Yes Bank AT1 Bonds Ruling: Moody’s Warns of Hit to Capital and Profits
Moody's warns that the Supreme Court ruling on Yes Bank's AT1 bonds will hit its CET1 ratio and profitability. Read the full analysis here.
The Supreme Court's recent decision regarding Yes Bank AT1 bonds is set to trigger a ripple effect on the lender's financial health. According to a report by Moody’s Ratings, the ruling is expected to weigh down the bank's profitability and significantly impact its capital ratios.
The Capital Crunch: CET1 Ratio to Slide
The core of the concern lies in the bank's Common Equity Tier 1 (CET1) capital ratio. Moody’s projects that this ratio will drop to 11.4 per cent from its current 13.7 per cent on a pro forma basis by September 2026. This decline is a direct result of the reinstatement of the Additional Tier 1 (AT1) securities.
While the overall Tier 1 capital ratio is expected to remain steady—since the reinstated bonds still count toward regulatory capital adequacy—the shift toward common equity capital will create a one-time negative hit to the bank's bottom line.
The Legal Battle and the Supreme Court's Verdict
The turmoil stems from a legal battle over the write-off of AT1 securities. On October 15, the Supreme Court upheld a Bombay High Court decision that set aside the write-off of these bonds. The court dismissed appeals filed by the Government of India, the Reserve Bank of India (RBI), and Yes Bank itself.
The judiciary's decision was based on the premise that the legal process required for writing down these securities was not properly followed. However, Moody’s clarified that the ruling does not challenge the fundamental principle that AT1 securities must absorb losses when a bank reaches a point of non-viability.
Moody's Rating and Future Outlook
Despite the expected dip in core capital, Moody’s has affirmed Yes Bank’s long-term foreign and local currency deposit ratings at Ba1, maintaining a stable outlook. The agency believes several factors will mitigate the impact of the lower CET1 ratio:
- Improved Funding Profile: A stronger approach to how the bank secures its funds.
- Better Asset Quality: The gross non-performing loan (GNPL) ratio has seen a positive trend, declining to 1.2 per cent as of September 2026.
- Robust Liquidity: The bank's liquidity coverage ratio stood at 131 per cent for the quarter ending September 2026, which is above the average of its peers.
The Path Forward: Raising New Capital
To counter the weakening of its loss-absorbing buffers, Moody’s expects Yes Bank to replenish its capital. The bank will likely need to raise new equity capital to ensure it can continue supporting loan growth and maintain a healthy financial cushion.
The rating agency also issued a warning: downward pressure on ratings could occur if the tangible common equity to risk-weighted assets ratio falls below 11 per cent, especially if there is no clear plan for raising capital or if asset quality and funding deteriorate.
Yes Bank officially disclosed these rating actions through filings with the National Stock Exchange and the BSE, adhering to SEBI Listing Obligations and Disclosure Requirements Regulations, 2015.