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India Ratings Assigns Yes Bank ‘IND AA+’ and its INR21 billion AT1 Bonds ‘IND AA’; Outlook Stable
Ind-Ra-Mumbai-19 December 2016: India Ratings and Research (Ind-Ra) has assigned Yes Bank Ltd a Long-Term Issuer Rating of ‘IND AA+’ with a Stable Outlook and Short-Term Issuer Rating of ‘IND A1+’. The agency has also assigned Yes Bank’s proposed INR21 billion of Basel-III Additional Tier-1 (AT1) bonds an ‘IND AA’ rating with a Stable Outlook.
 
The issuer ratings factor in the bank’s demonstrated superior ability to manage its credit risk, high mix of better rated large borrowers, reasonably large and expanding franchise on both asset and liability sides, and strengthening of profitability buffers. The bank also generates a sizeable fee income, primarily from its corporate clients, which supports its profitability buffers. Yes Bank’s proportion of bulk funding is higher than that of better rated peers though the bank’s concentration on deposit side has shown an improving trend. However, the bank runs an asset-liability tenor gap on account of a lower share of the current account and saving account deposit ratio than larger peers.
 
Ind-Ra has notched down the rating for Yes Bank’s AT1 bonds from its Long-Term Issuer Rating. For AT1 instruments, the agency considers 'discretionary component', 'coupon omission risk', and 'write-down/conversion risk' as the key parameters to arrive at the final rating. The agency recognises the unique going-concern loss absorption features that these bonds carry and differentiates them from the bank's senior debt (one notch in this case) factoring in a higher probability of an ultimate loss for investors in these bonds. Ind-Ra envisages coupon deferrals and principal write-down risk as a remote possibility in view of Yes Bank’s financial strength, adequate revenue reserve buffers and its track record of consistent operating performance through cycles.
 
The Stable Outlook reflects Ind-Ra’s expectation that any deterioration in Yes Bank’s asset quality will be adequately absorbed by its operating profits without any impairment in its Tier 1 capitalisation (September 2016: Tier 1 ratio of 10.1%). The ratings also factor in the agency’s expectation that the bank would maintain above average core capitalisation on an ongoing basis in line with its higher rated private sector peers.
 
Key Rating Drivers 
Consistent Performance through Cycles: Yes Bank’s performance on various credit metrics has been consistent and largely stable even in the face of the current cyclical downturn. This becomes all the more important in view of portfolio, which is largely inclined towards corporate borrowers, reflecting strong credit risk management practices. The agency also derives comfort from the bank’s significant proportion of large exposure to better rated borrowers. 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. In Ind-Ra’s view, growth in the retail asset segment would come at lower incremental retail margins than for its large peers’, highlighting their pricing power. Nevertheless, expansion in the retail segment should result in an improvement in the overall margins for the bank.
 
Stable Asset Quality: Yes Bank reported delinquencies compare favourably with peers’ (gross NPL September 2016: 0.83%; September 2015: 0.61%). This is in contrast to the banking system’s gross NPL ratio, which surged to 7.6% as of March 2016, while the ratio of private sector banks on a blended basis was 2.7%. The bank’s credit costs have been under control (FY16: 57bp, average FY13-FY16: 34bp). This, in the agency’s view, is underpinned by the bank’s lower concentration in stressed sectors, proactive intervention and higher agility in resolving contentious exposure, backed by its limited presence as a consortium lender. In Ind-Ra’s view, the banking system 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. The mid-corporate segment (business banking) constituted 10.7% (at end-September 2016) of Yes Bank’s total loan book, with a bulk of its NPLs emanating from this segment over the past couple of years. Nevertheless, the bank has been slowing down expansion of its business banking book. Further, the bank’s reasonable pre-provision profitability provides a reasonable cushion to absorb spike in the credit costs under Ind-Ra’s stress scenarios.
 
Moderate Funding Profile: Bulk deposits contributed around 43.5% of Yes Bank’s total funding at end-September 2016, 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 CASA deposits would be a key monitorable. Yes Bank’s proportion of bulk deposits to total deposits has shown an improvement over the last couple of years, highlighting the bank’s focus to reduce its liability concentration by increasing branch presence (September 2015: 700; September 2016: 950). Yes Bank’s funding gap (cumulative one-year mismatch as a percentage of average assets) has shown improvement, but continues to be higher than a few large peers’.
 

Rating Sensitivities 
Positive: Increase in franchise scale, along with a considerable improvement in 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 INR1.87 trillion at end-September 2016, with 2QFY17 clocking a net profit of INR8.01 billion. At 2QFYE17, the bank had a network of 950 branches and 1,756 ATMs spread across the country.
Contacts
Primary Analyst
Udit Kariwala
Analyst
+91 22 4000 1749
India Ratings and Research Pvt Ltd
Wockhardt Towers, Level 4, West Wing
Bandra Kurla Complex, Bandra (East)
Mumbai 400051
 
Secondary Analyst
Abhishek Bhattacharya
Director
+91 22 4000 1786
 
Committee Chairperson
Prakash Agarwal
Director
+91 22 4000 1753

Media Relations:
Mihir Mukherjee,
Mumbai, Tel: +91 22 4035 6121,
Email:
mihir.mukherjee@indiaratings.co.in

Additional information is available on 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.


Applicable criteria, ‘Financial Institutions Rating Criteria’ and ‘Rating of FI Subsidiaries and Holding Companies’ dated 1 December 2015, are available at www.indiaratings.co.in.


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