Reuters logo
Fitch Affirms India's Shriram Transport Finance's 'BB+' Rating
February 7, 2017 / 12:15 PM / 10 months ago

Fitch Affirms India's Shriram Transport Finance's 'BB+' Rating

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, February 07 (Fitch) Fitch Ratings has affirmed India-based Shriram Transport Finance Company Limited's (STFC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB+'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. STFC's IDR is based on its standalone credit profile, which reflects its sound franchise and market share in used commercial-vehicle financing. This is supported by its quasi-monopoly status, strong management team and a highly customer-centric business model. STFC's profile is partly countered by its concentration towards the commercial-vehicle segment and a relatively riskier customer base that is prone to the economic cycle. However, STFC's established underwriting standards, almost 40-year operating record and strong liquidity position help mitigate these risks. The Stable Outlook highlights Fitch's view that the rating is well-balanced at its current level. KEY RATING DRIVERS IDR STFC's rating reflects the established nature of its used-commercial-vehicle financing business. The lender is the largest player in this segment, with a pan-India presence and a business model that has stood through numerous economic cycles. STFC's close customer relationships and sound used-commercial vehicle valuation capabilities give it a strong understanding of the transport market, which financial peers like banks and non-bank financial institutions have found difficult to replicate. STFC's presence across transport hubs helps it keep in touch with customers and underpins its underwriting capabilities. Its valuation abilities have kept credit losses low despite high NPLs and a risky customer profile; most customers either lack a formal credit history or have an inadequate one. STFC's management quality, which shows stability and a strong understanding of the business dynamics prevalent in its niche segment, also has a strong influence on its rating. Changing regulatory norms on NPL recognition may also face the added pressures of demonetisation in the next few quarters, particularly in relation to asset quality. We believe STFC's management depth and experience should help manage this transition without undue negative surprises for the lender's financial profile. Nonetheless, its NPL ratio will continue rising until recognition norms converge with those of the banks. This will continue testing STFC's earnings and core capital buffers, although they are satisfactory for now. STFC's credit losses remain below 2% of average loans despite its NPL ratio rising to 6.6% as of the third-quarter of the financial year ending March 2017 (FY17). This was as per Fitch's expectations, which are based on STFC's strong recovery capabilities that are intricately linked to its ability to value used commercial vehicles and the loan/value ratio applied. Management expects to limit credit losses within its historical average, despite the higher NPL ratio, as it transitions to a tighter recognition standard of 90 days past due by FYE18, from 150 days. This implies that its NPL ratio will continue rising, with demonetisation possibly adding temporary pressure in the interim. Management has indicated the 9MFYE17 NPL ratio would have been another 60bp higher without regulatory forbearance. STFC's profitability weakened in FY16 to 1.87% (9MFYE17 return on assets: 2.1%) led by higher credit costs, in line with Fitch's expectations. Fitch expects profitability pressure to continue, but believes its pre-provisioning profitability should provide it with some buffer against further credit cost rises. STFC's Tier 1 capitalisation ratio of 15.5% at 3QFYE17 is satisfactory, considering its relatively riskier business profile and high loan-loss provision cover of 75% at 9M17. Fitch does not expect the company to raise capital before FY18, but any marked deterioration from current levels also seems unlikely - considering slower growth and risk-weighted asset management through securitisation. This should help offset some pressure from weaker internal capital accretion, which Fitch expects, although we understand that STFC has in-principle approval for fresh capital from strategic investors, such as Piramal Enterprises Limited and Sanlam Life Insurance Limited (National Long-Term Rating; AAA(zaf)/Stable), if needed. STFC's funding profile continues to benefit from its franchise and diversified funding structure across sources and tenor, despite its wholesale nature. The company's liquidity position is supported by access to funding from unutilised bank credit lines and securitisation. RATING SENSITIVITIES Key rating considerations include STFC's ability to maintain its credit profile in light of ongoing changes to NPL recognition norms and to manage the temporary disruptions caused by demonetisation. A credit-loss ratio above Fitch's expectations due to the transition could have a negative effect on earnings and capitalisation, which could in turn pressure STFC's rating. A sustained improvement in capitalisation would be credit-supportive, although an immediate improvement is not probable. The rating actions are as follows: Shriram Transport Finance Company Limited: Long-Term Foreign-Currency IDR affirmed at 'BB+'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Stable Short-Term IDR affirmed at 'B' Contact: Primary Analyst Ambreesh Srivastava Senior Director +65 6796 7218 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Jobin Jacob Associate Director +91 22 4000 1773 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 Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018663 Solicitation Status here Endorsement Policy 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 WEB SITE AT 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below