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S&P upgrades Manappuram Finance to “BB-” for strong gold lending business

S&P Global Ratings has upgraded its long-term issuer rating on Manappuram Finance Ltd to “BB-” from “B +” with a stable outlook. He sees the company’s gold lending activities as an effective counterweight to the weakness of the microfinance segment in India. S&P also confirmed the short-term “B” issuer credit rating for the India-based finance company.

He says: “We improved Manappuram because we expect the company to continue to outperform its non-bank finance company (NBFC) peers over the next 12 months. This would be reflected in lower costs of credit. of the company, above-average profitability, and strong capitalization. “

S & P’s BB rating is derived from a speculative rating, which indicates that the issuer is less vulnerable in the short term but faces significant persistent uncertainties related to adverse business, financial and economic conditions.

According to S&P, Manappuram’s gold-based lending model with a three-month term allows it to recognize tensions over asset quality early on.

Gold prices had fallen significantly until April 2021, after peaking in August 2020. Stress in the economy due to the second wave of COVID-19 infections in April-June 2021 and the decline in Gold prices have led to an increase in higher loan auctions. loans to value (LTV) during the first quarter of fiscal 2022, ending March 31, 2022.

“Manappuram gold auctions are expected to gradually return to their normal level as economic conditions improve. The high bids have, in part, lowered Manappuram’s average LTV ratio to around 65% as of June 30, 2021, from around 71% at the end of March 2021, providing the company with some buffer to absorb price fluctuations ” , said the rating agency.

Gold price movements play a vital role in the cushion available to lenders like Manappuram, which is primarily in the collateral-based gold lending industry. Gold loans account for nearly 70% of the company’s total loans, with microfinance loans accounting for around 25%, and vehicle finance and affordable housing contributing most of the rest.

However, according to S&P, stress will likely remain high in Manappuram’s non-gold portfolio, particularly in the microfinance sector. “The asset quality of the non-gold loan portfolio has deteriorated significantly over the past two years. However, billing and collection efficiency is once again close to pre-COVID-19 levels, suggesting an improvement in asset quality trends. In addition, the company has pre-provisioned for the microfinance activity. Therefore, we believe that the company’s profits can largely absorb any residual impact. “

“We expect Manappuram’s risk-adjusted capital ratio to remain above 30% over the next 12 months. The company’s core earnings are expected to remain above 5% of its average assets under management during this period. This ratio is one of the highest among Manappuram’s funding profile is also improving with a shift to longer term debt. However, the company still has significant exposure to short term wholesale funding, ”he said. added S&P.

According to the rating agency, Manappuram has also benefited from lower interest charges due to increased liquidity in the Indian banking system. Its average interest expense excluding liabilities fell to 9% as of March 31, 2021, from 9.8% as of June 30, 2020.

“Despite this gain, margins declined because the company chose to maintain higher liquidity and yields declined. We expect Manappuram’s margin and profitability to remain much better than its peers,” he added.

The stable outlook for Manappuram reflects S&P’s view that the company will essentially maintain its financial profile over the next 12 months, supported by improving economic conditions in India.

He warns, however, against a downgrade if the costs of Manappuram’s credit increase “much more than expected, especially in microfinance loans”.

“We see a limited increase in the rating of Manappuram over the next 12 months. We will upgrade the company if we believe its funding profile has become more stable. Increased access to longer-term funding that reduces the renewal risk associated with short-term wholesale funding could indicate such an improvement, ”says S&P.

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