By Jindal Haria

India Ratings and Research (Ind-Ra) has rated Yes Bank Ltd’s proposed Basel III Tier 2 bonds as follows:

Instrument Type*

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III Tier 2 Bonds

-

-

-

INR40

IND AA+/Stable

Assigned


The rating factors in Yes Bank’s ability to manage its credit costs, reasonably large and expanding franchise, sufficient levels of capitalisation and adequate profitability buffers. The rating also factors in Yes Bank’s higher proportion of bulk funding and asset liability tenor mismatches than larger private sectors peers’. The bank is expanding its liability franchise, which should help in reducing depositor concentration as well as tenor mismatches as it builds its granular deposits. Yes Bank’s core equity tier 1 ratio reduced to 9.5% at end-June 2018 (March 2017: 11.4%) on account of high capital consumption, given large loan growth in FY18. Yes Bank’s capital buffers and its ability to curtail divergences and maintain its overall asset quality would be a close monitorable.

 

The Stable Outlook reflects Ind-Ra’s expectation that credit costs would be adequately absorbed by its operating profits without impacting its equity. The agency expects the bank to maintain above-average core capitalisation with sufficient cushion above the regulatory requirement on an ongoing basis, in line with its higher rated private sector peers’.

KEY RATING DRIVERS

Reasonable Managed Asset Quality: Yes Bank’s gross NPL ratio declined to 1.31% in 1QFY19 from 1.72% as of 3QFY18, primarily on account of large loan growth in 4QFY18 (53.9% yoy). The total impaired assets (net non-performing assets + standard restructured assets + 5/25 + S4A + SDR outstanding + security receipts outstating) to net worth ratio as of March 2018 was 13.6% (16.9% in December 2017). Ind-Ra expect the credit cost to remain in the range of 80-90bp in FY19. Yes Bank has a meaningful exposure in the mid-corporate segment. In Ind-Ra’s view, borrowers in the mid-corporate segment could remain stressed, considering their high dependence on large corporates carrying stretched working capital cycles, stemming from building-up of non-productive assets and resulting in slippages in this segment. Given the large quantum of loan growth in FY18, the seasoning of loan book for Yes Bank remains low and its ability to maintain the inherent risks in this segment will be a key monitorable. Ind-Ra believes Yes Bank’s pre-provision profitability and capitalisation provide adequate buffers to absorb the elevated levels of stress.

 

Strong Pre-provision Operating Profit: Yes Bank’s pre-provision operating profit/average assets ratio remains comfortable at 2.94% in FY18 (FY17: 3.07%). A marginal reduction in the ratio was account of large loan growth in the corporate loan portfolio and significant debt capital raise in FY18. Ind-Ra expects the bank to maintain the ratio at the FY18 level in the medium term. Incrementally, the bank’s focus is to increase the granularity of its loan portfolio by venturing into the retail segment, eventually translating into higher yields. Growth in the retail asset segment would come at lower incremental retail margins than for its large peers’, highlighting their pricing power. Nevertheless, the expansion in the retail segment should result in an improvement in the bank’s overall margins.

 

Moderate Funding Profile: Bulk deposits contributed around 42.8% to Yes Bank’s total funding at end-March 2018, significantly higher than better rated private banks’. Although Yes Bank’s retail deposit franchise is improving, the cost of acquiring granular savings deposits has been high on account of the higher interest offered by it on savings deposits than by larger peers. The effect of normalising its savings deposit interest rate (aligning it to larger peers) on its savings account deposits would be a key monitorable. Yes Bank’s proportion of bulk deposits to total deposits has improved over the last couple of years, highlighting its focus to reduce its liability concentration by increasing branch presence (March 2018 1,100; March 2017: 1,000). Yes Bank’s funding gap (cumulative one-year mismatch as a percentage of average assets) has improved, but continues to be higher than a few large peers’.


RATING SENSITIVITIES

Positive: An increase in the franchise scale, along with a considerable improvement in the retail franchise with a more granular funding and asset mix, while building stronger capital and operating buffers, could lead to a Positive Outlook.


Negative: Significantly higher-than-expected deterioration in the asset quality, weaker-than-expected capital buffers and impairment in the funding profile could lead to a Negative Outlook.


COMPANY PROFILE

Yes Bank is a new generation private bank headquartered in Mumbai. It was incorporated in 2004 and has grown to become a full service commercial bank. The bank reached an asset size of INR3.12 trillion at end-March 2018, with a net profit of INR42.2 billion for the year. At 1QFYE19, the bank had a network of 1,105 branches and 1,741 ATMs (including bunch note acceptors) spread across the country.

FINANCIAL SUMMARY

 

Particular

FY18

FY17

Total assets (INR million)

3,124,456

2,150,599

Total equity (INR million)

257,583

220,541

Net income (INR million)

42,246

33,301

Return on assets (%)

1.6

1.8

CET1 (%)

9.7

11.4

Capital adequacy ratio (%)

18.4

17.0

Source: Company, Ind-Ra

 

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

19 February 2018

27 December 2016

Issuer rating

Long-term/Short-term

-

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

Basel III Tier 2 Bonds*

Long-term

INR110

IND AA+/Stable

IND AA+/Stable

-

Additional Tier-1 Basel III Bonds*

Long-term

INR111

IND AA/Stable

IND AA/Stable

IND AA/Stable

Infrastructure Bonds*

Long-term

INR35.8

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

* Details present in the annexure

ANNEXURE

Issue name/ Type

ISIN

Date of Issuance

Coupon rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Additional Tier-1 Basel III bonds

INE528G08394

18 October 2017

9.0

Perpetual

INR54.15

IND AA/Stable

Additional Tier-1 Basel III bonds

INE528G08352

23 December 2016

9.5

Perpetual

INR30

IND AA/Stable

Total utilised

INR84.15

Total unutilised

INR26.85

Infrastructure bonds

INE528G08360

29 December 2016

7.62

29 December 2023

INR3.3

IND AA+/Stable

Total utilised

INR3.3

Total unutilised

INR32.5

Basel III Tier 2 Bonds

INE528G08378

29 September 2017

7.8

29 September 2027

INR25

IND AA+/Stable

Basel III Tier 2 Bonds

INE528G08386

3 October 2017

7.8

1 October 2027

INR15

IND AA+/Stable

Basel III Tier 2 Bonds

INE528G08402

22 February 2018

8.73

22 February 2028

INR30

IND AA+/Stable

Total utilised

INR70

Total unutilised

INR40



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121