Lower costs, new lending buoy Yes Bank’s improving profits

New lending will help it meet rules, and in turn reduce operating expenses.

India’s Yes Bank will see its profitability improve over the next 12-18 months on the back of lower operating expenses and new lending, says Moody’s Ratings.

“We expect Yes Bank's core profitability, which is measured by pre-provisioning profits to total assets, will gradually improve to above 1.2% over the next 12-18 months from 0.8% in the financial year ended March 2024,” the ratings agency said in a report, where it revised its outlook for Yes Bank from stable to positive.

New lending from its branches will buoy Yes Bank’s ability to meet the central bank’s priority sector lending (PSL) rules. This, in turn, will help reduce its operating expenses for meeting targets– improving its overall profitability, according to Moody’s.

Yes Bank’s focus on higher yielding– although also higher-risk– retail and small and medium enterprise segments will help widen its net interest margins (NIM).

A gradual increase in its credit costs will be largely offset by recoveries from its legacy stressed assets, given the high loan loss provision coverage of those assets, Moody’s added.

Deposit quality has improved, with current and savings accounts (CASA) accounting for 30.9% of Yes Bank’s total deposits as of end-March, up from 26.1% a year earlier. Deposits grew 22.5% in FY2024.

However, Yes Bank's profitability will remain weak compared with its Indian peers under Moody’s review. Its funding and liquidity are also “modest” compared with other large private-sector banks in India.

“We expect the bank's funding costs to remain higher than its peers' over the next 12-18 months because of increasing competition amongst banks for deposits,” Moody’s said.