YES Bank stock rallies 8% on Moody's rating upgrade to 'positive'

Moody's outlook revision was on expectation of a gradual improvement in YES Bank's depositor base and lending franchise, which will help improve its core profitability over the next 12-18 months.

Shares of YES Bank rallied 8.5 per cent to Rs 26.95 on the BSE in Wednesday’s intra-day trade backed by heavy volumes after global rating agency Moody's revised its outlook on the Indian private sector lender from "stable" to "positive" on expectations of a gradual improvement in its depositor base and lending franchise. This will help improve its core profitability over the next 12-18 months.

At 09:35 am; YES Bank was trading 6.6 per cent higher at Rs 26.61, as compared to 0.01 per cent decline in the BSE Sensex. The counter saw huge volumes, with a combined 257.52 million shares changing hands on the NSE and BSE.

Moody's Ratings (Moody's) on Tuesday, July 10 said it affirmed Yes Bank’s Ba3 ratings and changed the rating outlook to positive from stable.

The change in outlook to positive reflects our expectation that a gradual improvement in YES Bank's depositor base and lending franchise will help improve its core profitability over the next 12-18 months.

The positive outlook takes into account the improvement in the bank's asset quality and capitalization over the past 2-3 years, somewhat offset by the bank's weak core profitability driven by high funding costs and the strain from meeting priority sector lending (PSL) targets, Moody’s said in its rationale.

Moody’s expect YES Bank's core profitability, which is measured by pre-provisioning profits to total assets, will gradually improve to above 1.2 per cent over the next 12-18 months from 0.8% in the financial year ended March 2024 (fiscal 2024).

An improvement in YES Bank's ability to meet the central bank's PSL rules through new lending from its branches will help reduce operating expenses for meeting the targets, improving its overall profitability. In addition, YES Bank's lending focus on higher yielding, albeit higher-risk retail and small and medium enterprise segments will help widen its net interest margin, Moody’s said.

“A gradual increase in the bank's credit costs will be largely offset by recoveries from its legacy stressed assets, given the high loan loss provision coverage of those assets. Despite these improvements, YES Bank's profitability will remain weak compared with the Indian peers we rate and a key drag on further improvements to its credit profile,” the rating agency said.