Moody's Investors Service on Tuesday downgraded Yes Bank's ratings to non-investment grade and changed outlook to negative from stable on the back of various resignations from the Board.
The resignations, when seen in conjunction with RBI's September directive to restrict the term of the bank's MD&CEO Rana Kapoor, till January 31, 2019, have raised concerns over corporate governance, it said.
"Although the bank's reported credit fundamentals remain stable, the developments surrounding the transition in leadership as well as the governance issues are credit negative because they complicate management's effective implementation of the bank's long-term strategy," it said.
Furthermore, these developments could constrain the bank's ability to raise new capital, Moody's said.
Moody's has downgraded foreign currency issuer rating to 'Ba1' from 'Baa3', and also the bank's baseline credit assessment (BCA) and adjusted BCA to 'ba2' from 'ba1'. The rating implies that these instruments are non-investment grade, speculative.
The outlook, where applicable, has been changed to negative from stable.
Moody's said although Yes Bank's capitalisation is adequate, the bank would need to raise capital from the market to continue to grow its balance sheet more rapidly than the Indian banking system.
Moody's said while Yes Bank's current asset quality metrics are superior to those of its Indian peers, its aggressive growth strategy poses asset risks.
"In particular, Moody's has noted significant divergence in the bank's reported asset quality metrics compared with the RBI's assessment of asset quality in 2016-17 and 2015-16 While the results of RBI's risk-based supervision report for 2017-18 are not known as yet, nevertheless, any adverse findings from its assessment will be credit negative," it said.
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," it said.
The outlook has been revised to negative, after taking into account the uncertainty relating to the bank's asset quality and profitability performance and in particular any adverse findings from RBI's risk-based supervision 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 BCA, adjusted BCA and ratings," Moody's said.
It said a negative outlook implies that the bank's ratings are unlikely to be upgraded during the outlook horizon.
Nevertheless, the rating outlook could return to stable if Yes Bank maintains its current asset-quality ratios and there is no adverse impact from the RBI's risk-based supervision exercise; the bank manages to raise new equity capital.
Yes Bank's ratings could be downgraded further if there is a sustained deterioration in impaired loans; the bank's capital ratios decline, and there are any regulatory actions by RBI, including adverse findings from the risk-based supervision report and/or any regulatory restrictions or fines.
Headquartered in Mumbai, Yes Bank had total assets of Rs 3.7 lakh crore at September 30, 2018.
RBI has found corporate governance issues and under-reporting of non-performing assets, which has led to a series of negative developments in the private sector lender's functioning in the recent past.
The central bank has asked the private sector lender to find a replacement for its founder MD and CEO by January 31, 2019.
On November 14, Yes Bank non-executive chairman Ashok Chawla resigned as his name figured in a CBI chargesheet filed in the Aircel-Maxis case. Another independent director Vasant Gujarathi too tendered his resignation on the same day.
The bank has seven board members -- Rana Kapoor, Lt General Mukesh Sabharwal, Brahm Dutt, Subhash Kalia, Ajai Kumar, Pratima Sheorey and Uttam Agarwal, as per the bank's website.