Stock Report

YES Bank Limited ratings upgraded to 'CRISIL A-/CRISIL A1+', outlook revised to 'Positive'

Posted On : 2022-08-30 09:34:12( TIMEZONE : IST )

CRISIL Ratings has upgraded the rating on Tier-II bonds (under Basel III) and Infrastructure Bonds of YES Bank Limited (Yes Bank) to 'CRISIL A-' from 'CRISIL BBB+' and has revised the outlook to 'Positive' from 'Stable'. CRISIL Ratings has also upgraded the rating on the Rs 20,000 crore certificates of deposit (CD) of the bank to 'CRISIL A1+' from 'CRISIL A1'.

The rating action reflects the expectation of continued improvement in the performance of the bank, including traction in deposits, better underlying asset quality with realignment of business model and risk management practices, uptick in profitability and strengthening of capital buffers with the proposed capital raise of Rs 8900 crore. The steady improvement in the deposit base of the bank seen since the reconstruction scheme in March 2020 is expected to continue and hold the bank in a good stead. Yes Bank's total deposits increased to Rs 1.93 lakh crore as on June 30, 2022 (1.97 lakh crore as on March 31, 2022) from Rs 1.63 lakh crore as on March 31, 2021 and Rs 1.05 lakh crore as on March 31, 2020. The proportion of granular and sticky, current account and savings account (CASA) deposits to overall deposits has been on an improving trend and stood at 30.8% as on June 30, 2022 (31.1% as on March 31, 2021) as against 26.2% as on March 31, 2021. On an absolute basis, it increased to Rs 59,544 as on June 30, 2022 (Rs 61360 crore as on March 31, 2021) as against Rs 42587 crore as on March 31, 2021. While the CASA level may not see a sharp increase in the near term given the interest rate cycle and consequent potential shift to term deposits which carry higher rates, and well as the greater comfort of institutional depositors with the bank, the overall stability of deposits is expected to be sustained.

On the asset side, the bank has realigned its business model with a focus towards more granular lending, with the share of retail and small and medium enterprises (SME) increasing. Even within the corporate book, the bank is focussing on lower sized exposures that in the past and with a higher proportion of working capital loans, with term lending mainly to better rated corporates. In each of its business segments, the bank has strengthened its risk management practices over the last two years. The proportion of gross advances for retail, SME and medium corporates segments increased to 57 % as on June 30, 2022 from 47% as on March 31, 2021 and 39% as on March 31, 2020. All of this is expected to support underlying asset quality going ahead.

The reported asset quality metrics are also expected to benefit from the proposed transaction with an asset reconstruction company (ARC), wherein the bank will sell the stressed exposures worth Rs 48000 crore. The bank has received a base bid of Rs 11813 crore, which is 135% of the book value of the assets and the final winner will be decided based on the financial bids submitted by other ARCs, if any. The transaction is expected to be consummated by the third quarter of the current fiscal and is likely to result in a reduction in gross NPAs of about 1150 to 1200 bps from the current level of 13.45% as on June 30, 2022, Nevertheless, Under the RBI's August 2020 resolution framework for Covid-19-related stress, as on June 30, 2022, the bank's restructured advances stood at 1.8% of its gross advances. This is over and above around 1.3% of gross advances restructured under the other restructuring mechanisms such as extension of the date for commencement of commercial operations (DCCO) and restructuring for MSME scheme. The ability of the bank to manage collections and execute the revised business model with controlled asset quality will need to be demonstrated over a longer period.

Profitability is on an improving trend with the bank reporting profits for past five consecutive quarters as against losses in fiscal 2021 and fiscal 2020. The bank reported a profit after tax (PAT) of Rs 311 crore with a return of assets (RoA) of 0.4% for the quarter ended June 30, 2022 and a PAT and RoA of Rs 1066 crore and 0.4%, respectively, for fiscal 2022 as against a loss of Rs 3462 crore with an RoA of negative 1.3% for fiscal 2021. Profitability should benefit from the expected improvement in the cost of funds as well as lower credit costs than in the past.

Additionally, the bank's capital position is adequate with the common equity tier I (CET1) ratio and overall capital adequacy ratio (CAR) of 11.9% and 17.5%, respectively, as on June 30, 2022 (11.6% and 17.4%, respectively, as on March 31, 2022). Further, the bank has also announced a capital raise of Rs 8900 crore in July 2022, out of which Rs 5100 crore is in the form of equity (to be raised in fiscal 2023) and rest is in the form of equity warrants (to be converted in fiscal 2024). This would support the bank's growth going ahead.

Nevertheless, the ability of the bank to continue to build a strong retail liabilities franchise and a stable and sound operating business model with strong compliance and governance framework over the medium term, needs to be demonstrated over the longer term. Additionally, the impact of the shift in business model to focus on granular retail and micro, small and medium enterprises (MSME) segments and selective working capital loans in the corporate segment will need to be seen over a longer period. These will be key rating monitorables.