Yes Bank’s balance sheet clean-up to strain profitability in next 12-18 months: Moody’s

The balance sheet clean-up by Yes Bank will strain its profitability in the next 12-18 months as it makes provisions for stressed assets, Moody’s Investors Service said on Tuesday.

On April 26, the bank reported its first-ever quarterly loss since its inception in 2004 at Rs 1,506 crore in the January-March quarter.

Nevertheless, the bank is profitable on a full-year basis, with a return on assets of 0.5 per cent as of March 31, 2019, as against 1.4 per cent a year ago.

“We estimate that the bank’s overall stressed assets are about eight per cent of its gross loans. The balance sheet clean-up will strain the bank’s profitability in the next 12-18 months as it provides for the stressed assets,” Moody’s said in a report.

The March quarter loss of Yes Bank was driven by higher credit costs for non-performing loans (NPLs) and the creation of a contingent provision against a pool of identified stressed assets.

“Despite near-term weakness, we expect the change in corporate behaviour under new bank leadership will be credit-positive after the de-risking is complete,” Moody’s said.

Reacting to the result, the bank’s shares on Tuesday slumped over 30 per cent to Rs 165.30 apiece on the Bombay Stock Exchange (BSE) in the early trade. The scrip ended the day at Rs 168, down 29.23 per cent on the BSE.

The March-quarter results of Yes Bank were announced after close of market hours on Friday. Stock markets were closed on Monday on account of polling in Mumbai.

In January this year, the bank appointed Ravneet Gill as its managing director (MD) and chief executive officer (CEO), after the Reserve Bank of India (RBI) restricted the bank’s founder and long-time MD and CEO Rana Kapoor’s term until January 2019.

In the next three financial years, the bank may slow loan growth to about 20-25 per cent annually, compared with an average loan growth of 34 per cent a year between 2013-14 and 2018-19, Moody’s said.

“The bank will increase the focus on the retail segment and small- and medium-sized enterprises and reduce dependence on corporate lending,” Moody’s said.

It added that a reduction in loan concentration to large corporate groups will be credit-positive, as these types of loans have lent volatility to the bank’s asset performance in the recent years.

The bank’s board has approved an equity capital raising plan of up to $1 billion, which, once complete, will help improve loss-absorbing buffers while supporting asset growth, it added.

Total NPAs pegged at eights per cent

The investors’ services firm said Yes Bank has an overall stressed advance of eight per cent and new CEO Ravneet Gill’s clean-up will keep profit under pressure for up to the next 18 months.

However, looking beyond the near-term stress, Gill’s clean-up is positive, once the de-risking is completed, the agency noted.

“We estimate that Yes Bank’s overall stressed assets are about eight per cent of its total loans, taking into account this new disclosure,” Moody’s said after the bank Friday reported its maiden loss of Rs 1,506 crore for March quarter.

Gross NPAs shot up to 3.2 per cent, while Gill also marked out a Rs 10,000-crore portfolio as potentially stressed.

Provisions on account of higher NPAs and also a contingent provision representing 20 per cent of the Rs 10,000 -crore portfolio resulted in the losses, Gill explained.

The agency said the bank expects 50 per cent of these potentially stressed loans to slip into NPAs and will provide more for the same going forward.

The eight percent dud loans include a gross NPAs of four percent which has been called out as potentially stressed, net standard restructured loans and security receipts of 0.8 per cent of gross loans, the agency said.

On a pro-forma basis, the provision coverage ratio is at 33 per cent of the stressed assets, it added.

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