FPO strengthens Yes Bank's capital, reduces risks for creditors: Moody's

The equity raise reflects its renewed access to external market funds. This, in turn, shows the bank's improving financial strength and will help support depositor confidence, Moody's said

Rating agency Moody’s today said the fresh equity capital injection of about Rs 15,000 crore ($2 billion) is credit-positive for Yes Bank as it strengthens the lender’s capitalisation and loss-absorbing buffers. It will also reduce default risk for its creditors.

On July 17, Yes Bank announced the closure of a Rs 15,000 crore equity capital raise.

The successful equity raise reflects Yes Bank's regained access to external market funds. This, in turn, shows the bank’s improving financial strength and will help support depositor confidence, Moody’s said in a statement.

The new capital from the equity raise will nearly double the bank's Common Equity Tier-1 (CET1) ratio to 12.9 per cent from 6.3 per cent. This assessment is based on the bank’s capital position as of the end of March 2020.

On March 5, 2020, the Reserve Bank of India (RBI) placed Yes Bank under a moratorium due to weakening solvency and liquidity. Following the moratorium, the RBI and the Government of India (Baa3 negative) completed a rescue plan. The bailout plan included a capital infusion by a consortium of Indian public and private sector banks and liquidity support from the RBI.

Also, the bank's Basel III-compliant additional Tier-1 securities amounting to Rs 8,415 crore were written down in full. On March 18, 2020 the RBI lifted the moratorium on Yes Bank.

The capital raise brings Yes Bank’s capitalisation closer to private sector peers like IndusInd Bank. It will strengthen the bank’s resilience to potential asset quality stress because of coronavirus-related disruptions to India's economy.

In June 2020, the RBI prohibited the bank from paying coupons on its Tier-II bonds as it failed to meet regulatory capital requirements. The bank reported a capital adequacy ratio (CAR) of 8.5 per cent as of 31 March 2020, below the minimum requirement of nine per cent.

With this capital raise, the bank will be able to service the coupon of its Tier II debt since its CAR of 19 per cent will be well above the regulatory capital requirements, thereby reducing risks to the holders of its Tier-II debt, rating agency added.