Shares of YES Bank surged over 8% in early trade on Thursday after global brokerage Moody's Investors Service reaffirmed the ratings of the private sector lender and upgraded outlook to ‘Positive’ from ‘Stable’. This was attributed to improvement in the bank’s depositor base and lending franchise as well as improvement in the bank's asset quality and capitalisation.

Cheering the news, YES Bank shares jumped as much as 8.4% to ₹27.08, while the market capitalisation climbed to ₹81,665 crore. Early today, the banking stock opened 4.1% higher at ₹26.01 after ending over 3% lower at ₹24.97 in the previous session on the BSE.

The share price of YES Bank touched its 52-week high of ₹32.81 on February 9, 2024, and a 52-week low of ₹14.10 on October 23, 2023. The private bank shares gained 52% in the past one year; 2.5% in six months; and 11% in a month.

YES Bank informed exchanges today that Moody's has affirmed “Ba3” ratings to the lender’s long-term foreign currency and long-term (local and foreign currency) deposit. It has also affirmed Yes Bank, IFSC Banking Unit Branch's long-term foreign currency and local currency counterparty risk ratings to “Ba3” and its senior unsecured (foreign currency) medium-term note program to “(P)Ba3”. The rating outlook has been revised to positive from stable on both entities.

“The change in outlook to positive reflects our expectation that a gradual improvement in YES Bank's depositor base and lending franchise will help improve its core profitability over the next 12-18 months. The positive outlook takes into account the improvement in the bank's asset quality and capitalisation over the past 2-3 years, somewhat offset by the bank's weak core profitability driven by high funding costs and the strain from meeting priority sector lending (PSL) targets,” Moody’s says in its report.

Moody’s expects YES Bank's core profitability, measured by pre-provisioning profits to total assets, to gradually improve to above 1.2% over the next 12-18 months from 0.8% in fiscal 2024. “An improvement in Yes Bank's ability to meet the central bank's PSL rules through new lending from its branches will help reduce operating expenses for meeting the targets, improving its overall profitability.”

The brokerage mentions in its report that YES Bank's lending focus on higher yielding, albeit higher-risk retail and small and medium enterprise segments, will help widen its net interest margins. “A gradual increase in the bank's credit costs will be largely offset by recoveries from its legacy stressed assets, given the high loan loss provision coverage of those assets.” 

Despite these improvements, the brokerage expects the bank’s profitability to remain weak compared with the Indian peers.

Moody’s says that it could upgrade the bank's ratings and baseline credit assessment (BCA) if the bank manages to sustainably improve its core profitability while maintaining stable asset quality and capitalization. Specifically, an improvement of pre-provisioning profits to total assets above 1.2% while maintaining stable asset quality and capitalisation without a significantly increase in credit costs will be positive for the BCA and rating.

Given the positive outlook, a downgrade of YES Bank's ratings is unlikely over the next 12-18 months, it says. “wWe could downgrade Yes Bank's ratings if its asset quality significantly deteriorates, leading to an erosion of its profitability and capitalisation. Specifically, a decline in its total common equity/risk-weighted assets to below 10% with pre-provisioning profits to total assets remaining below 0.8% will exert downward pressure on the BCA. Any weakening in Yes Bank's funding and liquidity would also be negative for the rating.” It adds.

In the fourth quarter ended March 31, 2024, YES Bank reported better than expected earnings, posting 123% growth in net profit at ₹452 crore against ₹202 crore in the same period last year. Sequentially, the profit was up 95.2% from ₹231 crore in the December quarter of FY24.

The net interest income (NII) grew 2.3% to ₹2,153 crore in Q4 FY24 as compared to ₹2,105 crore in the corresponding period last year. On quarter-on-quarter, the NII rose 6.8% from ₹2,017 crore in Q3 FY24.

On the asset quality front, the gross non-performing assets (GNPAs) improved to 1.7% from 2% in Q3 FY24 and 2.2% in Q4 FY23. In a similar trend, the net non-performing assets (NNPAs) also declined to 0.6% from 0.9% in the previous quarter and 0.8% in the same period last year. The provision cost (non-tax) was at ₹471 crore for Q4 FY24, down 23.8% YoY and 15.1% QoQ.

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