Rationale

 The rating upgrade factors in the sizeable capital raise of Rs. 15,000 crore in July 2020, which has resulted in an improvement in the capital ratios of Yes Bank Limited (YBL). The ratios are now comfortably above the regulatory levels. The capital raise follows the Government-approved reconstruction scheme implemented in Q4 FY2020, under which equity capital of Rs. 10,000 crore from State Bank of India (SBI; rated [ICRA]AAA (Stable) for Tier II bonds) and other domestic institutions was infused into the bank. Besides the reconstruction of the bank, the board was reconstituted with a new Managing Director (MD) and Chief Executive Officer (CEO; former Deputy MD & CFO of SBI). Moreover, two other nominee directors were appointed by SBI and two by the Reserve Bank of India (RBI). The rating upgrade also factors in the improvement in the bank's liquidity position after the stability and subsequent increase in its deposit base. This, coupled with the recent capital raise, has helped YBL fully repay the Special Liquidity Facility (SLF) extended to it by the RBI. While the improvement in the capital position remains a key positive for the bank, the Covid-19-induced stress on the residual corporate book as on June 30, 2020 (~5% of standard advances were overdue) are likely to keep the credit costs at elevated levels in the near term. The management has guided towards a slippage of ~5% in FY2021. Despite having the flexibility to restructure loans, ICRA estimates that the slippages and credit costs will remain high in a stress scenario.