Yes Bank Alert! Why you should worry about what this foreign agency has said

While many analysts have kept Yes Bank on wait and watch outlook, foreign rating agency Moody's Investor Services has showed everyone a whole new picture about this private lender. Something that should worry all those linked to Yes Bank. Moody's raised a red flag on Yes Bank, by downgrading  the bank's outlook ahead with a negative opinion. The issues highlighted by Moody's paints a very cautious picture for investors on Yes Bank shares. Following the announcement, Yes Bank share price today has plunged by over 4%, before ending at Rs 183.15 per piece down by Rs 4.80 or 2.55% on Sensex. Yes Bank, which is currently very much tied up in a search for a new CEO and MD to replace co-founder Rana Kapoor, who has been given his marching orders by RBI and now it is having to face the impact of Moody's rating impact. 

Moody's has also downgraded the bank's foreign and local currency bank deposit ratings to Ba1/NP from Baa3/Prime-3 and foreign currency senior unsecured MTN program rating to (P)Ba1 from (P)Baa3.

And, Moody's has downgraded Yes Bank's baseline credit assessment (BCA) and adjusted BCA to ba2 from ba1.

At the same time, Moody's has affirmed the bank's counterparty risk assessment (CR Assessment) of Baa3(cr)/P-3(cr) and domestic and foreign currency counterparty risk rating (CRR) of Baa3/P-3.

For the bank's IFSC Banking Unit Branch, Moody's has also downgraded the foreign currency senior unsecured MTN program rating to (P)Ba1 from (P)Baa3 and senior unsecured debt rating to Ba1 from Baa3. At the same time, Moody's has affirmed the IFSC Bank Unit Branch's CR Assessment of Baa3(cr)/ P-3(cr), and domestic and foreign currency CRR of Baa3/P-3.

The outlook, where applicable, has been changed to negative from stable.

Giving rationale to their rating, Moody's raised concerns over corporate governance. The agency considers the resignation of various members of the bank's Board of Directors -- which, when seen in conjunction with the Reserve Bank of India's (RBI) directive in September 2018 to restrict the term of the bank's MD&CEO as well as founder, Rana Kapoor, till 31 January, 2019. 

In past two weeks, Yes Bank faced a host of resignation in their management.

Non-executive chairman Ashok Chawla and Rentala Chandrashekhar, Independent Director has tendered his resignation from the Bank's Board, with immediate effect. 

Hence, Yes Bank is not just in need of a new CEO, but is also searching for new Independent Director and non-executive chairman. 

In Moody's opinion, although the bank's credit fundamentals remain stable, the developments surrounding the transition in leadership as well as the governance issues are credit negative because they complicate management's effective implementation of the bank's long-term strategy. Furthermore, these developments could constrain the bank's ability to raise new capital.

As a result, Moody's has incorporated a negative adjustment for corporate behavior in Yes Bank's standalone credit profile, which then led to the downgrade of its BCA and adjusted BCA to ba2 from ba1 and in turn the downgrade in its ratings.

Furthermore, Moody's states that, although Yes Bank's capitalization is adequate, the bank would need to raise capital from the market to continue to grow its balance sheet more rapidly than the Indian banking system. If Yes Bank experiences difficulty in raising external capital, this will impede the bank's ability to grow its loan book.

Additionally, while its current asset quality metrics are superior to those of its Indian peers, its aggressive growth strategy poses asset risks. In particular, Moody's has noted significant divergence in the bank's reported asset quality metrics compared with the RBI's assessment of asset quality in the two fiscal years ended March 2017 and 2016. While the results of the RBI's risk-based supervision report for fiscal 2018 are not known as yet, nevertheless, any adverse findings from its assessment will be credit negative.

Despite these developments, Moody's notes that the bank's funding and liquidity positions have remained fairly stable. Nevertheless, its funding profile is relatively weaker compared to other public sector banks in India, as measured by its low current and savings account deposit ratio and the dominance of corporate deposits.

At the same time, Moody's has maintained its assumption of a moderate probability of government support for deposits and senior unsecured debt reflecting the bank's modest, but rapidly growing franchise, and its relative importance to India's banking system. 

These factors as per Moody's can even downgrade Yes Bank's rating further.

Yes Bank's ratings could be downgraded if (1) there is a sustained deterioration in impaired loans or loan-loss reserves, or if the rate of new NPL formation is significantly higher than previously experienced; (2) the bank's capital ratios decline due to its inability to raise new capital; and (3) there are any regulatory actions by the RBI, including adverse findings from the risk-based supervision report and/or any regulatory restrictions or fines.

Can Rana Kapoor's successor do the impossible? 

According to Moody's  the rating outlook could return to stable if (1) Yes Bank maintains its current asset-quality ratios and there is no adverse impact from the RBI's risk-based supervision exercise; (2) the bank manages to raise new equity capital and bring its capital ratios in-line with similarly rated peers in India; and (3) the bank's funding profile remains stable without weakening its net interest margin.

For now everyone is waiting to see who will take charge in Yes Bank. But one can expect in current scenario that Yes Bank share price would take further hit in tomorrow's trading session.