Fitch downgrades HDFC Bank rating as govt. fails to infuse capital

Fitch Ratings yesterday downgraded Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC Bank) national long-term rating to ‘BBB-(lka)’ from ‘BBB(lka)’ as the bank has failed to beef up its capital base. 

“The one-notch downgrade reflects Fitch’s assessment of the weakening of support from the Sri Lanka sovereign (B+/Stable) to HDFC Bank. 

This is after the state failed to provide capital to the bank in timely manner for it to meet the minimum Rs.5 billion regulatory capital requirement by January 1, 2018,” Fitch said. 

However, Fitch believes that it is still likely that the authorities would provide adequate support to meet the shortfall within an extended deadline.  

The bank’s senior secured and senior unsecured debentures have also been downgraded to ‘BBB-(lka)’ from ‘BBB(lka)’. 

The ratings are maintained on Rating Watch Negative (RWN).   

The RWN reflects the risk that the state, as the major shareholder, would not raise the bank’s capital to meet the minimum capital requirement, in which case Fitch will downgrade the rating to reflect the bank’s weaker intrinsic strength.   

HDFC’s rating reflects Fitch’s expectation that the bank would receive extraordinary support from the sovereign, if required.

“Our assessment captures the National Housing Development Authority’s direct 49 percent stake in the bank, which brings the state’s holdings in the bank to 51 percent effectively; the bank’s quasi-policy role in supporting housing-development initiatives; as well as HDFC Bank’s low systemic importance,” the rating agency said.  Fitch’s assessment of the bank’s standalone profile is weak compared with better-rated peers. HDFC Bank’s reported NPL ratios (18.5 percent at end-3Q17) are above the industry average and its capital buffers (Fitch Core Capital ratio of 14.2 percent at end-3Q17) are thin and declining. 

The bank is also more exposed than peers to low- and middle-income customers, mainly through housing loans (87 percent of total loans at end-3Q17), which are susceptible to economic and interest rate cycles.   

The bank’s outstanding debentures are rated in line with its national long-term rating and rank equally with the claims of other senior unsecured creditors.Fitch has not provided any rating uplift for the collateralisation on the senior secured debentures as their recovery prospects are considered to be average and comparable with those of the unsecured notes in a developing legal system.