Investing.com -- Moody’s Ratings has today upgraded the long-term corporate family rating of Muthoot Finance Limited (Muthoot) to Ba1 from Ba2, while maintaining a stable outlook.
Muthoot’s upgrade is a reflection of its strong credit profile, bolstered by its leading position and solid history in the gold financing industry in India. The company’s robust operational controls and risk management practices have supported its growth and asset quality in the gold financing portfolio. Despite fierce competition and aggressive lending practices from other banks and non-bank financial institutions, Muthoot has preserved its underwriting standards, leading to steady loan growth and stable asset quality.
Muthoot’s profitability is a significant credit strength, making it the most profitable among Moody’s rated Indian finance companies. The company reported a strong net income to average managed assets of 4.9% in the nine months ending December 2024, supported by a high net interest margin and low credit costs on gold financing. This superior profitability has boosted internal capitalization, reflected in its tangible common equity to total managed assets (TCE/TMA) of approximately 23.3% at the end of December 2024.
However, there has been a rapid growth in Muthoot’s non-gold financing subsidiaries in recent years, accompanied by a slight deterioration in their asset quality. Muthoot’s consolidated problem loans as a percentage of gross loans rose to 4.1% at the end of December 2024, up from 3.0% at the end of March 2024. The consolidated credit costs, or loan loss provisions to average total assets, more than doubled to 1.5% (annualized) in the nine months ending December 2024, up from 0.5% (annualized) in the previous year. This was mainly due to an increase in delinquencies in its microfinance loans, a trend observed across the industry.
Muthoot’s ability to decrease problem loans while keeping low net charge-offs is a significant factor to monitor. However, it is expected that the higher credit costs from subsidiaries will have a moderate impact on Muthoot’s overall loan portfolio, as gold financing continues to be the company’s main focus.
Muthoot primarily relies on bank borrowings for its funding needs, accounting for 56% of its funding mix at the end of December 2024. In recent years, the company has diversified its funding sources to include more stable, long-term funding and foreign currency borrowing through external commercial borrowings, which is credit positive. Despite maintaining modest liquidity on its balance sheet, approximately 6.0% of its total assets as of December 2024, the short duration and liquid nature of its loans, along with its well-established access to banks and debt market investors, mitigate the risks.
The rating could be further upgraded if the operating environment for gold financiers in India improves and Muthoot maintains its dominance in the gold financing industry, supported by strong operational controls and risk management. A downgrade is possible if Muthoot’s asset quality or capitalization worsens, such that its TCE/TMA drops below 17.0% without a clear capital raising plan or if its access to funding worsens. A significant regulatory change that affects the company’s growth or profitability could also lead to a downgrade.
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