Moody’s downgrades YES Bank ratings, changes outlook to negative

Mumbai: Moody’s Investors Service has downgraded YES Bank’s long-term foreign-currency issuer rating to ‘Ba3’ from ‘Ba1’, concluding the review for downgrade initiated on June 11.

The ratings agency also downgraded the bank’s long-term foreign and local currency bank deposit ratings to ‘Ba3’ from ‘Ba1’, foreign currency senior unsecured MTN program rating to (P) ‘Ba3’ from (P) ‘Ba1’, and Baseline Credit Assessment (BCA) and adjusted BCA to ‘b1’ from ‘ba2’.

The outlook on the bank’s ratings, where applicable, is negative, it said. The negative outlook primarily reflects the risk of further deterioration in the bank’s solvency, funding or liquidity, as the bank continues to work through the asset quality issues and rebuilds its loss absorbing buffers.

“The downgrade of YES BankNSE -7.75 %’s ratings takes into account: the lower than expected amount of capital raised by the bank recently; and the risk that the substantial decline in the bank’s share price will challenge its ability to raise sufficient capital to maintain the rating at its previous level, “Moody’s said in a note.

On August 14, Yes Bank raised Rs 1,930 crore in new capital via a qualified institutional placement (QIP). On a pro-forma basis, the QIP will moderately improve the bank’s reported common equity tier 1 (CET1) ratio as of 30 June 2019 to 8.6 per cent from 8.0 per cent.

Moody’s also expects the bulk of YES Bank’s operating profits will get consumed by loan loss provisions over the next 12-18 months, and thus not support internal capital generation.

“This will leave the bank dependent on external capital raising to improve its loss-absorbing buffers, which in Moody’s opinion is becoming more challenging given the substantial decline in its share price,” it said.

It noted that YES Bank’s asset quality deteriorated in the quarter ended June 30, with its gross non-performing loan (NPL) ratio rising to 5.0 per cent from 3.2 per cent at the end of March.

As of the same date, about Rs 10,000 crore loans — or about 4 per cent of YES Bank’s total loans — remain on a watchlist, meaning the company expects these watchlist loans may translate into NPLs over the next 2-3 quarters.

In addition, about Rs 7,500 crore of bond investments — or 10 per cent of its total investment holdings — have experienced rating downgrades in the past quarters, Moody’s noted.

Although the bank’s funding and liquidity profile has remained broadly stable, it compares weakly to other rated private sector peers in India, it said.

Moody’s maintains a negative adjustment for corporate behavior in YES Bank’s BCA, which results in a one-notch negative adjustment to the bank’s BCA when compared to its financial profile.