IIFL Finance Falls 20% For 2nd Day After RBI Ban; Jefferies Downgrades Stock To 'Hold'

IIFL Finance Falls 20% On Wednesday: Shares of IIFL Finance nosedived 20 per cent for the second straight session after RBI decided to ban the company from issuing gold loans.

The share price had declined 20 per cent on Monday also post Reserve Bank of India barred IIFL Finance from disbursing Gold Loans. The IIFL Finance share price trading at close to Rs 382.80 now in the morning trades thereby is down more than 35 per cent compared to closing levels of around Rs 596.80 on the BSE on Friday.

Gold loan book forms around 32 per cent of assets under management as per analysts. Jefferies has downgraded the stock to Hold ratings as a ban will hurt profit. It further slashed the target price to Rs 435 per share from Rs 765. This implies that analysts expect the stock to further fall by 9 per cent after it hit a 20 per cent lower circuit on March 5.

The Reserve Bank of India (RBI) directed IIFL Finance to cease and desist from sanctioning or disbursing gold loans. The decision followed an inspection of the company by the RBI as of March 31, 2023, that revealed discrepancies in the company’s functioning in certain areas.

“Certain material supervisory concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of gold at the time of loan sanctions, breaches of loan-to-value ratio, and significant disbursal and collection of loan amount in cash far in excess of the statutory limit,” the company filing said quoting the RBI’s order.

Analysts at Jefferies said that the gold loan ban is expected to hurt IIFL’s profit. “The RBI’s order can dent earnings due to rapid unwinding of profitable gold loan book. Given the time of lifting of the ban is uncertain and we assume that the ban would stay for 9 months, we expect assets under management (AUM) to fall 1 per cent YoYand 51 per cent YoY fall in gold AUM in FY25,” the brokerage firm noted.

Moreover, analysts cut FY25-26 earnings per share (EPS) by 26 percent-27 per cent and RoE by 460-480 basis points (bps). They forecasted muted EPS compounded annual growth rate (CAGR) of 5 per cent and RoE of 15-15.8 per cent over FY24-26.

Over the last few months, the RBI has been engaging with the senior management and the statutory auditors of the company on these deficiencies, however, no meaningful corrective action has been evidenced so far, the company said in its exchange filing.

That being said, the RBI has allowed the company to continue to service its existing gold loan portfolio through the usual collection and recovery processes.