Moody's again warns YES Bank about ratings for exposure to shadow banks

Topics Moody's | YES Bank

In more troubles for the already struggling Yes Bank, global rating agency Moody's Monday reiterated it decision to keep its ratings "under review for downgrade" for the second time in under two months citing worsening asset quality and higher exposure to shadow banks.

It has also extended its review to downgrading its long-term foreign and local currency bank deposit ratings of Ba1, foreign-currency senior unsecured MTN programme rating of Ba1, and baseline credit assessment of Ba2.

In a note Monday, the agency also said the bank's counterparty risk assessment of Baa3 and domestic and foreign currency counterparty risk rating of Baa3 also remain under review for downgrades.

It can be recalled that on June 12, Moody's had placed Yes Bank's ratings under review for a downgrade, citing worsening asset quality driven primarily by the housing finance companies and non-bank finance companies, which stood at 6.4 percent of its loan books.

Monday the agency has also extended its review for downgrade of the bank's IFSC banking unit branch assessment of Baa3 and domestic and foreign-currency ratings issued from this unit at Baa3 up for review.

"The review for downgrade was initiated on June 11, reflecting our expectation that the ongoing liquidity pressures on finance companies will negatively impact Yes Bank's credit profile, given its sizeable exposure to weaker companies in the sector," it said.

The agency noted the further deterioration in the bank's asset quality, with the gross nonperforming loan (NPL) ratio increasing to 5 in the June quarter from 3.2 in the March quarter. Its profitability also declined, with an annualized return on assets of 0.1 percent compared to 0.5 percent in year to March 2019.

It can be noted that after the RBI asked its founder CEO Rana Kapoor to leave the bank in January end for many a corporate governance failure, the new management under Ravneet Gill has begun a massive cleaning of the book which saw the bank reporting its first ever loss at a hefty Rs 1,506 crore in the March quarter.

Though the bank remained in the green it reported a massive 92 percent plunge in numbers at a low Rs 96 crore for the June quarter as its exposure to the troubled NBFCs and realty players roiled other improvements which saw a massive spike in bad loans provisions and ratios.

The bank's common equity tier 1 ratio also declined to 8 in June from 8.4 in March.

For the June quarter, nearly Rs 10,000 crore of loans, which represented about 4 percent of its loan book, remained under a watchlist. Based on management expectation, these watchlist loans could potentially translate into NPLs over the next two to three quarters.

In addition, about Rs 500 crore of bond investments, representing 10 percent of its total investment holdings have experienced rating downgrades in the past quarters.

The bank has a contingent provision of Rs 700 crore against the watchlist loans and has also taken some marked- to-market losses on the investments that were downgraded.

"Any inability of the bank to raise equity capital over the next 1-2 quarters will add significant pressure to its ratings. The review will also focus on developments in the watchlist portfolio, including the potential for resolution or slippage of some key exposures," Moody's warned.

It also said it will unlikely upgrade the ratings over the next 12-18 months and warned that it could downgrade if there is a sustained deterioration in its impaired loans or loan-loss reserves, or if the rate of new NPL formation is significantly higher than previously experienced.

Scuppering its fund raising plans, Moody's domestic arm Icra had on July 31 had downgraded over Rs 32,000 crore of the bank's debt to junk, with negative outlook, which came after the share price lost more than 53 percent of its value to date since January.

This was the second downgrade by Icra on Yes Bank's debt rating, and has complicated Gill's efforts to raise the planned USD 1.2 billion through a mix of public and private share sales. Gill took the helm March 1 after running Deutsche's India unit for more than six years.

Yes Bank was the top loser on the Nifty pack Monday plunging 8.15 percent to Rs 8.10, while the benchmark tanked 1.23 percent.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel