Moody’s cuts Yes Bank rating over governance

MUMBAI: Moody’s has downgraded Yes Bank, citing developments surrounding the transition in leadership as well as governance issues that complicate implementation of the lender’s long-term strategy. The rating agency has said that these developments could constrain the bank’s ability to raise new capital.

Yes Bank’s foreign currency issuer rating has been downgraded to Ba1 from Baa3 and its foreign and local currency bank deposit ratings to Ba1/NP from Baa3/Prime-3. “The rating action considers the resignation of various members of the bank’s board of directors, which — when seen in conjunction with the RBI’s directive in September 2018 to restrict the term of the bank’s MD CEO as well as founder, Rana Kapoor, till January 31, 2019 — have raised Moody’s concerns over corporate governance,” the rating agency said in a statement issued here on Tuesday.

The downgrade comes at a time when the two warring promoter factions of the bank — Rana Kapoor and his sister-in-law Madhu Kapur — are working on arriving at consent terms to settle their differences and draw up a common plan for identifying directors. The truce is aimed at enabling the board to identify a new CEO acceptable to all shareholders who will replace Kapoor when he steps down at the end of January 2019.

Shares of Yes Bank closed at Rs 183 on Tuesday, down 2.6% from its previous close. On Monday, the bank’s shares had fallen following reports that two of the promoter group companies Morgan Credits and Yes Capital had raised funds by issuing zero-coupon bonds.

“These two promoter companies belong 100% to my three grown-up daughters who are qualified and experienced to handle their business affairs independently without my interference. They have set up a startup business,” said Kapoor in response to a query on the fund-raising. Besides downgrading domestic operations, Moody’s has also downgraded the foreign currency senior unsecured MTN programme rating to (P)Ba1 from (P)Baa3 and senior unsecured debt rating to Ba1 from Baa3. The bank’s operation at the international finance centre at Gift City Gujarat is rated Baa3(cr)/ P-3(cr).

“Despite these developments, Moody’s notes that the bank’s funding and liquidity positions have remained fairly stable. Nevertheless, its funding profile is relatively weaker compared to other public sector banks in India, as measured by its low current and savings account deposit ratio and the dominance of corporate deposits,” Moody’s said.

Besides downgrading the bank, the rating agency has also revised the outlook to negative, indicating that an upgrade is unlikely. The negative outlook takes into account the uncertainty relating to the bank’s asset quality and profitability performance and in particular any adverse findings from the RBI’s risk-based supervision report or the divergence report. “In addition, any negative developments in the bank’s funding and liquidity profile or ability to raise new capital to a level comparable with other similarly rated peers in India will exert pressure on its ratings,” Moody’s said.

To improve its rating outlook to stable, the bank will need to maintain its asset quality ratio even after RBI’s risk-based supervision exercise. It would also need to raise new equity capital.

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