Credit rating agencies face the prospect of further downgrades

Market downgrades have been dogging rating agency scrips. In the past year, the CARE Ratings Ltd stock tumbled 59%, while Icra Ltd and Crisil Ltd slid 29% each. Comparatively, the Nifty 500 index slipped only 11%. What lies ahead for these stocks

Lately, negative news has dominated the credit rating business, with the top management of two rating agencies asked to step down. Agencies may also need to separate their rating and non-rating businesses.

“While business momentum has been improving, the absence of top management in two large CRAs (credit rating agencies) and the reports of an unbiased rating for IL&FS are negative, in our view. The third CRA might have to comply with the regulations to separate rating and non-rating businesses, affecting stock performances," said Elara Securities (India) Pvt. Ltd in a note to clients.

To top it all, in the bread-and-butter rating segment, growth has slowed to a crawl. Crisil’s rating division grew 2% year-on-year due to a drop in bank-loan ratings and fewer corporate-bond issuances. Icra’s rating revenues dropped 8%, while CARE Ratings’ fell 21%.

Much of the tight liquidity conditions and sluggish issuances may continue to persist. For credit rating agencies, this poses significant challenges. “Bank credit contracted 1.3% in Q1 FY20 as headwinds blasting NBFCs since end-Q2 FY19 impacted the number of bank-loan ratings. The quarter also saw fewer bond issuances, both corporate and financial. Further, ICRA seems to have lost share in the corporate-bond market after a default by a client," said Edelweiss Securities Ltd in a note to clients.

Meanwhile, securitization, which was growing lately, too is slowing. A double whammy to the rating business comes from corporate bodies shying away from incurring significant capital expenditure. Rating revenues could continue to grow marginally.

Additionally, credit rating agencies have been hit by regulatory costs and higher operating expenses that will weigh on operating margins going ahead.

Ostensibly, much hinges on credit offtake reviving. Thankfully, contracting interest rates could spur credit offtake later. But until then, these stocks may take time to see the light at the end of the tunnel.

Get Best Stock Options Tips For More Updates in Stock Market Tips Give a Missed call @9644405057 and Get Free Trial