Rating agency ICRA on Wednesday downgraded as many as eight Edelweiss Group companies with a negative outlook, a move which may add more pain for debt mutual funds. The Edelweiss Group companies that were downgraded include Edelweiss Finance and Investments Ltd, Edelweiss Custodial Services Ltd, Edelweiss Retail Finance Ltd, Edelweiss Finvest Pvt Ltd, Edelweiss Housing Finance, Edelweiss Asset Reconstruction Company, Edelweiss Rural and Corporate Services Ltd and Edel Finance Company.
Most of the downgrades were from a rating of A+ to AA- with a negative outlook, citing increasing stress in the wholesale portfolio, leading to deterioration in the asset quality, and the consequent impact on the financial performance.
"ICRA has taken a consolidated view of the Edelweiss Group, given the close linkages between the group entities, common promoters and senior management team, shared brand name, and strong financial and operational synergies," the rating agency said.
However, CARE has reaffirmed its rating for NCDs of Edelweiss Financial Services at AA- with negative outlook. The rating for commercial papers was also reaffirmed at CARE A1+. The rating action factored in the diversified business profile of the Edelweiss group, adequate capitalisation with continuous plans for equity infusion, moderate asset quality and moderate liquidity profile. The ratings are, however, constrained by dependence on revenue from the capital market related activities, client concentration and credit risk in its wholesale credit book, risk associated with distressed assets and substantial moderation in the profitability during the first three quarters of FY20.
Given the negative outlook, an upgrade is less likely in the next 12 months, ICRA said, adding that it could revise the outlook in case of a significant and sustained improvement in the group's asset quality, profitability and its ability to mobilise resources at competitive terms.
Edelweiss Group's gross non-performing assets (GNPAs) increased to 2.76 per cent of total advances as of December 31, 2019, from 1.87 per cent as of March 31, 2019.
The rating actions also take into account the continued funding challenges, as witnessed by the reduced fundraising by the group, and the widening credit spreads, it added.
Edelweiss Group has been actively looking to sell its bad loans to asset reconstruction companies (ARCs) to leverage their resolution capabilities; adjusting for this the GNPA level would be higher.
The resultant higher credit costs, in turn, impacted the group's profitability during nine-month period (April-December) of FY20, with return on assets (RoA) declining to 0.2 per cent in Q3 FY20 and 0.5 per cent in 9M FY20 from 1.6 per cent in FY19. The rising credit costs are likely to continue to exert pressure in the current fiscal as well, ICRA said.
"The ratings also factored in Edelweiss group's demonstrated track record and established position in the financial services industry as well as its diversified business profile. While the credit businesses have emerged as key business segments, the group continues to have a healthy stream of fee and advisory income," the rating agency said.
ICRA, however, believes that these positives are partially offset by the credit and concentration risks in the group's wholesale lending segments and the risks associated with the distressed assets business, given the focus on large ticket exposures. Adding to the woes, retail lending has also seen an increase in non-performing assets in the past few quarters as the seasoning of the book increases.
ICRA noted that the Edelweiss group is actively pursuing various alternatives for resolving potential stress and managing the portfolio. "Going ahead, Edelweiss Group's ability to maintain a healthy asset quality, given the increased risk profile of wholesale book, keep its credit costs under control and improve its profitability remains critical from a credit perspective going forward," the rating agency said.
Adding to it, the group's ability to raise and diversify its borrowings and maintain a comfortable liquidity profile would be a credit sensitive factor, ICRA said.