Why Yes Bank shares increased by 8% to Rs. 27 is explained.

Thursday’s trading saw a nearly 8% increase in Yes Bank shares as ratings agency Moody’s upgraded its rating outlook.

Expectations of a steady improvement in Yes Bank’s lending franchise and depositor base accompany this optimistic prognosis, which is expected to boost the bank’s core profitability over the following 12 to 18 months.

Moody’s mentioned that their positive outlook considers the improvement in Yes Bank’s asset quality and capitalisation over the past 2-3 years.

However, it is somewhat offset by the bank’s weak core profitability, which is affected by high funding costs and the pressure of meeting priority sector lending (PSL) targets.

The statement from Moody’s reads as follows: “We anticipate that Yes Bank’s core profitability, which is determined by pre-provisioning profits to total assets, will increase from 0.8% in the fiscal year that ended in March 2024 to above 1.2% over the course of the next 12 to 18 months.

” Yes, Bank’s overall profitability will increase if it is able to better comply with the central bank’s PSL regulations by increasing lending from its branches and lowering operating costs associated with hitting targets.”

Yes Bank shares increased 8.45% on the BSE to a high of Rs 27.08. Subsequently, the stock was up 4.45% at Rs 26.07.

Moody’s also emphasized Yes Bank’s strategy to increase its net interest margins by concentrating on higher-yielding, but riskier, retail and small- and medium-sized company divisions.

“Given the high loan loss provision coverage of those assets, recoveries from the bank’s legacy stressed assets will largely offset a gradual increase in credit costs.” Even with these gains, Yes Bank’s profitability will not catch up to those of its rated Indian peers, and this will be a major hindrance to future credit profile enhancements, the report stated.

First Abu Dhabi Bank PJSC is reportedly one of the possible suitors for a nearly $5 billion stake in Yes Bank, according to a Bloomberg article. According to the source, the Middle Eastern lender is thinking about making a bid for up to a 51% share in India’s private lender.