Edelweiss Financial Services Limited Long-term rating downgraded to 'CRISIL A+/CRISIL PPMLD A+'; outlook revised to 'Stable'
Rating Action
^public issue Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has downgraded its long-term rating on the debt instruments of Edelweiss Financial Services Limited (EFSL) to ‘CRISIL A+’ from ‘CRISIL AA-’ while revising the outlook to ‘Stable’ from ‘Negative’. The short-term rating has been reaffirmed at ‘CRISIL A1+’.
Ratings on Rs 650 crore redeemed non-convertible debentures have been withdrawn (See Annexure 'Details of Rating Withdrawn' for details). This is in line with CRISIL Rating’s withdrawal policy and CRISIL Ratings has also received an independent confirmation for fully redeemed instruments.
The rating action is driven by lower-than-expected revival in core profitability, relatively slower growth in retail (including MSME) lending and continued high level of unprovided monitorable[1] portfolio. However, the group’s overall credit profile is supported by adequate capitalization, and a diversified business profile with good market position in asset reconstruction and asset management businesses.
Despite improving from earlier levels, Edelweiss Group’s profitability continues to remain subdued, with revival being slower than anticipated. The main reason for muted profitability in recent years has been the stress in its wholesale lending book, in turn leading to higher credit costs; the retail book was also impacted and required higher provisioning in the aftermath of the Covid-19 pandemic. After reporting a loss of Rs 2,044 crore in fiscal 2020, the group reported a profit of Rs 254 crore and Rs 212 crore in fiscal 2021 and fiscal 2022 respectively. However, profitability has been supported by one off item such as capital gains on stake sale of Rs 1,406 crore in fiscal 2021 and Rs 306 crore in fiscal 2022 respectively. In fiscal 2023, the group reported a profit after tax (PAT) of Rs 406 crore; however, excluding the one-off items such as revaluation etc. (and also accelerated provisions made basis the one-off gain), the profit would have been Rs 248 crore. In the first half of fiscal 2024, the group reported an improved PAT of Rs 173 crore, however, the quantum and pace of improvement in profitability remains lower than earlier envisaged. Return on average assets (ROA) was 0.8% (annualised) for the first half of fiscal 2024 against 0.9% for fiscal 2023 and 0.5% for fiscal 2023 and fiscal 2022.
Of the various businesses, the asset reconstruction business and asset management business, mainly alternate assets, remain the largest contributors to overall profitability. The profitability of the credit business has improved from the past levels with credit costs reducing, however remains muted with retail lending yet to gather pace. Further, any challenges in effecting recoveries from the monitorable book as per plan could necessitate higher provisioning and put pressure on profitability and hence, this remains a key monitorable for the rating. The insurance businesses are expected to breakeven only over the next 2-3 years. While the asset reconstruction and alternate assets businesses should continue to support profitability, the group’s ability to scale up the retail lending business while managing credit costs will be important and this remains a key monitorable.
In retail lending, the group focuses primarily on mortgages and MSME financing. As on September 30, 2023, this AUM stood at Rs 4,869 crore. This has come down significantly from Rs 11,339 crore as on as at March 2020 and has marginally grown as on September 2023 from Rs 4,271 crore as on June 30, 2023. The decline is owing to the group pivoting to an asset light model with a focus on co-lending as well as for liquidity management. Even from product segment perspective, the group has shifted to mid-size ticket segments. The group has tied up with four partners for the mortgage business and three partners for MSME lending. However, the growth in the co-lending portfolio has been relatively slow, with a delay in operationalising the onboarding and underwriting process with the partners. CRISIL Ratings understands that the operational issues have been steadily resolved and consequently, disbursement has picked up in the first half of fiscal 2024 to Rs 862 crore from Rs 1,176 crore in full year fiscal 2023. However, the ability to significantly scale up hereon and demonstrate higher profitability in a sustained manner is to be seen.
While the asset light model on the credit side reduces the need for on-balance sheet funding compared to past levels, CRISIL Ratings notes that the major source of incremental funding has been through public issue of NCDs, structured NCDs. In this context, it will also be important for the group to demonstrate its ability to diversify its funding sources at optimal costs.
While retail lending is a focus area, the group has been consciously running down the wholesale portfolio through various modes. Hence, the wholesale credit on-book has run down to Rs 2,493 crore as on September 30, 2023, from Rs 11,514 crore as on March 31, 2020. While recoveries have contributed to this, the reduction has been primarily due to sell down to ARCs (both internal and external) and AIFs. However, Edelweiss group has retained risks and rewards on a large portion of this and hence, CRISIL Ratings tracks the monitorable portfolio. Gross Stage III of loan book reduced to Rs 758 crore from Rs 1,222 crore as on March 31, 2020. But the overall monitorable portfolio stood at Rs 11,234 crore as on September 30, 2023, on a gross basis. This comprises gross stage III of Rs 758 crore, loans sold down to external and internal ARCs of Rs 8,628 crore and sold down to AIFs of Rs 1,848 crore. While the monitorable portfolio has reduced from Rs 12,097 crore as on March 31, 2022(Rs 11,383 crore as on March 31, 2021), it remains elevated. However, the group has made provisions against this portfolio, and therefore, the net monitorable portfolio stood at Rs 7,084 core as on September 30, 2023. Further, there are also recoveries expected against these assets over time which would reduce the monitorable portfolio. Basis management estimates, there is a reasonable level of collateral cover on most of this portfolio. Going ahead, any challenges in effecting recoveries as per plan could necessitate higher provisioning and put pressure on profitability and hence, this remains a key monitorable for the rating.
The group’s capital position, with its demonstrated ability to raise capital even in challenging times, remains a strength for the rating. Networth stood at Rs 6,282 crore as on September 30, 2023. While it has reduced compared to Rs 8,581 crore as on March 31, 2023, this is because the stake of ~30% in Nuvama Wealth Management Ltd (Nuvama) was distributed to the shareholders of EFSL, as part of the demerger. Resultantly, gearing inched up to 3.2 times (excluding CBLO gearing was 2.94 times) as on September 30, 2023, from 2.5 times (2.26 times) as on March 31, 2023. Nevertheless, this remains lower than 4.3 times (3.95 times) as on March 30, 2020, with the group having made conscious efforts to reduce external debt. Total borrowings have reduced to Rs 20,189 crore (excluding CBLO Rs 18,520 crore) as on September 30, 2023, from Rs 27,492 crore (Rs 25,695 crore) as on March 31, 2021, and Rs 35,553 crore (33,754 crore) as on March 31, 2020. CRISIL Ratings notes that as at September 30, 23, the group has financial flexibility on account of the 15.3% stake in Nuvama (market value of ~Rs 1990 crore as on date).
The Edelweiss group has also been able to build competitive presence in multiple businesses- it is one of the leading players in the alternate assets business and asset reconstruction business and had also established competitive position (now exited) in wealth and institutional businesses. However, with the rundown of wholesale credit, divestment of the wealth management business, and planned stake sale of the housing finance and general insurance businesses, the diversity in the business risk profile is a monitorable. [1] Gross Stage 3 accounts in the lending book, security receipts held by the group (including in EARC) pertaining to stressed assets in lending book, and loans sold to AIFs where the external investors have a put option |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of EFSL and its subsidiaries. This is because these entities, collectively referred to as the Edelweiss group, have significant operational, financial and managerial linkages.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
Edelweiss group has demonstrated its ability to raise capital from global investors across businesses, despite the tough macroeconomic environment. The group has raised Rs 4,400 crore since 2016 across lending, wealth management and asset management businesses. This has helped maintain the capital position, despite elevated credit costs and absorb the asset-side risks. The group’s networth stood at Rs 6282 crore as on September 30, 2023, as against Rs 8581 crore as on March 31, 2023 (Rs 8,537 crore as on March 31, 2022). The networth reduced as ~30% Nuvama’s networth was distributed to the shareholders of Edelweiss Financial Services Limited as part of the demerger.
Resultantly, gearing inched up to 3.2 times (2.94 times excluding CBLO borrowings) as on September 30, 2023, from 2.5 times (2.26 times) as on March 31, 2023 (2.6 times as on March 31, 2022, and 3.2 times as on March 31, 2021). With increased focus on fee-based businesses, and strategy to grow in credit business through an asset-light model, the incremental debt requirement will be low. The group has plans to divest its remaining stake in Nuvama group, and fully or partly exit housing and general insurance businesses, which will further aid in unlocking capital and debt reduction.
The Edelweiss group is a diversified financial services player, with presence in four verticals i.e. credit (wholesale and retail), insurance (life and general), asset management, and asset reconstruction. The group has attained leading positions in the alternate asset and asset reconstruction businesses and is focusing on building market position in other businesses too, which should lend greater stability to earnings over a period of time.
The asset management business comprises mutual fund and alternate asset businesses. The group is a leading player in the alternate asset segment and its mutual fund AUM has been growing steadily. The asset management AUM grew to Rs 1,64,000 crore as on September 30, 2023, from Rs 1,51,500 crore as on March 31, 2023.
In the distressed assets segment, Edelweiss Asset Reconstruction Company Limited (Edelweiss ARC) is the largest ARC in India, with total securities receipts managed at Rs 37,650 crore as on September 30, 2023 (Rs 37,100 crore and Rs 40,200 crore as on March 31, 2023, and March 31, 2022). From being largely corporate focused, the ARC has, in the recent past, started focusing on retail and micro, small and medium enterprises (MSME) segments. The share of retail is expected to grow over the medium term.
In the lending business, while the wholesale book is under run down, the group is focusing on growth in retail through the asset-light model. The group has entered into agreements with various co-lending partners, which are large domestic and foreign banks, for both the priority and non-priority sector portfolios. The key product offerings in the retail credit book would be mortgage and MSME loans.
The group also houses the life and general insurance businesses, which are gaining scale and are expected to break even over the medium term.
However, with the rundown of wholesale credit, divestment of the wealth management business, and planned stake sale of the housing finance and general insurance businesses, the diversity in the business risk profile is a monitorable.
Weaknesses:
Edelweiss Group’s profitability has been lower compared to other large, financial sector groups. However, most of the businesses have been reporting profit since the last quarter of fiscal 2021.
The group reported a PAT of Rs 406 crore in fiscal 2023 against Rs 212 crore and Rs 254 crore in fiscal 2022 and fiscal 2021 (loss of Rs 2,044 crore in fiscal 2020); However, profitability has been supported by a one-off item of revaluation gains (and also accelerated provisions made basis the one-off gain), excluding which the profit would have been Rs 248 crore for fiscal 2023. Similarly, profitability for fiscal 2022 and fiscal 2021 was supported by capital gains on stake sale of Rs 306 crore in fiscal 2022 and Rs 1,406 crore in fiscal 2021 respectively.
Although in the first half of fiscal 2024, the group reported an improved PAT of Rs 173 crore excluding any one-off items, the quantum and pace of improvement in profitability remains lower than earlier envisaged. Return on average assets (ROA) was 0.8% for the first half of fiscal 2024 against 0.9% for fiscal 2023 and 0.5% for fiscal 2023 and fiscal 2022. The group’s overall profitability is weighted down by losses in insurance businesses, however, ex insurance profit stood at Rs 331 crore for the first half of fiscal 2024 against Rs 730 crore for fiscal 2023 and Rs 523 crore fiscal 2022.
Of the various businesses, the asset reconstruction and asset management businesses, mainly alternate assets, remain the largest contributors to overall profitability forming 74% of overall PAT (ex-insurance) for first half of fiscal 2024. The profitability of the credit business has improved from the past levels with credit costs reducing, however remains muted with retail lending yet to gather pace However, additional provisioning is likely to be required on the monitorable book based on the pace and extent of recovery from underlying assets. The insurance businesses are expected to breakeven only over the next 2-3 years. While the asset reconstruction and alternate assets businesses should continue to support profitability, the group’s ability to scale up the retail lending business while managing overall credit costs will be important and this remains a key monitorable.
The group’s overall gross loan book (excluding monitorable portfolio net off on-book gross stage III assets) stood at Rs 6,250 crore as on September 30, 2023, against Rs 7,548 crore as on March 31, 2023, and Rs 10,502 crore as on March 31, 2022. Of this, retail on book stood at Rs 3,853 crore (Rs 3,795 crore and Rs 6,749 crore) and remaining was wholesale book.
The group has been consciously running down the wholesale portfolio through various modes. While recoveries have contributed to this, the reduction has been primarily due to sell down to ARCs (both internal and external) and AIFs.
Edelweiss group has retained risks and rewards on a large portion of this and hence, CRISIL Ratings tracks the monitorable portfolio to assess asset quality of the group. This includes gross stage III accounts in the lending book (Rs 758 crore), security receipts held by the group (including in EARC) pertaining to sell down (Rs 8,628 crore) and loans sold down to AIFs (Rs 1,848 crore). Overall monitorable portfolio stood at Rs 11,234 crore. While the monitorable portfolio has reduced from Rs 12,097 crore as on March 31, 2022(Rs 11,383 crore as on March 31, 2021), it remains elevated. CRISIL Ratings notes that although the majority of this monitorable portfolio is on-book exposure of Edelweiss group, some part pertains to exposure of external ARC or AIF wherein the group has extended a put option.
The group has made provisions against the monitorable portfolio, and therefore, the net monitorable portfolio stood at Rs 7,084 core as on September 30, 2023. Basis management estimates, there is a reasonable level of collateral cover on most of this portfolio.
The overall gross stage III assets in the lending business stood at Rs 758 crore (12.1% of loans) as on September 30, 2023, against Rs 794 crore (10.5%) as on March 31, 2023 (Rs 930 crore ( 8.9%) as on March 31, 2022, and Rs 1,601 crore ( 10.9%) as on March 31, 2021).Retail book gross stage III was Rs 102 crore (2.6%) as on September 30, 2023, against Rs 124 crore (3.3%) and Rs 182 crore (2.7%) as on March 31, 2023, and March 31, 2022.
However, any challenges in effecting recoveries as per plan could necessitate higher provisioning and put pressure on profitability and hence, this remains a key monitorable for the rating. |
Liquidity: Adequate The group maintains adequate liquidity. As of the end of November 30, 2023, the group had overnight liquidable assets of Rs 2,812 crore, undrawn bank lines of Rs 179 crore and other liquidable assets (includes short term loans and treasury assets) of Rs 658 crore. This is adequate to cover upcoming debt repayments till May 2024.
ESG: CRISIL Ratings believes that EFSL’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.
The ESG profile of financial institutions typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment and other sustainability related factors.
EFSL group has an evolving focus on strengthening various aspects of its ESG profile.
EFSL group’s key ESG highlights:
There is growing importance of ESG among investors and lenders. EFSL group’s commitment to ESG will play a key role in enhancing stakeholder confidence, given the presence of foreign investors. |
Outlook: Stable The ‘Stable’ outlook factors in the group’s adequate capitalisation and flexibility to raise additional capital if needed. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company EFSL was incorporated in 1995 as Edelweiss Capital Ltd. The company, on standalone basis, is primarily engaged in investment banking services and provides development, managerial and financial support to group entities.
On standalone basis, EFSL’s networth stood at Rs 4,919 crore as on September 30, 2023. The company reported PAT of Rs 2,388 crore on total income (net off interest exp) of Rs 2,786 crore in fiscal 2023, as against PAT of Rs 933 crore on total income of Rs 1,158 crore in fiscal 2022.
The company reported PAT of Rs 159 crore on total income (net off interest exp) of Rs 197.5 crore for first half of fiscal 2024 against PAT of Rs 147 crore on total income of Rs 407.8 crore. |
About the Group The Edelweiss group comprised 28 subsidiaries and associates as on September 30, 2023. The number of companies has come down from 74 as on March 31, 2016, because of multiple factors such as sale, windup and merger among others. The group had 293 offices (including 10 international offices in 6 locations) in around 136 cities as on March 31, 2022. Furthermore, as part of streamlining its operating structure, the group has restructured the businesses into four verticals namely credit, insurance, asset management and asset reconstruction.
The group is present across various financial services businesses, including loans to individuals, mortgage finance - loans against property and small-ticket housing loans, MSME finance, alternative and domestic asset management, and life and general insurance. In addition, the Balance sheet Management Unit (BMU) focuses on liquidity and asset-liability management.
On a consolidated basis, the group reported PAT of Rs 406 crore on a total income of Rs 6,058 crore for fiscal 2023, as against PAT of Rs 212 crore on a total income of Rs 4,228 crore for fiscal 2022.
For the first half of fiscal 2024, the group reported PAT of Rs 173 crore on a total income of Rs 2,819 crore as against PAT of Rs 112 crore on a total income of Rs 2,121 crore during similar period in previous fiscal. |
Key Financial Indicators: EFSL (consolidated)
^refers to gross stage III of the on balance sheet loan book. The reported gross stage III assets as per annual report is Rs 13,155 crore as on March 31, 2023, and Rs 12,368 crore as on March 31, 2022. Net Stage III was Rs 8313 crore and Rs 8681 crore respectively. These include stage III assets in EARC on monitorable book sold down by ECL Finance, interest accrued on non-performing assets and stage III assets held by group entities other than NBFCs on trade and general-purpose advances. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^yet to be issue *public issue
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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Criteria Details
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