By Karan Gupta

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 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*

-

-

-

INR71.27 (reduced from 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

* Details in annexure

The ratings reflect HDFC’s financial strength, diverse earning profile and consistent and best-in-class through-the-cycle performance in the Indian banking system. The bank’s retail focus on both the asset and liability sides has resulted in a high-yielding granular asset book and a stable and strong funding profile. Furthermore, the existing capital buffers and the strong ability to raise capital are factored into the ratings. 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 material impairment to its Tier 1 capitalisation. 

For AT1 instruments, the agency considers the 'discretionary component', 'coupon omission risk', and the 'write-down/conversion risk' as the key parameters to arrive at the rating. The agency recognises the unique going-concern loss absorption features that these bonds carry and differentiates them from the bank's senior debt factoring in a higher probability of an ultimate loss for investors in these bonds.

KEY RATING DRIVERS

Stable Through-the-cycle Performance: HDFC’s strength lies in its strong credit underwriting skills and risk management, widespread reach –in terms of both geographic presence and customer base, wide product offering, strong liability franchise with efficient asset-liability management and maintenance of higher-than-required liquidity buffers. The agency is of the view that the bank’s focus on the adoption of technology, analytics and digital initiatives for both asset and liability products will improve its process efficiency, customer traction ability and operating costs (as of percentage of total assets), which would also drive incremental profitability buffers over the near to medium term. 

Retail-led Growth Continues; Growth Picking Up in Wholesale Segment:
HDFC’s advances book is granular in nature, with retail constituting about 52.6% in 4QFY19. The loans accounted for about 42.8% of the incremental year-on-year growth in 4QFY19. Within retail, unsecured loans (personal loans and credit cards) constituted about 45.9% of the incremental year-on-year growth. The retail unsecured book has been growing in size (about 17% of advances in 4QFY19) as well as faster than the overall growth in advances. According to 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

The bank’s wholesale book grew 18.0% yoy in 1QFY19, 24.5% yoy in 2QFY19, 23.4% yoy in 3QFY19 and 31.2% yoy in 4QFY19. The growth was faster than the growth seen in comparable private bank peers. HDFC will continue to leverage its existing client relationships, focus on refinancing opportunities and innovate on its product offering to grow this segment. Growth in the wholesale segment comes with increasing exposure to better rated corporates but with a marginal compression in margins. The bank is using high yields in its unsecured portfolio to offset the same. 

Resilient Asset Quality:
In comparison to most peer-rated private banks which have seen a sharp increase in gross NPAs, HDFC reported an increase of only 32bp in its gross NPA ratio to 1.36% over 1QFY17-4QFY19. HDFC has also steadily been improving its provision coverage ratio (excluding prudential write-offs), which stood at 71.4% in 4QFY19 (4QFY18: 69.8%), significantly higher than that for other private peer banks. It also maintains floating provisions of INR14.5 billion, about 45% of net NPAs as of 4QFY19. Credit costs for HDFC have ranged between 50-80bp over FY14-FY18, significantly lower than the peer group’s. Farm loan waiver announcements have had a significant impact on the asset quality of its agricultural portfolio with an uptick in slippages from the segment where gross NPAs (priority and non-priority) increased sharply to 3.04% in FY18 from 1.93% in FY17. While Ind-Ra derives significant comfort from the granular book of the bank, significant exposure to unsecured retail and MSME segments becomes a key monitorable as the agency holds a cautious view on asset quality in these segments (Ind-Ra’s FY20 Indian banking outlook).  

Adequate Capital Buffers for Higher-than-system Growth:
HDFC had a common equity tier 1 capital of 14.9% as of 4QFY19 (FY18: 12.25%, FY17: 13.74%), at the higher end of the range seen for peer rated banks. Over July-August 2018, HDFC raised about INR240 billion from its promoters and other investors. With the bank expecting a common equity tier 1 consumption of 100-150bp per annum, this capital raise gives HDFC enough growth capital for the next two to three years. The bank’s strong profitability will also  add to the capital buffers. The presence of a strong promoter along with a stable through-the-cycle performance track record gives the bank a strong ability to raise funds from equity markets.

Adequate Liquidity Buffers:
HDFC maintained a gap of 1.8% of total assets on the contractual asset-liability management in up to one-year maturity bucket at end-FY18. In comparison, most scheduled commercial banks have this gap as a marginal surplus up to a deficit of 35%-40% of the total assets. HDFC also maintains about 26% of total assets in balances with the Reserve Bank of India and in government securities in FY18, which gives Ind-Ra the comfort that HDFC is more than adequately placed to meet its short-term funding requirements. Moreover, HDFC maintained a liquidity coverage ratio of 118% as of 4QFY19 as against a regulatory requirement of 100%. 

Rising Reliance on Term Deposits; CASA Ratio Continuing above 40%:
HDFC’s current account and saving account deposit (CASA) ratio ranged between 43%-48% over FY14-FY18. For 4QFY19, the ratio stood at the lower end of the range at 42.4%. The agency believes that while HDFC has a robust, low-cost funding profile, their reliance on term deposits has been increasing which is also reflected in the 19% yoy growth in term deposits in 4QFY19 (3QFY19: 29% yoy), higher than 17% yoy growth in overall deposits. Term deposits and borrowings together constituted 52% of total liabilities in 4QFY19 (54%-55% over 1QFY19-3QFY19). A widespread network of about 5,103 branches and planned annual growth of 150-200 branches are likely to bode well for growth in the bank’s granular liability franchise. However, at a system level, the agency believes that with growth in advances outpacing the growth in deposits, the competition for deposits is likely to remain elevated at the system level in the near to medium term. 


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-4QFY19, gross advances for the bank stood at INR8,194 billion. The bank has a large retail footprint, with a leading market share across multiple product lines. At end-4QFY19, HDFC had a network of 5,103 branches and 13,160 ATMs. 

FINANCIAL SUMMARY
 

Particulars

FY19

FY18

Total assets (INR billion)

12,445.4

10,639.3

Total equity (INR billion)

1,492.1

1,063.0

Net income (INR billion)

210.7

174.8

Return on assets (%)

1.9

1.9

Common equity tier 1 (%)

14.9

12.2

Capital adequacy ratio (%)

17.1

14.8

Source: Company, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

12 March 2018

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

INR71.27

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

Instrument

ISIN

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

Lower Tier-2 sub debt

INE040A08245

26 December 2008

10.70

26 December 2018

INR11.5

WD (Paid in full)

Lower Tier-2 sub debt

INE040A08278

19 February 2009

9.75

19 February 2019

INR1.5

WD (Paid in full)

Lower Tier-2 sub debt

INE040A08302

12 May 2011

9.48

12 May 2026

INR36.5

IND AAA/Stable

Lower Tier-2 sub debt

INE040A08310

13 August 2012

9.45

13 August 2027

INR34.77

IND AAA/Stable

Total Unutilised

 

 

 

 

INR55.36

WD* 

Total

 

 

 

 

INR71.27

IND AAA/Stable 

Basel III AT1

INE040A08377

12 May 2017

8.85

Perpetual

INR80

IND AA+/Stable

Total Unutilised

 

 

 

 

INR70

IND AA+/Stable

Total

 

 

 

 

INR150

IND AA+/Stable

* Issuer cannot issue any more instruments in this category


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

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 and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. 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

    Karan Gupta

    Associate 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 40001744

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121