But the rating rational is not a commentary on IBH alone.
“The downgrade reflects renewed pressure on the cost and availability of funds for IBH and certain other finance companies
in India. This presents a more challenging external environment than Moody's had anticipated,” the rater said in a statement.
The company's incremental cost of funding increased 45 basis points quarter-on-quarter ending June 2019, while the company's balance sheet declined by 7 per cent over the same period, the rater noted. This rise in funding costs was a key driver for the 28 basis points decline in spreads in the same period, “although profitability remains comparatively strong relative to its peer group,” it said.
According to Moody’s IBH’s liquid assets, at around 24 per cent of its balance sheet size, remained high, as was a “key positive credit driver.”
Nevertheless, “as interest rates on high quality liquid assets have declined, the company's strategy of holding a relatively high pool of liquid assets — a positive rating factor — has become costlier, presenting a drag on earnings due to negative carry.”
At the same time, the firm's progress in improving the quality of its liquid assets has been slower than what was anticipated by Moody's.
Asset quality stress has also increased in the housing finance company. IBH said as on June, stage three loans went up by 57 per cent on a quarter on quarter basis, mostly from the corporate loan segment. However, the base was low.
“This segment is facing significant headwinds for the overall finance company sector driven by a combination of very tight refinancing conditions and weak borrower profiles. This segment will continue to be a key source of asset quality risk for the company,” Moody’s said.
However, the rating agency said the company has “solid capital and profitability,” while capital levels have been strengthening, driven by a decline in balance sheet size and relatively high retained earnings. The company’s merger with Lakshmi Vilas Bank, and get converted into a bank, “would be a significant credit positive event for the company.”
If the merger approval is secured from the Reserve Bank of India (RBI), the outlook would be revert back to ‘stable’, Moody’s said.
However, the rating could be further downgraded if the company is forced to shrink its core business because of impediments on funding, or there is further meaningful deterioration in asset quality, or reduction in either the quantity or quality of liquid assets that it is currently holding.
Shares of the company fell 3.90 per cent to Rs 551.30 a piece on the BSE.