Can YES Bank, India's Youngest and Fastest-growing Bank, Be a Model for Newer Entrants?Published: February 01, 2012 in India Knowledge@Wharton
In the first flush of liberalization post 1991, the Reserve Bank of India (RBI) also imbibed some of the spirit of reform and opened up a trifle. New banking licenses were issued to several aspirants. But many of those banks collapsed and ultimately had to be rescued by the system. HDFC Bank (itself a new licensee) had to take over Times Bank and Centurion Bank of Punjab. Global Trust Bank ran into serious ethics issues and had to be merged with Oriental Bank of Commerce. And CRB Capital Markets, which was issued a banking license, never took off; the institution's chairman, C.R. Bhansali, was arrested for various scams.
Currently, the RBI is set to issue a new set of licenses. The responses to the white paper on new guidelines are in. (The deadline was October 31, 2011.) These rules will allow large industrial groups to apply, a practice that was earlier banned after several instances of diversion of funds from the banks to group companies. Several industrial houses and industrialists -- Anil Ambani (Reliance Commercial Finance); Kumar Mangalam Birla (Aditya Birla Nuvo); Larsen & Toubro (L&T Finance); the Tatas and Mahindra & Mahindra -- are planning to apply.
For guidance in moving forward, they are looking closely at the relatively few success stories. HDFC Bank was set up in 1994 and has cut a very successful swathe. But the bank is fairly long in the tooth now, and its achievements have been well documented. The more recent successes are Kotak Mahindra Finance and YES Bank, which got the RBI in-principal approval on January 30, 2002. Kotak Mahindra was a bustling non-banking finance company and its conversion into a bank was mainly about managing the transition. The other license, given to what later became YES Bank, was a partnership of two banking professionals -- Ashok Kapur and Rana Kapoor.
Kapur, YES Bank's non-executive chairman, was killed in the terror attack in Mumbai in November 2008. Since then, Kapoor, managing director and CEO, has been steering the bank single handedly, albeit with a strong management team.
Kapoor has been in the banking sector since 1980. He held senior positions at ANZ Grindlays' Investment Bank and Bank of America and also set up Rabo India Finance, a non-banking financial company. Kapoor is perceived by many observers as a high energy professional-entrepreneur with a hands-on and focused approach, while at the same time nurturing an entrepreneurial culture within the organization.
Recently, when the RBI deregulated the savings bank deposit rate, Kapoor was the first to make a move. He saw it as a huge opportunity to garner retail deposits. Within a few hours of the RBI move, Kapoor announced that YES Bank was increasing its savings deposit rate by 200 basis points to 6%. This nimbleness in grasping opportunities is characteristic of the 54-year-old Kapoor, observers say. Take the 2008-2009 period: In the wake of the global crisis, most other banks became more conservative. Kapoor, who did not have legacy issues to deal with, decided to press on the accelerator. He increased the number of branches, invested in the brand, continued with hiring, intensified product management and customer relationship. Most importantly in a money market that was almost frozen, he showed risk appetite.
"We were somewhat shaken and disturbed [by the crisis] because it was so early in the life [of the bank], but we also realized that it was a great opportunity to acquire new customers and build confidence," Kapoor says. Jaideep Iyer, YES's president of financial management, adds: "Given our scale and size we offered reasonably large sums in credit lines when other banks were dealing with liquidity issues. And we got more relationship breakthroughs during this period than we did in the earlier years." Ashvin Parekh, partner and national leader of global financial services at Ernst & Young, notes that YES Bank has weathered the economic ups and downs very well. "The leadership team's ability to assess the risks and rewards has held them in good stead," he says.
Shekhar Bajaj, managing director of Bajaj Electricals, points out that bankers typically tend to be shortsighted and "go strictly by the numbers and ratings that computers throw at them." But Kapoor, he says, looks at the bigger picture. Around 2006 or 2007, Bajaj was looking for a loan for a company that his firm had acquired earlier. That company had become debt-free post acquisition, but Bajaj was finding it difficult to get any further bank loans for it. At this time Kapoor stepped in. "Instead of just looking at the balance sheet and the rating of that company, Rana Kapoor looked at the parent company," Bajaj notes. "He charged me 2% to 3% higher interest, and made his extra money without really any additional risk because of the corporate guarantee that he got from us."
Vaijayanti Pandit, senior director of the Federation of Indian Chambers Of Commerce & Industry (FICCI), ranks YES Bank high on customer service. Six years ago, FICCI shifted its account to YES Bank and Pandit says: "They have delivered on everything that they promised."
Building a Track Record
YES Bank's performance since inception has been compelling. The youngest greenfield bank in India (and the only greenfield license awarded by the RBI in the last 16 years), YES Bank was incorporated in November 2003 and got its banking license in May 2004. It started with an initial capital of US$45 million. The shareholders comprised co-founders Kapoor and Kapur (55%), the Dutch financial services firm Rabobank (20%) and private equity players (25%). The relationship with Rabobank was part of a reciprocal agreement; prior to setting up YES Bank, Kapoor and Kapur had set up Rabo India Finance in 1998.
In the first six years of operations YES Bank clocked a compound annual growth rate (CAGR) of 74% and in 2010-2011 it became the fourth-largest private sector bank in the country. YES Bank is a full service commercial bank with corporate, small and medium enterprises (SME) and retail banking, and has a comprehensive product suite comprising financial markets, investment banking, business and transaction banking and wealth management.
For the year ending March 2011, YES Bank's balance sheet grew at 62% over the previous year to reach Rs. 59,007 crore (around US$11.5 billion at the exchange rate of Rs. 51 to a U.S. dollar). Deposits grew by 71% to reach Rs. 45,939 crore (US$8.9 billion), advances were at Rs. 34,364 crore (US$6.7 billion. 55% growth) and net profit was. Rs 727 crore (US$141 million. 52% growth).
Over the years, YES Bank has won many accolades in various banking surveys. It was ranked as India's fastest growing bank of the year at the Bloomberg-UTV Financial Leadership Awards 2011. Kapoor was also awarded the Banker of the Year 2010-2011 by business daily Business Standard. During the selection process, M. Damodaran, former chairman of the Securities and Exchange Board of India and head of the jury, noted that "the best should not be [selected] on past performance, but also on what it promises to deliver."
Kapoor and his team are now working towards the next phase of growth. Called Version 2.0, Kapoor presented the growth plan to internal and external stakeholders in April 2010. Before this, Kapoor admits candidly, he ran the bank with "outright gut entrepreneurship." Covering a five-year period ending in March 2015, Version 2.0 envisages a CAGR of 35% and Rs. 150,000 crore (approximately US$30 billion) balance sheet, a deposit base of Rs. 125,000 crore (US$24 billion) and a loan book of Rs. 100,000 crore (US$19 billion). Kapoor also plans to increase the number of branches to 750, ATMs to 3,000 and up the employee pool to 12,000 by 2015. (In April 2010, YES Bank had 150 branches, 240 ATMs and 3,034 employees; currently the numbers are at 325, 378 and 4,875 respectively.)
For Kapoor, Version 2.0 is an "orbit changing strategy" -- one that will help him "break away from the pack of mid-sized banks." "We believe that we are on the right track. From predominantly corporate and institutional banking, we have ramped up our other businesses [retail and SME]," he notes. "A lot of our bank expansion has happened in the past 12 to 18 months. The retail and SME businesses are very granular and accumulative. They build over a period of time." He also wants to build YES Bank as the "best quality bank of the world in India" by adhering to the triple bottom line ethos of people, planet and profit. The destination journey, he says, is to make YES Bank a public trust institution and the logo a trust mark. He adds: "We want to evolve our organizational ethos into the 'professionals' bank of India'."
Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business (ISB) at Hyderabad, notes that YES Bank has "always been a bank with a difference." "It has demonstrated unprecedented growth rates in India and notwithstanding its still small size, has created a very strong ethos and reputation of professionalism among Indian banks," Chakrabarti notes. "Also its DNA, with the Rabobank connections, has helped cement their professional team-building. [It's] one of the best in the country."
According to Chakrabarti, corporate banking and wealth management services have been the key strength areas for YES Bank right from its inception, but retail banking and access to cheap CASA [current account, savings account] funds may play a big role in competition. "That's where YES Bank may have a disadvantage," he says. "It is still viewed as a niche bank in a branch-dominated banking system in the country." FICCI's Pandit adds: "I see it more as an urban centric bank. To be seen as a large and inclusive player, YES Bank needs to go more into the semi-urban and the rural areas."
Is Speed a Danger?
Is there a danger that despite its fast-paced growth, YES Bank may end up as only a boutique bank? Amit Kumar, YES's senior president and country head for corporate and institutional banking, is unfazed. "As a retail bank we are young and new and we do have to build on our retail franchise, so people may tend to have a perception that we are a boutique or niche bank. But if you look at our balance sheet, we are a reasonably sized mid-sized bank. Our aspiration is to grow into a large bank over the next three years."
In Version 2.0, the bank's main focus is on liability generation through relationships, granularity, geographical spread, the retail and SME market, and increasing CASA deposits to 30%. At present, branch banking accounts for only 12% of the total assets at YES Bank. Corporate and institutional banking accounts for 65% and commercial (mid-market) 23%. By the end of 2015, the target is to build the SME and retail business to 30% with mid-market bringing in 30% and corporate 40%.
YES Bank is also looking to leverage its corporate and institutional relationships to make inroads into the retail and SME segments. "Our mantra is B2B2C. We are targeting the entire supply chain of our corporate customers. If we can have access to their employees and partners and customers, then we can further cross-sell to them," says Kumar. The bank is also looking to partner with other service providers to offer new products: for instance, a co-branded debit card with insurance company Bajaj Allianz. The medical insurance offered by Bajaj Allianz is embedded in the co-branded card. Currently in the pilot stage, this has the potential to give YES Bank access to 4 million customers of Bajaj Allianz in a single shot.
Building excellence in service delivery is critical for Kapoor's team and it is partnering with leading-edge technology providers to do so. In 2006, YES Bank was invited by Intel Technologies to Shanghai to visit a mock-up of the "bank branch of the future" powered by Intel's technologies. Two executives from Kapoor's strategy team visited this branch and were interested in pursuing the concept. "So we decided to partner with Intel to put up a 'live, proof of concept' bank branch of the future in India," Kapoor notes. Spread over 15,000 square feet, the branch is located in New Delhi and is called the YES-Intel Global Innovation Center. Intel launched its first Wi-Fi-enabled bank branching network from the location. YES Bank has also partnered with Nokia for the telecommunications firm's pilot of its global launch of mobile money transfer.
At another end of the spectrum, YES Bank wants its branches to also function like social transformation centers. Anindya Datta, president and chief marketing officer, says that the branches typically organize theme-based events on a regular basis. The themes are around various issues like environment, health and education. "We believe that this will help us become more relevant and more regarded within the community and enable us to build more sticky relationships," Datta states. Deeper customer engagement is expected to result in better cross selling and obtaining greater share of consumers' wallets, officials say.
Working towards building deeper customer engagement is something that YES Bank adopted early on. The strategy has been to position itself as a 'knowledge partner' to its corporate clients. The bank has identified certain sunrise sectors within the country that have high growth potential, and aims to provide customized products that cater to the specific needs of each of these industries. The sectors include food and agriculture, health care and life sciences, renewable energy, telecommunications, education and media, and entertainment. "Our approach is to be diagnostic and prescriptive and offer differentiated solutions to clients in these sectors," notes Binoj Vasu, group executive vice president and chief learning officer. "We have put together specialist teams including domain experts. This helps us to interact at the CEO level."
This strategy of knowledge banking is partly need driven. The mature sectors are heavily banked and it is tough for a young bank to penetrate them. As these sunrise sectors mature, YES Bank can grow with them. Analysts, though, point out that while YES Bank is on the right track, it is too small as of now to claim expertise in any sector. Kapoor, however, is confident that it is a strong differentiator. "We are a new economy bank," he notes. "Knowledge banking has become part of our DNA and our ethos."
The Entrepreneurship Edge
Kapoor counts entrepreneurship as another core strength of his team and attributes some of the early decisions of the bank to their ability to make intuitive and quick decisions. For instance, in 2004 YES Bank became the first in the banking sector to outsource its complete IT infrastructure. This allowed the bank to focus on its core activity and expand at a rapid pace. It also decided to go in for an IPO less than a year after starting operations. The IPO for Rs. 315 crore (around US$61 million) was oversubscribed almost 30 times. "Not only did we raise the capital to de-risk the bank, equally important, we saw [the IPO] as a vehicle to establish the bank's credentials," Kapoor recalls. It was also a great motivator for the team -- "almost like a moon landing," he adds.
One of the key challenges ahead for Kapoor is to sustain this even as he scales the operations. Executing and managing larger projects will come with their own inherent challenges. Kapoor will need to bring on board senior executives who have experience scaling organizations and he will need to build more robust systems, processes, procedures and controls, observers say. Costs will need to be kept lean and agile. And as YES Bank ventures deeper into the retail and SME segments, observers note, building the brand will be even more crucial.
Meanwhile, there are other immediate areas of concern. For instance, YES Bank has exposure to companies (like financially troubled Kingfisher Airlines) and sectors (like power) that are facing turbulence. Can this create a roadblock to YES Bank's growth? No, says Kumar. "Our exposure in these companies is not very high. Secondly, [our exposure] is very well structured and very well collateralized. We have a lot of liquid collateral backing our exposure."
The bank's very high pace of growth could be another area of concern, observers say. Kumar is again quick to defend. "It's been a fast growth, but at the same time it has also been a controlled growth. In terms of stretched assets, non-performing assets, etc., ours is among the lowest in the industry. We are very alert in terms of how sectors and clients are behaving and we take very proactive measures in terms of riding credit cycles, managing stress in the portfolio and so on. We have successfully ridden the crisis of 2008-2009 and are holding out well at present, too. So we have seen through two economic cycles."
Kapoor is already looking beyond Version 2.0. He wants to build the bank to a size of US$100 billion by 2020. But although YES Bank is currently ranked the fourth largest private sector bank in the country, it is also only one-fourth the size of Axis Bank, the third largest private sector bank with total assets of Rs. 2,42,746 crore (around US$47 billion). Close on YES Bank's heels are Federal Bank with Rs. 51,699 crore (US$10 billion) and Kotak Mahindra with Rs. 50,850 crore (US$9.5 billion). At the top of the list are ICICI with Rs. 4,06,678 crore (US$80 billion) and HDFC with Rs. 2,77,428 crore (US$54 billion). The country's largest bank overall is the public sector behemoth the State Bank of India with assets of Rs. 12,24,693 crore (US$239 billion). And now, with the RBI set to issue new licenses, some heavyweight corporations are expected to enter the sector.
"When there was a shortage of funds in the market, YES Bank reacted fast and made good inroads with customers. But now they have to be more competitive and react even faster," says Bajaj of Bajaj Electricals. ISB's Chakrabarti adds: "Its current rate of growth is not sustainable in the long term, but YES bank has got at least a few more years of steam left before the slowing down sets in."