Rating Rationale
March 19, 2020 | Mumbai
YES Bank Limited
'CRISIL A2' assigned to CD 
 
Rating Action
Rs.20000 Crore Certificate of Deposits CRISIL A2 (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A2' rating to the Rs 20,000 crore certificate of deposit programme of YES Bank Limited (Yes Bank).

The rating is underpinned by the expectation of continued extraordinary systemic support from key stakeholders, along with sizeable ownership of State Bank of India (SBI). 

CRISIL has taken note of the 'Yes Bank Limited Reconstruction Scheme, 2020' (the Scheme) that was notified by the Government of India (GoI) on March 13, 2020. The Scheme followed the imposition of a moratorium on Yes Bank by the central government on March 5, 2020, under Section 45 of the Banking Regulation Act, 1949. Pursuant to the Scheme, key stakeholders, including the Reserve Bank of India (RBI), have put in place various measures to bolster the bank's liquidity.

While the moratorium was initially slated to continue till April 3, 2020, it has been lifted in 13 days, on March 18, 2020, as per the Scheme. The Scheme involves, among other measures, equity infusion of Rs 10,000 crore by 8 entities, mainly banks led by SBI, and the reconstitution of Yes Bank's board, with Mr Prashant Kumar (former Deputy Managing Director and Chief Financial Officer of SBI) taking over as Managing Director and Chief Executive Officer.

However, the ability of the bank to limit deposit outflow with lifting of the moratorium, and to build a strong retail liabilities franchise along with a stable and sound operating business model with strong compliance and governance framework over the medium term, needs to be demonstrated. Furthermore, the bank's asset quality is weak and the impact of the shift in business model to focus more on granular retail segments will need to be seen over a longer period. These will be key rating monitorables.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Yes Bank and its subsidiaries, because of 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 - List of entities consolidated, 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. All the key stakeholders, including the Ministry of Finance, RBI, and SBI have, over the past few days, reiterated in various forums that depositors' money in Yes Bank is safe and in case of any requirement, they will continue to ensure the safety of deposits through various measures. 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 restructuring Scheme of the bank within a short time frame. As part of the Scheme, an Administrator was appointed by the RBI to oversee its implementation. Furthermore, pursuant to the Scheme, 8 entities, primarily other banks, have infused Rs 10,000 crore of equity in the bank, bolstering the bank's capital ratios, which had weakened significantly following the large loss reported in the third quarter of fiscal 2020 on account of higher provisions. Factoring this capital along with write-down of Additional Tier I (ATI) bonds, the bank's Common Equity Tier I (CET1) ratio and overall capital adequacy ratio (CAR) improves to 7.6% and 13.6%, respectively, from 0.6% and 4.1%, respectively, as on December 31, 2019. The rating also factors in proposed capital raising of Rs 10,000 crore over the near term.

Second, systemic support has come in to bolster the liquidity position of Yes Bank. These avenues cover a significant proportion of Yes Bank's overall deposit base and is expected to support any potential surge in deposit withdrawals post lifting of the moratorium. RBI is expected to provide significant liquidity support, in case of any requirement, and has articulated the same in various forums. Yes Bank is also in the process of raising certificates of deposit from other banks. Refinance from financial institutions, is also available, in case the need arises. Furthermore, Yes Bank can also raise funds through securitisation and inter-bank participation certificates. CRISIL believes Yes Bank will be able to tap into these sources in a stress case scenario wherein there is withdrawal of a large quantum of deposits.

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 has come from SBI, thereby making it the single largest stakeholder in Yes Bank with a shareholding of 48.21%. SBI is also expected to be an investor in Yes Bank's certificates of deposit. SBI will nominate 2 directors on the board of Yes Bank. SBI has publicly articulated that for the next 3 years, it will not sell any part of its shareholding in Yes Bank. The rating reflects this articulated stance of SBI and any change in this is a key rating sensitivity factor.

Weaknesses:
* Modest resource profile - ability to limit deposit outflow with lifting of the moratorium and to build a retail liabilities franchise over the medium term needs to be demonstrated
Yes Bank has witnessed a steady outflow of deposits in the past few quarters given the challenges faced by it and the adverse news reports with respect to the bank. Just between December 31, 2019, and March 5, 2020, the deposit base shrunk by around Rs 28,000 crore. Since March 31, 2018, the deposit base has declined by over Rs 63,000 crore.

Nevertheless, the bank added depositors even in recent quarters. It has been in touch with existing depositors to address concerns. Key stakeholders have provided public assurances regarding the safety of deposits in Yes Bank.

However, deposits tend to be highly confidence sensitive in nature. Given the recent events, it remains to be seen whether there is any significant withdrawal by depositors with the moratorium being lifted. Nevertheless, liquidity support measures provide a good mitigant to the same.

The extent of withdrawal will be a key monitorable and ability of the bank to limit decline in deposits will play a key role in its future prospects. The bank's ability to build a retail liabilities franchise on a steady state basis also needs to be seen; this will be a critical determinant in building a stable business model going forward.

* Weak asset quality, impacting profitability
The bank witnessed a sharp increase in slippages in the third quarter 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 18.9% as on December 31, 2019, from 7.4% as on September 30, 2019 (3.2% as on March 31, 2019). As a result, and because of the associated provisioning cost, Yes Bank reported a large loss of Rs 18,560 crore in the third quarter of fiscal 2020.

The Special Mention Account -1 (SMA-1) and SMA-2 portfolio was around Rs 13,900 crore as on December 31, 2019, which was almost 7.5% of net advances. Any further material slippages can potentially impact the bank's earnings, and thereby, its capital position.

The bank plans to increasingly focus on granular retail asset segments. Over the medium term, the share of the retail portfolio is targeted to increase to around two-thirds of the portfolio. 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 along with strengthening of governance and compliance framework will also be key for the long-term success of the bank and will be key rating monitorable.
Liquidity Adequate

Liquidity is driven by systemic support in various forms. Liquidity coverage ratio was 74.6% as on December 31, 2019, against the regulatory requirement of 100%. Nevertheless, CRISIL understands that the ratio has improved as on latest date supported by capital infusion into the bank. Furthermore, as on the latest date, the bank's statutory liquidity ratio is also in line with regulatory requirements.

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
* Decline in CAR 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 was the fourth largest private sector bank in India as on September 30, 2019, in terms of assets. However, after contraction in the balance sheet, it was the sixth largest as on December 31, 2019, with a network of 1,130 branches.

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 activity. The bank had also defaulted on the coupon payment on the Basel II Tier I bond due on March 5, 2020.

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. On a pro forma basis, post the capital infusion, the CET1 ratio is 7.6% compared with 0.6% as on December 31, 2019, while the overall CAR is 13.6% compared with 4.1%.

Key Financial Indicators - (Consolidated)
As on/for the nine months ended Dec 31, Unit 2019 2018
Total assets Rs crore 2,91,012 3,73,946
Net Advances^ Rs crore 1,86,099 2,43,885
Deposits^ Rs crore 1,65,755 2,22,758
Total income (net of interest expense) Rs crore 8,440 11,427
Profit after tax Rs crore -19,098 3,218
Gross NPAs % 18.9 2.1
Net NPAs % 5.97 1.18
Provision coverage ratio (PCR) % 72.7 44.3
Tier I capital adequacy ratio % 2.1* 12.0
Overall capital adequacy ratio % 4.2* 16.4
Return on assets (annualised) % -7.6 1.3
^Standalone;
*On a proforma basis Tier I CAR and overall CAR are 7.8% and 13.6%, respectively subsequent to recent capital infusion

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs Crore)		 Rating assigned
with outlook
NA Certificate of Deposits NA NA 7-365 Days 20000 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    --    --    --    --  -- 
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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