24 July 2019: Credit rating agency Icra Ltd on Wednesday downgraded ratings on Yes Bank’s ₹32,911.7 crore bond programme, citing an increase in stressed assets and lack of debt resolutions. The rating on bonds aggregating ₹22,111.7 crore were downgraded by one notch, while that on ₹10,800 crore of additional tier I (AT-I) bonds were downgraded by two notches.
The outlook on the ratings remained negative as Yes Bank saw a sizeable increase in gross bad loans and BB and below rated exposures along with weakened capital cushions, Icra said.
The rating for these AT-I bonds (BBB+) is three notches lower than the rating for the Basel III compliant tier II bonds (A+) of Yes Bank as these instruments have loss-absorption features that make them riskier, said the credit rating agency. The coupon payments are non-cumulative and discretionary and the bank has full discretion at all times to the cancel the coupon payments.
“The cancellation of discretionary payments shall not be an event of default. Coupons can be paid out of the current year’s profits. However, if the current year’s profit is not sufficient or if the payment of the coupon is likely to result in a loss, the coupon payment can be made through reserves and surpluses created through the appropriation of profits, (including statutory reserves),” it said.
The coupon payment is subject to the bank meeting the minimum regulatory requirements for common equity tier I (CET-I), tier I and total capital ratios (including capital conservation buffer, at all times as prescribed by the Reserve Bank of India (RBI), Icra said.
“These AT-I bonds are expected to absorb losses through a write-down mechanism at the objective pre-specified trigger point fixed at the bank’s CET-I ratio as prescribed by the RBI, 5.5% till March 2020, and thereafter 6.125% of the total risk-weighted assets of the bank or when the point of non-viability trigger is breached in the RBI’s opinion,” it said.
The rating downgrades, Icra said, also factor in the further weakening in Yes Bank’s core equity (CET-I) capital cushions with the growth in RWAs and elevated provisioning leading to subdued profitability. The CET-I declined to 8% as on 30 June 2019 against the minimum regulatory requirement of 7.375% for 31 March 2019 and 8% for 31 March 2020.
“Hence, the bank would need to raise capital on an immediate basis. While the board has approved a capital raise of $1 billion, Yes Bank’s ability to raise capital considering its recent performance and earnings guidance remains to be seen. The bank will also need to accelerate the resolution and recovery from stressed exposures and will also need to calibrate growth to restore the capital cushion,” it said.
Icra said it has taken note of the stability in the bank’s overall deposits base, though the current account and savings account deposits declined in Q1FY20, while term deposits witnessed a growth, perhaps a negative for the cost of funds and earnings.
“The management guided towards an increase in the share of granular retail and small and medium enterprise assets to around 50% over the medium to long term from the existing level of 36.1%, though the same will remain dependent on the bank’s ability to raise growth capital,” Icra said.
The ratings continue to factor in the private lender’s position as the fourth largest private sector bank, in terms of total assets, its satisfactory operating profitability and wide branch network, Icra said.