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CARE Ratings has downgraded the ratings it assigned to Yes Bank ’s debt instruments, aggregating about ₹21,000 crore. The ratings continue to be on ‘credit watch with developing implications’.
The rating agency reasoned that the revision factors in further deterioration in the bank’s asset quality parameters leading to incremental credit costs which impacted its profitability. The new rating also factors in majority corporate exposures and concentration risk.
Asset quality stresses
The agency, in a statement, said Yes Bank’s profitability is expected to remain under pressure in the near to medium term on account of asset quality stresses that are likely to play out over the period.
The rating on Yes Bank’s Infrastructure Bonds (₹5,000 crore), Lower Tier II bonds (₹2,530.60 crore), and Basel III Tier II Bonds (₹8,900 crore) have been downgraded from 'AA-' to 'A+'. The rating on Basel III Additional Tier I Bonds (₹3,600 crore) has been downgraded from 'A-' to 'BBB+'.
Also read:Why YES Bank is still not out of the woods
The rating on Upper Tier II Bonds (₹904.10 crore) and Basel II Perpetual Bonds (₹82 crore) has been revised from 'A+' to 'A'.
Instruments with 'AA' rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
Instruments with 'A' rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.
Instruments with 'BBB' rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.
To weigh on profitability
CARE Ratings said Yes Bank has seen significant amount of slippages as well as migration of credit exposures to ‘BB and below rated’ during Q2FY20 (from July 1 to September 30) and which now stands at about ₹31,400 crore as on September 30, 2019.
Considering the slippages, risk migration in its advances book and slower than expected resolution in stressed accounts, the bank has increased its guidance on credit costs to 225–250 basis points (from 125 bps earlier) for FY20. The agency assessed that this significantly weighs down on the profitability outlook for the whole year FY20.
The additional provisioning requirement to enhance the provisioning coverage ratio, which currently stands at about 43 per cent, would also impact the profitability in medium term, it added.
Capitalisation below peers
The bank has raised equity capital of ₹1,930 crore during August, 2019 through a Qualified Institutional Placement (QIP) of equity shares, which has helped it maintain its core capitalisation above the minimum regulatory requirement of 8 per cent (including Capital Conservation Buffer) required as on March 31, 2020, along with reduction in risk weighted assets (RWA).
However, the core capitalisation level of 8.7 per cent as on September 30, 2019 continues to remain significantly lower than its private sector bank peers, the agency said.
Also read:YES Bank gets $1.2-b binding offer from global investor; shares surge 24%
CARE Ratings has noted that the bank has been in the process of raising significant amount of equity capital over the last few months and has received a binding offer from an investor of $1.2 billion (approximately ₹8,400 crore), valid till November 30, 2019, subject to regulatory and other approvals.
The agency observed that raising of equity capital within the expected timeline would be critical for the bank to maintain adequate capital buffers over the minimum regulatory requirement as well as fund future growth.
Rating watch
CARE has placed the ratings under credit watch with developing implications on account of expected significant amount of equity capital infusion which would enhance the capital buffers to absorb the credit losses and support business growth.
“At current market capitalization levels, the expected capital raise entails regulatory risks in being able to consummate the transaction within given timelines,” the agency said.
The agency added that it would monitor the progress on the expected equity capital raise and resolve the rating watch after significant clarity emerged on equity raising, which is expected during Q3FY20.
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