ICRA rates India s first Basel III compliant Tier I Bond programme

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1 FOR IMMEDIATE RELEASE December 30, 2013 ICRA rates India s first Basel III compliant Tier I Bond programme ICRA has assigned a rating of [ICRA]A(hyb) 1 with stable outlook to the Basel III compliant Rs 300 crore Tier I Bonds of Yes Bank Limited (YBL). This is the first Tier I capital instrument, compliant with the Basel III Capital Regulations, to be issued by an Indian Bank. The rating for these Basel III compliant Tier I bonds is three notches lower than the Basel II complaint Lower Tier II bonds of the bank as they have the loss absorption features in compliance with the RBI guidelines on Basel III Capital Regulations in May 2012 that make them riskier. ICRA s assessment on the level of notching takes into account various factors, including: Bank s relative standalone financial/ fundamental strength Bank s relative ranking on its expected capitalisation levels under stress testing scenarios Bank s track record and philosophy on maintaining excess capital Bank s franchise, relative standing in equity market, its demonstrated ability in attracting fresh equity, and the quality and diversity of its investors. The likelihood of capital erosion for banks with relatively higher scores on key operating parameters would be much lower, and therefore, the notching of ratings could be correspondingly lesser. However, banks scoring relatively low on these parameters would have a relatively higher probability of capital erosion, and therefore, the notching of rating in their case could be greater. Says Ms. Vibha Batra, Co-Head Financial Sector Ratings, ICRA Limited, The RBI guidelines on Basel III Capital Regulations in May 2012 introduced stringent clauses for the debt capital instruments so that loss absorption kicks in before the public injection of funds. While both Tier I and Tier II Basel III compliant instruments have loss absorption features, Tier I instruments are meant to absorb losses on a going concern basis, and therefore, the loss absorption trigger kicks in fairly early. The high loss absorption features of Tier I are likely to bail out depositors as well as investors in Tier II instruments well ahead of stress. The loss absorption capacity of Basel III compliant Tier I bonds is higher than those of other debt capital instruments under Basel II norms. The following loss absorption features make them riskier: Basel III Additional Tier I capital instruments, upon the occurrence of the trigger event (Common Equity Tier I dropping below 6.125%), at the option of RBI, will have to be either written off, or converted into Common Equity; while there is no clause of write off/conversion in the earlier instruments. Permanent write off in case of public injection of funds under Point of Non-Viability (PONV). PONV trigger for all Basel III capital instruments is earlier of: o Decision by the RBI for conversion or temporary/permanent write-off, without which the firm o would become non-viable; Decision by relevant authority to make a public injection of capital, or equivalent support, without which the firm would have become non-viable. Capital Conservation (by restricting dividend payouts etc.) to kick in once Common Equity Tier I drops below 8%, unlike 9% overall capital adequacy under Basel II. If a bank wants to make payments in excess of the amount that the norm on capital conservation allows, it would have the option of raising capital for such excess amount. Banks have full discretion at all times to cancel distribution/payments. Cancellation of discretionary payments shall not be an event of default. 1 The letters hyb in parenthesis suffixed to a rating symbol stand for hybrid, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features; such features may translate into higher levels of rating transition and loss-severity vis-à-vis conventional debt instruments. PRESS RELEASE Page 1

2 Chart1: Default Zone for additional Tier I Instruments Default Zone for Additional Tier I 9% 8% 5.50% 6.125% CET1=6.125%; AT1 to be written off / converted 5% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Common Equity Tier 1 Says Karthik Srinivasan, Co-Head Financial Sector Ratings, ICRA Limited, As the local markets evolve, this instrument would be an important tool to partly meet the large capital requirements of domestic banks. While Basel III instruments are likely to absorb losses on the breach of loss triggers, ICRA expects prudent regulatory provisions, close supervision and RBI oversight to help banks lower the probability of capital erosion, and therefore, of trigger breach. For ICRA Rating Methodology for Basel III Compliant Non-Equity Capital Instruments please refer ICRA Rating Methodology for Basel III Compliant Non-Equity Capital Instruments PRESS RELEASE Page 2

3 Rating of [ICRA]A(hyb) with stable outlook assigned to Basel III compliant Rs 300 crore Tier I Bonds of Yes Bank Limited Rating of [ICRA]A(hyb) with stable outlook has been assigned to the Basel III compliant Rs 300 crore Tier I Bonds of Yes Bank Limited (YBL). The letters hyb in parenthesis suffixed to a rating symbol stand for hybrid, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features; such features may translate into higher levels of rating transition and loss-severity vis-à-vis conventional debt instruments. ICRA also has ratings outstanding of [ICRA]AA with stable outlook on its Lower Tier II bonds, [ICRA]AA- with stable outlook on its IPDI bonds and Upper Tier II bonds and [ICRA]A1+ rating on the Certificate of Deposits programme and Short Term Fixed Deposit programme of YBL. The rating for the Basel III compliant Tier I bonds is three notches lower than the Basel II complaint Lower Tier II bonds of the bank as these instruments have the following loss absorption features that make them riskier. Bank has full discretion at all times to cancel distribution/payments and cancellation of discretionary payments shall not be an event of default. The minimum capital conservation ratio applicable to the banks may restrict the bank from servicing these Tier I bonds in case the Common Equity Tier-I falls below limit as prescribed by RBI. These Tier I bonds are expected to absorb losses through Write-Down Mechanism at the Objective Pre-Specified Trigger Point fixed at Bank s Common Equity Tier-I ratio as prescribed by RBI, currently 6.125% of Total Risk Weighted Assets of the Bank or when the Point of Non Viability (PONV) trigger is breached in the RBI s opinion. The rating factors in Yes Bank s (YBL) continued robust reported operating performance with strong profitability indicators on the back of its ability to generate high levels of fee income, comfortable asset quality indicators, its technology initiatives and increasing CASA base (20.39% as on Sep-13) post deregulation of savings account interest rates. Though its core equity Tier I capital compares lower to its private sector peers, its regulatory capital adequacy at 13.8% (Tier I of 8.4%) as per Basel III as on Sep 30, 2013 (15.6% if we include the net profit of Q2FY14 with Tier I capital of 9.5%) is comfortable. ICRA believes that in addition to steady accruals, the bank would need to raise capital going forward as growth picks up. However given the demonstrated track record of raising capital at regular intervals, ICRA expects the bank to be able keep adequate capital cushion at all points in time; more so as the importance of core equity Tier I is greater under Basle III norms. Notwithstanding the recent rise in slippages in recent quarters, the reported asset quality for the bank is sound with Gross NPA% and Net NPA% at 0.28% and 0.04% respectively as on Sep 30, Despite the bank having 13.4% exposure to infrastructure segment (power sector at 6.1% and telecom sector at 2.8%) and also exposure to some of the more levered corporate groups (partly mitigated by adequate collateral/ take out structures), the standard restructured assets of the bank are also low at 0.26% as on Sep 30, The ability of the bank to protect its asset quality given its medium term business targets while improving its retail liability franchise and its low cost deposit base remain key rating sensitivities. YBL advances stood at Rs. 47,717 crore as on Sep 30, 2013 recording a 13.6% increase compared to Sep-12. Following the deregulation of savings bank interest rates from Oct-2011, YBL has been improving its low cost deposit base at a fast clip which stood at 20.39% as on Sep-13 compared to 17.28% as on Sep-12 and 10.98% in Sep-11, prior to deregulation. The ALM profile of the bank gets stretched due to low average maturity of less than a year for the wholesale deposits but mitigated by a short tenure asset profile. The bank posted a net profit of Rs. 772 crore for H1FY14. Overall, the return on assets of the bank continues to remain robust at 1.53% in H1FY14. For complete rating definition please refer to ICRA Website or any of the ICRA Rating Publications PRESS RELEASE Page 3

4 Bank Profile YBL is a new private sector bank promoted by Dr. Rana Kapoor and late Mr. Ashok Kapur. On the back of consistent growth in Net Interest Income and Fee Income, Yes Bank reported Net Profit of Rs 1,301 crore on a Total Income of Rs. 9,551 crore for the year ended March 31, 2013 as compared with Rs. 977 crore and Rs 7,164 crore respectively for the year ended March 31, The asset base of the Bank increased by 35% from Mar 31, 2012 and stood at Rs. 99,104 crore as on Mar 31, Return on Assets of the Bank stood at 1.51% in FY12-13 as compared to 1.47% in FY The reported Gross NPA% and Net NPA % stood at 0.20% and 0.01% respectively as on Mar 31, 2013 as compared to 0.22% and 0.05% respectively as on March 31, The regulatory Capital Adequacy Ratio (Basel II) of the Bank stood at 18.3% (Tier I: 9.5%) as on Mar 31, Recent Results During the quarter year ending Sep 30, 2013, YBL reported net profit of Rs. 371 crore on a total income of Rs. 2,947 crore. Total deposits grew to Rs. 67,575 crore while total advances stood at Rs. 47,717 crore as on Sep 30, The reported Gross NPA% and Net NPA % stood at 0.28% and 0.04% respectively. For further details please contact: Analyst Contacts: Mr. Karthik Srinivasan, (Tel No ) karthiks@icraindia.com Relationship Contacts: Mr. L. Shivakumar, (Tel. No ) shivakumar@icraindia.com December 2013 PRESS RELEASE Page 4

5 ICRA Limited An Associate of Moody's Investors Service CORPORATE OFFICE Building No. 8, 2 nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon Tel: ; Fax: info@icraindia.com, Website: REGISTERED OFFICE 1105, Kailash Building, 11 th Floor; 26 Kasturba Gandhi Marg; New Delhi Tel: ; Fax: Branches: Mumbai: Tel.: + (91 22) /53/62/74/86/87, Fax: + (91 22) Chennai: Tel + (91 44) /9659/8080, / 3293/3294, Fax + (91 44) Kolkata: Tel + (91 33) / / / , Fax + (91 33) Bangalore: Tel + (91 80) /4049 Fax + (91 80) Ahmedabad: Tel + (91 79) /5049/2008, Fax + (91 79) Hyderabad: Tel +(91 40) /7251, Fax + (91 40) Pune: Tel + (91 20) /95/96, Fax + (91 20) Copyright, 2013 ICRA Limited. All Rights Reserved. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. PRESS RELEASE Page 5