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. |