Dewan Housing Finance Corporation Limited's (DHFL's) weakening solvency is credit negative for Indian banks because they are key lenders to the company and its default will negatively affect their asset quality and profitability, Moody's Investors Service said on Monday.
Among Moody's-rated banks, private sector lender Yes Bank will be the most affected given its significant exposure to DHFL bonds.
Public-sector banks such as Bank of India, Central Bank of India, Syndicate Bank, Union Bank of India and Bank of Baroda will also be affected given that loans to DHFL comprised more than 10 per cent of their common equity tier 1 (CET1) capital as of March 2019.
On July 13, DHFL reported a significant deterioration in its financial performance for 2018-19. "Stressed liquidity is negatively affecting the company's day-to-day operations and solvency. Since June, DHFL has also defaulted on the repayment of a number of its bond obligations," said Moody's in its credit outlook.
Lenders to DHFL have initiated a resolution process that may involve a capital infusion from external investors or a debt restructuring. "Although the resolution process will take time to finalise, we expect that the banks will need to build loan-loss provisions for a potential haircut in the process," said Moody's.
Additionally, rated banks that have invested in DHFL's bonds will need to mark to market the value of their bond holdings, based on those securities' trading performance.
DHFL's weak financial performance highlights growing stress among Indian real estate developers, to which HFCs and other non-bank finance companies (NBFCs) are the main source of lending. In the fiscal year ended March, DHFL took a write-down of about 10 per cent for its developer loan exposure which led to a spike in credit costs and losses for the company.
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"Nevertheless, we expect that DHFL's loans to retail homeowners have remained stable and will provide some support against risks to the banks. Since September 2018, liquidity conditions for Indian finance companies have significantly tightened after the default of Infrastructure Leasing & Financial Services (IL & FS).
DHFL is the fourth-largest Indian housing finance company based on loans outstanding as of March. In fiscal 2019, DHFL reported a negative return on assets of 1.1 per cent versus a positive return of 1.2 per cent the year before. Its shareholders equity or total assets ratio declined to 7.6 per cent as of March from 8.7 per cent a year earlier.