By Siddharth Goel

India Ratings and Research (Ind-Ra) has revised Can Fin Homes Limited’s (CFHL) Outlook to Negative from Stable and affirmed the Long-Term Issuer Rating at ‘IND AAA’ while resolving the Rating Watch Negative (RWN). The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Commercial paper

-

-

7 to 365 days

INR45

IND A1+

Rating affirmed; off RWN

Subordinated debt*

-

-

-

INR3

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

Non-convertible debentures (NCDs)*

-

-

-

INR70 (reduced from INR80)

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN


* Details in Annexure

The Negative Outlook is based on Ind-Ra’s limited clarity on Canara Bank Limited’s (Canara, ‘IND AAA’/Stable) long-term strategy for CFHL. Ind-Ra has resolved the RWN because Canara Bank has called off its plan to sell its stake in CFHL. Canara in December 2017 announced to sell 4% stake in CFHL while keeping the effective control and shareholding post the stake-sale at 26%. It however, called off the divestment process through a public announcement in March 2018. 

Analytical Approach:
The long-term ratings are driven by Ind-Ra’s continued expectation of support from Canara to CFHL, if required.

KEY RATING DRIVERS

Support-Driven Rating; Limited Clarity on Canara’s Strategy for CFHL: Ind-Ra’s expectation of the parent’s continued support for CFHL is based on CFHL’s strong linkages with Canara, which held a 30% equity stake as of September 2018. CFHL is an important vehicle for Canara in the housing finance segment, which is a key priority segment for the government of India. The company’s managing director is deputed from Canara. The parent continues to have a sizeable representation on CFHL’s board with four of the seven members being deputed from Canara. Canara shares its brand with CFHL and retains management control in the latter. Canara has provided funding support in the form of INR7 billion line of credit and INR10 billion overdraft facilities as a contingent facility. 

CFHL is one of Canara’s high profitable group companies with return of equity of 25% in FY18. However, the Finance Ministry in 2017 directed Canara to offload its stake in CFHL to augment resources and improve Canara’s capital base. Canara was able to raise capital (INR48 billion) from the government of India which improved its capital adequacy. Canara’s common equity tier 1 in 1QFY19 was 9.35% (FY17: 8.92%). Due to Canara’s improved capital ratio along with depressed market conditions, there have been no further developments on the sales front by Canara.
Canara has announced to participate in CFHL’s planned right issue which would enable it to maintain its shareholding in CFHL. Ind-Ra would continue to engage with all stakeholders and monitor related developments to seek further clarity. 


Healthy Standalone Metrics
: CFHL maintains comfortable asset quality, with gross non-performing asset ratio of 0.66% in 1QFY19 (1QFY18: 0.38%), underscoring prudent underwriting practices. This includes conservative loan-to-value (circle rates considered for valuation compared with market rates used by peers) as well as instalment-to-income ratios. However, the portfolio is unseasoned and a sustained performance has to be established. Over the next few years, CFHL plans to expand into tier 2 and tier 3 cities, operating on a hub and spoke model, and offer products to self-employed professionals and non-professionals. The proportion of self-employed professionals and non-professionals in CFHL’s loan mix increased to 27% in 1QFY19 (1QFY18: 25%) from 15% in FY15. This has helped the company to maintain yields and net interest margin (FY18: 3.5%, FY17: 3.5%). Interest spreads are likely to be impacted due to the recent increase in borrowing costs as well as rising competitive intensity in the affordable housing space, believes Ind-Ra. However, an increase in low-cost refinancing from National Housing Bank (NHB; ‘IND AAA’/Stable) could somewhat mitigate the impact of a decline in the margin

Average Capitalisation:
CFHL’s leverage (debt-equity ratio) moderated slightly to 9.4x at FY18 (FY17: 11x), based on strong internal accruals in relation to credit growth. The tier 1 capitalisation ratio (1QFY19: 16.7%, FY18: 16.9%, FY17: 16%) remained average, on the back of reduced risk weights on small ticket housing loans. The company plans to shore up its capital base by way of an INR10 billion rights issue approved by the board, likely to be raised in the next few quarters, which would be based on the prevailing market conditions. 

Diversified Funding Profile and Adequate Liquidity
: CFHL has a mix of bank funding, refinancing lines and market borrowings. Non-convertible debentures constituted 30% of the total borrowings at end-March 2018, while NHB funding was at 15% (FYE17: 28%). Management targets to increase NHB funding in the near to medium term based on its targeted low income group affordable housing focus. CFHL has certain asset liability mismatches in the near-term buckets. Nevertheless, the availability of unutilised bank sanctioned limits of INR43.7 billion provides comfort.


RATING SENSITIVITIES

Negative: A negative rating action could result from downgrade in Canara’s rating or Canara ceding its management control in CFHL which could result on account of significant dilution of Canara’s ownership in CFHL. The ratings would also be negatively impacted by lack of timely liquidity support or weakening of Canara’s own capitalisation levels affecting its ability to support CFHL. A negative rating action could also result from signs of a sharp deterioration in CFHL’s liquidity and/or access to funding, as well as from a trend of rising delinquencies, which, in Ind-Ra’s opinion, could lead to a significant weakening of profitability and capital buffers or result in a loss of strategic importance to Canara.
 


COMPANY PROFILE

CFHL is a housing finance company started in 1987 by Canara in association with Housing Development and Finance Corporation and Unit Trust of India. The company caters primarily to salaried borrowers in urban areas and 74% of its advances are sourced from the four southern states. At end-June 2018, CFHL had a loan book of INR162 billion and a network of 148 branches, 17 satellite offices and 20 affordable housing centres. 

FINANCIAL SUMMARY

Particulars

FY18

FY17

Total assets (INR million)

145,750

120,820

Total equity (INR million)

11,905

9,643

Net profit (INR million)

1,462

1,048

Return on average assets (%)

2.12

1.87

Equity/assets (%)

8.2

8.0

Source: CFHL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Rating Watch/Outlook

Rating Type

Rated Limits (billion)

Rating/ Outlook

15 December 2017

3 August 2016

7 October 2014

Issuer rating

Long-term

-

IND AAA/Negative

IND AAA/RWN

IND AAA/Stable

IND AAA/Stable

NCDs

Long-term

INR70

IND AAA/Negative

IND AAA/RWN

IND AAA/Stable

IND AAA

Subordinated debt

Long-term

INR3

IND AAA/Negative

IND AAA/RWN

IND AAA/Stable

IND AAA

Commercial paper

Short-term

INR45

IND A1+

IND A1+/RWN

-

-

ANNEXURE

Instrument

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

NCDs

INE477A07050

6 February 2015

8.80

6 February 2018

INR2

WD

Withdrawn(paid infull)

NCDs

INE477A07068

28 April 2015

8.69

28 April 2018

INR2

WD

Withdrawn (paid in full)

NCDs

INE477A07076

28 May 2015

8.70

28 June 2018

INR1

WD

Withdrawn (paid in full)

NCDs

INE477A07084

2 July 2015

8.80

2 July 2018

INR2

WD

Withdrawn (paid in full)

NCDs

INE477A07092

7 August 2015

8.71

7 August 2018

INR2

WD

Withdrawn (paid in full)

NCDs

INE477A07118

8 October 2015

8.44

8 October 2018

INR1

WD

Withdrawn (paid in full)

NCDs

INE477A07126

30 October 2015

8.41

30 January 2019

INR1.5

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07134

24 November 2015

8.45

22 February 2019

INR1

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07142

22 December 2015

8.55

22 March 2019

INR1

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07159

7 January 2016

8.60

6 April 2019

INR1.25

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07167

17 February 2016

8.85

17 May 2019

INR1.65

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07100

10 September 2015

8.69

10 September 2020

INR1

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07175

22 April 2016

8.37

22 March 2019

INR3

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07183

27 May 2016

8.55

27 August 2019

INR1

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07191

16 September 2016

7.85

16 December 2019

INR3

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07209

24 October 2016

7.73

24 January 2020

INR4.4

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07217

15 November 2016

7.77

15 November 2021

INR1.22

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07225

12 January 2017

7.57

12 April 2020

INR4

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07233

27 February 2017

7.68

27 May 2020

INR2

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07241

18 May 2017

7.89%

18 May 2022

INR6

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs**

INE477A08025

3 December 2014

8.94

3 December 2024

INR1

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

NCDs

INE477A07258

26 July 2017

7.32

26 October 2020

INR4

IND AAA/Negative

Rating affirmed, Outlook revised; off RWN

Limits utilised

 

 

 

 

INR37.02

 

 

Limits unutilised ^

 

 

-

-

INR35.98

 

 

Total

 

 

 

 

INR73.0

 

 

** Sub-debt
^Sub-limit for sub-debt of INR2 billion


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity indicators

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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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Analyst Names

  • Primary Analyst

    Siddharth Goel

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001760

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121