(The following statement was released by the rating agency)
Dec 20 -
Summary analysis -- HDFC Bank Ltd. -------------------------------- 20-Dec-2012
CREDIT RATING: BBB-/Negative/A-3 Country: India
Primary SIC: Commercial banks,
Credit Rating History:
Local currency Foreign currency
16-Jan-2008 BBB-/A-3 BBB-/A-3
The rating on HDFC Bank Ltd. reflects the bank's "strong" business position, "adequate" capital and earnings, "adequate" risk position, "above-average" funding, and "strong" liquidity, as our criteria define those terms. The bank's stand-alone credit profile (SACP) is 'bbb+'.
The rating is two notches below the SACP. We do not rate HDFC Bank above the foreign currency sovereign rating on India (BBB-/Negative/A-3) since the bank operates almost exclusively in India and we do not expect it to be able to withstand the stress associated with a sovereign default. Although we view HDFC Bank as having "moderate" systemic importance in India, the rating reflects no government support at this point.
Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in India is 'bbb-'. The BICRA score is based on our evaluation of economic risk: in our view, India's economic resilience is constrained by its low-income, though diverse and growing, economy; and weak foreclosure laws, which accentuate credit risk despite moderate private sector debt. On the other hand, the risk of imbalances is low. In our industry risk assessment, Indian banks benefit from high levels of stable, core customer deposits. Banking regulations are in line with international standards and the regulatory track record is moderately successful, though disclosure standards are inadequate. Indian banks have moderate risk appetite and the industry is stable (despite fragmentation), although directed lending and government-ownership create some market distortion.
We assess HDFC Bank's business position as "strong." It is the second-largest private-sector bank in India. Despite its relatively short operating history, HDFC Bank has established a strong domestic competitive position in its three principal business areas, i.e. retail banking, wholesale banking, and treasury operations. The bank's above-average efficiency in product and service delivery not only helps retain a highly loyal customer base but has contributed to a steady gain in market share over the years. Compared with its major domestic peers, HDFC Bank is more focused on commercial and retail banking within the Indian market. While the bank's strong growth could expose it to various risks, in particular economic risk, HDFC Bank has a track record of delivering sound credit and financial performance. In our view, this is attributable to the bank's strong management and adequate risk management in business expansion.
We assess HDFC Bank's capital and earnings as "adequate," on the basis of our expectation that the bank's pre-diversification risk-adjusted capital (RAC) ratio, which is 9.2% as on March 31, 2012, will be 7%-10% over the next 12-18 months. Its capitalization is likely to remain among the best of its domestic peer group for the next two years. The bank's earnings profile is strong, with a return on average assets of about 1.7% (annualized) for the nine months ended Sept. 30, 2012. In our view, HDFC Bank's profitability could be less affected than its peers by rising funding costs given its stronger capacity to pass on costs to clients. Nevertheless, in our view, we do not expect the bank's earnings accumulation to be able to sustain its RAC ratio at the current level given the rapid loan growth.
We view HDFC Bank's risk position as "adequate," reflecting the bank's above-average credit growth. HDFC Bank's credit cost experience has improved over the past few years. The bank's credit cost of about 50 basis points to average assets for fiscal 2012 was lower than the industry average and majority was general provisioning. HDFC Bank's loan quality is one of the best in the Indian banking industry. The bank's gross nonperforming loan ratio stood at 0.9% as of Sept. 30, 2012. Its restructured asset book was also miniscule. The bank's consistently good asset quality is due to the absence of legacy problem loans, effective risk monitoring and management systems, and sector diversification of its loan portfolio. HDFC Bank's funding is "above-average" and its liquidity position is "strong," in our opinion. Customer deposits represent about 88% of its funding base at the end of March 2012. Savings and current deposits, which are inherently low cost and stable, have been stable at about 46% of the bank's deposit base as of Sept. 30, 2012. The bank's ratio of total loans to customer deposits was 80% at the end of March 2012, by our calculation. Its liquidity ratios are noticeably stronger than those of its peers. Liquid assets--comprising cash and reserve balances, interbank and government investments--account for about 40% of total deposits.
The negative outlook on HDFC Bank reflects that on the long-term sovereign rating on India. The ratings and outlook on HDFC Bank will move in tandem with the sovereign rating.
Standard & Poor's does not rate Indian banks above the sovereign rating because of the direct and indirect influence the sovereign in distress would have on a bank's operations, including its ability to service foreign currency obligations. Accordingly, we would lower the ratings on HDFC bank if we downgrade the sovereign. Similarly, we may raise the rating on HDFC Bank in step with a similar rating action on the sovereign. We may lower the rating if the sovereign is downgraded or the bank's SACP deteriorates substantially to 'bb' from 'bbb+', which in our view, is very unlikely.
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010