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

-

-

-

INR34.77 (reduced from INR71.27)

 

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 continue to 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, Ind-Ra continues to factor into the ratings the bank’s capital buffers and its strong ability to raise capital. The Stable Outlook continues to reflect Ind-Ra’s expectation that even under a stress scenario, as seen recently in FY21 resulting from the COVID-19 pandemic, 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 continues to consider discretionary component, coupon omission risk, and 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 Continues: 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 and upgradation 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. Amongst the peer group, HDFC has seen one of the most stable profitability profiles over the years with stable return on assets of 1.8%-2.0% over FY14-FY21.

 

High Provision Coverage Ratio, Additional Provisions and Strong Profitability Buffers Provide Comfort: As compared to most peer-rated private banks who have seen volatility in gross non-performing asset (NPA) over FY16-FY21, HDFC’s efficient risk management practices has help in maintaining gross NPAs at 0.9%-1.4%, well below that of rated peers. HDFC had a provision coverage ratio (excluding prudential write-offs) of 69.8% in 4QFY21 (FY20: 72.0%, FY19: 71.4%), slightly below the median of comparable private peer banks. It also maintains floating and contingency provisions of INR73.1 billion, about 1.6x of net NPAs as of 4QFY21. Net NPA to common equity tier 1 (CET1) capital stood at 2.3% in 4QFY21 (FY20: 2.2%). Furthermore, with strong operating buffers (pre-provisioning operating profit/provisions) of 3.7x in FY21 (FY20: 4.0x, FY19: 5.3x) already in place, the agency believes HDFC is better positioned than most of its peer group to face any elevated asset quality stress.


HDFC reported gross NPAs of 1.32% in 4QFY21 (FY20: 1.26%, FY19: 1.36%). HDFC has been at the forefront in providing funds under the Emergency Credit Line Guarantee Scheme (ECLGS) with the disbursements (as of 5 April 2021) constituting 2.3% of net advances as of 4QFY21. Furthermore, restructuring under the Reserve Bank of India’s (RBI) one-time debt restructuring for COVID 1.0 constituted about 60bp. Moreover, retail assets constitute most of the restructured assets. The agency believes the restructured assets for HDFC could further increase as it provides relief to customers amid the second wave of COVID-19 pandemic under RBI’s recently introduced resolution framework 2.0 for individuals, small businesses and micro, small and medium enterprises (MSMEs). In the agency’s opinion, higher write-offs in consumer loans on a yoy basis and continuing retail asset sales are also signs of elevated delinquencies in the segment (retail asset sales of INR20 billion in 2HFY21). While Ind-Ra derives significant comfort from the granular book of the bank, a significant exposure to MSME and unsecured retail segments is a key monitorable as the agency holds a cautious view on asset quality in these segments and slippages from restructured and ECLGS pools. 

 

Adequate Capital Buffers along with Strong Access to Markets for Capital Raising: HDFC had a CET1 capital of 16.9% as of 4QFY21 (FY20:16.4% FY19: 14.9%), at the median of the peer rated banks. During July-August 2018, HDFC raised about INR240 billion from its promoters and other investors. The agency believes that with the loan growth for the bank slowing down in the current COVID-19 affected environment, the current capital levels provide HDFC enough growth capital for the next two-to-three years. The bank’s strong profitability also aids the capital buffers. The presence of a strong promoter, along with a stable through-the-cycle performance track record gives the bank the strong ability to raise funds from equity markets.

 

Low Cost CASA Franchise Continues to Build-up: HDFC’s current account (CA) and saving account (SA) deposit ratio ranged between 42% and 45% over FY14-FY20. For 4QFY21, the ratio has shown a strong improvement to 46.1% with a strong accretion seen in both CA and SA account balances of 21.8% yoy and 30.0% yoy. Correspondingly, the reliance on term deposits declined on a yoy basis with term deposits constituting 53.9% of the overall deposits as of 4QFY21 (FY20: 57.8%) and growing at 8.5% yoy. Term deposits and borrowings together constituted 48.9% of the total liabilities in 4QFY21 (FY20: 52.8%, FY19: 52.2%). A widespread and growing network of about 5,608 branches (FY20: 5,254) bodes well for growth in the bank’s granular liability franchise. Concentration in deposits remains low in comparison to comparable peers with top depositors constituting 4.0% of the total deposits in FY21.

 

Wholesale Segment Continues to Drive Loan Growth: The bank’s wholesale book has been growing steadily over the last three years (FY21: 21.2%, FY20: 28.7%, FY19: 31.2%, FY18: 9.2%) and constituted 53.4% of the overall loan book in FY21 (FY20: 50.2%). The growth in this segment has been faster than the comparable private bank peers, despite deleveraging by corporates and pressure on pricing. HDFC continues to leverage on its existing client relationships, focus on refinancing opportunities and innovate on its product offering to grow this segment. The growth in the wholesale segment comes with increasing exposure to better-rated corporates as evidenced by the movement in the rating mix of the portfolio.

 

Amid COVID-19-driven challenges, the retail loan growth slowed down significantly to 6.7% in FY21 (FY20: 14.6%, FY19: 19.0%, FY18: 27.8%). HDFC’s retail loan book continues to be granular and accounted 46.6% of the overall advances book in 4QFY21, down from 55.1% in FY18 (FY20: 49.8%, FY19: 52.6%). Within retail, unsecured loans (personal loans and credit cards) constituted about 16.2% of the overall advances (FY20: 17.4%) while the secured book constitutes of auto-linked loans with a contribution of 10.7% (auto, commercial vehicles, construction equipment and two wheelers), business banking (6.3%), home loans (6.2%), kisan gold card (4.2%) and have all shown a yoy decline in contribution to the overall advances. 


Liquidity Indicator - Superior: HDFC had an overall funding surplus of 8.3% in the cumulative one-year bucket as a percentage of the total assets in FY20. HDFC also maintains about 25.2% of total assets in balances with the RBI and in government securities in FY20, 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 138% at 4QFYE21, against the regulatory requirement of 90%. 

Technology Driven Outages Attract Regulatory Action: HDFC and its customers have faced multiple technology driven outages over the last few years, which has led to the RBI restricting the onboarding of new credit card customers and launching of new digital initiatives, and has appointed an external agency to conduct a special audit of the information and technology infrastructure. HDFC is working on a detailed plan with defined milestones over the near-to-medium term to counter such instances and build capacity to improve customer experience and maintain its leadership position among private banks. Execution and delivery on this strategy becomes a key monitorable in the near-to-medium term. 
 


RATING SENSITIVITIES

The Outlook could be revised to Negative if the asset quality starts deteriorating sharply and credit costs are high on a sustained basis. The ratings could be downgraded if there is a material impact to Tier-I capitalisation levels with the CET1 falling below 11.5% on a sustained basis; the net NPA-to-CET1 capital rises sharply higher than comparable peer group; there is a significant erosion of franchise – reduction of deposits or advances market share on a sustained basis; or weakening of the relative competitiveness in the banking space. A weakened liquidity or funding profile may also result in a negative rating action.


COMPANY PROFILE

HDFC is the largest private sector bank in terms of advances as well as deposits. At 4QFYE21, its net advances stood at INR11,328 billion. The bank has a large retail footprint, with a leading market share across multiple product lines. At 4QFYE21, HDFC had a network of 5,608 branches and 16,087 automated teller machines.

 

FINANCIAL SUMMARY

 

Particulars

FY21

FY20

Total assets (INR billion)

17,468.7

15,305.1

Total equity (INR billion)

2,037.2

1,709.9

Net income (INR billion)

311.2

262.6

Return on assets (%)

2.0

2.0

CET1 (%)

16.9

16.4

Capital adequacy ratio (%)

18.8

18.5

Source: Company, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

3 June 2020

7 May 2019

12 March 2018

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

INR34.77

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

IND AA+/Stable


ANNEXURE

ISIN

Instrument

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

INE040A08302

Lower Tier-2 sub debt

12 May 2011

9.48

12 May 2026

INR36.5

WD (paid in full)

INE040A08310

Lower Tier-2 sub debt

13 August 2012

9.45

13 August 2027

INR34.77

IND AAA/Stable

 

Total

 

 

 

INR34.77

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

Complexity Indicator

Complexity Indicator

Lower Tier-2 subordinated debt

Low

Certificate of deposits

Low

Term deposit programme

Low

Basel III AT1 bonds

High

 
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.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Analyst Names

  • Primary Analyst

    Karan Gupta

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001744

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121