In a possible setback for Yes Bank, Moody’s investor service on Wednesday placed the private sector bank’s foreign currency issuer rating of Ba3 under review for downgrade. The rating agency cited weak financial performance and uncertainty over regulatory approvals to its $1.2 billion stake sale as reasons for its action.
Moody's said that while bank's weakening financial position can be somewhat offset by the capital raise, there is 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," it said.
Yes Bank said on 3 November that it has received offers of $3 billion from potential investors, including the recently-announced $1.2 billion from a North American family office.
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 for review.
In the quarter ended 30 September, 2019, Yes Bank's asset quality substantially deteriorated, with the gross non-performing assets (NPAs) ratio rising to 7.6% at the end of the quarter from 3.2% at the end of March 2019. As of the same date, about ₹31,400 crore of loans and investments (about 10.4% of Yes Bank's total loans and investments) were rated below investment grade under the domestic rating scale.
Moody's expects about 30-40% of these loans and investments to turn non-performing in the next few quarters.
“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 ongoing 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," it said.
Moody’s added that at the end of September 2019, Yes Bank's exposure to Indian housing finance companies and non-bank finance companies (NBFCs) represented 6% of its total exposure to the property sector. As of the same date, the bank also had a 7.2% direct exposure to the commercial and residential real estate sector.
The rating agency also said that in its review for downgrade, it will also focus on the developments in the bank's funding and liquidity.
“In particular, Yes Bank's funding and liquidity compares weakly to other rated private sector peers in India, and could come under pressure if the bank is unable to strengthen its solvency in the next few quarters. Moody's continues to maintain a moderate probability of government support for deposits and senior unsecured debt, reflecting the bank's modest but rapidly growing franchise, and importance to India's banking system," it said.