Moody’s Investors Service has placed Yes Bank’s ratings under review for a downgrade citing its large exposure to debt-laden nonbanking financial companies (NBFC) and the possibility that the bank’s loans under watch list could slip into non-performing assets (NPAs). In a note on Tuesday, the rating agency arm said it had placed the bank’s foreign currency issuer rating, long-term foreign and local currency bank deposit ratings, medium-term note issuer rating under review for a possible downgrade.
“The review for downgrade takes into account Moody’s expectation that the ongoing liquidity pressures on Indian finance companies will negatively impact the credit profile of Yes Bank, given the bank’s sizeable exposure to weaker companies in the sector. At the end of March 2019, Yes Bank’s exposure to Indian housing finance companies (HFC) and non-bank finance companies (NBFC) represented 6.4 per cent of its total exposure. In addition, Yes Bank had a 7 per cent direct exposure to the commercial and residential real estate sector as of the same date, which is also under pressure, because liquidity conditions have worsened for the real estate sector, just like with the HFCs and NBFCs,” Moody’s said.
Moody’s pointed out that the bank had classified about Rs 10,000 crore of its exposure, representing about 4.1 per cent of its total loan book, under a watch list after its results for the quarter ended March 2019.
These loans could slip into NPAs in the next 12 months, Moody’s said. The bank had made a 20 per cent provision for these loans under watch list during the quarter ended March.
“The bank’s weak performance in fiscal 2019 led to its capital, as measured by the common equity tier 1 ratio, falling to 8.4 per cent from 9.7 per cent in fiscal 2018… If Yes Bank cannot raise the capital, its loss absorbing capacity and therefore financial profile will be under pressure,” said Moody’s.
The rating agency has maintained a negative adjustment for corporate behaviour for Yes Bank, because of the account management’s aggressive strategy, which has translated into rapid loan growth in the past 4-5 years and large concentrations to some of the Indian conglomerate groups.
“The adjustment also takes into account the Reserve Bank of India’s (RBI) identification of several lapses and regulatory breaches in the various areas of the bank’s functioning. In Moody’s opinion, given the recent changes at the bank, its corporate behaviour can gradually improve. Nevertheless, Moody’s continues to make the negative adjustment to reflect the fact that the changes are fairly new and our expectation that the impactof the previous actions will continue to negatively impact the financial performance of the bank,” Moody’s said.