Moody's revises Yes Bank outlook to 'positive', expects gradual improvement in profitability

July 11,2024

Global rating agency Moody's has revised its outlook on Indian private sector lender Yes Bank from "stable" to "positive." This change reflects the expectation of a gradual improvement in the bank's depositor base and lending franchise, which is anticipated to enhance its core profitability over the next 12–18 months.

The positive outlook considers the improvement in Yes Bank's asset quality and capitalization over the past 2-3 years. However, this is 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 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 the financial year ended March 2024 (fiscal 2024).

The 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, thereby improving its overall profitability, according to Moody's.

Moody's also noted that YES Bank's focus on higher-yielding, albeit higher-risk, retail and small and medium enterprise segments will help widen its net interest margins.

Additionally, Moody's highlighted that the 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, Moody's noted that Yes Bank's profitability will remain weak compared with its Indian peers and will be a key drag on further improvements to its credit profile.

Moody's expects the bank's funding costs to remain higher than their peers over the next 12–18 months due to increasing competition among banks for deposits.

Yes Bank's asset quality has significantly improved, with its non-performing loan (NPL) ratio declining to 1.7% as of March 31, 2024, from 2.2% a year earlier, supported by lower slippages, stronger recoveries, and higher write-offs.

Moody's expects a gradual increase in NPLs due to portfolio aging and a shift towards riskier, high-yield segments. However, the NPL ratio will remain stable because of write-offs and recoveries of legacy problem loans.

Over the next 12 to 18 months, Moody's expects the bank's capitalization to moderately decline as credit growth outpaces internal capital generation.