Moody’s Downgrades Yes Bank Ratings With A Negative Outlook

Moody's Investors Service Inc. on Wednesday downgraded Yes Bank Ltd.’s long-term foreign-currency issuer rating to non-investment grade and kept the outlook as negative. The rating has been lowered to Ba3 from Ba1.

Moody's also downgraded Yes 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 and adjusted BCA to B1 from Ba2.

Moody’s Yes Bank downgrade is on account of lower-than-expected amount of capital raised by the lender as well as the risk related to substantial decline in its share price.

"The downgrade takes into account the lower-than- expected amount of capital raised by Yes Bank recently and the risks that the substantial decline in its share price, which will challenge its ability to raise sufficient capital to maintain the rating at its previous level," Moody's said.

"The outlook on the bank's ratings, where applicable, is negative. Today's rating action concludes the review for downgrade initiated on June 11, 2019," Moody's said.

The negative outlook primarily reflects the risk of further deterioration in the bank's solvency, funding or liquidity, as it continues to work through the asset quality issues and rebuilds its loss absorbing buffers. The fall in share price will challenge the bank's ability to raise sufficient capital to maintain the rating at its previous level, said Moody’s.

On Aug. 14, Yes Bank raised Rs 1,930 crore in fresh capital through a qualified institutional placement to fund its business expansion.

On Aug. 27, BloombergQuint reported that talks between Yes Bank and at least four global private equity funds for a possible stake sale went cold after the funds did not get enough comfort from publicly available information on the bank’s asset quality and profitability outlook.

On Aug. 28, Yes Bank told the stock exchanges that its board will meet on Aug. 30 to consider a plan for further fundraising.

"On a pro-forma basis, the Yes bank QIP will moderately improve the bank's reported Common Equity Tier 1 (CET1) ratio as of June 30 to 8.6 percent from 8 percent... Moody's 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," it said.

This will leave the bank dependent on external fundraising to improve loss-absorbing buffers, which in Moody's opinion is becoming more challenging given the substantial decline in its share price.

The agency said the negative outlook reflects the risk of further deterioration in the bank's solvency, funding or liquidity, as it continues to work through asset quality issues and rebuilds its loss absorbing buffers.

Yes Bank reported a deterioration in its asset quality in the June quarter as its gross non-performing asset ratio rose to 5.01 percent from 3.22 percent in the previous three months. About Rs 10,000 crore worth of loans (4 percent of the total loan book) remain on a watchlist, which means the bank expects these loans to become NPAs over the next 2-3 quarters, said Moody’s.

In addition, about Rs 7,500 crore of the bank’s bond investments (or 10 percent of its total investment holdings) have experienced rating downgrades in the past quarters.

Yes Bank has also taken some mark-to-market losses on investments that were downgraded.

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

And given the negative outlook, an upgrade is unlikely over the next 12-18 months.

"Nevertheless, Moody's could change the ratings outlook to stable if Yes Bank maintains its current asset quality profile, or adequately provides for the stock of stressed assets; or concludes a further material capital raise that strengthens its loss absorbing buffers,” said the credit ratings agency.

However, if there is a sustained deterioration in the bank's impaired loans or loan-loss reserves or if the rate of new NPA formation is significantly higher than previously experienced, the bank may face another ratings downgrade, it added. Among others, a decline in the bank's capital ratios on account of losses or inability to raise external capital as well as funding/liquidity deterioration could also impact the bank negatively.

On Wednesday, Yes Bank shares fell 7.47 percent to Rs 59.50 apiece on the BSE while the benchmark Sensex shed 0.50 percent to end the day at 37,451.84 points.