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Muthoot Finance’s asset quality poses no significant concern, analysts

MUMBAI: Muthoot Finance may have reported a deterioration in asset quality over the past two quarters, but it does not pose a significant concern, analyst said.

The lender has aggressively avoided auctioning of gold until now, driven by its inherent philosophy of granting customers time to repay their loans, rather than rushing to auction their gold, Motilal Oswal said in a report on 8 November.

Gold prices have remained stable for the last two quarters, but the risk of a default by customers, who would have borrowed at the peak of gold prices in August last year, persists.

“With normalcy restored and resumption of business activity after the lifting of covid-related restrictions, demand for gold loans has rebounded as customers opted for immediate access to financing as their own cashflows were stressed,” the report said.

Analysts at Motilal Oswal expect Muthoot Finance to deliver 15% loan growth over the medium term. With an AA+ rating, cost of funds is likely to decline further in coming quarters. This should mitigate yield pressures, if any, the report said.

“Return on assets (RoA) and return on equity (RoE) is likely to remain robust (6% and 23%) over the medium term,” it said.

The report cited management commentary to say that quantum of gold loan auctions stood at ₹270 crore in Q2 FY22. Gold auctions were spread out throughout FY22. Moreover, it said that the lender does not lose any money in the auctions and sells off the gold only when the borrower is in default and does not want to take back the pledged jewellery.

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