Fitch Ratings has today affirmed India-based infrastructure finance company IDFC long-term issuer default rating (IDR) at 'BBB-'. The Outlook is Stable.
Commenting on the rating rationale, Fitch said, "The affirmation of IDFC's IDR with a Stable Outlook is driven by its stand-alone credit strength and the expectation that this is unlikely to change in the near- to medium-term even though IDFC is building its banking business after receiving an in-principle banking license in April 2014. The way IDFC rebalances its business profile and the impact of this on its overall risk profile will be important considerations for the rating in future. However, Fitch expects that such a change would take place over the medium to long term.
IDFC's capital buffer with Tier 1 capital ratio at 20.1% at end-March 2014 (19.8% at end-March 2013) underpins the rating given the finance company's high concentration risk, which is likely to remain at high levels during the initial transition process.
Asset quality has also been a historical strength, notwithstanding the higher NPL ratio of 0.56% at end-March 2014 compared with 0.15% a year earlier and a restructured loans ratio of 4.5% at end-March 2014. These are counterbalanced by specific and floating provisions, which covered NPLs in excess of 11 times and stressed assets at around 42%.
IDFC's wholesale funded profile has been relatively well-managed. Borrowings have been steadily diversified towards the longer-end while asset-liability mismatches have been kept low. As a bank, IDFC's funding options will increase, but building a deposit base will be a slow process.
Profitability indicators have been good, but Fitch expects them to narrow over the medium-term towards averages in the banking sector as the balance sheet recalibrates with higher levels of liquid assets, a change in the loan mix and a different cost structure.
IDFC's move into banking will likely come with challenges and benefits. The near-term benefits include greater asset diversification and higher funding flexibility, while some challenges include building a branch network and the need to meet regulatory targets for extending loans to certain priority sectors that regulators deem are underserved (around 40% of a bank's credit). In the longer term, IDFC's ability to position itself in a highly competitive market space without taking undue risks would be important consideration for the IDR.
IDFC's IDR is sensitive to changes, in particular, to its capital strength as it extends itself beyond its core competencies and into new businesses with different competitive dynamics and unfamiliar risks, where its execution capabilities have yet to be tested. The IDR, which is currently at the same level as India's sovereign rating, has limited upside."
Shares of the company declined Rs 0.55, or 0.42%, to trade at Rs 129.25. The total volume of shares traded was 656,618 at the BSE (11.45 a.m., Tuesday).
