India Ratings and Research (Ind-Ra) has affirmed Can Fin Homes Limited’s (CFHL) Long-Term Issuer Rating at ‘IND AA’ with a Stable Outlook.

The instrument-wise rating actions are as follows:

*Details in Annexure

KEY RATING DRIVERS

Long Track Record of Operations: CFHL, which started operations in 1987, is a sizable player in the housing finance industry with assets under management of INR208 billion on 30 September 2020. It has close to three decades of track record and has the experience of managing asset quality and growing the business through various business cycles. It is a fairly well-established player in the southern states of the country and an important player in the low-ticket granular housing finance segment.

Improvement in Collection Efficiency; Sustainability a Key Rating Monitorable: CFHL’s collection efficiency improved to 93% in September 2020 and further to 93.5% in October 2020 (around 90% in January and February 2020). However, this improvement was due to some cash conservation at the borrower’s end and sustainability remains to be seen. CFHL’s stage 3 assets have been fairly range bound (2QFY21: 0.72%, FY20: 0.76%), as reflected in the composition of the book which is fairly granular home loan portfolio (92% of the portfolio) targeted towards higher proportion of salaried and professional customers (71%).

CFHL has been operating predominantly in the southern states (70% the portfolio) and has developed the expertise of managing the asset quality in this geography. The management’s strategy to continue focusing on the home loan portfolio towards salaried segment provides comfort. There is negligible builder portfolio which is facing headwinds and can give asset quality pain to the industry. Around 14% of CFHL’s customers did not pay a single equated monthly instalment during the Reserve Bank of India-prescribed moratorium period (April to August 2020); however, they started paying post August 2020.

The management does not expect a high proportion of the book to undergo restructuring based on the trend in collection efficiency. CFHL has made 0.4% as COVID-19-related provisioning and increased the provision coverage on stage 3 assets to 36% at end-2QFY21 (29% at FYE20, 27% at end-2QFY20). The operating profit buffers (1HFY21: 6.0x, FY20: 9.6x) are strong even at increased coverage ratio. There could be some rise in delinquencies in FY21; however, the incremental credit cost will not have a disproportionate impact on the buffers.

Moderately Diversified Resource Profile though Largely Institutional Funded: CFHL has a larger proportion of borrowings from banks (banks accounted for 60% of the borrowings at end-September 2020) than other sources with concentration with two banks. Additionally, the company has a sizeable proportion of funding from National Housing Bank (‘IND AAA’/Stable; 21% of funding). Capital market funding accounts for 17% of the borrowing (NCDs 10% and CPs 7%).

CFHL has a deposit-taking license; however, it has not tapped this source of funding to a large extent (only 2%). CFHL’s access to funding remains adequate with large unutilised lines of INR30 billion at end-September 2020. CFHL has mobilised INR18 billion of bank loans and INR30 billion of CPs post April 2020 as being an associate of Canara Bank  (‘IND AAA’/Negative) helps it mobilise funds at competitive rates from banks and capital markets.

Liquidity Indicator – Adequate: CFHL’s structural liquidity statement (adjusted by removing pending disbursements of loans and also draw down of unutilised funding lines) for September 2020 shows negative cumulative mismatches till the one-year bucket. The peak negative cumulative gap stood at INR13 billion in the six-months-to-one-year bucket.

The gaps are attributed to longer tenure (15-20 years) of assets (53% of loan book flows in beyond the seven year bucket) as compared to liabilities (8-10 years; just 9% of debt liabilities mature beyond the seven-year bucket) and also CP (7% of borrowings) maturities till the one year period. CFHL has considered prepayments of INR15 billion (7% of the book) in the structural liquidity statement  till the one-year bucket. This is based on behavioral analysis of prepayments for trailing 24 months.

CFHL has unutilised bank facilities of INR30 billion, which can cushion the gaps in the liquidity profile. CFHL has a policy of maintaining a backup for CP borrowings in the form of unutilised bank lines. Furthermore, CFHL can also raise funds through securitisation/assignment route though it has not tapped this avenue in the past.

Stable Profitability: CFHL has been maintaining net interest margin of over 3% consistently. Moreover, the lower cost of funding in 1HFY21 has helped it maintain the margins despite reducing lending rates during the same period. Furthermore, CFHL has always maintained a strong control on credit cost and its operating cost has been modest (operating cost to average assets: 0.45% in 1HFY21, 0.54% in FY20, 0.53% in FY19).

CFHL cut down on the operating cost during 1HFY21; however, when business picks up in FY22, it will again increase and reach a steady state. CFHL is facing competition from banks and saw an increased rate of foreclosures in 1HFY21 and to stay competitive, it has reduced lending rates. Increased competition can put some pressure on margins. The important levers of profitability will be funding cost and the ability to manage asset quality.

Moderate Capital Buffers: CFHL’s leverage (1HFY21: 7.8x, FY20: 8.7x, FY19: 9.5x) declined over the last one year due to tempered growth in the loan book. However, due to reduced risk weights for small ticket home loans, Tier 1 capitalisation is (2QFY21: 22.5%) significantly above the regulatory requirement.

CFHL plans to shore up its capital base by INR4 billion-5 billion. However, given the volatile operating environment, the loan book growth will be modest and capital consumption may not be much.  Capital infusion may be required if the loan book grows beyond the rate of internal accruals. Capital buffers are reasonable even under Ind-Ra’s stress case scenario.

Source: India Rating and Research

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