Fitch Upgrades Outlook on IIFL Finance to 'Positive' Amid Strong Performance

In a significant boost for India's non-banking financial sector, Fitch Ratings has revised its outlook on IIFL Finance Limited to 'Positive' from 'Stable', while affirming its Long-Term Issuer Default Rating (IDR) at 'B'. This upgrade underscores the company's consistent and robust financial performance, particularly its enhanced asset quality and strong profitability metrics over the past 12 to 18 months, signaling a promising trajectory for the leading Indian NBFC.

The revised outlook reflects IIFL Finance's impressive operational resilience and strategic initiatives that have led to a sustained improvement across key financial indicators.

A pivotal factor in Fitch’s decision was the notable enhancement in asset quality. The Gross Stage 3 (GS3) ratio, a crucial indicator of non-performing assets, significantly improved to 1.7% in the third quarter of fiscal year 2024 (Q3 FY24) from 2.2% in Q4 FY23. Similarly, the Net Stage 3 (NS3) ratio also saw a healthy decline to 0.8% from 1.1% over the same period, demonstrating effective risk management and collection mechanisms.

Beyond asset quality, IIFL Finance has showcased compelling profitability.

The company maintained a strong Return on Assets (ROA) of 3.9% (annualized) during the first nine months of FY24. This robust profitability is a testament to stable net interest margins and a commendable reduction in credit costs, which have been a consistent focus for the company. Such strong financial health provides a solid foundation for future growth and resilience against market fluctuations.

Fitch also highlighted IIFL Finance's increasingly diversified funding profile as a key strength.

The company has demonstrated strong access to both bank funding and capital markets, enabling it to manage liquidity effectively and support its growth ambitions. This diversified funding base reduces reliance on any single source, enhancing financial stability and operational flexibility.

Moreover, IIFL Finance's capitalization remains healthy, providing ample buffer for potential risks and supporting its expanding loan book.

As of Q3 FY24, the common equity Tier 1 (CET1) ratio stood at 16.5%, with the total capital ratio at 20.3%. These figures indicate a well-capitalized institution, capable of absorbing shocks and pursuing strategic expansion.

The 'B' IDR affirmation, balanced against the 'Positive' outlook, acknowledges IIFL Finance's established market presence, diversified loan portfolio across various segments like gold loans, home loans, and microfinance, and adequate capitalization.

While the operating environment for NBFCs in India can be inherently cyclical and competitive, IIFL Finance has effectively navigated these challenges, demonstrating prudent management and a clear growth strategy.

This positive outlook from Fitch suggests that an upgrade to IIFL Finance's long-term rating is a distinct possibility if the company continues its trajectory of improving asset quality, sustains its strong profitability, and maintains its diversified funding avenues.

It's a clear indicator of confidence in the company's strategic direction and its ability to deliver consistent financial performance in the dynamic Indian financial landscape.