“The outlook has been changed to negative to reflect the possibility that the tight funding conditions may persist for some time, which could further pressure other aspects of IBH's credit profile, such as profitability and asset quality,” the rating agency said in a statement.
“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,” it said.
The downgrade also factors in deterioration seen in asset quality in the quarter ended June 2019, wherein stage 3 loans went up by 57 per cent on a sequential basis, albeit from a low base. Most of the increase in stage 3 loans has come from its corporate loan segment. 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.
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,” the rater said.
Also, 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.
The stock plunged 45 per cent from its recent high of Rs 903 on April 5, 2019, as compared to 4 per cent decline in the S&P BSE Sensex. It touched a 52-week low of Rs 425 on August 8, 2019 in intra-day trade.