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Fitch Affirms India's Shriram Transport Finance's 'BB+' Rating
February 7, 2017 / 12:16 PM / a year 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:; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on 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. 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