Moody's downgrades Yes Bank's ratings, changes outlook to negative citing governance issues

File Photo: A security guard stands outside a closed Yes Bank branch in New Delhi

Global rating agency Moody's Investors Service has downgraded Yes Bank's foreign currency issuer rating to Ba1 from Baa3, citing leadership transition and governance issues as credit negative.

“In Moody's opinion, although the bank's credit fundamentals remain stable, developments surrounding the transition in leadership as well as governance issues are credit negative because they complicate the management's effective implementation of its long-term strategy. Furthermore, these developments could constrain its ability to raise new capital,” Moody’s said in a statement.

The rating action considers resignation of various members of the bank's board -- which, when seen in conjunction with the Reserve Bank of India's September directive to restrict the term of the bank's MD & CEO as well as founder, Rana Kapoor, till January 31, 2019 -- have raised Moody's concerns over corporate governance.

Divergence in NPAs
In particular, Moody's has noted significant divergence in the bank's reported asset quality metrics compared with RBI's assessment of asset quality in two consecutive fiscals.

Divergence in classification of non-performing assets between the bank and RBI’s assessment stood at Rs 4,176 crore as of March 2016 and Rs 6,355 crore as of March 2017.

Negative outlook
“The outlook, where applicable, has been changed to negative from stable,” it added.

The negative outlook takes into account uncertainty relating to the bank's asset quality and profitability performance, in particular, any adverse findings from the RBI's risk-based supervision report or the so-called divergence report.

While results of RBI's risk-based supervision report for FY18 are not known as yet, any adverse findings from its assessment will be credit negative, Moody’s said, adding that if Yes Bank experiences difficulty in raising external capital, this will impede the bank's ability to grow its loan book.

“In addition, while its current asset quality metrics are superior to those of its Indian peers, its aggressive growth strategy poses asset risks,” the statement said.

Despite these developments, Moody's states that the bank's funding and liquidity positions have remained fairly stable. Nevertheless, its funding profile is relatively weaker compared to other public sector banks in India, as measured by its low current and savings account deposit ratio and dominance of corporate deposits.

• Ratings Bank’s foreign and local currency bank deposit ratings: Ba1/NP from Baa3/Prime-3
• Foreign currency senior unsecured MTN programme: (P)Ba1 from (P)Baa3
• Bank’s baseline credit assessment (BCA) and adjusted BCA: Ba2 from Ba1
• Counterparty risk assessment (CR Assessment) affirmed at Baa3(cr)/P-3(cr)
• Domestic and foreign currency counterparty risk rating (CRR) affirmed at Baa3/P-3
• IFSC branch’s foreign currency senior unsecured MTN programme rating downgraded to (P)Ba1 from (P)Baa3
• Senior unsecured debt rating downgraded to Ba1 from Baa3

Nevertheless, the rating outlook could return to stable if: 1) Yes Bank maintains its current asset-quality ratios and there is no adverse impact from the RBI's risk-based supervision exercise; 2) The bank manages to raise new equity capital and bring its capital ratios in-line with similarly rated peers in India; and 3) Its funding profile remains stable without weakening its net interest margin.

What could move the rating down?The ratings could be downgraded if: 1) There is a sustained deterioration in impaired loans or loan loss reserves, or if the rate of new NPL formation is significantly higher than previously experienced; 2) The bank's capital ratios declined due to its inability to raise new capital; and 3) There are regulatory actions by RBI, including adverse findings from the risk-based supervision report and/or any regulatory restrictions or fines.