Key Rating Drivers & Detailed Description
Strengths:
Strong capitalisation with healthy cover for asset-side risks
Capitalisation is marked by sizeable networth of Rs 17,576 crore as on June 30, 2023, supported by healthy internal accruals. Accretion of Rs 1,988 crore from sale of bulk of its investment in OakNorth Bank in fiscal 2021 also contributed to the strengthening of capital position. Net worth coverage for net non-performing assets (NPAs) was also comfortable at around 15.7 times as on June 30, 2023. On the same date, consolidated Tier-1 capital adequacy ratio (CAR) was healthy at 26.7%, as was overall CAR at 31.2%. Consolidated on-book gearing was comfortable at 2.9 times as on June 30, 2023 (3.0 times as on March 31, 2023). Given the strong liquidity that IBHFL maintains on a steady-state basis, net gearing was 2.2 times as on March 31, 2023 (2.6 times as on March 31, 2022).
The company has demonstrated strong ability to raise capital including the Rs 683 crore equity raised through qualified institutional placement [QIP] in fiscal 2021 and Rs 293 crore through stake sale in Oaknorth Bank in fiscal 2022. Strong capitalisation should continue to support the company’s overall financial risk profile over the medium term.
Comfortable asset quality in retail segments
IBHFL reported overall gross non-performing assets (GNPAs) of 2.87% as on June 30, 2023 compared to 2.86% as on March 31, 2023 (3.21% as on March 31, 2022). The reduction in GNPAs over fiscal 2022 has been driven by improvement in asset quality (GNPAs) of the developer loan book from 13.33% as on March 31, 2022 to 9.06% as on March 31, 2023.The GNPAs in home loans and Loan Against Property (LAP) segments have increased from 1.48% and 2.94% as on March 31, 2022 to 1.64% and 3.40% in March 31, 2023, respectively. Nevertheless, overall asset quality has improved in Q1FY24 and remains comfortable in these segments (together forming 87% of AUM as on June 30, 2023) with gross NPAs at 1.60% and 3.52%, respectively. The increase in absolute amount of GNPAs within these segments, over fiscal 2023, was insignificant. However, due to de-growth in the loan book, the reported numbers (in percentage terms) have inched up.
With a few high-ticket slippages in commercial credit book over past few years and continued traction in refinancing of this portfolio resulting in its de-growth, GNPAs in this segment remain elevated at 9.28% as on June 30, 2023 (9.06% as on March 31, 2023)
Nevertheless, the company’s risk-mitigating measures are prudent, in the form of conservative loan-to-value ratios (averaging around 65%) in the LAP segment, and emphasis on collateral with sufficient cover in the commercial real estate segment. However, any sharp increase in NPAs, mainly in the commercial credit portfolio, and its impact on profitability will remain key rating sensitivity factors for IBHFL.
Sizeable presence in the retail mortgage finance segment
IBHFL’s total AUM stood at Rs 65,787 crore as on June 30, 2023. The share of housing loans within the overall AUM continues to increase and was at 72% as on June 30, 2023 as compared to 50% as on March 31, 2015. The company’s LAP portfolio accounted for 16% of the overall AUM as on June 30, 2023, with the remaining 13% being constituted of commercial credit. The proportion of housing loans and LAP is expected to increase further from current levels over the medium term.
Overall AUM has declined by 10% year-on-year as on June 30, 2023, on account of lower disbursements as well as higher prepayments, and sell-down in commercial credit book. This is because of the current business transition towards building a more granular portfolio. The overall disbursements during fiscal 2023 were Rs 14,042 crore (Rs 11,091 crore during fiscal 2022) as the market picked up pace post pandemic.
The revival in IBHFL’s overall AUM growth is expected to begin in the fiscal 2024. Over the medium term, share of own book in the total AUM would continue to decline as the company remains focused on co-lending. Nonetheless, its overall presence in the retail mortgage finance market is expected to remain sizeable.
Weaknesses:
Successful transition to new business model to be established
The management has recalibrated its business model, under which IBHFL is gradually moving towards a less risky and asset-light framework, wherein disbursements will primarily be in the HL and LAP segments (with a potential 60:40 split), with a low proportion of incremental disbursals in developer finance portfolio. Further, on a steady state basis, of the overall disbursals, a significant proportion will be either co-originated or sold down to banks.
IBHFL has started working towards this new model and thus far, has entered into a co-origination agreement with eight financial institutions. Disbursements amounting to Rs 7,844 crore were done in fiscal 2023 under these agreements. However, the management’s ability to increase the disbursement pace, establish tie-ups with multiple banks and successfully scale-up this model, while maintaining healthy profitability and asset quality is to be witnessed. However, the company has demonstrated good execution capabilities in scaling up businesses in the past.
While earnings are expected to decline from levels seen in the recent past, it will be supported by income from co-origination, off-balance sheet portfolio, and from spread on sold-off loans. Further, this will be commensurate with the more granular, lower-risk portfolio, which will be the focus under the new business model. In the recent past, earnings were impacted on account of decline in AUM, however it stabilized in fiscal 2023 due to increase in income from other sources. Overall, IBHFL’s return on assets (RoA) improved to 1.4% during fiscal 2023 and 1.6% (annualized) for quarter ended June 30, 2023, from 1.3% for fiscal 2022 and 1.5% (annualized) for quarter ended on June 30, 2022.
Susceptibility to asset quality risks arising from the commercial real estate portfolio
Asset-quality risks arising from a sizeable, large-ticket commercial credit portfolio of Rs 7,573 crore as on June 30, 2023, persist, and could impact the company’s portfolio performance. This portfolio exhibits high concentration (average ticket size of Rs 150 crore) with the top 10 exposures forming 62% of the corporate AUM and having a median rating of B/BB. Thus even a few large accounts experiencing stress could impact the overall asset quality.
The share of commercial credit in overall AUM has decreased over the last few years to 13% on June 30, 2023 from 17% on March 31, 2019. The management has launched an alternative investment fund (AIF) platform for this segment wherein Rs 200 crore has been disbursed to a leading developer. Further, the process of filing for regulatory approvals is underway for launching two more AIFs. Going forward, the company may continue to do selective lending to existing borrowers in this space.
However, any weakening in asset quality, specifically in the commercial real estate book and its impact on profitability, remains a monitorable.