Credit rating agency CARE Ratings upgraded Yes Bank’s long-term debt instruments citing improved operating metrics, including the recent restructuring of the banks shareholding. The rating agency has revised the ratings on Yes Bank’s infrastructure bonds and Tier II bonds to ‘CARE A; Positive’ from ‘CARE A-; Positive’.
CARE said the revision factors in continued growth in business with focus on “granularisation” of advances, increase in proportion of retail lending and SME lending, reduction in higher ticket corporate loans, and growth in deposits with stable retail and CASA deposits. The ratings also consider the adequate capitalisation level post equity infusion of Rs 6,037 crore in FY23, and improvement in asset quality due to lower incremental slippages and sale of NPAs.
SBI, along with ICICI Bank, Axis Bank, IDFC FIRST Bank, Kotak Mahindra Bank and Housing Development Finance Corp had invested in Yes Bank in March 2020 as a part of a rescue plan hatched by India’s central bank. They infused equity capital aggregating to Rs 10,000 crore as part of restructuring scheme. Furthermore, in July 2020, the bank raised equity capital of Rs 15,000 crore through a follow-on public offer (FPO) supporting the capitalisation levels of the bank.
State Bank of India (SBI) shareholding of up to 26% had a lock-in up to three years while the other banks which infused equity capital as a part of the reconstruction scheme have a lock-in for 75% of their shareholding up to three years.
Capital Adequacy Improves After Equity Infusion
Yes Bank’s capitalisation levels have improved due to equity infusion, CARE said. In the year ended March, Yes Bank raised equity capital of Rs 8,898 crore, out of which Rs 6,037 crore was received during the year. The remaining Rs 2,846 crore is expected to be infused in near term. This provides cushion for growth and absorb credit losses, the ratings agency said.
The total capital adequacy ratio rose to 17.93% in March 2023 from 17.43% a year ago, with Tier I CAR of 13.26%. This is well above regulatory norms and provides growth capital, the agency said. As of June 2023, CAR was 18.18% and Tier I CAR was 13.50%, comparable to other private banks.
Focus on Retail Lending Improves Loan Mix
Yes Bank is shifting focus from corporate loans to retail advances and SME loans. Retail loans have grown 35% in FY23 and formed 72% of total loans as of March 2023, up from 51% in March 2021. The share of retail loans has further gone up to 75% by June 2023.
Within retail, mortgage loans comprise 33%, followed by personal loans (16%), auto loans (16%) and commercial vehicle loans (11%). The corporate loans share has declined to 27% of total loans in March 2023 from 40% a year ago.
Improved Asset Quality on Lower Slippages, Sale to ARC
Yes Bank’s asset quality has improved significantly due to lower incremental slippages at 2.76% in FY23 against 3.68% in FY22. The sale of stressed assets to JC Flowers ARC also supported improvement in asset quality, the agency noted.
Gross NPA declined to 2.17% as of March 2023 compared to 13.93% a year ago. Net NPA also fell to 0.82% from 4.53%. The net stressed assets to tangible net worth ratio improved to 28.76% from 60.73%. Including net non-performing investments, the ratio declined to 32.37% from 65.37%.
However, the stressed assets ratio remains higher than private sector peers, it said. The ability to maintain asset quality as the new retail loans season would be crucial.
Moderate Profitability on Higher Costs
Yes Bank’s profitability remains moderate despite some improvement in net interest margin. The NIM rose marginally to 2.42% in FY23 from 2.27% in FY22 as yield on assets increased more than cost of funds.
However, operating expenses rose to 2.65% of assets from 2.40% due to higher business and IT costs related to retailisation. Credit costs also went up to 0.68% from 0.5% owing to provisions on sale of stressed assets.
As a result, return on assets was 0.22% in FY23 compared to 0.40% in FY22. Going forward, profitability is expected to improve as credit costs decline and operating efficiency improves, CARE Ratings said. But NIMs may moderate due to higher deposit costs.
CARE Ratings has revised the outlook to Positive from Stable earlier. This factors in expected continued improvement in business profile and profitability, while maintaining comfortable asset quality.
Monitorables
The rating agency would monitor Yes Bank’s ability to raise growth capital as planned. Maintenance of asset quality as the new retail loans season and performance of security receipts would be crucial. Improvement in deposit profile and profitability would also be monitored.
Any adverse legal judgment on additional Tier I bonds may impact growth capital and would remain a sensitivity. Overall, CARE Ratings expects Yes Bank’s operating metrics to improve with retailisation, but track record needs to be established over time.