ICRA downgrades ratings of YES Bank, outlook of Canara Bank's debt instruments lowered

Rating agency Icra has downgraded private sector lender YES Bank's long-term ratings along with a negative outlook. The agency has also downgraded some of Canara Bank's debt instruments by taking the bank's asset quality, earning profile, and capital requirements into account.

Canara Bank, in a BSE filing, said ratings of its Tier-I bonds, which are worth Rs 1,500 crore, have been lowered from "AA" with a negative outlook to "AA-" with a stable outlook. The lender's Tier-II bonds, which are worth Rs 7,900 crore, have also been downgraded from 'AAA' with a negative outlook to 'AA+' with a stable outlook.

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Canara Bank said, "The ratings have been revised/downgraded considering the outlook on bank's earnings profile, asset quality, regulatory and growth capital requirements."

In case of private sector YES Bank, the rating agency downgraded ratings on six instruments with totalling borrowings of more than Rs 33,000 crore after it reported a surge in BB and below-rated advances in Q4 FY19 to 7.1 per cent under Ranveer Gill, new chief executive of the bank.

Icra has also factored in further weakening in core equity capital cushion, due to consequent losses and voluntary provisions in the March quarter. The agency has lowered the banks' tier-I bond from "AA-" to "A" and tier-II bonds from "AA" to "AA-".

However, YES Bank, under Ravneet Gill, has moved towards an improved focus on liabilities as the cost of interest-bearing funds for the bank remains high in relation to the lender' average. There was also an increase in YES Bank's deposits, with YoY growth of 13.4 per cent in FY2019, Icra said.

The downgrade comes after Icra, last November, placed the ratings under watch with negative implications after the RBI restricted Yes Bank's Promoter and Chief Executive Rana Kapoor term till January 31.

YES Bank, in Q4 FY19 earnings report, declared a rise in BB and below rated advances. This was because of deterioration in the credit profile of the banks' some of the larger borrowers. The bank, given the identification of such advances, has made contingent provisions of Rs 2,100 crore in March quarter.

The CET-I declined from 9.1 per cent on December 31, 2018, to 8.4 per cent on March 31, 2019, said Icra. Additionally, the minimum regulatory requirement of CET-I is 8 per cent for March 31, 2020, and 7.375 per cent for March 31, 2019.

Icra added, "The ability to reduce low-rated advances and improve the CET-I capital cushion along with diversifying the advances and liabilities will result in a change in the outlook to stable from negative."

YES Bank reported a surprise loss of Rs 1,506-crore net loss for the March quarter last week as against a profit of Rs 1,179 crore in the year-ago period as provisions soared over nine-times. The earnings shock was  clearly visible during the next market session when the YES Bank share price tanked 30% to 166 level.

Higher provisions for possible reverses, including a massive Rs 2,100-crore contingency reserve, were the prime reason for the massive loss, the bank said. The heavy quarterly loss crimped the full year profit at Rs 1,720 crore as against Rs 4,224 crore in FY18.

Had it not been for a Rs 831-crore write-back, the private sector lender would have reported higher losses for the quarter. An almost 10-times spike in provisions to Rs 3,661 crore from Rs 399 crore in the year-ago period led to the massive hit on the bottomline.

This includes a contingent provision of Rs 2,100 crore. Leadership changes have often led to massive clean-ups at banks, and the practice, normally at state-run banks, has been adopted by the new Managing Director and Chief Executive Ravneet Gill.

Overall slippages stood at Rs 3,481 crore and included Rs 552 crore exposure to Jet Airways. The bank has outstanding loan of Rs 2,528 crore to various companies and SPVs of IL&FS Group. Of this, Rs 2,442.05 crore has been classified as NPA with specific provision of Rs 610.51 crore (25 per cent).

The gross non-performing assets ratio more than doubled to 3.22 per cent from 1.28 per cent in the year-ago period and 2.10 per cent in the preceding quarter. It has a 7 per cent exposure to the commercial real estate sector, which is facing troubles.

The bank, which closed FY19 with credit costs of 2.19 per cent due to the additional provisioning, is targeting to get the same down to 1.25 per cent in FY20.

(Edited by Vivek Dubey)

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