YES Bank times its fund raising right

YES Bank had little choice than to dilute its stake. The fourth largest private sector bank has the lowest capital adequacy ratio (CAR) among the top banks. Tier I capital as per Basel III norms stood at 9.8% on March 31, 2014. It had been waiting for the right moment and price to dilute its stake further and strengthen its capital base.

A low capital base restricted its ability to raise deposits or loans, which would have been utilised to lend and grow its business. The bank had deliberately put the brakes on advances on account of a lower capital adequacy.

In its tenth year of operation YES Bank has managed to raise nearly Rs 3,000 crore ($550 million) by diluting only one-fifth of its capital base. Apart from the need for capital inflow the bank has been plagued on account of its low cost fund base CASA (current account and savings account).  CASA deposits account for 22% of all deposits compared to mid-40s of other bigger private and public sector banks.

However, its deposits have starter to improve, mainly on the saving accounts side as the bank offers one of the highest savings deposit rates of 7% (for above Rs 1-lakh deposit). CASA deposits have seen a healthy 28.8% jump over the previous year. Earlier, the bank’s management had said that they expect CASA to improve by 100-200 bps (basis points) every year.

Risk taking ability

But what makes the fund raising exercise interesting is that it would give the bank more leg room to take on risk. Till last year, its deposits were largely deployed in investments rather than lent to businesses or retail consumer. This is now likely to change as the increased capital gives more risk taking ability.

Like most of the other private banks, Yes Bank will also be focusing on selling retail products to its 600,000 strong customer base that is expected to increase to one million by June 2015. The bank currently has over 600 branches with only the initial 200 branches being productive.

The focus of the bank now is to make other branches productive which will help its growth numbers. Retail is expected to contribute 40% as compared to 21% of its growth going forward.

More importantly the bank is expecting growth to come without any sacrifice to its margins, which are expected to remain intact and improve further on account higher proportion of lower cost funds and higher contribution of better yielding loan portfolio than investments.

Timing fund raising exercise when there is better visibility of growth and at a price near its all-time high levels, YES Bank has played the game well. It now has to deliver on growth numbers.