June quarters, maintaining a net interest margin of approximately 2.9% back-to-back.
This is the result of concerted actions on many fronts — timely review of lending rates, adjustments in deposit rates, mobilization of higher current and saving accounts as well as float-based products and focus on quality of credit.
In this challenging environment, protecting your spread and harnessing net interest margins are very important.
Banks also need to be very conscious of their cost base and costs at all stages need to be dynamically managed. A lot of long-term effective cost, or which we prefer to call waste management decisions, need to be taken.
How do you manage costs and credit quality?
The most sensitive sector in a rising interest rate scenario is consumer lending. We have consciously refrained from building products for this sector, including credit cards. This is in recognition of the fact that there have been high price wars.
The other thing that is somewhat extraordinary in our model is the proportion of fee income to total income that we have averaged since our birth. In all quarters, we have shown a moving average of almost 50% of our income coming from non-funded activities, or fees.
We will also have to maximize our product penetration and cross-selling across clients. We are not just a lending institution because pure lending on a long-term basis is a value destroyer.
You don’t have too many branches. How do you build your current and saving accounts base?
We have 101 branches. Our proposition is better than any foreign bank operating in India. With this network, we have a reason to believe that we are bigger than any foreign bank in India.
We also have to keep our eyes on the cost-income ratio. In the June quarter, we had a cost-income ratio of 45% and for the next two years, we should be able to sustain the cost-income ratio at 50%. This is good for a new bank that is growing at a rapid pace. We want to have a network of 250 branches by 2010.
You have consciously kept away from retail lending. That must have affected your ability to garner retail deposits.
We are offering wealth management solutions to our customers — getting them the best deals in wealth products, including insurance products and investment options through mutual fund offerings. In an economy like ours, there is no dearth of lending options, but it is not easy to garner deposits.
Of our total deposit base, 17-18% are from retail customers. By September, we expect it to be 20%, which includes both individuals and small and medium enterprises.
In the high interest rate environment, how do you derisk your bond portfolio?
It’s very important to have the right economic intelligence at all points in time. We have churned our bond portfolio into short-dated securities and treasury bills to mitigate our mark-to-market risk even at a marginally lower coupon.
At the same time, when rates go up, there is an opportunity to acquire high-yielding securities and they form a part of our held-to-maturity portfolio (on which one does not need to provide for depreciation).
What is the status on your sale of derivatives products? Some of your customers, we believe, have gone to court.
There are two cases, involving approximately Rs10 crore. We are resolving both cases through a combination of legal and amicable measures without compromising on the principal amount.