Moody’s Upgrades Yes Bank Outlook to ‘Positive’, Sees Gradual Profit Boost

Global rating agency Moody’s has changed its outlook on Yes Bank from “stable” to “positive.” This means they expect Yes Bank’s profits to improve gradually over the next 12–18 months as the bank’s depositor base and lending business grow.

Key Points:

1. Asset Quality and Capitalization: Yes Bank’s asset quality and capitalization have improved over the past 2-3 years. However, the bank’s core profitability remains weak due to high funding costs and the pressure to meet priority sector lending (PSL) targets.
2. Profitability: Moody’s expects Yes Bank’s core profitability (pre-provisioning profits to total assets) to rise from 0.8% in the fiscal year ending March 2024 to above 1.2% in the next 12–18 months.
3. Cost Reduction: The bank’s ability to meet PSL targets through new branch lending will help lower operating expenses, boosting overall profitability.
4. Higher-Yield Segments: Yes Bank’s focus on higher-yielding, though riskier, retail and small and medium enterprise loans will increase its net interest margins.
5. Credit Costs: Although credit costs will rise, recoveries from old stressed assets with high loan loss provisions will offset this increase.
6. Profitability Compared to Peers: Despite these improvements, Yes Bank’s profitability will still lag behind other Indian banks, which will affect its overall credit profile.
7. Funding Costs: The bank’s funding costs are expected to remain higher than its peers due to intense competition for deposits.
8. Non-Performing Loans (NPLs): Yes Bank’s NPL ratio has improved to 1.7% as of March 31, 2024, from 2.2% a year earlier. However, Moody’s anticipates a gradual rise in NPLs due to portfolio aging and a shift towards riskier segments. The NPL ratio is expected to stay stable due to write-offs and recoveries.
9. Capitalization: Over the next 12–18 months, Moody’s expects Yes Bank’s capitalization to decline slightly as credit growth outpaces the bank’s internal capital generation.

Conclusion: Moody’s sees a brighter future for Yes Bank with a gradual improvement in profits, despite some ongoing challenges.