KEY RATING DRIVERS
rating reflects IBHFL’s strong liquidity profile, well-matched asset-liability
tenors, strong capitalisation, and robust operating profitability buffers which
enable it to absorb significant levels of credit losses. The rating also
factors in IBHFL’s wholesale funding profile and high ticket corporate loan
portfolio that is inherently vulnerable to volatility in delinquencies and credit
As a policy, IBHFL maintains adequate cash and equivalents, liquid investments and unused bank lines at all times to cover at least the next six months' targeted disbursals and debt repayments. There are no cumulative negative asset and liability mismatches across the short-term buckets (up to 12 months) or even all the longer term buckets (above 12 months).
IBHFL’s capitalisation should support its above-average loan growth targets (around 22%-25% CAGR) over the medium term. It reported a high Tier 1 capital ratio of 20.33% at FYE16 (FYE15: 15.25%). Also, the company’s leverage is lower (FY16: 4.7x) than peers’ and is projected to stay between 5x-6x over the next two years.
The overall return on average assets (FYE16: 3.53%; FYE15: 3.78%) and pre-provision operating profitability (PPOP) ratios remain strong (PPOP/average loans: 6.79%; 6.87%), aided by high yields on advances, controlled funding costs and a competitive cost/income ratio (14.54%; 16.70%). That said, overall profitability ratios are likely to see a decline over the near-medium on the back of declining yields on advances given the company’s plan to increase the lower-yielding home loan component to around 60% of the overall loans over the next five years (FYE16: 52% ).
Bank loans, bonds, sell downs, and external commercial borrowings accounted for 49%, 38%, 11%, and 2%, respectively, of the total funding as at end-March 2016 (FYE16). That being said, bank loans are sourced from several domestic banks, with no significant concentration at any particular bank. IBHFL also plans to increase its access to longer-term bond funding and to securitise 25%-30% of its incremental loan book, which should help reduce the cost of borrowings.
Credit costs marginally declined during FY16 to 0.73% of average loans (FYE15: 0.75%) though there could be volatility in delinquencies from IBHFL’s high-ticket corporate credit portfolio (FYE16: 22% of assets under management (AUM)), especially from the loans extended to developers for residential construction. That being said, these developer loans accounted for around 9% of the AUM at FYE16 and IBHFL plans to restrict them to 8%-10% of the AUM over the near-medium term. Overall asset quality has remained reasonable (though on an unseasoned loan portfolio) with incremental gross NPLs averaging around 0.6% of the average loans over the past five years. Incremental delinquencies in the high-ticket loan against property portfolio would be a key monitorable.
Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.