By Udit Kariwala

India Ratings and Research (Ind-Ra) has rated HDFC Bank Ltd’s (HDFC) Basel III Additional AT1 bonds as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

AT1 perpetual debt

-

-

-

INR100

IND AA+/Stable

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 (March 2017: CET1 ratio of 12.8%). 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, the Stable Outlook reflects Ind-Ra’s expectation that even under stress scenario any deterioration in HDFC’s asset quality will be adequately absorbed by its solid pre-provision profitability without any impairment in its above-average Tier 1 capitalisation. 

Ind-Ra has notched down the rating for HDFC’s AT1 bonds from its Long-Term Issuer Rating. For AT1 instruments, the agency considers discretionary component, coupon omission risk, and write-down/conversion risk as the key parameters to arrive at the final rating. The agency recognises the unique going-concern loss absorption features that these bonds carry and differentiates them from the bank’s senior debt (one notch in this case) factoring in a higher probability of an ultimate loss for investors in these bonds. Ind-Ra envisages coupon deferrals and principal write down risk as a remote possibility in view of HDFC’s financial strength and its track record of consistent and superior operating performance through cycles, over similar rated peers.

KEY RATING DRIVERS

Superior in Class Risk Pricing with Stable Asset Quality: HDFC maintains a stable asset quality through the cycles (gross non-performing loans March 2017: 1.05%; March 2016: 0.94%). This is in contrast to the banking system’s gross non-performing loans ratio, which surged to 9.3% as of December 2016 and was at 4.2% on a blended basis for private sector banks. Ind-Ra expects HDFC’s credit costs to continue to remain stable at 70-90bp over FY18. This, in the agency’s view, is underpinned by the bank’s strong credit underwriting, ability to price risk and its 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 March 2017, business banking constituted 12.8% 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.

 

Steady Low-cost Funding: HDFC’s current account and savings account (CASA) has been fairly robust at 40-45% over the last few quarters. Its dependence on volatile and high-cost wholesale deposits at around 20% of the total deposits continues to be the lowest among the peers, helped by its persistent efforts to attract deposits through a focussed retail strategy. In FY17, the growth of term deposits was modest at 7.9% on account of an outflow of around USD3 billion towards maturities of foreign currency non-resident deposits. The modest growth in term deposits was compensated by an above average growth in its CASA deposits of around 31%, part of which was driven by demonetisation led inflow of deposits (FY17 CASA ratio: 48%). The bank’s strong funding profile is the key competitive strength, yielding low funding costs and high pricing power.

 

Unsecured Portfolio’s Asset Quality a Key Monitorable: While on an overall basis HDFC maintains a well-diversified loan book across the retail and corporate sectors (March 2017 domestic loan mix - retail: 53%, corporates: 47%), there has been a gradual increase in the share of its unsecured portfolio (March 2017: 18.4%; March 2015: 15.9%). Within unsecured book, the personal loan portfolio contributed 14.3% to the overall loan book growth over the 12 months ended March 2017. A considerable part of HDFC’s large unsecured loan book has been built by leveraging its internal customer base. Historically, asset quality of its unsecured portfolio has been stable. Ind-Ra believes that HDFC’s ability to maintain the inherent risks in this segment will be a key monitorable.

 

Cost Control to be a Key Driver of Profitability: HDFC’s income diversity, stable costs and controlled asset quality have provided it with a strong earnings buffer, against stressed credit costs in times of crisis. The bank has maintained a return on asset above 1.8% over the last five years, while its stable dividend has contributed strongly to the internal capital accretion rate. With the sluggish loan off-take impacting net interest income growth, and credit costs staying close to cyclical lows, focus on cost control would be a key driver for managing profitability in line with the asset growth. The bank’s thrust towards enhancing its offering of digital banking products would keep its spends on technology high in the near-to-medium term but could turn out to be beneficial in reducing its operating costs over longer term with slowdown in its physical branch expansion pace.


RATING SENSITIVITIES

Negative: The Outlook on HDFC’s Long-Term Issuer Rating as well as the instrument ratings could be revised to Negative if there is significantly higher-than-expected deterioration in the asset quality, particularly if accompanied by higher-than-expected loan growth, which could dilute the capital buffers and impair the funding profile.


COMPANY PROFILE

HDFC is the largest private sector bank in terms of advances as well as deposits. At end-4QFY17, advances for the bank stood at INR5,546 billion. The bank has a large retail footprint, with a leading market share across multiple product lines. At end-4QFY17, HDFC had a network of 4,715 branches and 12,260 ATMs spread across 2,657 cities/towns.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (billion)

Rating

17 April 2017

28 November 2016

20 April 2015

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/Stable

Certificate of Deposits

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/Stable

Basel III AT1 bonds

Long-term

INR150

IND AA+/Stable

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.

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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

    Archana Tiwari

    Sr. Manager – Corporate Communications & Investor Relations
    +91 22 40001729