YES Bank Limited - Long-term rating upgraded to 'CRISIL A/Positive', short-term rating reaffirmed

CRISIL Ratings has upgraded its long-term rating on the Tier-II bonds (under Basel III) and infrastructure bonds of YES Bank Ltd (YES Bank) to 'CRISIL A/Positive' from 'CRISIL A-/Positive'. CRISIL Ratings has also reaffirmed its short-term rating on the certificates of deposit (CD) of the bank at 'CRISIL A1+'.

The rating action is driven by strengthened capital buffers, greater granularity of the lending portfolio, and expectation of continued traction in deposits and controlled asset quality. The Bank's profitability, currently constrained by drag on their investments in priority sector lending (PSL) assets and relatively moderate CASA, is expected to gradually improve over the medium term.

The bank's capital position has been strengthened with the common equity Tier I (CET1) ratio and overall capital adequacy ratio (CAR) of 13.6% and 18.3%, respectively, as on June 30, 2023 (13.3% and 17.9%, respectively, as on March 31, 2023) following the capital raise in fiscal 2023. Yes Bank raised Rs 8,887 crore in fiscal 2023, of which Rs 6,041 crore was received during the fiscal through a mix of preferential allotment of shares and warrants, while the remaining Rs 2,846 crore is expected to flow in upon the conversion of the warrants in fiscal 2024 and fiscal 2025. This would support the bank's growth going ahead.

On the asset side, the bank has realigned its business model with a focus towards more granular lending, with the share of loans to retail and small and medium enterprises (SME) increasing. Even within the corporate book, the bank is focusing on lower sized exposures and a higher proportion of working capital loans, with term lending mainly to better rated corporates. The proportion of gross advances for retail, SME and medium corporates segments increased to 75% as on June 30, 2023 from 47% as on March 31, 2021 and 39% as on March 31, 2020. The improved granularity of the portfolio, coupled with strengthened risk management practises across asset segments, should support underlying asset quality going ahead.

The reported asset quality metrics have also benefited from lower slippages as well as the transaction with JC Flowers ARC, as asset reconstruction company (ARC), wherein the bank has sold legacy stressed assets worth nearly Rs 48,000 crore. Consequently, the GNPA levels witnessed sharp decline from 13.9% as on March 31, 2022 to 2.2% as on March 31, 2023 (2.0% as on June 30, 2023).

Under the Reserve Bank of India (RBI)'s August 2020 resolution framework for Covid-19-related stress, as on June 30, 2023, the bank's restructured advances stood at 1.2% of its gross advances. This is over and above around 1.1% 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.

On the liabilities side, steady improvement in the deposit base 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 2.19 lakh crore as on June 30, 2023 (2.17 lakh crore as on March 31, 2023) 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 steady and stood at 29.4% as on June 30, 2023 (30.8% as on March 31, 2023) as against 26.1% as on March 31, 2021. On an absolute basis, CASA deposits increased to Rs 64,568 crore as on June 30, 2023 (Rs 66,903 crore as on March 31, 2023) as against Rs 42,587 crore as on March 31, 2021. Retail Business segment deposits have also witnessed steady uptick and stood at 54% of the overall deposits as on June 30, 2023 (50% as on June 30, 2022). While the CASA level may not see a sharp increase in the near term given the interest rate cycle and consequent continued 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.

The profitability of the bank remains muted majorly impacted by higher one-time provisioning costs in fiscal 2023 linked to the sale of stressed assets to JC Flowers ARC and elevated level of operating expenses, however, pre-provisioning profitability remained stable.

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, needs to be demonstrated over the longer term along with the ability of the bank to enhance its profitability levels. 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.

Shares of Yes Bank Limited was last trading in BSE at Rs. 16.97 as compared to the previous close of Rs. 16.93. The total number of shares traded during the day was 13254418 in over 6754 trades.

The stock hit an intraday high of Rs. 17.06 and intraday low of 16.86. The net turnover during the day was Rs. 224528375.00.

Source : Equity Bulls

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