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/Positive' 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+’.

 

The rating action is driven by strengthened capital buffers, greater granularity of the lending portfolio, and expectation of continued traction in deposits and controlled asset quality. The Bank’s profitability, currently constrained by drag on their investments in priority sector lending (PSL) assets and relatively moderate CASA, is expected to gradually improve over the medium term.  

 

The bank’s capital position has been strengthened with the common equity Tier I (CET1) ratio and overall capital adequacy ratio (CAR) of 13.6% and 18.3%, respectively, as on June 30, 2023 (13.3% and 17.9%, respectively, as on March 31, 2023) following the capital raise in fiscal 2023. Yes Bank raised Rs 8,887 crore in fiscal 2023, of which Rs 6,041 crore was received during the fiscal through a mix of preferential allotment of shares and warrants, while the remaining Rs 2,846 crore is expected to flow in upon the conversion of the warrants in fiscal 2024 and fiscal 2025. This would support the bank’s growth going ahead.

 

On the asset side, the bank has realigned its business model with a focus towards more granular lending, with the share of loans to retail and small and medium enterprises (SME) increasing. 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, 2023 from 47% as on March 31, 2021 and 39% as on March 31, 2020. The improved granularity of the portfolio, coupled with strengthened risk management practises across asset segments, should support underlying asset quality going ahead.

 

The reported asset quality metrics have also benefited from lower slippages as well as the transaction with JC Flowers ARC, as asset reconstruction company (ARC), wherein the bank has sold legacy stressed assets worth nearly Rs 48,000 crore. Consequently, the GNPA levels witnessed sharp decline from 13.9% as on March 31, 2022 to 2.2% as on March 31, 2023 (2.0% as on June 30, 2023).

 

Under the Reserve Bank of India (RBI)’s August 2020 resolution framework for Covid-19-related stress, as on June 30, 2023, the bank’s restructured advances stood at 1.2% of its gross advances. This is over and above around 1.1% of gross advances restructured under the other restructuring mechanisms such as extension of the date for commencement of commercial operations (DCCO) and restructuring for MSME scheme.

 

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, 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 2.19 lakh crore as on June 30, 2023 (2.17 lakh crore as on March 31, 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 29.4% as on June 30, 2023 (30.8% as on March 31, 2023) as against 26.1% as on March 31, 2021. On an absolute basis, CASA deposits increased to Rs 64,568 crore as on June 30, 2023 (Rs 66,903 crore as on March 31, 2023) as against Rs 42,587 crore as on March 31, 2021. Retail Business segment deposits have also witnessed steady uptick and stood at 54% of the overall deposits as on June 30, 2023 (50% as on June 30, 2022). While the CASA level may not see a sharp increase in the near term given the interest rate cycle and consequent continued shift to term deposits which carry higher rates, and well as the greater comfort of institutional depositors with the bank, the overall stability of deposits is expected to be sustained.

 

The profitability of the bank remains muted majorly impacted by higher one-time provisioning costs in fiscal 2023 linked to the sale of stressed assets to JC Flowers ARC and elevated level of operating expenses, however, pre-provisioning profitability remained stable.

 

Nevertheless, the ability of the bank to continue to build a strong retail liabilities franchise and a stable and sound operating business model with strong compliance and governance framework, needs to be demonstrated over the longer term along with the ability of the bank to enhance its profitability levels. Additionally, the impact of the shift in business model to focus on granular retail and micro, small and medium enterprises (MSME) segments and selective working capital loans in the corporate segment will need 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:

Adequate capitalization

Yes Bank has adequate capitalisation with CET 1, Tier 1 and overall CAR of 13.6%, 13.6% and 18.3%, respectively, as on June 30, 2023. Capital position was bolstered by the capital infusion of Rs 6,041 crore received in December 2023 of the total Rs 8,887 crore announced in July 2023.  Previously, capital of Rs 10,000 crore was also 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 (excluding share warrants) of Rs 40,213 crore as on June 30, 2023 (Rs 39,794 crore as on March 31, 2023) and the networth coverage for net NPAs remained adequate at 19.1 times as on June 30, 2023 (24.0 times as on March 31, 2023).

 

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 ~310 basis points (bps), while the AT-I ratio would go up by the same extent. However, the Tier I ratio and total capital ratio of the bank should remain unaffected.

 

Additionally, the bank’s internal accruals have also improved with the bank reporting profits in the last five quarters. 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.

 

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 after March 31, 2020. Total deposits (including certificate of deposits) as on June 30, 2023 increased to Rs 2,19,369 crore – registering a year-on-year increase of 13.5% and an absolute increase of 108% from March 31, 2020. This has been supported by the bank’s increased efforts to bring in new depositors. The top priority of the management, since the reconstruction of the bank, has been to rebuild the liability franchise and the bank has taken various steps and initiatives in this regard.

 

Further, CASA deposits formed 29.4% of the overall deposits as on June 30, 2023, an improvement from 25.8% as on June 30, 2020 but has come down on sequential basis from 30.8% as on March 31, 2023 in line with the industry trend. Additionally, retail deposits defined as SA deposits and retail term deposits stood at 45.4% as on June 30, 2023 (49.6% as on June 30, 2022).

 

Depositor concentration is reducing with top 20 depositors forming 12.0% of the total deposits as on March 31, 2023, from 14.2% as on March 31, 2022. Reliance on non-deposit funding has been steadily reducing but still forms 25.4% of total funding (borrowings+deposits) as of June 30, 2023, 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.

 

Increased granularity of the advances book

Retail, SME and medium corporate segments formed 75% of the overall gross advances as on June 30, 2023 (39% as on March 31, 2020). Of this, retail has grown from 21% to 47% share of advances during the same period. The overall net advances grew by 7.4% year on year (y-o-y) and stood at Rs 2,00,204 as on June 30, 2023 while the retail portfolio grew by 31.3% y-o-y during the same period and stood at Rs 94,445 crore as on June 30, 2023 as against Rs 71,919 crore as on June 30, 2022 (Rs 91,036 crore as on March 31, 2023). There was growth across retail product offerings including home loans, personal loans, secured business loans and auto loans. Going forward, bank aims to grow its retail book which is expected to add further granularity to the overall loan book.

 

The improved granularity of the portfolio should also support fundamental asset quality going ahead.

Reported asset quality metrics have also improved significantly in fiscal 2023, primarily supported by sale of stressed assets amounting to ~Rs 48,000 crore to JC Flowers ARC, with gross NPA reducing to to 2.0% as on June 30, 2023. While corporate GNPA saw the sharpest decline to 4.9% as on March 31, 2023 (28.4% as on March 31, 2022), improvement in asset quality was also seen across other segments during the same periods with retail GNPA at 1.3% versus 1.7% and SME GNPA at 1.0% (3.1%).

 

Notably, the bank has stepped up its recovery efforts in the past few quarters. In fiscal 2023, it witnessed total recovery and upgrades of Rs 6120 crore (Rs 7,290 crore for fiscal 2022). Slippages were also lower in fiscal 2023 at Rs 4,775 crores as against Rs 5,795 crore in fiscal 2022.

 

Given the intense competition, ability to scale up the retail and SME portfolios while maintaining asset quality. Build-up of a sound operating model and strengthening of governance and compliance framework will also be critical for the long-term success of the bank and will be key rating monitorables.

 

Weaknesses:

Muted profitability, albeit an improvement in recent quarters

The bank reported a profit of Rs 717 crore (RoA of 0.2%) as against Rs 1066 crore (RoA of 0.4%) in the previous fiscal. Profitability was impacted by higher one-time provisioning costs in fiscal 2023 linked to the sale of stressed assets to JC Flowers ARC. Provisions increased to Rs 2,220 crore (0.7% of average assets) for fiscal 2023 as against Rs 1,480 crore (0.5% of average assets) in fiscal 2022. However, the pre-provisioning profitability remained stable at 0.9% for fiscal 2023 and 1.0% for fiscal 2022. Further, the bank reported a profit of Rs 343 crore in Q1FY24.

 

NIMs have improved in fiscal 2023 to 2.4% from 2.2% in fiscal 2022. However, some tempering in margins is expected in the current fiscal as the full impact of the rising interest rate cycle is absorbed in the funding costs.  Cost of funds inched up to 6.2% in Q1FY24 from 5.5% in fiscal 2023 and 5.3% in fiscal 2022.

 

Operating expenses remained elevated at 2.6% of average assets in fiscal 2023 (2.3% in fiscal 2022) due to higher spend on IT infrastructure and business volume linked expenditure.

 

Provisioning coverage ratio (PCR) stood at 48.4% as on June 30, 2023 (62.3% as on March 31, 2023 and 70.7% as on March 31, 2022). The decline in PCR in first quarter of fiscal 2024 over fiscal 2023 is largely on account of technical write offs during the quarter which has resulted in reduction in GNPA and release of corresponding provisioning.

 

The Bank’s profitability is also constrained by drag on their investments in PSL assets which impacts the RoA by 0.35% in fiscal 2023.

 

Sustenance of margins and normalisation of credit costs will remain to be seen to improve the bank’s earnings profile, and thereby, also benefit its capital position.

Liquidity: Adequate

Average liquidity coverage ratio (LCR) was 127% for the quarter ended June 30, 2023, 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
• 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 high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Positive

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 ROA improving to over 0.6%
• 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 3,55,754 crore, total gross advances of Rs 2,00,204 crore, and a network of 1,212 branches as on June 30, 2023.

 

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 and Rs 8887 in fiscal 2023, which significantly improved the capital position of the bank. Its CET1 and overall CAR stood at 13.6% and 18.3%, respectively, as on June 30, 2023.

 

The bank reported a profit of Rs 343 crore and total income (net of interest expense) of Rs 3,141 crore in the quarter ended June 30, 2023, against Rs 311 crore and Rs 2,632 crore, respectively, in the corresponding quarter of the previous fiscal.

Any other information: Not applicable