By Udit Kariwala

India Ratings and Research (Ind-Ra) has rated HDFC Bank Ltd’s (HDFC) certificate of deposits (CD) as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

CD

-

-

-

INR150

IND A1+

Assigned

The rating reflects HDFC’s financial strength, diverse earning profile, and track record of consistent and superior operating performance through cycles over similar rated peers. The ratings also consider the bank’s strong funding profile, robust risk management systems and above-average capital levels. The bank’s retail focus, both on the asset and the liability side, has helped in building a stable funding profile, along with a high yielding granular asset book. Additionally, HDFC’s solid pre-provision profitability continues to provide cushion even under Ind-Ra’s stress scenarios.

KEY RATING DRIVERS

Steady Low-cost Funding: HDFC’s current account and savings account (CASA) growth has been fairly robust at around 40% over the last few quarters. Its dependence on volatile and high-cost wholesale deposits at around 20% continues to be the lowest among the peers, helped by its persistent efforts to attract deposits through a focused retail strategy. Ind-Ra expects a further improvement in the bank’s CASA ratio by FYE17, even after assuming partial retention of the cash deposits attracted under the demonetisation. HDFC has been consistently outperforming its peers in terms of CASA growth (CAGR of 18.9% over FY13-FY16); however, pre-demonetisation the ratio has remained stable at around 40% on account of the proportionate growth in its term deposit book. The bank’s strong funding profile is the key competitive strength, yielding low funding costs and high pricing power.

 

Stable Asset Quality: HDFC maintains a stable asset quality through the cycles (gross non-performing loans December 2016: 1.05%; December 2015: 0.97%). This is in contrast to the banking system’s gross NPL ratio, which surged to 7.6% as of March 2016, and was at 2.7% on a blended basis for private sector banks. This, in the agency’s view, is underpinned by the bank’s strong credit underwriting and monitoring culture. The agency also derives comfort from the bank’s granular asset book and proportionately smaller exposure to highly levered corporate groups, compared with peers’. As of December 2016, business banking constituted 12.3% of HDFC’s retail loan book. In Ind-Ra’s view, this portfolio could see some pressure on account of rising stress levels across this segment. Nevertheless, the bank’s strong pre-provision profitability and robust capitalisation provides a strong cushion to absorb the elevated levels of stress under Ind-Ra’s stress scenarios.

 

Robust Capitalisation: The bank’s robust capitalisation (3QFY17: Basel III Tier I ratio of 13.8%) and low solvency ratio (net NPLs/equity: 1.82% at FY16) provide solid buffers, given its above-average growth rates in relation to industry. Both quantity and quality of capital, together with healthy margins, strong funding structure and loan book diversity, underpin HDFC’s absorption capacity under a stress scenario.


RATING SENSITIVITIES

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


COMPANY PROFILE

HDFC is the largest private sector bank in terms of advances as well as deposits. At end-3QFY17, the advances for the bank stood at INR4,950 billion. The bank has a large retail footprint, with a leading market share across multiple product lines. At end-3QFY17, the bank had a network of 4,555 branches and 12,087 ATMs spread across 2,597 cities/towns.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (billion)

Rating

28 November 2016

20 April 2015

7 October 2013

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Issuer rating

Short-term

-

IND A1+

IND A1+

IND A1+

IND A1+

Lower Tier-2 subordinated debt

 

Long-term

INR139.63

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA

CD

Short-term

INR400

IND A1+

IND A1+

IND A1+

IND A1+

Term deposit programme

Long-term

-

IND tAAA/Stable

IND tAAA/Stable

IND tAAA/Stable

IND tAAA

Basel III AT1 bonds

Long-term

INR50

IND AA+/Stable

IND AA+/Stable

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

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Analyst Names

  • Primary Analyst

    Udit Kariwala

    Associate Director
    Wockhardt Towers, Level 4, West Wing, Bandra Kurla Complex, Bandra (E), Mumbai :-400051
    +91 22 40001749

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121