Moody's places Yes Bank ratings under review for a downgrade

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Moody's places Yes Bank ratings under review for a downgrade

Bad news for Yes Bank continues unabated. In the latest such development, rating agency Moody’s Investor Service has placed the rating of the private sector bank under review for a possible downgrade. The agency is concerned about the bank’s large exposure to the Non-Banking Financial Company (NBFC) and real estate sectors, both of which are struggling. The bad news is not restricted to a possible downgrade but extends to continued resignations from its board as well as a fine levied by the central bank.
All of the aforementioned developments – the ratings being placed under review, continued resignations from its board, and the fine by the central bank – took place on June 11 – a day before Yes Bank’s annual general meeting.

As far as the ratings downgrade is concerned, Moody’s said that it believed that the continuing pressures on Indian finance companies, especially from the NBFC and real estate sectors, will be detrimental to the credit profile of Yes Bank. The bank’s large exposure to weaker companies from these sectors will have a material impact on its ratings.

Moody’s noted that housing finance companies and NBFCs formed 6.4% of Yes Bank’s total exposure at the end of March 2019. Meanwhile, its direct exposure to the commercial and residential real estate sector stood at 7%, also at the end of March 2019. Given the tight liquidity conditions being faced by these two sectors, Yes Bank’s rating can possibly be downgraded. The ratings major also said that the bank’s finances will be under further pressure if it fails to raise the board-approved capital of $1 billion.

Moody’s added, though, that the bank’s proactive provisioning in the March quarter will absorb some of the stress created by the aforementioned headwinds.

Takeaway- 
  • The stress on finances, which may result into a credit rating downgrade is not the only problem being faced by Yes Bank. Its non-executive independent director Mukesh Sabharwal resigned from the board on June 11 – the second such resignation after former interim MD & CEO Ajai Kumar had resigned with immediate effect a day ago.
  • Meanwhile, the Reserve Bank of India imposed a fine of Rs 11.25 lakhs on the bank for non-compliance with prepaid payment instrument norms.

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