Detailed Rationale

CRISIL Ratings has upgraded its long-term rating on the Tier-II bonds (under Basel III) and infrastructure bonds of YES Bank Ltd (YES Bank) to 'CRISIL A+/Stable' from 'CRISIL A/Positive’. CRISIL Ratings has also reaffirmed its short-term rating on the certificates of deposit (CD) of the bank at ‘CRISIL A1+’.

 

CRISIL Ratings has also withdrawn its rating on infrastructure bonds of Rs 330 crore (See ‘Annexure - Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

 

The rating action is driven by continued focus on building granularity both on the assets and liabilities side and sustaining comfortable capitalisation levels. The Bank’s profitability, while improving remains constrained by the drag on their investments in priority sector lending (PSL) assets, industry wide press on funding costs and higher operating expenses

 

On the asset side, the bank had realigned its business model with a focus towards more granular lending, with the share of loans to retail and small and medium enterprises (SME) at ~60% of the net advances. Even within the corporate book, the bank is focusing on lower sized exposures and a higher proportion of working capital loans, with term lending mainly to better rated corporates. The proportion of gross advances for retail, SME and medium corporates segments increased to 75% as on June 30, 2024, from 47% as on March 31, 2021, and 39% as on March 31, 2020. While there has been a marginal uptick in the retail GNPA, the improved granularity of the portfolio, coupled with strengthened risk management practices across asset segments, should support underlying asset quality going ahead. The ability of the bank to manage collections and execute the revised business model with controlled asset quality will need to be demonstrated over a longer period.

 

On the liabilities side, the steady improvement in the deposit base seen since the reconstruction scheme in March 2020 is expected to continue and hold the bank in a good stead. Yes Bank’s total deposits increased to Rs 2.65 lakh crore as on June 30, 2024 (2.19 lakh crore as on June 30, 2023) from Rs 1.63 lakh crore as on March 31, 2021, and Rs 1.05 lakh crore as on March 31, 2020. The proportion of granular and sticky, current account, and savings account (CASA) deposits to overall deposits has been steady and stood at 30.8% as on June 30, 2024 (30.9% as on March 31, 2024) as against 26.1% as on March 31, 2021. On an absolute basis, CASA deposits stood at Rs 81,567 crore as on June 30, 2024 (Rs 82,317 crore as on March 31, 2024) as against Rs 42,587 crore as on March 31, 2021. Retail term deposits (TD’s) + CASA deposits have also remained stable and stood at 58% of the overall deposits as on June 30, 2024 (59% as on June 30, 2023). While the CASA level may not see a sharp increase in the near term given the interest rate cycle and continued shift to term deposits which carry higher rates, as well as higher dependence on institutional depositors, the overall stability of deposits is expected to be sustained.

 

The bank’s capitalisation remains adequate, supported in part by internal accruals, with common equity Tier I (CET1) ratio and overall capital adequacy ratio (CAR) of 13.3% and 16.5% respectively, as on June 30, 2024 (12.2% and 15.4%, respectively, as on March 31, 2024). Capital position had improved after the receipt of Rs 2,845 crore towards exercise of share warrants in first quarter of fiscal 2025.

 

Profitability, while on an improving trend in recent quarters, with return on average assets (ROAA) of 0.3% for FY24 and 0.5% for Q1FY25 (annualized), remains lower than peers. This is due to drag on interest income from investments in Rural Infrastructure Development Fund (RIDF) to meet PSL shortfall, along with higher funding costs in the current interest rate environment and elevated operating expenses from growing a retail and SME portfolio. Excluding the impact of the PSL drag, ROAA would have been higher by 40 basis points for FY24.

 

Going ahead, the ability of the bank to continue to build a strong retail liabilities franchise and a stable and sound operating business model needs to be demonstrated over the longer term along with an improvement in its profitability levels. Additionally, the impact of seasoning on the retail and MSME segments also needs to be seen over a longer period. These will be key rating monitorables.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Yes Bank and its subsidiaries, because of the majority shareholding, business and financial linkages, and shared brand.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Granularity of the advances book

Retail, SME and medium corporate segments formed 75% of the overall gross advances as on June 30, 2024 (39% as on March 31, 2020). Of this, retail has grown from 21% to 44% share of advances during the same period. The overall net advances grew by 14.7% year on year (y-o-y) and stood at Rs 2,29,565 as on June 30, 2024 while the retail portfolio grew by 7.8% y-o-y during the same period and stood at Rs 1,01,781 crore as on June 30, 2024. There was growth across retail and SME product offerings including home loans (19% of retail advances), secured business loans (16%) personal loans (15%), and auto loans (15%). The improved granularity of the portfolio should also support fundamental asset quality going ahead.

 

Reported asset quality metrics have also improved in fiscal 2024 and 1QFY2025, with gross NPA at 1.7% as on June 30, 2024, primarily driven by reduction in corporate GNPA to 1.7% as on June 30, 2024, from 4.4% as on June 30, 2023.  Although, slippages were higher in fiscal 2024 at Rs 5,334 crores as against Rs 4,775 crore in fiscal 2023, due to higher delinquencies seen in the retail and MSME segments. However, overall asset quality remains comfortable.

 

Given the intense competition, the ability to scale up the retail and SME portfolios while maintaining asset quality will be critical and will be key rating monitorables.

 

Improvement in stability and granularity in the liability profile

Yes Bank witnessed a steady outflow of deposits prior to the reconstruction of the bank, till March 2020 due to heavy withdrawals of both bulk and retail deposits preceding the moratorium. As on March 31, 2020, deposits stood at Rs 105,364 crore as against Rs 227,610 crore as on March 31, 2019. CASA deposits as a proportion of overall deposits had declined to 26.6% as on March 31, 2020, from 33.1% as on March 31, 2019.

However, the deposit base has stabilised and improved over the last four fiscals. Total deposits (including certificate of deposits) as on June 30, 2024, increased to Rs 2,65,072 crore – registering a year-on-year increase of 20.9% and an absolute increase of 151.6% from March 31, 2020. This has been supported by the bank’s increased efforts to bring in new depositors.

 

Further, CASA deposits formed 30.8% of the overall deposits as on June 30, 2024, an improvement from 25.8% as on June 30, 2020. Additionally, retail deposits defined as SA deposits and retail term deposits stood at 43.7% as on June 30, 2024 (45.4% as on June 30, 2023).

 

Depositor concentration is reducing with top 20 depositors forming ~11.5% of the total deposits as on March 31, 2024, from 12% as on March 31, 2023. Reliance on non-deposit funding has been steadily reducing but still forms 23.2% of total funding (borrowings + deposits) as of June 30, 2024 higher than larger private banking peers. Thus, the ability of the bank to continue to build a retail liabilities franchise on a steady state basis will be a critical rating sensitivity factor.

 

Adequate capitalization

Yes Bank has adequate capitalisation with CET 1, Tier 1 and overall, CAR of 13.3%, 13.3% and 16.5%, respectively, as on June 30, 2024. Capital position was supported by capital infusion of Rs 2,845 crore received in May 2024 towards exercise of share warrants by investors. This helped offset the moderation in capital metrics in fiscal 2024 over the previous year due to the impact of higher risk weights and loan growth. The bank has previously received capital infusions of Rs 6,041 crore in fiscal 2023 and Rs 10,000 crore infused by different financial institutions as part of its reconstruction scheme in March 2020, with a follow-on public offer (FPO) of Rs 15,000 crore in July 2020.

 

The bank has a sizeable networth of Rs 45,649 crore as on June 30, 2024 (Rs 41,197 crore (excluding share warrants) as on March 31, 2024) and the networth coverage for net NPAs remained comfortable at 36.6 times as on June 30, 2024 (31.2 times as on March 31, 2024).

 

The Bank’s CET I could deteriorate in case of an adverse judgement by the Honourable Supreme Court in the matter relating to the write-off of its Additional Tier- I (AT-I) bonds. The complete writeback of these bonds could adversely impact the CET I by ~250-260 basis points (bps), while the AT-I ratio would go up by the same extent. However, the Tier I ratio and total capital ratios of the bank should remain unaffected.

 

Additionally, the bank’s internal accruals have also improved with the bank reporting profits in the last three fiscals. While the profitability is muted, it should also support the capitalisation levels of the bank. Going ahead, the bank’s ability to generate healthy internal accruals and raise timely capital for growth and any potential asset side risks, remains a key rating sensitivity factor.

 

Weakness:

Muted profitability, albeit an improvement in recent quarters

Profitability, while improving, remains muted due to the drag on NIMs from PSL shortfall, industry wide impact of higher funding costs and elevated operating expenses. NIMs were lower in fiscal 2024 at 2.1*% compared to 2.4*% in fiscal 2023 both due to the PSL drag and impact of the rising interest rate cycle on funding costs. The negative carry from PSL related RIDF investments on NIMs stands at around 40 basis points for FY24. NIMs improved slightly to 2.2[1]% (annualized) for Q1FY25.

 

Operating expenses remained elevated at 2.6% of average assets in fiscal 2024 (2.5% in fiscal 2023) due to higher spend on IT infrastructure and business volume linked expenditure.

Provisioning expenses have lowered from 0.7% of average assets in fiscal 2023 to 0.5% in fiscal 2024 and was further down to 0.2% (annualized) for Q1 FY25. Provision coverage ratio (PCR) improved from 62.3% to 66.8% and 67.6% during the same periods.

 

Pre-provisioning profitability remained nearly stable at 0.9% for fiscal 2024, compared to the previous year. The bank reported a profit of Rs 1,251 crore (RoA of 0.3%) in fiscal 2024 as against Rs 718 crore (RoA of 0.2%) in the previous fiscal. Further, the bank reported a profit of Rs 502 crore (RoA 0.5%) in Q1FY25.

 

As the bank continues to maintain its growth trajectory, sustenance of margins and stability of credit costs will remain to be seen to improve the bank’s earnings profile, and thereby, also benefit its capital position.

[1]Net interest margin = net interest income/average total assets

Liquidity: Adequate

Average liquidity coverage ratio (LCR) was 138% for the quarter ended June 30, 2024, against the regulatory requirement of 100%. Liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the RBI and access to the call money market.

 

ESG Profile

CRISIL Ratings believes that Yes Bank’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

Yes Bank has an ongoing focus on strengthening various aspects of its ESG profile.

 

Yes Bank’s key ESG highlights: 

• Yes Bank has developed interim target of reducing financed emission intensity of its electricity generation portfolio, at least by 50% over the base year of fiscal 2022, while striving for achieving 75% reduction by fiscal 2032
• The Bank has migrated all its facilities from conventional fixtures to light-emitting diode (LED) lighting, across India. In fiscal 2023, the bank replaced 21,259 conventional fixtures with LED units across 565 branches, resulting in 2,362.56 GJ in energy saving.
• The bank’s total workforce comprised around 21% women as on March 31, 2023, and it has taken initiatives to promote gender equality within the organisation. The bank is aiming for 25% gender diversity by fiscal 2025.
• The bank has established a clearly defined risk management framework for its suppliers, based on the risk profile of the vendor and item category.
• The majority of the bank’s board members are independent directors. None of the independent directors have tenure of more than 10 years and there is a segregation in chairperson and executive positions. The bank has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. Yes Bank’s commitment to ESG will play a key role in enhancing stakeholder confidence, given the high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes Yes Bank’s profitability will improve gradually while the Bank maintains its deposit profile and asset quality

Rating Sensitivity factors

Upward factors:

• Improvement in profitability with the bank reporting ROA of over 0.75% on a sustained basis
• Improvement in deposit base with higher proportion of CASA deposits
• Improvement in capital position with CET 1 capital remaining above 13%.

 

Downward factors:

• Significant contraction in deposit base over a prolonged period
• Buffers in capital adequacy ratios over regulatory requirement remaining below 2% over an extended period of time.
• Inability to improve profitability ratios.
• Any adverse observations by investigative agencies or regulators

About the Company

Set up in 2004, Yes Bank is a private sector bank with total assets of Rs 4,07,697 crore, total gross advances of Rs 2,26,176 crore, and a network of 1,232 branches as on June 30, 2024.

 

On March 5, 2020, the central government had imposed a moratorium on the bank, based on RBI’s assessment of lack of a credible revival plan by the bank, and in the interest of the public and depositors. During the moratorium that was initially slated to last till April 3, 2020, Yes Bank could not, without written permission from RBI, pay any depositor or creditor a sum exceeding Rs 50,000. The bank was also restricted from lending. The moratorium on the bank was lifted on March 18, 2020.

 

Following equity infusion of Rs 10,000 crore by eight financial institutions under the reconstruction scheme of the bank, and with write down of Basel III ATI bonds aggregating Rs 8,415 crore (the first such instance in India), the capital position of the bank improved significantly. Post this, the bank raised Rs 15,000 crore through an FPO in July 2020, Rs 8,887 crore from two financial institutions, of which Rs 6,041 crore was received in fiscal 2023 and Rs 2,845 crore was received in first quarter of fiscal 2025, which significantly improved the capital position of the bank. Its CET1 and overall CAR stood at 13.3% and 16.5%, respectively, as on June 30, 2024.

 

The bank reported a profit of Rs 502 crore and total income (net of interest expense) of Rs 3,443 crore in the quarter ended June 30, 2024, against Rs 343 crore and Rs 3,141 crore, respectively, in the corresponding quarter of the previous fiscal.

Any other information: Not Applicable