Japanese Lender SMBC's Acquisition In Yes Bank Credit-Positive, Says Moody's

Japanese lender Sumitomo Mitsui Banking Corp.'s acquisition of Yes Bank Ltd. is credit-positive, Moody's Ratings said on Wednesday.

"The planned acquisition is credit positive for Yes Bank because it brings in a long-term strategic partner, with a strong balance sheet and funding capacity to support its growth," the rating agency said in a note.

On May 9, Yes Bank announced that SMBC would acquire a 20% stake from its shareholders, including State Bank of India and several Indian banks, which had participated in the private lender's restructuring plan in 2020.

SMBC's parent, Sumitomo Mitsui Financial Group, plans to make Yes Bank an equity-method affiliate after the acquisition, which is subject to regulatory and shareholder approvals.

While SMBC can nominate two non-executive directors to Yes Bank's board to support its governance and strategy with a 20% stake, Moody's believes that SMFG's influence will be limited.

"Consequently, we do not currently plan to factor in any affiliate support in Yes Bank after completion of the proposed transaction. If SMBC significantly increases its stake in Yes Bank, we may consider incorporating affiliate support into Yes Bank's ratings," it said.

This deal has come as the Reserve Bank of India bailed out depositors and senior creditors of Yes Bank in March 2020 under a reconstruction scheme. SBI and other Indian financial institutions had pumped in Rs 10,000 crore new equity capital into Yes Bank.

In July 2022, Yes Bank exited the central bank's reconstruction scheme following the formation of a new board with shareholders' approval. Post this transaction, SBI will hold more than 10% stake in Yes Bank.

Typically, the RBI restricts foreign bank ownership in domestic private banks to 15% but it made an exception to allow higher foreign ownership in distressed banks.

For example, the Indian branch of DBS Bank Ltd. acquired 100% of Lakshmi Vilas Bank, and Fairfax Financial Holdings Ltd. acquired a 51% stake in Catholic Syrian Bank through its Indian subsidiary.

Yes Bank's deal will enhance SMFG’s presence in India, which it considers has both medium- and long-term strong growth potential. SMFG already holds a 100% stake in SMFG India Credit Co., a medium-sized non-bank finance company.

The transaction will have a limited financial impact on SMFG because of its relatively small size compared with the company's overall scale. In Asia, SMFG has acquired stakes in several financial institutions across emerging markets such as India, Indonesia, Philippines and Vietnam.