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Deepa Salunkhe made post

How will the downgrading of Yes Bank ratings impact the stock price?

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Juvina Maggie answered.
8 months ago


India Ratings downgraded YES Bank long-term issuer rating to A from A+ and its short-term issuer rating to A1 from A1+. In addition, the rating agency also placed these two debt packets on Rating Watch Negative (RWN). Some of the reasons cited by India Ratings for the downgrade include delay in capital raising and uncertainty regarding the quantum of capital available and interested. In addition, the agency also raised red flags over the low CASA ratio.

It may be recollected that Yes Bank had initially planned to raise capital of over $1.2 billion in FY20. Although the bank has announced plans of raising $2.0 billion of equity during the year, clarity is awaited. As of now, there is no progress on the game plan to raise capital. The agency has also expressed concerns that the time lines may get extended if there are not enough interested parties to invest.

India Ratings also raised concerns that the gross non-performing assets (GNPAs) and loan accounts rated “BB” and below are about 20% of its total book as of September 2019. That is not a very encouraging scenario for the bank and makes it extremely vulnerable to sudden shocks. In a nutshell, the downgrade reflects the inadequate progress on capital raising and NPA control as well as the uncertainty over the quantum and pace of equity infusions. The bank has seen its core capital dip to 8.7%, marginally above the statutory 8% and hence equity infusion is urgent if the bank has to continue to operate.

However, the limited impact on the stock price was more due to the worst case scenario being already factored in the price. Yes Bank has seen value depletion of over 70% in the last one year and even a worst case scenario is factored in. Hence, the markets did not see much of downside risk in the downgrade since there have already been similar downgrades in the past.