As Gill shines sunlight on Yes Bank’s past, investors get ready for pain

Looks like Yes Bank Ltd’s new boss Ravneet Gill is taking a chapter out of American litigator Louis Brandeis’s philosophy. Brandeis had famously said: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

Gill has thrown sunlight on every nook and corner of the private sector bank, which was until January headed by founder Rana Kapoor, who was ousted by the regulator after it found that corporate governance practices were compromised with, leading to a sharp divergence in bad loan assessment during his tenure.

What Gill found out was nasty. The lender hadn’t recognized all the defaulting accounts as bad and had grossly under-provided for them. Ergo, Gill made a choice to report the largest quarterly loss in the bank’s history and provided ₹3,661 crore, which is understood to be largely towards exposure to Infrastructure Leasing and Financial Services Ltd (IL&FS) and Jet Airways (India) Ltd. IL&FS is already a defaulter and Jet Airways shut operations a little over a week ago.

But these two accounts are just part of a series of other bad decisions. The above-mentioned two accounts were responsible for only 31% of the total slippages. Gill also chose to illuminate further potential delinquencies in the form of a ₹10,000 crore stressed asset watch list.

But the most painful was the huge reversal in fee income, unheard of among private sector lenders. Essentially, it means that Yes Bank took it for granted that fees on structured loan deals will be paid and accounted for upfront on its books. As borrowers turned defaulters, the fees tied to these loan deals fell off the cracks. Gill has now vowed to shift to a safer accounting practice of amortizing fee income rather than booking these upfront.

Gill’s move to mend past ways means that there will be no nasty surprises in the future. This is good news considering that investors love a clean image and loathe uncertainties.

But there is no gain without pain and the promise of a strong and stable balance sheet comes with some sacrifices as well. Investors will have to give up the hopes of phenomenal growth, a promise made by Kapoor.

Gill has suggested a more modest growth rate of 25% for Yes Bank, henceforth—a far cry from the 40-50% gallop in the previous three fiscal years. For FY19, the bank had to settle for 18.7% loan growth.

Yes Bank’s valuation has been buttressed by its growth story. Despite divergences in the past, analysts had believed that the bank’s growth would hold. In the words of analysts at Macquarie Capital Securities (India) Pvt. Ltd, they have to eat humble pie now. One of Gill’s early contributions is that he has made hubris leave Yes Bank.