Moody’s Upgrades YES Bank Outlook to Positive, Affirms Ratings

In a recent development, Moody’s Ratings has reaffirmed YES Bank’s Ba3 long-term foreign currency and local currency ratings while changing the outlook to positive from stable. This change in outlook is based on Moody’s expectations that YES Bank’s depositor base and lending franchise will gradually improve over the next 12-18 months, leading to enhanced core profitability.

The positive outlook is attributed to the bank’s significant improvement in asset quality and capitalization over the past two to three years. Despite this, YES Bank’s core profitability remains weak due to high funding costs and the strain of meeting priority sector lending (PSL) targets. Moody’s expects the bank’s core profitability, measured by pre-provisioning profits to total assets, to improve to above 1.2% over the next 12-18 months from 0.8% in the financial year ended March 2024.

The rating agency believes that YES Bank’s ability to meet the central bank’s PSL rules through new lending from its branches will help reduce operating expenses and improve overall profitability. Additionally, the bank’s focus on higher-yielding, albeit higher-risk retail and small and medium enterprise segments will help widen its net interest margins.

Moody’s also expects a gradual increase in credit costs to be largely offset by recoveries from the bank’s legacy stressed assets, given the high loan loss provision coverage of those assets. However, the bank’s profitability will remain weak compared to its Indian peers, and a key drag on further improvements to its credit profile.

The bank’s asset quality has significantly improved, with its non-performing loan (NPL) ratio declining to 1.7% as of 31 March 2024 from 2.2% a year earlier, supported by lower slippages, stronger recoveries, and higher write-offs. Moody’s expects a gradual increase in NPLs due to portfolio aging and a shift towards riskier, high-yield segments. However, the NPL ratio is expected to remain stable due to write-offs and recoveries of legacy problem loans.

Over the next 12-18 months, Moody’s expects the bank’s capitalization to moderately decline due to credit growth outpacing internal capital generation. Given the positive outlook, a downgrade of YES Bank’s ratings is unlikely over the next 12-18 months. However, Moody’s could downgrade the bank’s ratings if its asset quality significantly deteriorates, leading to an erosion of its profitability and capitalization.

In conclusion, Moody’s upgrade of YES Bank’s outlook to positive and affirmation of ratings reflects the bank’s gradual improvement in depositor base, lending franchise, asset quality, and capitalization. The bank’s focus on higher-yielding segments and ability to meet PSL targets will help improve its profitability, while its asset quality and capitalization will remain stable.

Historical Context:

YES Bank, one of India’s largest private sector banks, has been facing challenges in recent years, including a significant decline in its stock price and a crisis of confidence among investors. In 2019, the bank’s founder and CEO, Rana Kapoor, was arrested by the Enforcement Directorate (ED) in connection with a money laundering case, leading to a loss of confidence in the bank’s management and governance. The bank’s asset quality also deteriorated, with its non-performing loan (NPL) ratio rising to 2.2% in March 2020.

In response to these challenges, the bank’s new management team, led by CEO Prashant Kumar, has implemented several measures to improve the bank’s asset quality, including a significant increase in provisioning for bad loans and a focus on recovering legacy stressed assets. The bank has also been working to improve its capitalization, including a rights issue in 2020 to raise additional capital.

The upgrade in Moody’s outlook to positive reflects the bank’s progress in improving its asset quality and capitalization, as well as its ability to meet the central bank’s priority sector lending (PSL) targets and focus on higher-yielding segments.

Summary in Bullet Points:

• Moody’s upgrades YES Bank’s outlook to positive from stable, affirming its Ba3 long-term foreign currency and local currency ratings • The positive outlook is based on expectations of improved depositor base and lending franchise, leading to enhanced core profitability • YES Bank’s asset quality has significantly improved, with its NPL ratio declining to 1.7% as of March 2024 from 2.2% a year earlier • The bank’s focus on higher-yielding, albeit higher-risk retail and small and medium enterprise segments will help widen its net interest margins • Moody’s expects a gradual increase in credit costs to be largely offset by recoveries from legacy stressed assets • The bank’s capitalization is expected to moderately decline over the next 12-18 months due to credit growth outpacing internal capital generation • A downgrade of YES Bank’s ratings is unlikely over the next 12-18 months, but could occur if asset quality significantly deteriorates • The upgrade reflects the bank’s gradual improvement in depositor base, lending franchise, asset quality, and capitalization • The bank’s ability to meet PSL targets and focus on higher-yielding segments will help improve its profitability, while its asset quality and capitalization will remain stable.