Moody's Investors Service has affirmed Muthoot Finance Ltd's Ba2 corporate family rating and changed its outlook to stable from negative.
It said the affirmation and change in outlook to stable reflect Muthoot's steady credit profile despite the economic contraction caused by coronavirus pandemic.
In addition, the rating action reflects Moody's expectation that Muthoot's financial performance will remain stable over the next 12 to 18 months, supported by its leading franchise and track record of providing loans against gold jewellery, superior profitability and strong capitalisation.
Over the past six months, a surge in gold price -- which backs about 90 per cent of the company's loans -- helped improve loan collections and disbursements with both exceeding their five-year averages in the quarter ended September.
Similarly, higher gold prices helped lower Muthoot's gross non-performing loan ratio for the gold portfolio to 1.3 per cent at the end of September from 3.4 per cent a year earlier.
Nevertheless, the asset quality of Muthoot's non-gold loan segments which includes home, vehicle and micro finance loans is susceptible to the challenging operating environment.
While loans against gold jewellery are also susceptible to a sharp and sudden decline in gold prices, this risk is mitigated by the short-duration and collateralised nature of the company's loan book, the maximum loan-to-value restriction under the central bank's norms, and the ability of the company to quickly liquidate the collateral if the borrower is unable to service the loan.
Muthoot's profitability has somewhat moderated with its return on assets down to 5.8 per cent for the first half of fiscal year ending March 2021 (fiscal 2021) from 6.6 per cent a year ago as asset growth outpaced net profit growth.
Nevertheless, Muthoot remains the most profitable among Moody's rated banks and non-bank finance compes in India. Its superior profitability supports internal capitalisation as reflected by its strong tier 1 ratio of 24.6 per cent at the end of September.
Muthoot's funding also remains steady as the secured and highly liquid nature of its loans enables it to obtain funding from banks and debt investors, said Moody's. Over the past year, the company has diversified its funding sources to more stable, long-term funding sources -- a credit positive.
( With inputs from ANI )
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