Anticipates execution risks in $1.2 billion new equity injection
Moody’s has also placed the bank’s long-term foreign and local currency bank deposit ratings of Ba3, foreign currency senior unsecured medium term note (MTN) programme rating of (P)Ba3, and Baseline Credit Assessment (BCA) and adjusted BCA of b1, long-term Counterparty Risk Assessment (CR Assessment) of Ba2(cr) and long-term domestic and foreign currency counterparty risk rating (CRR) of Ba2 under review for downgrade.
For Yes Bank, IFSC Banking Unit Branch, Moody’s has placed the foreign currency senior unsecured MTN programme rating of (P)Ba3, senior unsecured debt rating of Ba3, long-term CR Assessment of Ba2(cr), and long term domestic and foreign currency CRR of Ba2 under review for downgrade.
The review for downgrade is driven by two factors: (1) Yes Bank’s weak financial performance in the quarter ended September 30, 2019, which was disclosed on November 1, and (2) the announcement by the bank on October 31, 2019 that it had received a binding offer from a financial investor to invest up to $1.2 billion via new equity capital into the bank.
Moody’s says that the bank’s weakening financial position can be somewhat offset by the planned capital raise. Nevertheless, Moody’s notes that there are significant execution risks around the timing, price and regulatory approvals required. During the review period, Moody’s will focus on the bank’s ability to raise new equity capital. An inability to raise the planned equity capital will negatively impact Yes Bank’s credit profile and ratings. The bank has publicly disclosed that the binding offer is valid until November 30, 2019.
In the quarter ended September 30, 2019, Yes Bank’s asset quality substantially deteriorated, with the gross non-performing loan (NPL) ratio rising to 7.6 per cent at the end of the quarter from 3.2 per cent at the end of March 2019.
As of the same date, about Rs314 billion of loans and investments (about 10.4 per cent of Yes Bank’s total loans and investments) were rated below investment grade under the domestic rating scale.
Moody’s expects about 30- 40 per cent of these loans and investments to turn into NPLs in the next few quarters. Taking into account the reported NPLs, management’s expectation of further stress from the below investment grade rated exposures and other stressed assets — such as net standard restructured loans and net security receipts — Moody’s estimates that Yes Bank’s total pool of stressed assets registered about 12 per cent of loans and investments as of September 30, 2019.
Adding risk to asset quality is the increased pace of corporate downgrades from the bank’s portfolio of investment grade to sub-investment grade rated companies. In addition, the on-going liquidity pressures on Indian finance companies and the commercial real estate sector can further erode Yes Bank asset quality, given the bank’s sizeable exposure to weaker companies in the sector. At the end of September 2019, Yes Bank’s exposure to Indian housing finance companies and non-bank finance companies represented 6 per cent of its total exposure to the property sector.