In today’s Finshots, we unpack why a Japanese giant gave up on Kotak Mahindra Bank to back a once-battered lender, and why, sometimes, control beats comfort.

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Now, onto today’s story.

The Story

Imagine you walk into a museum and see a masterpiece. No dust, no cracks, no sign of chaos. It’s flawless. But the moment you try to touch it, a siren goes off. Because perfect things aren’t meant to be altered. They’re meant to be admired from a distance. That’s exactly how SMBC (Sumitomo Mitsui Banking Corporation) – the Japanese banking giant – felt holding a slice of Kotak Mahindra Bank.

You see, on paper, Kotak was perfect. It had a return on equity of over 12%. A CASA ratio of around 40%. It was prized for discipline and loved by the markets, but also priced like it. SMBC held a 1.65% stake in the bank, earning the satisfaction that comes with owning a quality franchise.

The catch? It was just a passive stake. No representation in the boardroom, no say in strategy, and no way to leverage its global strengths in trade finance or corporate banking beyond what Kotak already excels in. This is why SMBC walked away. In Kotak, it held prestige without power. In Yes Bank, it saw a second chance not just to invest, but to influence.

But why Yes Bank?

After all, back in 2020, the company teetered on the edge of collapse. A ballooning pile of bad loans, sudden exits at the top, and a government-imposed moratorium on withdrawals turned the once high-flying bank into a cautionary tale. But the turnaround since then has been real. Under new leadership, gross and net non-performing assets (NPAs) have dropped to around 1.6%, deposits have bounced back to ₹2.85 lakh crore, and FY25 profits jumped over 64%.

Sure, margins still trail top-tier peers, and legal baggage hasn’t vanished. Nobody’s calling it a finished product. But that’s exactly where the opportunity is buried. Yes Bank trades at just 1.4x book, the kind of valuation gap that excites growth-hungry investors. It’s the classic deep-value setup: embrace complexity, demand influence, and reap the upside if the rebuild holds.

And this is where the difference lies. In Kotak, SMBC was a polite minority. At Yes Bank, it becomes the largest shareholder, holding just under 25%, with voting rights, two board seats, and equity affiliate status. Board representation enables SMBC to push governance forward, accelerate tech and risk upgrades, and, most importantly, integrate its Japan-based relationships directly into an Indian franchise that can serve those customers end-to-end.

Think of the synergy map. SMBC sits on a deep roster of Japanese manufacturers, auto ancillaries, electronics suppliers, and trading houses expanding across India’s industrial corridors. Those clients require working capital lines, supply chain finance, foreign exchange risk coverage, cash management, and letters of credit. 

Then, there’s a second, subtler benefit. Turnarounds are powered by credibility arbitrage. A large, methodical shareholder with skin in the game shortens the time it takes for other stakeholders, depositors, bondholders, and rating agencies to gain confidence. You can’t just conjure that with press releases. You earn it with visible governance and the kind of oversight that only a board seat buys.

“But wasn’t Kotak the safer compounding machine?” Absolutely, and it still is. But that could also be a problem for a strategic investor looking for more than passive compounding. A premium-valued bank leaves little leftover return unless you bring a new engine of growth to justify an even higher multiple. 

With Yes Bank, the risk is higher, sure, but the levers are real: asset-mix upgrades, better pricing on corporate and SME books, cross-sell into a 1,200-branch network, and a digital stack that can be tightened with Japanese precision.

Of course, this isn’t a fairy tale. Yes Bank’s margin profile remains squeezed compared to top-tier peers; the retail business takes time to rebuild, and corporate pricing is competitive. The legal overhang from legacy episodes still hasn’t disappeared. And a big investor can’t just micromanage collection zones or credit committees. The execution still sits with the management.

But a partner like SMBC can tilt the odds with strong second-line risk teams, sharper treasury practices, and a pipeline of anchor clients that raise the average credit quality. After all, these are the compounding details turnarounds are made of.

So, why not split the difference and own both? 

Well, that’s easier said than done. You see, SMBC wasn’t just allocating to “India financials.” It was buying a role. In Kotak, the role was that of a spectator. In Yes Bank, it’s a co-author. And the trade-off is a classic finance dilemma: influence over inertia vs controlled risk for premium comfort.

If this thesis holds, here’s how it could play out: 

Deposit costs continue to ease as confidence builds. The mix tilts toward better-rated corporate and SME borrowers, aided by SMBC relationships, which lifts the risk-adjusted yield. 

Fee income climbs on trade finance and cash management. Credit costs remain contained if underwriting discipline is maintained. 

Combine these and book value compounds faster than the market anticipates. At that point, the multiple (1.4x Price-Book ratio today) has room to rerate without stretching credulity. You don’t need perfection but steady, boring progress.

And if it doesn’t? 

Then the downside of a turnaround is the same as its lure: volatility. Legal surprises, a credit shock, or sloppy growth could crimp the story. The difference now is that a large shareholder has the tools and the obligation to course-correct inside the room, not from the sidelines.

So, the bottom line is simple. SMBC didn’t really choose “Yes Bank over Kotak.” It chose influence over inertia. It traded a premium, passive slice of a finished franchise for a meaningful stake in an unfinished one, with governance levers, two board seats, and the ability to integrate global clients into a domestic network.

If the rebuild continues, the payoff can be outsized. If it stumbles, the costs will be visible and shared. And that’s the bet: not just parking capital in India, but planting a flag in a bank that can still change shape, and letting that change drive returns.

Until then…

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