ICRA Downgrades Indiabulls Housing Finance To AA+

Rating agency ICRA Ltd has downgraded Indiabulls Housing Finance Ltd’s long-term credit rating to AA+ from AAA, citing persistent funding challenges faced by non-bank lenders and housing finance companies.

The rating remains on ‘watch with developing implications’, given the proposed merger of Indiabulls Housing Finance with Lashmi Vilas Bank, ICRA said.

IBHFL’s asset under management declined by 10 percent year-on-year and stood at Rs 1.13 lakh crore as on June 30. The company’s loan book declined by 23 percent during the same period. The housing finance company has faced challenges in fund raising while the cost of borrowings have risen across the sector, which constrains its ability to maintain profitability over the near to medium term, the rating agency said.

Like its peers, IBHFL resorted to tapping alternate sources of funding and managed to raise Rs 60,781 crore between September 2018 and June 2019. Around Rs 23,000 crore was raised through securitisation.

“The resultant contraction in IBHFL’s loan book over the past two quarters, coupled with the higher cost of funds and provision expenses resulted in a moderation in its profitability,” ICRA said.

The rating agency says the company is well-capitalised with a tangible net-worth of Rs 16,854 crore and with a liquidity position of Rs 28,511 crore as of June 30, 2019.

The current liquidity position of the company will provide a cushion, a 140 percent cover, to IBHFL’s upcoming debt repayments over the next 12 months.

Asset Quality

The gross non-performing assets of IBHFL stood at 1.47 percent of the AUM and its net NPA stood at 1.1 percent of AUM, as of June 30, 2019. At the end of FY19, the company’s gross NPA stood at 0.88 percent and net NPA stood at 0.69 percent.

HFCs and NBFCs over the course of the last year have been reducing their exposure to real-estate developers. According to ICRA, the present slowdown in the real-estate sector, due to subdued sales and funding constrains, creates a challenge for IBHFL to maintain its asset quality.

The rating agency said there is a concentration of credit risks associated with the company’s large ticket-size commercial credit portfolio. “While the company has hitherto reported a healthy asset quality, its ability to maintain the same in light of the risk build-up in the real estate segment will be important from a credit perspective,” ICRA said.

While loans against property form 18 percent of the AUM and corporate mortgages form 16 percent of the AUM as of June 30, 2019, the rating agency sad IBHFL has strong systems and processes to manage this business.

Merger with Lakshmi Vilas Bank

The proposed merger between IBHFL and LVB has so far received approvals from the Competition Commission of India. However, the Reserve Bank of India is yet to give a nod.

“While IBHFL today has a strong market position in the HFC space and is among the larger HFCs, on conversion to a bank, it will be a relatively mid-sized bank,” ICRA said.

ICRA added that the financial risk profile of the merged entity is expected to be weaker than the current financial profile of IBHFL, at least in the short term.