Fitch Affirms India's IDFC at 'BBB-'; Outlook Stable

Tue Jun 3, 2014 1:57am EDT

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(The following statement was released by the rating agency) MUMBAI/SINGAPORE, June 03 (Fitch) Fitch Ratings has today affirmed India-based infrastructure finance company IDFC Limited's (IDFC) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. KEY RATING DRIVERS - IDR The affirmation of IDFC's IDR with a Stable Outlook is driven by its stand-alone credit strength and the expectation that this is unlikely to change in the near- to medium-term even though IDFC is building its banking business after receiving an in-principle banking license in April 2014. The way IDFC rebalances its business profile and the impact of this on its overall risk profile will be important considerations for the rating in future. However, Fitch expects that such a change would take place over the medium to long term. IDFC's capital buffer with Tier 1 capital ratio at 20.1% at end-March 2014 (19.8% at end-March 2013) underpins the rating given the finance company's high concentration risk, which is likely to remain at high levels during the initial transition process. Asset quality has also been a historical strength, notwithstanding the higher NPL ratio of 0.56% at end-March 2014 compared with 0.15% a year earlier and a restructured loans ratio of 4.5% at end-March 2014. These are counterbalanced by specific and floating provisions, which covered NPLs in excess of 11 times and stressed assets at around 42%. IDFC's wholesale funded profile has been relatively well-managed. Borrowings have been steadily diversified towards the longer-end while asset-liability mismatches have been kept low. As a bank, IDFC's funding options will increase, but building a deposit base will be a slow process. Profitability indicators have been good, but Fitch expects them to narrow over the medium-term towards averages in the banking sector as the balance sheet recalibrates with higher levels of liquid assets, a change in the loan mix and a different cost structure. IDFC's move into banking will likely come with challenges and benefits. The near-term benefits include greater asset diversification and higher funding flexibility, while some challenges include building a branch network and the need to meet regulatory targets for extending loans to certain priority sectors that regulators deem are underserved (around 40% of a bank's credit). In the longer term, IDFC's ability to position itself in a highly competitive market space without taking undue risks would be important consideration for the IDR. RATING SENSITIVITIES - IDR IDFC's IDR is sensitive to changes, in particular, to its capital strength as it extends itself beyond its core competencies and into new businesses with different competitive dynamics and unfamiliar risks, where its execution capabilities have yet to be tested. The IDR, which is currently at the same level as India's sovereign rating, has limited upside. Contact: Primary Analyst Ambreesh Srivastava Senior Director +65 6796 7218 Fitch Ratings Singapore Pte Ltd. 6 Temasek Boulevard #35-04/05 Suntec Tower 4 Singapore Secondary Analyst Saswata Guha Director +91 22 4000 1741 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, Global Financial Institutions Rating Criteria, dated 31 January 2014 and 'Evaluating Corporate Governance', dated 12 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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