Synopsis: YES Bank shares surged over 8 percent on Thursday following Moody's upgrade of its rating outlook to positive. This upgrade is driven by expectations of a gradual improvement in the bank's depositor base and lending franchise, which are anticipated to enhance core profitability over the next 12-18 months.
Moody's stated that YES Bank's focus on higher-yielding, albeit higher-risk, retail and small and medium enterprise segments will help expand its net interest margins.
YES Bank shares climbed over 8 percent in Thursday's trade after Moody's upgraded its rating outlook on the private lender to positive.
This upgrade is based on expectations that a gradual improvement in YES Bank's depositor base and lending franchise will enhance its core profitability over the next 12-18 months.
Moody's stated that its positive outlook on YES Bank reflects improvements in the bank's asset quality and capitalisation over the past 2-3 years, although it is somewhat offset by the bank's weak core profitability due to high funding costs and the strain of meeting priority sector lending (PSL) targets.
"We anticipate YES Bank's core profitability, measured by pre-provisioning profits to total assets, will gradually improve to above 1.2 percent over the next 12-18 months, up from 0.8 percent in the financial year ending March 2024 (fiscal 2024). Enhancing YES Bank's ability to meet the central bank's PSL rules through new lending from its branches will help reduce operating expenses, thereby improving overall profitability," Moody's said.
YES Bank shares surged 8.45 percent to reach a high of Rs 27.08 on the BSE.
Later, the stock was trading at Rs 26.10, still up 4.53 percent.
Moody's noted that YES Bank's lending focus on higher-yielding, albeit higher-risk, retail and small and medium enterprise segments will help expand its net interest margins.
"A gradual increase in the bank's credit costs will largely be 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 to the Indian peers we rate and will be a key drag on further improvements to its credit profile," the agency said.
Meanwhile, a Bloomberg report suggested that First Abu Dhabi Bank PJSC is among potential suitors for a roughly $5 billion stake in YES Bank.
The Middle Eastern lender is considering a bid for as much as a 51 percent stake in the Indian private lender, according to a source. Business Today could not independently verify the report.
In summary, YES Bank's shares surged over 8 percent after Moody's upgraded its rating outlook to positive, citing improvements in the bank's depositor base, lending franchise, asset quality, and capitalisation.
While challenges remain due to high funding costs and the strain of meeting PSL targets, the bank's focus on higher-yielding segments and potential recoveries from legacy stressed assets are expected to boost its core profitability.
Additionally, reports indicate potential interest from First Abu Dhabi Bank PJSC in acquiring a significant stake in YES Bank, highlighting continued interest in the bank's future prospects.
Disclaimer: The information provided is for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
