In a setback to Yes Bank, global rating agency Moody’s placed the private lender’s foreign currency issuer rating of Ba1 under review for downgrade as liquidity pressures on finance companies may negatively impact the credit profile of the bank.
As of March 2019, Yes Bank’s exposure to Indian housing finance companies (HFC) and non-bank finance companies (NBFC) accounted for 6.4 per cent of its total exposure, Moody’s said in a statement.
Besides, the bank also had a 7 per cent direct exposure to commercial and residential real estate as of the same date, which is also under pressure, because liquidity conditions in this space have worsened, just like with the HFCs and NBFCs.
“The review for downgrade takes into account Moody’s expectation that the ongoing liquidity pressures will negatively impact the credit profile, given the bank’s sizeable exposure to weaker companies,” it noted.
In April 2019, the bank classified about Rs 10,000 crore worth of its exposures, representing 4.1 per cent of its total loans under the watchlist that could translate into non-performing loans over the next 12 months.
“Taking into account the bank’s own disclosure of the stressed book, as well as Moody’s expectation of stress in the Indian HFC, NBFC and real estate sectors, Moody’s expects significant pressure on the bank’s asset quality and therefore profitability and capital position,” the ratings firms noted.
It added that the impact will be somewhat cushioned by the bank’s proactive loan loss provisioning for anticipated stress. During FY19, the bank made loan loss provisions of about 20 per cent for the loans on the watchlist.
Its weak performance eroded its capital, as measured by the common equity tier 1 ratio, to 8.4 per cent in FY19 from 9.7 per cent in FY18. The bank’s board had approved a plan to raise equity capital up to $1 billion and if the bank cannot raise capital, its loss-absorbing capacity and therefore financial profile will be under pressure.
According to Moody’s, the negative adjustment takes into account the management’s aggressive strategy, which translated into rapid loan growth in the past 4-5 years and large concentrations to some Indian groups.