top of page

S&P revises Muthoot Finance's Outlook To Stable From Negative; 'BB/B'

Sep 14, 2022 05:00 pm

S&P Global Ratings today revised its rating outlook on Muthoot Finance Ltd. to stable from negative. At the same time, S&P affirmed their 'BB' long-term and 'B' short-term issuer credit ratings on the India-based finance company.

S&P revised the rating outlook to reflect our expectation that Muthoot will continue to perform better than its peers by maintaining lower credit cost, good profitability, and strong capitalization.

With economic growth in India strengthening, the risk of material deterioration in credit costs for Muthoot has abated. The company's overdue loans in its gold loans book (taken against household gold jewelry) have continued to decline. The Stage 2 and Stage 3 loans together stood at about 3% of total loans as of June 30, 2022, after peaking at 13% as of Sept. 30, 2021. Along with the pickup in the economy, large-scale auctions have also supported the decline in overdue loans. In the fiscal year ended March 31, 2022, Muthoot auctioned loans totaling to Indian rupees (INR) 52 billion (principal) for 9,50,000 borrowers, the highest in the past nine years.

That said, eventual losses in this book should remain low, given the highly liquid nature of the gold collateral. Stress will likely remain high in the non-gold portfolio, especially in the micro finance business. But with the pickup in the economy, S&P expects the pressure on asset quality to start abating.

Although S&P expects Muthoot's loan growth to moderate due to competition, we believe the company will remain a market leader in its niche gold loans segment. Despite pressure on margins, Muthoot is likely to continue to outperform its peers, in our view. Its net interest margin will remain significantly higher than that of other nonbank financial companies (NBFCs).

In the past few years, banks and other NBFCs have turned aggressive in the gold loan segment and have been increasing their market share, leading to heightened competition. Muthoot had also offered teaser loans (low interest rate loans), like the other industry players, which in turn hit their margins. However, Muthoot has now stopped offering teaser loans. Existing loans with teaser rates have been revised to normal rates. The company also wants to maintain a spread of at least 10% in the new loan book, which should ease some pressure on margins. However, offsetting this would be rising funding costs, which the company may not be able to fully pass on to customers, given the competition. This could further erode the net interest margin, albeit at a slower pace. As a result of margin pressure, we expect Muthoot's return on average assets, which was about 4.5% in first-quarter 2022, to decline slightly in 2023, but remain better than the average of about 2% for other high-yield Asia-Pacific NBFC peers.

Muthoot's funding profile has been improving with a shift toward longer tenors, although the company still has material exposure to short-term wholesale funding, given the nature of its business. This exposes Muthoot to refinancing risk. But it is partly mitigated by its sizable equity base, which accounted for about 27% of its total funding base as of March 31, 2022. S&P believes that Muthoot's liquid asset base also mitigates the risks.

S&P's stable outlook reflects their view that Muthoot will maintain a strong capitalization and a robust market position in gold loans over the next 12 months, despite intense competition. At the same time, we expect the company to maintain superior financial performance, despite pressure on margins from competition and rising funding cost. In our base case, they expect limited upside or downside on the ratings in the next one year.

S&P said it could lower the ratings if competition or operational risk intensifies such that Muthoot's return on average assets (at 4.5% currently) dips sharply and is no longer materially superior to its peers', or its market position in the gold loan segment deteriorates.

S&P could raise the ratings on Muthoot if the company is able to diversify its funding profile into more long-term and stable sources.

bottom of page