Bank conversion to weaken IDFC profitability: India Ratings

Written by PTI | Mumbai | Updated: Apr 4 2014, 05:51am hrs
India RatingsIndia Ratings said key profitability metrics of the infra financier will drop sharply in near to medium-term. Reuters
Highlighting execution challenges that IDFC faces in turning into a universal bank, India Ratings today said key profitability metrics of the infra financier will drop sharply in near to medium-term.

"The successful conversion from an infrastructure non- banking finance company into a commercial bank with a strong retail deposit franchise and a diversified loan book will be a major challenge for IDFC," the rating agency said in a note.

IDFC's return on assets and return on equity (RoE) are likely to "drop sharply" due to requirements to maintain the statutory liquidity ratio at 23 per cent, cash reserve ratio at 4 per cent and 40 per cent priority sector lending, it said.

The city-based firm has RoE of 14.2 per cent and RoC employed at 11.4 per cent and a core capital of 22.1 per cent.

RBI has given three options to NBFC to carry out banking operation. One of the options is to convert NBFC into a bank.

IDFC, which is among the biggest infra financiers, yesterday bagged the coveted banking licence along with micro lender Bandhan, beating corporate biggies like Aditya Birla Group and Anil Dhirubhai Ambani Group.

India Ratings said the operational costs for IDFC will increase significantly as it invests in the branch network and employees. Also, maintaining credit costs at low levels will be important as it starts lending to non-infra sectors.

IDFC will also be tested on the risk management front as the loan book becomes more diverse, and is expected to maintain a robust capital buffer, it said.

The other key challenge for the lender will be building a retail deposit franchise, it said and maintained that competitive market and a mandatory requirement to have branches in non-urban areas will be a drag on this front.

On IDFC's rating, it said the banking licence will be helpful to the credit profile in the long term "provided the transition is managed appropriately."

The company scrip dropped 2.38 per cent to Rs 124.95 a piece on the BSE today after rallying nearly 13 per cent intra-day.

No change in IDFC rating at present: S&P

Credit rating agency Standard & Poor's today said rating on IDFC is not immediately affected by its getting licence to make a foray into commercial banking but warned of short-term challenges and dip in its profitability.

The top infrastructure finance firm and Kolkata-based micro-finance entity Bandhan were yesterday granted banking licence by the Reserve Bank of India (RBI).

"In our view, the move (licence) will improve IDFC's asset diversity and funding profile in the long-run. However, its expansion outside traditional expertise in the competitive banking sector has significant short-term challenges.

"Execution of its conversion strategy, including the final corporate structure and capital, will influence its credit profile," the global agency said in a late evening note issued from Singapore.

RBI has given three options to NBFC to carry out banking operation. One of the options is to convert NBFC into a bank.

S&P has a BBB-/A-3 rating on IDFC currently and has retained the same, saying the credit rating can be changed only after a meeting of its relevant committee.

Stating that IDFC's funding is weaker than that of established banks in India, the note said the licence will help IDFC access stable retail deposits and low-cost current and savings accounts "which will reduce the company's reliance on wholesale funding and also funding costs".

IDFC's profitability may moderate in the near-term due to higher operating costs to establish a retail brand, branch network and to adhere to regulatory norms on cash reserve ratio, statutory liquidity ratio and priority sector lending, the rating outfit said.