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Graphic: Mint
Graphic: Mint

Investor unease as Yes Bank loses its crown

Yes Bank's scorching pace of growth has been attributed to Rana Kapoor's aggressiveness and he was also the face of the lender at every forum

Yes Bank, a private lender proud of its growth trajectory and Facebook likes, saw its investors flee, eroding one-third of its market value in a single day because the regulator perhaps did not find its founder and chief “fit and proper" to run the bank anymore. The Reserve Bank of India’s (RBI) no to extension of the term of Rana Kapoor, Yes Bank’s co-founder and also chief executive officer, beyond January came as a rude shock to shareholders who had given a three-year extension to him in June.

RBI hasn’t made public the reasons for its decision to allow Kapoor to remain at the helm only till January but investors and analysts are putting two and two together already. Kapoor’s mistake is said to be what almost every banker was accused of making—hiding toxic loans by marking them as standard. The first casualty of masking bad loans was chief of Axis Bank Shikha Sharma and Kapoor would be the second.

A year-and-half ago, Yes Bank had reported a massive divergence in what RBI felt were the bank’s bad assets and what the bank had accounted for. Kapoor at that time had defended the bank by saying that these assets would soon be recovered although he was ready to abide by the regulator’s decision and provide for the same.

But that isn’t the reason investors punished the stock on Friday, as the divergences were already priced in at that time. What spooked investors were the implications of a founder leaving Yes Bank.

Can the departure of the bank’s head make such a big difference?

Well, in Yes Bank’s case, most investors believed Rana Kapoor and the bank were indistinguishable. Yes Bank’s scorching pace of growth has been attributed to Kapoor’s aggressiveness and he was also the face of the lender at every forum. The articles of association gives Kapoor and co-founder Ashok Kapoor (deceased) powers to appoint three directors on the board permanently.

One key question that investors now have is with Kapoor gone can Yes Bank continue on the same growth trajectory that has given it lofty valuations?

Another fear that investors have, given RBI’s brusque refusal to give Kapoor a long extension, is whether there are more toxic assets masquerading as standard and what’s more, with a new broom at the bank will these now be swept out into the open.

The crucial question is whether RBI would accept a successor that the bank board nominates. An outsider would bring in cleaner and perhaps more robust risk management but may not match Kapoor’s aggressive growth strategy. A successor from among the current executives of the bank would provide continuity but the regulator may not agree, given that they too are responsible for the bad loan divergence.

In short, there’s still plenty of uncertainty and till it lingers, the bank’s stock could be in for prolonged pain despite the massive valuation erosion on Monday. Having dropped 29%, the stock now trades at 1.7 times its estimated book value for FY19.

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