The outlook change reflects Moody’s expectation that gradual improvement in YES Bank’s deposit and loan base will lead to improved core profitability for the bank over the next 12 to 18 months.
The positive outlook takes into account improvements in banks’ asset quality and capital structure over the past two to three years, somewhat offset by weakness in banks’ core profitability due to higher funding costs and the burden of meeting priority sector lending (PSL) targets.
“We expect YES Bank’s core profitability, measured as profit before provisions as a percentage of total assets, to improve gradually over the next 12-18 months to above 1.2 percent from 0.8 percent in the fiscal year ending March 2024 (FY24),” Moody’s said.
Moody’s said YES Bank’s improved ability to meet the central bank’s PSL rules through new lending from branches will reduce operating expenses to achieve targets and improve overall profitability. YES Bank’s focus on lending in the higher-yielding but higher-risk retail and SME segments will also lead to wider net interest margins, the rating agency said. Moderate increases in the bank’s credit costs will be largely offset by recoveries from legacy stressed assets, given the high loan loss provision coverage of those assets. “Despite these improvements, YES Bank’s profitability remains low relative to its Indian peers that we rate, which will be a significant drag on further improvement in its credit profile,” it said.
“We expect our funding costs to remain higher than our peers over the next 12 to 18 months as competition among banks for deposits intensifies.”
The bank’s asset quality has improved significantly: its non-performing loan ratio declined to 1.7% as of March 31, 2024 from 2.2% a year ago, supported by lower slippages, stronger recoveries and higher write-offs.
“We expect non-performing loans to increase gradually due to the ageing of the portfolio and a shift towards riskier, higher-yielding segments. However, the NPL ratio should remain stable due to write-offs and recoveries of non-performing loans,” Moody’s said.
Moody’s expects banks’ capital to decline moderately over the next 12 to 18 months as credit growth outpaces internal capital generation.
Given the positive outlook, YES Bank’s ratings are unlikely to be downgraded over the next 12-18 months.
Moody’s may downgrade YES Bank’s ratings if there is a significant deterioration in the bank’s asset quality, leading to a decline in profitability and capital.
