Icra has downgraded the long-term ratings on various facilities of Edelweiss Housing Finance and Edelweiss Finance and Investments after taking a consolidated view of the Edelweiss Group.
Given the close linkages between the group entities, common promoters and senior management team, shared brand name, and strong financial and operational synergies, the rating agency downgraded the long-term ratings on several facilities of the group’s with a negative outlook.
The rating downgrade action took into account the increased stress in the wholesale portfolio, which could lead to a deterioration in the asset quality, and the consequent impact on the financial performance. The group’s gross non-performing assets (GNPAs) increased to 2.76% of total advances as of December 31, 2019, from 1.87% as of March 31, 2019. “Edelweiss Group has actively looked at divestment of stressed/potentially stressed assets to asset reconstruction companies (ARCs) to leverage the resolution capabilities of ARCs; adjusting for this the GNPA level would be higher. The resultant higher credit costs, in turn, impacted the group’s profitability in M9FY20 (return on assets RoA declined to 0.2% in Q3FY20 and 0.5% in M9FY20 from 1.6% in FY19) and are likely to continue to exert pressure in the current fiscal as well,” Icra said in its note.
The rating actions also took into account funding challenges, as witnessed by the reduced fundraising by the group, and the widening credit spreads.
Even as the rating action factored in asset quality deterioration, Icra also said the group had a demonstrated track record and established position in the financial services industry as well as its diversified business profile. While the credit businesses had emerged as a key business segment, the group continued to have a healthy stream of fee & advisory income, it said.
However, these positives were partially offset by the credit and concentration risks in the group’s wholesale lending segments and the risks associated with the distressed assets business, given the focus on large-ticket exposures. Moreover, retail lending has also seen an increase in NPAs in the past few quarters as the seasoning of the book increases.
Icra noted that the group was actively pursuing various alternatives for resolving potential stress and managing the portfolio. “Going forward, the progress on such endeavours and the impact on the group’s asset quality would be important from a credit perspective,” the rating agency added.