DHFL’s default can accentuate contagion risk; ICICI Bank, HDFC among top picks: CLSA

Domestic rating agencies ICRA and Crisil on June 6 downgraded rating on Rs 850 crore worth of commercial paper of Dewan Housing Finance Corporation (DHFL) to 'default' from 'A4'.

CLSA said in a note mortgage lender's deteriorating liquidity condition could accentuate contagion risk.

The global investment bank said that the intervention of Reserve Bank of India (RBI) may be required as DHFL default can expose Rs 1 lakh crore in borrowing to the risk of default/haircuts.

Banks funded half of Rs 1 lakh crore followed by insurers and mutual funds. Nearly 10 percent of Rs 1 lakh crore borrowing is through deposits where PSU banks were the key lenders.

Also Read: DHFL commercial paper downgraded to 'default' by ICRA, Crisil

The global investment bank further added that mutual funds will take a 75 percent haircut right away, and banks may also see MTM losses on bond exposure.

CLSA added that a default could also accentuate contagion risk in the financial sector. It prefers banks over NBFCs. In the financial space, CLSA top picks include – ICICI Bank, IndusInd Bank, HDFC and ICICI Lombard.

ICRA said that given the stretched liquidity profile and limited visibility on fresh funding, DHFL is unlikely to be able to service its debt obligation with regard to commercial paper programme in a timely manner.

The company has commercial paper (CP) worth Rs 750 crore maturing in June 2019 with the first repayment on June 7.

Morgan Stanley in a note said that rating downgrade after payment miss could make the market nervous, and stocks of wholesale lending NBFCs could be affected.

The global investment bank further added that banks may also face markdowns on their exposures. Going forward, weak MF debt inflows will keep NBFCs/HFCs under pressure, and potential risk of outflows will keep NBFCs/HFCs under pressure.