It said the downgrade is on account of lower than expected amount of capital raised by the lender recently as well as the risk related to substantial decline in its share price.
"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 firm 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.
Fall in share price will challenge the bank's ability to raise sufficient capital to maintain the rating at its previous level, it said.
On August 14, the bank raised Rs 1,930 crore as fresh capital through a qualified institutional placement (QIP).
"On a pro-forma basis, the QIP will moderately improve the bank's reported common equity tier 1 (CET1) ratio as of June 30, 2019 to 8.6 per cent from 8 per cent. Furthermore, 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 capital raising to improve its loss-absorbing buffers, which in Moody's opinion is becoming more challenging given the substantial decline in its share price.
The private sector lender has witnessed deterioration in its asset quality in the first quarter ended June with gross non-performing assets (NPAs) hitting 5 per cent as against 3.2 per cent by end of March 2019.
Besides, about Rs 10,000 crore worth of loans (about 4 per cent of total loans) remain on a watchlist, which means the bank expects these loans may translate into NPAs over the next 2-3 quarters, Moody's said.
In addition, about Rs 7,500 crore of bond investments (or 10 per cent of its total investment holdings) have experienced rating downgrades in the past quarters.
The bank has also taken some marked-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," it said adding 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 the 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," it added.
However, if there is a sustained deterioration in the bank's impaired loans or loan-loss reserves or if the rate of new NPAs formation is significantly higher than previously experienced, the bank may face rating downgrade, it added.
Among others, 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.
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