Shares of Indiabulls Housing Finance (IBH) cracked nearly 10% to Rs 498 in the early BSE trade this Friday morning. This happened after global rating agency Moody’s downgraded the mortgage lender’s long-term corporate family rating to Ba2 from Ba1 while changing its outlook to negative from stable.
By ‘negative’ outlook means that the ratings are not going to improve in the next 12 to 18 months. As per Moody’s rating scale, the ‘Ba’ rating, is “judged to be speculative, subject to substantial credit risk.”
At around 10:21 AM, the stock was trading 8.4 percent lower at Rs 505 in comparison to the 0.5 percent dip in the benchmark S&P BSE Sensex.
According to the rating agency:
“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.”
They also said in a statement:
“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 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 sequential basis, albeit from a low base. The major increase in stage 3 loans has resulted from its corporate loan segment. This particular segment is witnessing significant headwinds for the overall finance company sector which is led by a combination of refinancing conditions and weak borrower profiles. This segment will continue to be an important source of asset quality risk for the company.
The rater said:
“The company’s incremental cost of funding increased 45 basis points quarter-on-quarter ending June 2019, while the company’s balance sheet declined by 7 percent over the same period, the rater noted. This rise in funding costs was a key driver for the 28 basis points decline in spreads in the same period, although profitability remains comparatively strong relative to its peer group.”
The rating agency further said that the company has:
“solid capital and profitability,” while capital levels have been strengthening, driven by a decline in balance sheet size and relatively high retained earnings. The company’s merger with Lakshmi Vilas Bank, and get converted into a bank, “would be a significant credit positive event for the company.”