YES Bank shares climbed over 8 per cent in Thursday's trade as the ratings agency Moody's upped its rating outlook on the private lender to positive on expectations a gradual improvement in YES Bank's depositor base and lending franchise will help improve its core profitability over the next 12-18 months.
Moody's said its positive outlook on YES Bank took into account the improvement in the bank's asset quality and capitalisation over the past 2-3 years and 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.
"We expect YES Bank's core profitability, which is measured by pre-provisioning profits to total assets, will gradually improve to above 1.2 per cent over the next 12-18 months from 0.8 per cent in the financial year ended March 2024 (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," it said.
YES Bank shares rose 8.45 per cent to hit a high of Rs 27.08 on BSE. Later, the stock was trading at Rs 26.10 level, still up 4.53 per cent.
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, the ratings agency said.
"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, YES Bank's profitability will remain weak compared with the Indian peers we rate and a key drag on further improvements to its credit profile," it said.
Meanwhile, a report by Bloomberg suggested that First Abu Dhabi Bank PJSC is among potential suitors for a roughly $5 billion stake in the private lender. The Middle Eastern lender is weighing a bid for as much as a 51 per cent stake in India's private lender, it quoted a source as saying. Business Today could not independently verify the report.