Edelweiss Financial Services Limited Ratings placed on 'Watch Negative'
Rating Action
& public issue Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has placed its ‘CRISIL A+/CRISIL PPMLD A+/CRISIL A1+’ ratings on the debt instruments of Edelweiss Financial Services Limited (EFSL) on ‘Rating watch with Negative Implications’.
Ratings on Rs 222.05 crore of non-convertible debentures have been withdrawn (See Annexure 'Details of Rating Withdrawn' for details), as these are fully redeemed. CRISIL Ratings has also received independent confirmations for fully redeemed instruments. The withdrawal is in line with CRISIL Ratings’ withdrawal policy.
The rating action follows the material supervisory concerns raised by the Reserve Bank of India (RBI) via its press release on May 29, 2024, on ECL Finance Limited (ECLF) and Edelweiss Asset Reconstruction company Ltd (EARC).
The RBI has ordered ECLF to cease and desist, with immediate effect, from undertaking any structured transactions in respect of its wholesale exposures, other than repayment and/ or closure of accounts in its normal course of business. Separately EARC has been ordered to cease and desist from acquisition of financial assets including security receipts (SRs) and reorganising the existing SRs into senior and subordinate tranches.
CRISIL Ratings understands basis discussions with the management that RBI had shared its inspection observations with the companies in February 2024 and corrective steps on several matters have already been taken. This includes observations such as valuation differences, where there would be a financial implication- the required additional provisioning has been made in the March 2024 quarter and therefore is factored into fiscal 2024 results for both the companies. CRISIL Ratings also understand that all the AIF units held by the Edelweiss group with SRs as the underlying have been liquidated post the December 2023 RBI guideline pertaining to the investments made by NBFCs in AIFs.
Furthermore, ECLF and EARC are continuously engaging with the regulator and are required to submit a board approved remedial action plan within three weeks and two weeks respectively, from the date of the order, as per the management.
With respect to the business and financial impact on ECLF, the company had discontinued the wholesale lending business as on 1st Jan 2024- its residual wholesale loan portfolio is low at Rs 396 crore as at March 31, 2024. However, the entity carries Rs ~3800 crore of SRs on its balance sheet. While structured transactions are no longer permitted, based on management’s view, there is no restriction on sell down. However, management plans to seek clarity from the regulator on whether these can be liquidated through means other than normal course of recovery.
With respect to EARC, the company has been focusing primarily on retail acquisitions. This has also resulted in contraction in their SR assets under management to Rs 31,590 crore as on March 31, 2024, from Rs 37,500 crore as on March 31, 2023. Resultantly, revenues are largely derived from recoveries from EARC’s existing book with new retail business contribution to overall PAT at less than Rs 6 crore in fiscal 2024, of overall PAT of Rs 355 crore. Nevertheless, a prolonged restriction on acquisitions would have a bearing on EARC’s business risk profile.
Aside from the direct business and financial impact for both ECLF and EARC, these developments could have a second order impact on fund raising for the group given the confidence sensitive nature of the funding environment for NBFCs and ARCs. Although the group has been able to roll over Rs 450 crore of commercial paper and raise Rs 45 crore through structured product post the RBI supervisory action on May 29, 2024, traction in fund raising going forward will be key monitorable. Further, if the restrictions are not lifted for a prolonged period, there would be an impact on the business and financial risk profile, especially of EARC, which in turn would impact the group profitability given its sizeable contribution to the same.
As on May 29, 2024, the group had liquidity of Rs 2,502 crore of which Rs 1,560 crore was in the form of bank balances, fixed deposits and investments in mutual funds, Rs 838 crore in the form of exchange margin (unencumbered), Rs 20 crore as short-term loans and Rs 84 crore in the form of undrawn lines. This is expected to be sufficient to meet debt obligations and operating expenses for ~4 months, even assuming nil business inflows and no incremental fund raising. The group’s liquidity position is expected to be further supported by contractual receivables from the retail book and recoveries from wholesale exposures.
Additionally, the group also has divestment plans in pipeline of its stakes in Nuvama Group, housing finance business and alternate assets businesses, which act as additional cushion. Timing of these divestment initiatives will be crucial to meet the planned debt reduction by the group.
CRISIL Ratings will continue to closely monitor traction in fund raising, the company and group’s liquidity position, as well as await updates from the regulator on lifting of restrictions placed on the two companies. The watch will be resolved once greater clarity emerges on all these aspects.
The ratings continue to be supported by the group’s adequate capitalisation, and its diversified business profile with good market position in asset reconstruction and asset management businesses. Growth in retail (including MSME) lending has, however, been relatively slow. The ratings are constrained by lower-than-expected revival in core profitability, and continued high level of unprovided monitorable portfolio. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of EFSL and its subsidiaries. This is because these entities, collectively referred to as the Edelweiss group, have significant operational, financial and managerial linkages.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
Edelweiss group has demonstrated its ability to raise capital from global investors across businesses, despite the tough macroeconomic environment. The group has raised Rs 4,400 crore since 2016 across lending, wealth management and asset management businesses. This has helped maintain the capital position, despite elevated credit costs and absorb the asset-side risks. The group’s networth stood at Rs 6309 crore as on March 31, 2024, as against Rs 8581 crore as on March 31, 2023 (Rs 8,537 crore as on March 31, 2022). The networth reduced as ~30% Nuvama’s networth was distributed to the shareholders of Edelweiss Financial Services Limited as part of the demerger.
The gearing stood at 3.2 times (excluding CBLO, gearing was 2.9 times) as on March 31, 2024, against 2.5 times (2.26 times) as on March 31, 2023 (2.6 times as on March 31, 2022, and 3.2 times as on March 31, 2021). With increased focus on fee-based businesses, and strategy to grow in credit business through an asset-light model, the incremental debt requirement will be low. The group has plans to divest its remaining stake in Nuvama group, and fully or partly exit housing, alternate assets and general insurance businesses, which will further aid in unlocking capital and debt reduction.
The Edelweiss group is a diversified financial services player, with presence in four verticals i.e. credit (wholesale and retail), insurance (life and general), asset management, and asset reconstruction. The group has attained leading positions in the alternate asset and asset reconstruction businesses and is focusing on building market position in other businesses too, which should lend greater stability to earnings over a period of time.
The asset management business comprises mutual fund and alternate asset businesses. The group is a leading player in the alternate asset segment and its mutual fund AUM has been growing steadily. The asset management AUM grew to Rs 1,81,700 crore as on March 31, 2024, from Rs 1,51,500 crore as on March 31, 2023.
In the distressed assets segment, Edelweiss Asset Reconstruction Company Limited (Edelweiss ARC) is the largest ARC in India, with total securities receipts managed at Rs 31,590 crore as on March 31, 2024 (Rs 37,100 crore and Rs 40,200 crore as on March 31, 2023, and March 31, 2022). From being largely corporate focused, the ARC has, in the recent past, started focusing on retail and micro, small and medium enterprises (MSME) segments. The share of retail is expected to grow over the medium term.
In the lending business, while the wholesale book is under run down, the group is focusing on growth in retail through the asset-light model. The key product offerings in the retail credit book would be mortgage and MSME loans. The group has entered into agreements with various co-lending partners for retail product offerings, which are large domestic and foreign banks, for both the priority and non-priority sector portfolios. Although the retail AUM picked up pace in fiscal 2024, the growth has been relatively slow, due to delay in operationalising the onboarding and underwriting process with the co-lending partners. The retail AUM grew to Rs 5368 crore as on March 31, 2024, from Rs 4879 crore as on March 31, 2023.
The group also houses the life and general insurance businesses, which are gaining scale and are expected to break even over the medium term.
However, with the rundown of wholesale credit, divestment of the wealth management business, and planned stake sale of the housing finance and general insurance businesses, the diversity in the business risk profile is a monitorable.
Weaknesses:
Edelweiss Group’s profitability has been lower compared to other large, financial sector groups. However, most of the businesses have been reporting profit since the last quarter of fiscal 2021.
The group reported PAT of Rs 528 crore in fiscal 2024 (excluding any one-off items) as against PAT of Rs 406 crore in fiscal 2023. However, profitability in 2023 was supported by a one-off item of revaluation gains (and also accelerated provisions made basis the one-off gain), excluding which the profit would have been Rs 248 crore for fiscal 2023.Return on average assets (ROA) was 1.2% for fiscal 2024 against 0.9% for fiscal 2023 and 0.5% for fiscal 2023 and fiscal 2022. The group’s overall profitability is weighted down by losses in insurance businesses, however, ex insurance profit stood at Rs 808 crore for fiscal 2024 against Rs 730 crore for fiscal 2023 and Rs 523 crore for fiscal 2022.
Of the various businesses, the asset reconstruction and asset management businesses, mainly alternate assets, remain the largest contributors to overall profitability forming 70% of overall PAT (ex-insurance) for fiscal 2024. The profitability of the credit business has improved from the past levels with credit costs reducing, however remains muted with retail lending yet to gather pace. However, additional provisioning is likely to be required on the monitorable book based on the pace and extent of recovery from underlying assets. The insurance businesses are expected to breakeven only over the next 2-3 years. While the asset reconstruction and alternate assets businesses should continue to support profitability, the group’s ability to scale up the retail lending business while managing overall credit costs will be important and this remains a key monitorable.
The group’s overall gross loan book (excluding monitorable portfolio net off on-book gross stage III assets) stood at Rs 5537 crore as on March 31, 2024, against Rs 7,548 crore as on March 31, 2023, and Rs 10,502 crore as on March 31, 2022. Of this, retail on book stood at Rs 4,261 crore (Rs 3,795 crore and Rs 6,749 crore) and remaining was wholesale book.
The group has been consciously running down the wholesale portfolio through various modes. While recoveries have contributed to this, the reduction has been primarily due to sell-down to ARCs (both internal and external) and AIFs. Given the RBI restrictions, this process is likely to be slower than earlier.
Edelweiss group has retained risks and rewards on a large portion of this and hence, CRISIL Ratings tracks the monitorable portfolio to assess asset quality of the group. This includes gross stage III accounts in the lending book (Rs 720 crore), security receipts held by the group (including in EARC) pertaining to sell down (Rs 6852 crore) and loans sold down to AIFs (Rs 1,742 crore). Overall monitorable portfolio stood at Rs 9,315 crore as on March 31, 2024. While the monitorable portfolio has reduced from Rs 12,097 crore as on March 31, 2022(Rs 11,383 crore as on March 31, 2021), it remains elevated. CRISIL Ratings notes that although the majority of this monitorable portfolio is on-book exposure of Edelweiss group, some part pertains to exposure of external ARC or AIF wherein the group has extended a put option.
The group has made provisions against the monitorable portfolio, and therefore, the net monitorable portfolio stood at Rs 6,018 core as on March 31, 2024. Basis management estimates, there is a reasonable level of collateral cover on most of this portfolio.
The overall gross stage III assets in the lending business stood at Rs 720 crore (13% of loans) as on March 31, 2024, against Rs 794 crore (10.5%) as on March 31, 2023 (Rs 930 crore ( 8.9%) as on March 31, 2022, and Rs 1,601 crore ( 10.9%) as on March 31, 2021). Retail book gross stage III was Rs 78 crore (1.84%) as on March 31, 2024, against Rs 124 crore (3.3%) and Rs 182 crore (2.7%) as on March 31, 2023, and March 31, 2022.
However, any challenges in effecting recoveries as per plan could necessitate higher provisioning and put pressure on profitability and hence, this remains a key monitorable for the rating. |
Liquidity: Adequate As on May 29, 2024, the group had liquidity of Rs 2,502 crore of which Rs 1,560 crore was in the form of bank balances, fixed deposits and investments in mutual funds, Rs 838 crore in the form of exchange margin (unencumbered), Rs 20 crore as short-term loans and Rs 84 crore in the form of undrawn lines. This is expected to be sufficient to meet debt obligations and operating expenses for ~4 months, even assuming nil business inflows and no incremental fund raising. The group’s liquidity position is expected to be further supported by contractual receivables from the retail book and recoveries from wholesale exposures.
ESG: CRISIL Ratings believes that EFSL’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.
The ESG profile of financial institutions typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment and other sustainability related factors.
EFSL group has an evolving focus on strengthening various aspects of its ESG profile.
EFSL group’s key ESG highlights:
There is growing importance of ESG among investors and lenders. EFSL group’s commitment to ESG will play a key role in enhancing stakeholder confidence, given the presence of foreign investors. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company EFSL was incorporated in 1995 as Edelweiss Capital Ltd. The company, on standalone basis, is primarily engaged in investment banking services and provides development, managerial and financial support to group entities.
On standalone basis, EFSL’s reported networth stood at Rs 5,462.85 crore as on March 31, 2024. The company reported PAT of Rs 695 crore on total income of Rs 701 crore in fiscal 2024, as against Rs 2,388 crore on total income (net off interest exp) of Rs 2,786 crore in fiscal 2023. |
About the Group The Edelweiss group comprised 28 subsidiaries and associates as on March 31, 2024. The number of companies has come down from 74 as on March 31, 2016, because of multiple factors such as sale, windup and merger among others. The group had 293 offices (including 10 international offices in 6 locations) in around 136 cities as on March 31, 2024. Furthermore, as part of streamlining its operating structure, the group has restructured the businesses into four verticals namely credit, insurance, asset management and asset reconstruction.
The group is present across various financial services businesses, including loans to individuals, mortgage finance - loans against property and small-ticket housing loans, MSME finance, alternative and domestic asset management, and life and general insurance. In addition, the Balance sheet Management Unit (BMU) focuses on liquidity and asset-liability management.
On a consolidated basis, the group reported PAT of Rs 528 crore on a total income (net off interest expense) of Rs 6,815 crore for fiscal 2024, as against PAT of Rs 405 crore on a total income of Rs 6058 crore for fiscal 2023. |
Key Financial Indicators: EFSL (consolidated)
^refers to gross stage III of the on balance sheet loan book. The reported gross stage III assets as per annual report is Rs 13,155 crore as on March 31, 2023, and Rs 12,368 crore as on March 31, 2022. Net Stage III was Rs 8313 crore and Rs 8681 crore respectively. These include stage III assets in EARC on monitorable book sold down by ECL Finance, interest accrued on non-performing assets and stage III assets held by group entities other than NBFCs on trade and general-purpose advances. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^yet to be issue *public issue
Annexure - Details of Rating Withdrawn
*public issue |
Annexure – List of entities consolidated
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