Will Yes Bank leapfrog led by Japan's SMBC investment?

Different Orbit 

“This transaction is our transformation journey; this is not a step in the right direction, it is a leapfrog and will take the bank into a different orbit,” Prashant Kumar tells Forbes India from the bank’s corporate headquarters in Mumbai’s Santacruz (East). 

“The deal has addressed two important concerns: Of finding top grade investors that will replace SBI and other banks, and improve investor confidence in Yes Bank through capital infusion,” Kumar adds. The purchase consideration is for ₹13,480 crore ($1.58 billion) and awaits a nod from the RBI and Competition Commission of India. 

Post the deal, SMBC will have two board members on the Yes Bank Board and SBI will reduce its presence to one board member from two earlier.

“With this investment, SMBC will gain access to one of the largest private sector commercial banks in India which will allow us to further accelerate SMBC Group’s business in India, and contribute to the further development of the Indian financial industry as well as support the flow of trade and capital from Japan to India,” Sumitomo Mitsui Financial Group President & Group CEO Toru Nakashima said in an official statement, while announcing the deal on May 9.

SMBC currently has four branches in India—in New Delhi, Mumbai and Chennai, besides one in GIFT City. 

Investors have cheered the SMBC deal, and the Yes Bank stock has risen by nearly 20 percent in the past one month to ₹21.5 at the BSE.

From glory days to deep scrutiny

Between 2008 and 2015, Yes Bank had expanded rapidly nationwide and lent indiscriminately and aggressively to all, including shadow-lenders and real estate developers. Corporate banking in Q4FY19 formed 65.6 percent of the loan book size. This type of lending had led to a weakening in asset quality, which became a solvency issue because its capital buffers were diminished due to the push for persistent high growth. It was akin to speeding without seat belts.

Evergreening of bad loans was another growing concern so the true bad loans picture rarely came to light. Discrepancies in reporting of bad loans compared to RBI data for Yes Bank, poor appraisals of loans and weak governance and compliance activity in the bank were starting to show up. This led the RBI to inform Rana Kapoor that his term seeking a three-year extension to 2021 would not be extended beyond January 31, 2019. 

By this time Kapoor’s control over the bank that he had promoted continued to weaken and so did its financial health. By March 2020, when Kumar took charge of Yes Bank as its CEO, the gross non-performing assets (GNPAs) had surged to 16.8 percent as a portion of its total advances; double that of the level for all banks in India.

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Yes Bank had seen a sharp 39 percent erosion in deposits in nearly 12 months to ₹137,506 crore as of March 5, 2020, from ₹227,601 crore in March 2019. The loss of confidence in the bank called for quick action in the form of a cap on deposits, the RBI scheme for a reconstruction of the board and the infusion of capital from some of India’s strongest banks.  

Yes Bank set about to restructure its bad loans book by transferring ₹48,000 crore of its stressed assets loan portfolio to an asset reconstruction company (ARC) set up by Yes Bank and JC Flowers. The portfolio was purchased for ₹11,200 crore on a 15:85 basis, which meant that Yes Bank was paid 15 percent in cash upfront and the balance in the form of security receipts. The bank has received gross redemption from security receipts of ₹6,695 crore so far, since the deal was signed, based on Yes Bank’s investor presentation data.    

Besides the recoveries of the bad loans from the ARC, the constitution of a new board, with Kumar at the helm and the entry of private equity players the Carlyle Group and Advent International boosted compliance, governance risk management processes and access to improved technology platforms.

Kumar’s biggest challenge between 2020 and 2022, during the Covid-19 pandemic, was to boost deposit growth. The bank initially continued to keep deposit rates high, in the period of trust-deficit, but reduced them later as stickability of customers with the bank improved.

Improving margins and profitability

Yes Bank has learnt its lessons from the early days of being on a high risk-high reward growth path. “We have ensured that proper distribution of risk is important, so that in a particularly weak credit cycle, one segment can be taken care of by another asset class,” says Kumar.

Optics for the bank have obviously improved (see snapshot), enough for SMBC to invest into the bank. But the bank will need to improve its return on assets (RoA) and profitability for all stakeholders to benefit.

Yes Bank has been in profit for four successive fiscal years (FY22 to FY25) but its RoA has fluctuated between 0.2 percent and 0.6 percent in this period. Kumar wants the bank to exit the Q4FY26 quarter with a 1 percent RoA. Yes Bank will need to improve its income levels, while managing cost efficiencies.

“We need to identify those assets which give more profit. It means moving to a moderate risk-moderate return from a current low risk-low return path,” Kumar says. This will mean that Yes Bank will focus more on segments where margins will improve such as affordable housing (compared to prime home loans) and used car loans (compared to new car loans). Kumar says Yes Bank is less exposed to the riskier business lines of microfinance, credit cards and unsecured lending, which have emerged riskier due to rising bad loans in the past six to eight months.

Nitin Aggarwal, head-BFSI (institutional equities) at Motilal Oswal Securities, says Yes Bank has “made good progress” from the crisis it faced, but it still needs to move up the profitability curve. “Net interest margins are still low, the bank needs to improve its asset mix while simultaneously reducing the composition of borrowings in order to improve its RoA,” he says. 

With the SMBC deal, investor confidence, the ability to attract talent and operational processes will all improve for Yes Bank. “In recent months, the investor community and the bank management were focussed on when the transaction would be completed. Now, going ahead, we will be able to have a three-to-five-year strategic roadmap for the bank,” Aggarwal said.

While the deal is seen as a positive and the possibility of a re-rating for Yes Bank cannot be ruled out, much of the positives are expected to play out over the next three to five years. The bank needs to boost its RoA and grow the retail book. Yes Bank has been on a growth calibration in retail advances, forming just 41 percent of total advances, as of March 2025. This percentage is much lower than small-sized banks such as Federal Bank (53 percent), IndusInd Bank (54 percent) and RBL Bank (60 percent). 

Kumar’s term as CEO is set to end in October, though it is speculated that he may continue for a short term only if the bank does not find a suitable replacement. The bank has initiated a formal search for a new CEO, engaging global recruitment firm Egon Zehnder for the process. 

Yes Bank has been voted among India’s Best Workplaces in BFSI 2025, according to Great Place to Work. Kumar insists the bank is not chasing market share or size. “We don’t want to become the fifth largest in balance sheet. We want to be known as the best bank in customer service.”