Rating agency Icra has downgraded Yes Bank's tier-I and tier-II bonds and infrastructure debt on deterioration in the credit quality of large ticket borrowers.
The rating action has also factored in further weakening in core equity (CET-I) capital cushion, due to voluntary provisions and consequent losses in Q4FY19, Icra said in a statement. Icra has downgraded the lender's tier-I bond from "AA-" to "A" and tier-II bonds from "AA" to "AA-" The outlook is negative on both bonds.
On the positive side, the bank, under its new MD& CEO, has moved towards improved focus on granularisation of liabilities as the cost of interest-bearing funds for the lender remains high in relation to the private banks’ average. There was an improvement in Yes Bank’s deposit profile, with YoY growth of 13.4 per cent in the deposit base in FY2019, agency said.
In its recently declared earnings for Q4FY19, the lender reported a significant rise in BB and below rated advances (often termed junk bonds). This was due to deterioration in the credit profile of some of its larger borrowers. The share of such BB and below advances stood at 7.1 per cent of its advances as on March 31. Given the identification of such advances, the bank has made voluntary provisions of Rs 2,100 crore in Q4FY19.
The lender has guided for elevated credit cost, or provisioning for stressed assets, up to 1.25 per cent of advances for FY20 (2.09 per cent for FY19). This is expected to translate into a moderation in the earnings profile in the near term, with normalisation thereafter, subject to the resolution of stressed advances.
The moderation in earnings is expected to result from a decline in corporate fees, given the increased focus on the retail lending segment. The amortisation of high-ticket fee income over the tenure of the loans instead of the earlier practice of upfront recognition will also dent earnings, it said.
Icra said the CET-I declined to 8.4 per cent as on March 31, 2019 (9.1 per cent as on December 31, 2018). The minimum regulatory requirement of CET-I is 7.375 per cent for March 31, 2019 and 8 per cent for March 31, 2020.
Given the limited capital cushions, the bank will need to accelerate the resolution and recovery from BB and below rated advances. The private lender will also need to calibrate growth, Icra added.