A high incidence of corporate loans in Yes Bank's books could further worsen its asset quality and the private lender could face operating challenges as it expands retail presence, Moody's Investors Service today said
Moody's outlined a rapidly-expanding franchise with dominance of corporate loans, a higher dependence on corporate deposits relative to peers and a growing retail deposit base as credit challenges to Yes Bank.
"Given the high concentration risk and the dominance of corporate loans, we are still concerned about the asset quality and expect some further deterioration, given the pressure on Indian corporates," Moody's said in its credit opinion update on Yes Bank.
It said the bank's asset quality has deteriorated in recent quarters, with gross non-performing loans increasing 139 per cent in 2015-16 to Rs 750 crore, from Rs 310 crore a year ago. Restructured loans also increased 37 per cent to Rs 520 crore as of end-March 2016 from Rs 380 crore a year ago.
It said the bank's client base is mostly corporates whose leverage has increased dramatically over the past three years, and the sector now faces increased credit risk owing to higher refinancing costs.
"Furthermore, the loan book is relatively unseasoned - the bank's loan book has grown by 108 per cent over the past 3 years (March 2013- March 2016) and we expect some downside risk to asset quality from a relatively unseasoned loan book as evidenced from the recent deterioration.
Yes Bank has mitigated this risk by reducing infrastructure lending, structuring loans to secure cash flow, and prioritising loans for working capital to provide more control over borrowers' liquidity situations.
Nevertheless, the corporate sector has already undergone some restructuring and additional weakness is probable, it added.
"As Yes Bank expands its retail presence, it could encounter operating challenges. As of end-March 2016, the bank's network consisted of 860 branches and 1,609 ATMs," it said.
Moody's listed high profitability and focus on efficiency, sound buffers that are able to absorb additional asset quality weakness and adequate capitalisation given rapid loan growth will be the bank's credit strengths.
Yes Bank's largest exposures are to large corporates, which accounted for 65 per cent of its loan book at end-March 2016, with the remaining 35 per cent consisting of loans to retail, SME, micro SME and loans to mid-corporates.
Yes Bank launched operations in May 2004 as a wholesale bank, with mainly corporate loans and liabilities. Over the last few years, Yes Bank has focused on building its branch network and its retail banking franchise.
Moody's said the bank has a proven track record in raising fresh equity both domestically and internationally. Further, it also has the necessary approvals to raise new capital amounting to USD 1 billion in this financial year.
"While the bank is adequately capitalised, we expect the new capital will be important to sustain the credit growth," Moody's said.
