After the RBI ban, IIFL Finance Drops 20% for the Second Day; Jefferies Downgrades Stock To “Hold”

IIFL Financial Drops 20 percent On Wednesday, following the RBI’s decision to prohibit IIFL Finance from providing gold loans, the company’s shares fell 20% for the second consecutive day.

The Reserve Bank of India’s decision to prevent IIFL Finance from issuing gold loans caused the share price to drop by 20% on Monday as well. As of this morning’s trading, the price of IIFL Finance shares is trading at around Rs 382.80, down more than 35% from Friday’s closing levels of about Rs 596.80 on the BSE.

Analysts estimate that the gold loan book represents around 32% of the assets under control. Because a prohibition would reduce earnings, Jefferies has lowered the shares to a Hold recommendation. The target price was further reduced from Rs 765 to Rs 435 per share. This suggests that after the market struck a 20% lower circuit on March 5, experts anticipate a further 9% decline in the stock.

IIFL Finance has been instructed by the Reserve Bank of India (RBI) to stop approving or paying out gold loans. The judgment was made in response to an RBI examination of the business conducted as of March 31, 2023, which found disparities in the way the business was operating in several areas.

“The company’s gold loan portfolio exhibited certain material supervisory concerns, such as significant deviations in the assaying and certifying purity and net weight of gold at the time of loan sanctions, breaches of the loan-to-value ratio, and significant disbursal and collection of the loan amount in cash far in excess of the statutory limit,” the filing stated, citing the order from the RBI.

According to Jefferies analysts, IIFL’s earnings could suffer as a result of the gold loan prohibition. “The quick unwinding of the lucrative gold loan book might hurt profitability as a result of the RBI’s decision. We anticipate a 1% decline in assets under management (AUM) since the timing of the ban’s removal is unknown and we think it will remain in place for nine months. YoY and 51% YoY decline in gold AUM in FY25, according to the trading business.

Additionally, analysts reduced the profits per share (EPS) for FY25–26 by 26-27% and the return on equity (RoE) by 460–480 basis points (bps). Over FY24–26, they projected a subdued EPS compound annual growth rate (CAGR) of 5% and a RoE of 15.8%–15.78%.

The business said in its exchange filing that while the RBI has been in communication with the company’s statutory auditors and top management on these shortcomings over the last several months, no significant remedial action has been shown so far.

Nevertheless, the RBI has given the business permission to go on servicing its current portfolio of gold loans using the customary procedures for collection and recovery.