Global rating agency Moody's has affirmed Hero FinCorp's long-term corporate family rating (CFR) at "Ba1" on expectations that the company’s financial performance will remain stable over the next 12-18 months.
The rating outlook remains stable.
Hero FinCorp's asset quality is expected to be stable as borrowers' debt repayment capacity will be supported by India's economic momentum.
Its gross nonperforming loan ratio declined to 5.38 per cent at end of March 2023 due to write-offs. The GNPAs had touched 7.5 per cent at the end of March 2022 reflecting the impact of the pandemic. The net NPAs also declined to 2.79 per cent in March 2023 from 4.63 per cent in March 2022. The provision coverage ratio (PCR) for bad loans improved to 49.6 per cent at the end of FY23 from 43.76 per cent at end of FY22, according to results for FY23.
Its Loan loss provisions were 62 per cent of pre-provision income for the fiscal year ended March 2023 (fiscal 2023), down from 116 per cent in fiscal 2022, the rating agency said.
Pointing to risks to asset quality, Moody’s said Hero FinCorp is structurally more exposed to more volatile asset quality trends because of its modest franchise as well as its relatively risky target customers. These include small businesses and low income households, which are more vulnerable to the current high inflation and rising interest rate environment.
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Moody's expects Hero FinCorp's profitability to be broadly stable. A surge in loan disbursal will support top-line revenue but credit costs will continue to weigh on its overall profitability.
Its loans grew to Rs 36,213 crore in March 2023 from Rs 28,651 crore a year ago.
For the whole of FY23, the finance company posted a net profit of Rs 457.33 crore on standalone basis, as against a Rs 194 crore loss in FY22.
Capital remains the firm's credit strength, supported by regular infusions from its shareholders. Existing shareholders, alongside new investors, injected Rs 2,000 crore into Hero FinCorp by way of compulsory convertible preference shares (CCPS) in 2022, taking the company's regulatory Tier 1 ratio up to 19 per cent as of March 31, 2023 from 13 per cent a year earlier.
Moody's considers the CCPS as a financial liability and will monitor Hero FinCorp's ability to convert the CCPS into equity over the next 12-18 months. Inability to convert the CCPS into equity will be credit negative unless the company manages to raise new equity capital.
Funding and liquidity will remain stable. Despite the small buffer of liquid assets, Hero FinCorp leverages its strong links with its parent to access banks and debt market investors for funding, it added.