Economy: Low vehicle utilization
Shriram Transport Finance Co Ltd’s (STFC) low exposure to Yes Bank’s hybrid securities will shield its financial profile, according to S&P Global Ratings.
STFC does not hold any Additional Tier 1 (AT1) capital instruments of the bank.
Yes Bank is under a government moratorium until a resolution plan is firmed up. As per the proposed draft reconstruction scheme, the bank’s AT1 instruments will be entirely and permanently written down leading to losses for the investors.
As of 9 March 2020, STFC has a small exposure of Rs.500 million to Yes Bank’s hybrid securities in the form of upper Tier II bonds. The finance company had made this investment in 2010.
Only AT1 instruments are currently envisaged to be permanently written down.
However, even if STFC is required to make provision for 100% credit loss on this exposure, it will not materially affect its capitalization given the exposure is currently less than 0.5% of STFC’s net worth.
“But we believe other finance companies holding Yes Bank’s hybrid securities in their treasury investments could see credit losses,” said S&P.
“We continue to see risk of a potential deterioration in STFC’s asset quality over the next few quarters,” said the rating agency.
Slower economic growth and weaker economic activity in India could lower vehicle utilization, affecting the cash flows of road transport operators.
STFC’s strong business position and capitalization continue to underpin the ratings (BB+/Negative/B).
The company’s capitalization remains strong. As of 31 Dec 2019, the company’s Tier 1 capital ratio is 16.8%, and total capital adequacy ratio is 20.7%, supported by its good profitability, with reported return on assets of 2.7%, according to S&P. fiinews.com
