Fitch retains BBB- rating on IDFC despite asset quality risks

Rating agency Fitch today affirmed 'BBB-' rating with a stable outlook on infra lender IDFC -- which is racing to convert itself as a commercial bank -- despite the company facing severe asset quality issues.
The agency said IDFC's switchover into a bank will help its credit profile in spite of the challenges.
"IDFC's move into banking will likely help its credit profile in spite of the challenges," Fitch Ratings said in a note, affirming the 'BBB-' rating with a stable outlook.
It said after the possible launch of the bank in October, the diversification will help its credit profile.

Fitch said the strong capital base, with the tier-I capital at 23 per cent following an infusion of Rs 1,000 crore, is a "key support" for the current rating.
IDFC can also go in for one more round of capital raising, it said, adding, the way IDFC manages the change on its business and risk profiles will be an important consideration for rating in the future.

The spurt in asset quality stress in infrastructure segment is hurting the non-banking lender. This has also led to speculation if it will be able to keep up with its target of launching the bank by October.

Its gross non-performing assets ratio rose marginally to 0.65 per cent in the March quarter from 0.56 per cent a year ago. The restructured assets also increased and the company has accelerated its provisioning to ensure that there are no surprises once it converts into a bank.
"Fitch believes asset quality will remain weak for at least a few more quarters, although the pace of deterioration may slow. This will be mitigated by IDFC's consistent efforts to build a strong provision buffer," it said.
A bulk of its assets and liabilities will move to the bank, the report said, adding, "the bank will be no different from IDFC (as it is currently) from a risk perspective".

Fitch acknowledged that once it becomes a bank, IDFC will be able to raise deposits but stressed that building a stable deposit base is going to be a slow process.
The report warned that IDFC will find it difficult to meet mandatory priority sector lending, given its limited experience in the space.
IDFC was chosen along with micro-lender Bandhan to offer universal banking services in the last round of award of licenses by giving an in-principle nod.