By Abhishek Bhattacharya

India Ratings and Research (Ind-Ra) has assigned HDFC Bank Ltd’s (HBL) INR100bn certificates of deposit (CDs) an ‘IND A1+’ rating. Ind-Ra’s rated CD programme for HBL stands at INR250bn (increased from INR150bn). A list of outstanding ratings is at the end of this commentary.

KEY RATING DRIVERS

The rating on HBL’s CD programme reflects the financial strength of the bank and its track record of consistent and superior operating performance through cycles, over similar rated peers. The robust risk management systems have helped the bank to maintain stable asset quality. The ratings also consider the bank’s strong funding profile, robust profitability and above-average capital levels. Incrementally, the stress on HBL’s commercial vehicle (CV) portfolio appears to be moderating given the uptick in the CV cycle. Additionally, HBL’s solid pre-provision profitability continues to provide a cushion even under Ind-Ra’s stress scenarios.

HBL’s common equity Tier I as of September 2015 was 12.78%. The bank is placed comfortably for the Basel-III transition even after considering its risk appetite and above-average growth plans. According to Ind-Ra’s estimates, the bank will sustain 22%-24% loan CAGR by March 2019 including additional capital buffers.

The bank’s gross NPL ratio was 0.9% in 2QFY16 (FY15: 0.93%), while the banking system’s gross NPL ratio increased to 4.3% in FY15 (FY14: 3.9%) and private sector banks were at 2.1% on a blended basis. HBL’s overall delinquency numbers on the retail portfolio remain stable and manageable.

The bank continues to show well-diversified growth across the retail and corporate sectors. Retail loan share was 52% at 2QFYE16 (FY15: 51%). HBL’s current and savings account ratio has been fairly robust, at around 40% at 2QFY16 (FY15: 44%). Its dependence on volatile and costly wholesale deposits is lowest among peer banks as retail accounts for the bulk of term deposits.

The bank’s strong funding profile yields low funding costs and high pricing power.
HBL has maintained return on asset above 1.4% since FY11, while its stable dividend has contributed strongly to the internal capital accretion rate. With sluggish loan off-take impacting net interest income growth and credit costs staying close to cyclical lows, HBL’s focus on cost control through increasing technology focus and harvesting returns from its recent investment in rural/semi urban expansion would be key drivers for managing profitability in line with asset growth.


RATING SENSITIVITIES

The rating on CDs could be downgraded if HBL’s Long-Term Issuer Rating falls below ‘IND A+’ which is highly unlikely over the near-to-medium term.


COMPANY PROFILE

HBL is the largest private sector bank by advances as well as deposits. At 2QFY16, the advances for the bank stood at INR4,185bn. The bank has a large retail footprint with a leading market share across multiple product lines. At 2QFY16, the bank had a network of 4,227 branches and 11,686 ATMs in over 2,500 cities.

HBL’s ratings (including the above) are as follows:
- Long-Term Issuer Rating: ‘IND AAA’; Outlook Stable
- Short-Term Issuer Rating: ‘IND A1+’
- INR139.63bn lower Tier 2 subordinated debt: ‘IND AAA’; Outlook Stable
- INR250bn (increased from INR150bn) certificates of deposit: ‘IND A1+’
- Term deposit programme: ‘IND tAAA’; Outlook Stable



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Primary Analyst

    Abhishek Bhattacharya

    Director and Co Head Corporates
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001786

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121