Moody's upgrades YES Bank's ratings; outlook changed to positive

Global rating agency Moody's has upgraded YES Bank's long-term foreign currency rating from "Caa3" to "Caa1" on bail-out package involving fresh equity capital infusion. The rating action also factors in decision to lift moratorium on depositors and creditors from March 18 2020. 

The rating outlook is positive. In addition, Moody's has confirmed the bank's long-term foreign and local currency bank deposit ratings at Caa1. 

The rating action concludes the review with direction uncertain that was initiated on Yes Bank's ratings on 06 March 2020. Ailing private sector bank was placed under moratorium on March 5, 2020.

Under reconstruction package, State Bank of India and six other Indian financial institutions have infused Rs 10,000 crore as new equity capital into Yes Bank. The rights, along with the terms and conditions of the bank's depositors and senior creditors, remain unaffected by the planned reconstruction, Moody's said in a statement.

Separately, Rs 8,415 crore worth of Additional Tier 1 (AT1) bonds have been written down in full to provide additional loss absorbing capital against the bank's losses.

Yes Bank's solvency has improved on the raising of new capital and write down of the AT1 securities. The recovery rates for

the banks' depositors and senior creditors are expected to be very high, supporting the current credit ratings.

Despite the reconstruction scheme and new capital infusion, the bank's standalone viability is in question due to significant deterioration in deposit franchise since quarter ended 30 September 2019. 

Between October 01, 2019 to March O5 2020, Yes Bank's deposits declined by 34% and may weaken further once the moratorium is lifted. The bank will continue to require liquidity assistance and forbearance from RBI immediately after the moratorium is lifted and until its operations stabilize.

The change in outlook to positive reflects expectation that the bank's financial fundamentals can improve due to the extraordinary support provided by the Indian authorities. 

Such extraordinary support will provide the bank sometime to rebuild its franchise, including its deposit base, Moody's added.

Yes Bank's risk appetite is expected to decrease and the bank's management framework will remain consistent and in line with its lower risk appetite. Nevertheless, the bank's complex shareholding structure could complicate governance and management structures at the bank. Corporate governance remains a key credit consideration and requires ongoing monitoring, rating agency said.