Rating Rationale
August 27, 2020 | Mumbai
YES Bank Limited
CD rating upgraded to 'CRISIL A2+' 
 
Rating Action
Rs.20000 Crore Certificate of Deposits CRISIL A2+ (Upgraded from 'CRISIL A2')
Rs.3780 Crore Infrastructure Bonds CRISIL BBB/Stable (Reaffirmed)
Rs.13941 Crore Tier II Bonds (Under Basel III) CRISIL BBB/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the Rs 20,000 crore certificates of deposit (CD) of Yes Bank Limited (Yes Bank) to 'CRISIL A2+' from 'CRISIL A2'. It has reaffirmed its 'CRISIL BBB/Stable' rating on the bank's Tier-II bonds (under Basel III) and infrastructure bonds.
 
The upgrade in the short term rating reflects improvement in the funding and liquidity profile of the bank, with gradual increase in its deposit base as well as sizeable capital raised recently. With this, Yes Bank has repaid Rs 35,000 crore of the Rs 50,000 crore special liquidity facility availed from the Reserve Bank of India (RBI) in March 2020, which is ahead of the earlier plan. Further, the bank's liquidity coverage ratio (LCR) has improved in recent months.  
 
Yes Bank's total deposits increased to Rs 1.17 lakh crore (including CD) as on June 30, 2020 from Rs 1.05 lakh crore as on March 31, 2020. Further, the bank has raised Rs 15,000 crore though a follow-on public offer (FPO) in July 2020, significantly improving its capital position ' Pro-forma common equity tier I (CET1) ratio and overall capital adequacy ratio (CAR) improved to 13.4% and 20%, respectively, from 6.3% and 8.5%, respectively as on March 31, 2020. The bank's LCR improved to 114.1% as on June 30, 2020 from 37.0% as on March 31, 2020; as against the minimum regulatory requirement of 80%.
 
The ratings continue to be underpinned by the expectation of continued extraordinary systemic support from key stakeholders and sizeable ownership by the State Bank of India (SBI).
 
At the same time, the ability of the bank to control deposit outflow on a sustainable basis, build a strong retail liabilities franchise and a stable and sound operating business model with strong compliance and governance framework over the medium term, needs to be demonstrated. Additionally, the bank's asset quality is weak and the impact of the shift in business model to focus on granular retail 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.
 
From an industry perspective, the nationwide lockdown, imposed by the Government of India (GoI) to contain the spread of the Covid-19 pandemic, has impacted disbursements and collections of financial institutions. The lockdown has now been extended in containment zones, with re-opening of the prohibited activities in a phased manner in other areas. However, certain states have implemented localised lockdowns. Herein, CRISIL believes that eventual lifting of restrictions will continue to be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of lenders.
 
Yes Bank has provided moratorium to its borrowers in line with the relief measures provided by RBI. Any change in behaviour of borrowers on the payment discipline can affect asset quality levels post the moratorium. Also, while the one-time restructuring scheme announced by RBI will aid in providing necessary support to affected borrowers in the current environment, the details and operational implementation of the same will have to be seen.

Analytical Approach

For arriving at its ratings, CRISIL 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. CRISIL has also factored in the expectation of extraordinary systemic support for Yes Bank.

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

Key Rating Drivers & Detailed Description
Strengths
* Continued extraordinary systemic support
CRISIL's rating centrally factors in the extraordinary systemic support from key stakeholders. The key stakeholders, including the Ministry of Finance, RBI, and SBI have reiterated in various forums that depositors' money in Yes Bank is safe and they will continue to ensure the safety of deposits through various measures, if required. This systemic support has primarily come in three forms.
 
First, to protect the interests of the public and depositors, RBI and GoI came together to implement the reconstruction scheme within a short time. As part of the Scheme, the RBI appointed an administrator to oversee its implementation. Furthermore, pursuant to the scheme, 8 entities, primarily other banks, have infused Rs 10,000 crore equity in the bank in March 2020, bolstering its capital ratios, which had weakened significantly following the large loss in the third quarter of fiscal 2020 on account of higher provisions. While the capital infusion along with write-down of additional tier I (ATI) bonds, improved the bank's CET1 ratio and CAR to 6.3% and 8.5%, respectively as on March 31, 2020, from 0.6% and 4.1%, respectively, as on December 31, 2019, the ratios remained lower than the regulatory requirements as on March 31, 2020.
 
As a part of its plan to shore-up its capital position, the bank launched an FPO in July 2020, which witnessed interest from domestic as well as global institutional investors. It raised Rs 15,000 crore though the FPO, out of which Rs 4,098 crore was raised from anchor investors. Post this capital raise, its CET1 and CAR improved significantly to 13.4% and 20%, respectively, which is well-above the minimum regulatory requirement.
 
Second, systemic support has come in to bolster the bank's liquidity. Key stakeholders are expected to continue to provide liquidity support if required. Yes Bank has also raised CD from various banks which helped it manage deposit withdrawals. Refinance from financial institutions is also available if needed. Furthermore, Yes Bank can raise funds through securitisation and inter-bank participation certificates. CRISIL believes Yes Bank will be able to tap these sources, in case the need arises.
 
Third, SBI, the largest bank in India, is taking the lead in supporting Yes Bank in various forms. Over 60% (Rs 6,050 crore) of the equity infusion of Rs 10,000 crore, as part of the reconstruction scheme, came from SBI making it the single largest stakeholder in Yes Bank with a shareholding of 48.21% as on March 31, 2020. Further, SBI invested Rs 1,740 crore in the FPO of Yes Bank and continues to be the single largest stakeholder in Yes Bank with a shareholding of 30% post the FPO. SBI is also an investor in Yes Bank's CD. Two directors on the board of Yes Bank are from the SBI. Furthermore, SBI has publicly articulated that for the three years from the implementation of reconstruction scheme, it will not sell any of its stake in Yes Bank. The rating on Yes Bank reflects this articulated stance of SBI and any change in this will be a key rating sensitivity factor.
 
Weaknesses
* Modest resource profile - ability to limit further deposit outflow and to build a retail liabilities franchise over the medium term needs to be demonstrated
Yes Bank witnessed a steady outflow of deposits in the period till March 2020 given the challenges faced and the adverse news reports about the bank. Just between December 31, 2019, and March 5, 2020, the deposit base shrunk by around Rs 28,000 crore. Furthermore, after the moratorium, the bank saw deposit withdrawals of around Rs 30,000 crore between March 18 and March 31, 2020. As on March 31, 2020, deposits stood at Rs 105,364 crore.
 
The deposit base has stabilised after March 31, 2020, helped the bank's increased efforts to restrict deposit outflow and bring in new depositors. Total deposits as on June 30, 2020 increased at Rs 117,360 crore. Building back the liability franchise is the top priority of the management and the bank has taken various steps and initiatives in this regard. The bank has initiated a new campaign with 'Safety First' tagline and has moved away from the interest rate campaigns with overall strategy focussed on acquiring new customers, retaining existing clients, and winning back lost customers. It has been in touch with existing depositors to address concerns, and key stakeholders have provided public assurances regarding the safety of deposits in Yes Bank.
 
However, deposits tend to be highly confidence-sensitive. In the current environment, it remains to be seen if there will be any material deposit withdrawal in the near future. Nevertheless, liquidity support measures are expected to mitigate the risk substantially. The ability of the bank to build a retail liabilities franchise on a steady state basis will be a critical determinant in building a stable business model.
 
* Weak asset quality, impacting profitability
The bank witnessed a sharp increase in slippages in the second half of fiscal 2020, largely stemming from challenges in the corporate loan book. This led to a significant increase in gross non-performing assets (NPAs) to 16.8% as on March 31, 2020, from 7.4% as on September 30, 2019 (3.2% as on March 31, 2019). While the absolute gross NPAs were stable at Rs 32,703 crore as on June 30, 2020 compared to March levels, the same is partly contributed by the standstill in the accounts under the moratorium provided by the bank.
 
Because of the increase in gross NPAs and associated provisioning cost in fiscal 2020, Yes Bank reported a large loss of Rs 22,715 crore (excluding the extraordinary profit from the write down of Tier-I bonds) for fiscal 2020. However, with improvement in the provision coverage ratio to 73.8% as on March 31, 2020, from 43.1% as on March 31, 2019 and standstill on asset classification, incremental provisions on NPAs declined. Bank's credit costs (annualised) declined to 1.7% in the first quarter of fiscal 2021 (from 10.3% for fiscal 2020) and with the support of treasury income of Rs 407 crore, the bank reported a profit of Rs 45 crore with an RoA (annualised) of 0.1% in the first quarter of fiscal 2021.
 
Any further material slippage, particularly given the challenging macroeconomic environment amid the Covid-19 outbreak, can potentially impact the bank's earnings, and thereby, its capital position.
 
The bank plans to focus on granular retail asset segments and working capital financing for the corporate segment. However, given the intense competition, ability to scale up this book while maintaining asset quality and profitability needs to be seen. 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.
Liquidity Adequate

LCR was 114.1% as on June 30, 2020, against the regulatory requirement of 80%. Further, the regulator and SBI, the largest shareholder, are expected to support the bank with liquidity in various forms, if the need arises.

Outlook: Stable

CRISIL believes Yes Bank will continue to receive extraordinary systemic support over the medium term.

Rating sensitivity factors:
Upward factors:
* Stability in deposit base, with no material reduction from current levels
* Improvement in asset quality and profitability
 
Downward factors:
* Any change in expectation of systemic support from key stakeholders, including RBI, or material decline in SBI's ownership
* Significant contraction in deposit base over a prolonged period
* Capital adequacy ratios remaining below minimum regulatory requirements over an extended period of time
* Any adverse observations by investigative agencies or regulators

About the Bank

Set up in 2004, Yes Bank is a private sector bank with total assets of Rs 2,55,485 crore, total advances of Rs 1,64,510 crore, and a network of 1,139 branches as on June 30, 2020.
 
On March 5, 2020, the central government imposed a moratorium on Yes 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. Pursuant to the regulatory requirements for hybrid debt capital instruments, approval from the RBI is required for debt servicing (including principal repayments) in the event that the Bank reports a loss and is not liable to service the debt if it breaches the minimum regulatory capitalisation conditions. The coupon payment with respect to Bank's Basel II Tier I bonds amounting to 'Ã'¹8.4 crores was due on March 5, 2020. While the Bank had submitted an application for the payment of interest on January 5, 2020, the RBI did not permit the payment of interest.
 
Following equity infusion of Rs 10,000 crore by 8 financial institutions under the Scheme, 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 has improved significantly. As on March 31, 2020, post the capital infusion, the CET1 ratio is 6.3% compared with 0.6% as on December 31, 2019, while the overall CAR is 8.5% compared with 4.1%. However, this was lower than the regulatory requirement. Post this, the bank raised Rs 15,000 crore through an FPO in July 2020, which significantly improved the capital position of the bank. Its CET1 and overall CAR stood at 13.4% and 20.0%, respectively, post the FPO.
 
The bank had a profit of Rs 45 crore and total income of Rs 2529 crore in the quarter ended June 30, 2020, against a profit of Rs 114 crore and total income of Rs 3554 crore in the corresponding quarter of the previous year.

Key Financial Indicators - Standalone
As on/for the year ended Jun 30, Unit 2020 2019
Total assets Rs crore 255,485 371,161
Net advances Rs crore 164,510 236,300
Deposits Rs crore 117,360 225,902
Total income (net of interest expense) Rs crore 2529 3554
Profit after tax Rs crore 45.4 113.8
Gross NPAs % 17.3 5.0
Net NPAs % 4.96 2.9
Provision coverage ratio (PCR) % 75.1 43.1
Tier I capital adequacy ratio % 13.5* 10.7
Overall capital adequacy ratio % 20.0* 15.7
Return on assets (annualised) % 0.1 0.1

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs Crore) Comlexity level Rating assigned with outlook
INE528G08360 Infrastructure Bonds 29-Dec-16 7.62% 29-Dec-23 330 Simple CRISIL BBB/Stable
INE528G08345 Infrastructure Bonds 30-Sep-16 8.00% 30-Sep-26 2,135 Simple CRISIL BBB/Stable
INE528G08295 Infrastructure Bonds 05-Aug-15 8.95% 05-Aug-25 315 Simple CRISIL BBB/Stable
INE528G08279 Infrastructure Bonds 24-Feb-15 8.85% 24-Feb-25 1,000 Simple CRISIL BBB/Stable
INE528G08287 Basel III Compliant Tier II Bonds 29-Jun-15 9.15% 30-Jun-25 554 Complex CRISIL BBB/Stable
INE528G08303 Basel III Compliant Tier II Bonds 31-Dec-15 8.90% 31-Dec-25 1,500 Complex CRISIL BBB/Stable
INE528G08311 Basel III Compliant Tier II Bonds 15-Jan-16 9.00% 15-Jan-26 800 Complex CRISIL BBB/Stable
INE528G08329 Basel III Compliant Tier II Bonds 20-Jan-16 9.05% 20-Jan-26 500 Complex CRISIL BBB/Stable
INE528G08337 Basel III Compliant Tier II Bonds 31-Mar-16 9.00% 31-Mar-26 545 Complex CRISIL BBB/Stable
INE528G08378 Basel III Compliant Tier II Bonds 29-Sep-17 7.80% 29-Sep-27 2,500 Complex CRISIL BBB/Stable
INE528G08386 Basel III Compliant Tier II Bonds 03-Oct-17 7.80% 01-Oct-27 1,500 Complex CRISIL BBB/Stable
INE528G08402 Basel III Compliant Tier II Bonds 22-Feb-18 8.73% 22-Feb-28 3,000 Complex CRISIL BBB/Stable
INE528G08410 Basel III Compliant Tier II Bonds 14-Sep-18 9.12% 15-Sep-28 3,042 Complex CRISIL BBB/Stable
NA Certificate of Deposits Programme NA NA 7-365 Days 20,000 Simple CRISIL A2+
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
YES SECURITIES (India) Ltd Full Subsidiary
YES Asset Management (India) Ltd Full Subsidiary
YES Trustee Ltd Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  20000.00  CRISIL A2+  29-06-20  CRISIL A2    --    --    --  -- 
        05-06-20  CRISIL A2               
        19-03-20  CRISIL A2               
Infrastructure Bonds  LT  3780.00
27-08-20 
CRISIL BBB/Stable  29-06-20  CRISIL BBB/Stable    --    --    --  -- 
        05-06-20  CRISIL BBB/Stable               
Tier II Bonds (Under Basel III)  LT  13941.00
27-08-20 
CRISIL BBB/Stable  29-06-20  CRISIL BBB/Stable    --    --    --  -- 
        05-06-20  CRISIL BBB/Stable               
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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