Crisil has assigned a rating of ?AAA/Negative? and ?AAAr/Negative? to CitiFinancial Consumer Finance India Ltd?s (CitiFinancial?s) Rs 500 crore non-convertible debenture issue and Rs 500 crore equity-linked debenture issue, respectively. Crisil has also reaffirmed its ratings on CitiFinancial?s other debt programmes. The ratings reflect the company?s 100% ultimate ownership by Citigroup Inc (rated ?AA-/Watch Negative/A-1+? by Standard & Poor?s) and its strategic importance to Citigroup Inc?s business plans in India. Citigroup provides strong management and operational support to CitiFinancial. The ratings are also driven by CitiFinancial?s strong credit appraisal and risk management mechanism, healthy capital position, high but declining profitability margins, and comfortable resource profile, said Crisil.
The company?s standalone credit profile is partially offset by its exposure to retail borrowers with low credit profiles, in line with its business policy.
The ?r? suffix for the rating on CitiFinancial?s equity-linked debenture issue indicates that payments on the rated instrument have significant risks other than credit risk. The terms of the instrument specify that the payments to investors will not be fixed and could be linked to one or more external variables, such as commodity prices, equity indices, or foreign exchange rates.
This could result in variability in payments, including possible material loss of principal, because of adverse movement in the value of the external variables. The risk of such adverse movement in price/value is not addressed by the rating.
CitiFinancial witnessed a significant decline in its profits for the nine months ended December 31, 2007. The decline has been largely due to higher delinquencies in the unsecured personal loan segment.
The company?s spread has also been under pressure due to increased borrowing cost and a shift in its loan portfolio towards a higher proportion of mortgage products, which have a lower yield as compared with unsecured personal loans.
In an effort to contain credit costs in the unsecured personal loan segment, CitiFinancial is now shifting its focus towards customers with better credit profiles, which has resulted in a lower yield. It is also increasing its focus on fee-based income through insurance distribution. CRISIL believes that though the initiatives taken by CitiFinancial will be beneficial to the company in the medium term, the pressure on profitability will continue in the near term.
Although the company?s gross spreads continue to remain healthy, its success in controlling expenses and write-offs in an increasingly competitive market will be a crucial determinant of its profitability. The rating on CitiFinancial could be downgraded if there is further deterioration in the credit profile of Citigroup.
