The downgrade reflects renewed pressure on the cost and availability of funds for IBH and certain other finance companies in India.
Moody’s Investors Service on Wednesday downgraded Indiabulls Housing Finance’s (IBH) long-term corporate family rating to Ba2 from Ba1. At the same time, it downgraded the firm’s foreign-currency senior secured rating to Ba2 from Ba1, and foreign- and local- currency senior secured MTN programme rating to (P)Ba2 from (P)Ba1. Moody’s has also changed the outlook to negative from stable.
Bloomberg data showed loan funds of IBH stood at Rs 1.01 lakh crore as on March 2019.
The stock of Indiabulls Housing Finance on Wednesday ended the day at Rs 551.30, down by 3.90% or Rs 22.35. 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 company’s incremental cost of funding increased 45 bps quarter-on-quarter ending June 2019, while the company’s balance sheet declined by 7% over the same period. This rise in funding costs was a key driver for the 28bps decline in spreads in the same period, although profitability remains comparatively strong relative to its peer group,” Moody’s said in their rating rationale.
The downgrade also factors in deterioration seen in asset quality in the quarter ended June 2019, wherein stage 3 loans went up by 57% on a quarter-on-quarter 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 tight refinancing conditions and weak borrower profiles. This segment will continue to be a key source of asset quality risk for the company.
The firm had announced a plan in April 2019 to merge with Lakshmi Vilas Bank, a small bank in India, and thus get converted into a bank. “This merger proposal is now awaiting regulatory approval from the Reserve Bank of India (RBI). If approved and consummated, it would be a significant credit positive event for the company,” Moody’s said.
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, it added.