Moody’s affirms Shriram Finance’s Ba1 rating, outlook revised to positive after MUFG Bank investment

Moody’s Ratings has affirmed the Ba1 long-term corporate family rating (CFR) of Shriram Finance Limited (SFL) and revised its outlook to positive from stable. The rating action follows SFL’s announcement of a planned strategic investment by MUFG Bank.According to Moody’s, the outlook revision reflects expectations that SFL’s business and financial profile will strengthen over the coming quarters. This is based on MUFG Bank's plans to acquire a 20% stake in SFL through a preferential allotment of shares worth Rs 396 billion (approximately $4.4 billion).The transaction is subject to regulatory approvals and is expected to close in 2026.Moody’s noted that the investment will provide SFL with strategic benefits, including a stronger capital base, improved access to global funding channels, and enhanced risk management practices. The rating agency expects that SFL’s capitalisation will materially improve after the transaction, while profitability is expected to strengthen gradually as the company’s cost of funds declines.Additionally, both onshore and offshore funding access are likely to improve.On a pro forma basis, the capital infusion is projected to increase the company’s tangible common equity to tangible managed assets (TCE/TMA) ratio to over 29%, compared to 19% as of March 2025.This would place SFL among the highest capitalised non-bank finance companies in India. Moody’s expects the company to maintain a TCE/TMA ratio above 20% over the next four to five years, taking into account its credit growth.SFL’s profitability is also expected to strengthen over the next 12 to 18 months, supported by lower funding costs and improved access to liquidity following the transaction. Moody’s projects a reduction of about 100 basis points in SFL’s cost of funds over the next two years.The company’s 12-month debt maturity coverage ratio is also anticipated to rise to over 90%, up from 31% in March 2025. This improvement is attributed to the large capital injection, although Moody’s expects the ratio to normalise as the funds are deployed.The rating agency also expects SFL’s asset quality to remain stable over the next 12 to 18 months, citing robust lending and collection practices, a stable macroeconomic backdrop, and a high share of collateralised loans.However, Moody’s clarified that affiliate support from MUFG Bank is not incorporated into SFL’s current rating. While MUFG Bank will hold a 20% stake and board representation, the willingness to provide support in times of stress is expected to remain limited.The agency will re-evaluate affiliate support considerations if stronger financial linkages or documented support mechanisms are established between the two entities.Moody’s indicated that an upgrade of SFL’s rating could occur if the company sustains a net income to average managed assets ratio of around 3.5%, maintains a TCE/TMA ratio above 21%, and preserves stable asset quality. A rating upgrade may also be considered if there is a reassessment of MUFG Bank’s affiliate support.On the other hand, while a downgrade is viewed as unlikely over the next 12 to 18 months, it could be triggered by a deterioration in asset quality, profitability, or capitalisation.Specific triggers include a rise in net charge-offs above 2.5% of average gross loans, an increase in the problem loans to gross loans ratio above 7%, a reduction in the TCE/TMA ratio below 17%, or significant regulatory changes affecting the company’s franchise strength.Also read: IREDA Q3 Results: PAT jumps 15% YoY to Rs 1,381 crore, revenue up 28%Moody’s concluded that continued improvements in profitability, capital metrics, and funding access will be closely monitored to determine the potential for future rating actions.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)