The bank’s weak performance in the previous financial year led to capital erosion, bringing the common equity tier 1 ratio down to 8.4% from 9.7% in fiscal year 2018.
Ratings agency Moody’s on Tuesday put Yes Bank “under review for downgrade” citing ongoing liquidity pressures in Indian finance companies and real estate firms that will negatively impact the credit profile of the bank, given its sizeable exposure to weaker companies in these sectors.
The ratings agency observed that though the bank classified `10,000 crore of its exposures or 4.1% of the total loans under the watchlist in April, which could translate to non-performing loans over the next 12 months, any impact will be cushioned by loan loss provisioning of about 20% for loans on watchlist in the previous fiscal year.
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Both the lender’s foreign currency issuer rating and the long-term foreign and local currency bank deposit ratings were placed under review for downgrade. Both instruments are currently rated Ba1.
The ratings agency said it could downgrade the private lender’s ratings in case of sustained deterioration in impaired loans or loan-loss reserves, or if the rate of new non-performing loan formation is significantly higher than experienced earlier. Any decline in the bank’s capital ratios owing to an inability to raise fresh capital could also cause a downgrade, it added.
Yes Bank’s exposure to Indian housing finance companies (HFCs) and non-bank finance companies (NBFCs) stood at 6.4% of its total exposure at the end of March along with a 7% direct exposure to the commercial and residential real estate sector, which is under pressure owing to worsening liquidity conditions within the real estate sector, just like with the HFCs and NBFCs, Moody’s said.
Moody’s expects significant pressure on the bank’s asset quality and therefore profitability and capital position.
NBFCs have been in trouble ever since Infrastructure Leasing and Financial Services (IL&FS) defaulted on debt obligations last year, triggering a liquidity crisis within the financial services market. Banks became unwilling to lend to NBFCs and the cost of credit shot up.
“The negative adjustment takes into account management’s aggressive strategy, which has translated into rapid loan growth in the past 4-5 years and large concentrations to some of the Indian conglomerate groups. The adjustment also takes into account the Reserve Bank of India’s (RBI) identification of several lapses and regulatory breaches in the various areas of the bank’s functioning,” the report stated.
As part of its review for downgrade, Moody’s will consider developments in the bank’s solvency profile — asset quality, capital, profitability, and impact from the solvency pressures on its funding and liquidity profile. The agency will also review Yes Bank’s corporate behaviour given the changes made and being made in the operations and strategy.
“Moody’s continues to maintain its assumption of a moderate probability of government support for deposits and senior unsecured debt, reflecting the bank’s modest, but rapidly growing franchise, and relative importance to India’s banking system,” the report said. “This support assumption results in a one notch uplift to the bank’s foreign currency issuer rating of Ba1 from its BCA of ba2.”
It also placed the Yes Bank’s foreign currency senior unsecured MTN programme rating of (P)Ba1, its Baseline Credit Assessment (BCA) and adjusted BCA of ba2, Counterparty Risk Assessment (CR Assessment) of Baa3(cr)/P-3(cr) and domestic and foreign currency counterparty risk rating (CRR) of Baa3/P-3 under review for downgrade.
Moody’s affirmed the bank’s short-term foreign and local currency bank deposit rating of NP. For the bank’s IFSC Banking Unit Branch, the agency placed the foreign currency senior unsecured MTN programme rating of (P)Ba1, its senior unsecured debt rating of Ba1, its CR Assessment of Baa3(cr)/ P-3(cr), and domestic and foreign currency CRR of Baa3/P-3 under review for downgrade.
The bank’s weak performance in the previous financial year led to capital erosion, bringing the common equity tier 1 ratio down to 8.4% from 9.7% in fiscal year 2018. Moody’s anticipates the bank’s financial profile and loss absorbing capacity to be under pressure, if it is unable to raise further capital. The bank’s board has approved a plan to raise up to $1 billion equity capital. In this rating action, the agency has maintained negative adjustment for Yes Bank’s corporate behaviour for Yes Bank, resulting in a ‘one notch adjustment’ to Yes bank’s standalone credit profile compared to bank’s financial profile.
The agency stated that the recent changes at the bank, including appointment of an external candidate, Ravneet Gill as MD and CEO and of retired RBI deputy governor R Gandhi by the regulator as additional director to the bank’s board could help gradually improve Yes Bank’s corporate behaviour.
However, it noted that above mentioned changes are fairly new and impact of previous actions will continue to negatively impact the financial performance of the bank.Moody’s stated that given its review for downgrade, it will unlikely upgrade the bank’s ratings over the next 12-18 months.