Don’t expect FY18, FY19 earnings upgrade due to Moody’s updrages: Macquarie Cap


Moody’s Investors Service (“Moody’s”) upgraded the Government of India’s local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive.

Moody’s has also upgraded India’s local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.

To know what this means to the companies and cost of credit, CNBC-TV18 spoke to Suresh Ganapathy, Banking Analyst, Macquarie Capital Securities.

Ganapathy said it take some time for this to flow into the system and the immediate impact could be seen on the well-rated corporates and create a base for lower margin structure for banks because these corporates can bargain and get a low interest rate on their borrowings.

Suresh Ganapathy
Suresh Ganapathy
Banking Analyst|Macquarie
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However, the corporate which are under the NCLT or where some resolution of bad debts is happening, it will not move the needle for them in a big way.

So in the near-term it could be negative but longer-term these rating upgrades should be constituted as positive for the banking system, said Ganapathy form the sidelines of the Macquarie India Investor Conference 2017.

He also does not think one will see an earrings upgrade in FY18 and FY19 because of this Moody’s rating upgdrade.

When asked what changes for the financials post this upgrade, he said this is unlikely to flow into bank margins immediately in any possible way because 90-95 percent of funding for banks happen through deposits and that has no co-relation with any rating upgrades.

However, over the longer-term because of the positive sentiment and rating upgrade, the cost of capital of the system will come down and it will have an eventual impact on credit cost.

When asked about Centre’s approval of increased carpet area for middle income group (MIG) houses under the Pradhan Mantri Awas Yojana- Urban (PMAY-U) and whether it would materially alter earnings expectation from NBFCs, he said it would take some time for affordable the housing segment to move the needled in big way in terms of growth, margins or profitability unless it becomes a meaningful proportion of the portfolio for all housing finance companies.

However, he is convinced that the growth for the housing finance companies is very secular and so remains constructive on them. Most of these companies are well rated, he added.

He also pointed out that the credit linked subsidy schemes of the government comes with lot of conditions – a buyer is eligible for this scheme only if it is his first house and not if he wants to upgrade from a one-bedroom to 2-3 bedroom house. Second, there are also condition on locations, there are specified eligible locations.

If one is keen to play the reform and recapitalization story in banks it would be good to play through the corporate facing private sector bank like Axis Bank and ICICI Bank, which are equally leverage to the recovery in economic, capex cycle, said Ganapathy.

They will also benefit from the resolutions which can now take place considering the fact public sector banks will be in better position to take write-offs, he said. Their capital position is also far better than PSU banks.