By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed HDFC Bank Limited’s (HDFC) Long-Term Issuer Rating at ‘IND AAA’ with a Stable Outlook and the Short-Term Issuer Rating at ‘IND A1+’. The instrument-wise ratings are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Lower Tier-2 sub debt

-

-

-

INR139.63

IND AAA/Stable

Affirmed

Certificates of deposit

-

-

70-365 days

INR400

IND A1+

Affirmed

Term deposit programme

-

-

-

-

IND tAAA/Stable

Affirmed

Basel-III compliant Tier 1 bonds

-

-

-

INR150

IND AA+/Stable

Affirmed

The ratings reflect HDFC’s financial strength, diverse earning profile and consistently among the best operating performances through cycles in the Indian banking system. Also, the bank’s capitalisation is comparable to peers’. The bank’s retail focus on both the asset and the liability sides has resulted in a high yielding granular asset book and a stable and strong funding profile. The Stable Outlook reflects Ind-Ra’s expectation that even under a stress scenario, the incremental credit costs resulting from any deterioration in HDFC’s asset quality will be absorbed by its solid pre-provision profitability without any impairment to its Tier 1 capitalisation.

KEY RATING DRIVERS

Capital Buffers Adequate; High Ability to Raise Capital: The bank’s common equity tier 1 (FY17: 12.8%, 9MFY18: 12.57%) has been comparable to peer rated private banks’. The bank’s access to equity market remains strong, enabling it to raise capital as and when required.  The bank expects its CET1 consumption to be 1%-1.5% per annum and hence, to build growth capital and to maintain adequate capital buffers over next couple of years, the bank proposes to raise INR240 billion in equity through a preferential allotment, of which one-third is to be infused by its parent. The parent has already raised about INR110 billion of equity in FY18. 

Superior Risk Pricing;
As of December 2017, the unsecured retail book (credit cards and personal loans) constituted about 16% of HDFC’s loan book while business banking constituted 7.5%. These are high-yield segments and have seen 30%-35% three-year CAGR against the total advances’ three-year CAGR of about 23%. Although the agency expects the growth in these segments to continue in the near term, the SME segment (covered partly under the aforementioned products) could witness some pressure in the absence of a pick-up in the economic cycle. Nevertheless, the bank’s strong pre-provision profitability and peer-comparable capitalisation together provide a strong cushion to absorb the elevated credit costs under Ind-Ra’s stress scenarios. 

Asset Quality Deteriorates Marginally, but Remains Superior to Peers’:
HDFC’s asset quality has deteriorated marginally (gross non-performing loans 9MFY18: 1.29%, March 2017: 1.05%; March 2016: 0.94%) primarily due to NPAs originating in its agri portfolio. Out of the divergence of about INR20 billion of gross NPAs on FY17 disclosures, the net addition at end-December 2017 on this account has been nominal at INR3 billion (0.05% of gross advances at end-December 2017). The rated peer banks had a gross NPA ratio in a range of 5% to 10% at end-December 2017. Ind-Ra expects HDFC’s credit costs to remain stable at 70-90bp over FY18-FY19, given the high adjusted provision cover (59% v/s 40%-50% for other large private banks) that the bank intends to maintain. The agency also derives comfort from the bank’s granular asset book (especially retail) and lower exposures to highly levered corporate groups than peers’ and hence, it does not expect significant asset deterioration from the current levels. 

Low-cost Funding Strategy among Best in Class:
HDFC’s current account and savings account has been fairly robust at 40%-45% over the last few quarters. The deposit profile is aided by its persistent efforts to attract granular deposits through a focussed retail and relationship-based strategies. The bank’s high share in POS machines and debit and credit card spends at POS machines also helps maintain current account and savings account. 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 (December 2017 domestic loan mix - retail: 55%, corporates: 45%), there has been a gradual increase in the share of its unsecured portfolio (personal loans and credit cards; December 2017: 16%, March 2017: 13.7%; March 2015: 12.4%) that has been growing at a faster pace than overall advances. As per the bank’s management, a considerable part of HDFC’s large unsecured loan book has been built by leveraging its internal customer base through cross-selling ability through various channels. Historically, the 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

Technology Key for Lower Operational Costs, thereby Incremental Profitability:
HDFC’s income diversity, stable costs and controlled asset quality have provided it with a strong operating profitability buffer to absorb stressed credit costs if any. The agency is of the view that a reduction in operating costs (as a percentage of total advances) would be a key driver for incremental profitability buffers. The bank’s focus on developing alternate channels for both asset and liability products by leveraging technology and digitisation could decouple the business growth from growth in employees and physical infrastructure over near-medium term. This could result in lower addition of branches and net employee addition and thereby, lower operating costs as a percentage of assets.


RATING SENSITIVITIES

The Outlook 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-3QFY18, gross advances for the bank stood at INR6,312 billion. The bank has a large retail footprint, with a leading market share across multiple product lines. At end-3QFY18, HDFC had a network of 4,734 branches and 12,333 ATMs. 

FINANCIAL SUMMARY
 

Particulars

FY17

FY16

Total assets (INR billion)

8,638.4

7,408.0

Total equity (INR billion)

894.6

726.8

Net income (INR billion)

145.5

123.0

Return on assets (%)

1.8

1.8

Common equity tier 1 (%)

12.8

13.2

Capital adequacy ratio (%)

14.55

15.53

Source: Company, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

3 May 2017

28 November 2016

27 January 2016

Issuer rating

Long-term/Short-term

-

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/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

-

ANNEXURE

ISIN

Instrument

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

INE040A08245

Lower Tier-2 sub debt

26 -December 2008

10.70

26 December 2018

INR11.5

IND AAA/Stable

INE040A08278

Lower Tier-2 sub debt

19 February 2009

9.75

19 February 2019

INR1.5

IND AAA/Stable

INE040A08302

Lower Tier-2 sub debt

12 May 2011

9.48

12 May 2026

INR36.5

IND AAA/Stable

INE040A08310

Lower Tier-2 sub debt

13 August 2012

9.45

13 August 2027

INR34.77

IND AAA/Stable

 

Total unutilised

 

 

 

INR55.36

IND AAA/Stable 

 

Total

 

 

 

INR139.63

IND AAA/Stable 

 

ISIN

Instrument

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

INE040A08377

Basel III AT1

12 May 2017

8.85

Perpetual

INR80

IND AA+/Stable

 

Total unutilised

 

 

 

INR70

IND AA+/Stable

 

Total

 

 

 

INR150

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. 

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    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 40001750

    Media Relation

    Abhijit Roy

    Head - Corporate Communications
    +91 22 40001781