Fitch affirms HDFC Bank at ‘BBB(lka)’; outlook stable

Fitch Ratings has affirmed Housing Development Finance Corporation Bank of Sri Lanka (HDFC Bank) national long-term rating at ‘BBB(lka)’. The outlook 
is stable. 

The agency also affirmed HDFC Bank’s senior secured and senior unsecured debentures at ‘BBB(lka)’.

HDFC Bank’s National Long-Term Rating reflects Fitch’s expectation that the bank would receive extraordinary support from the Sri Lanka sovereign, if required. The sovereign’s limited ability to provide support is reflected in Sri Lanka’s ‘B+’/Negative rating. Fitch believes the sovereign’s propensity to extend support to the bank stems from the state’s 51 percent effective holding and HDFC Bank’s quasi-policy role in supporting the state housing-development initiatives. 
However, Fitch sees potential for state support for HDFC Bank as being much lower than for the country’s larger state-owned banks, due to its lower systemic importance.

The stable outlook on the bank’s national long-term rating reflects its creditworthiness relative to the best credit in Sri Lanka.

Housing loans accounted for 87 percent of HDFC Bank’s loan-book at end-1Q16. The bank is authorised to provide housing loans to members of the Employees’ Provident Fund (EPF), Sri Lanka’s retirement savings scheme. 
The loans are secured against members’ EPF balances and accounted for 29 percent of the bank’s total 
loans in 1Q16. 
NPLs on these loans are much higher than for the rest of the bank’s portfolio, but the Central Bank of Sri Lanka annually reimburses HDFC Bank for EPF-backed loans in arrears for 
over three months.

However, the bank’s reported gross NPL ratio remains high even after excluding EPF-backed housing loan NPLs, at 8.4 percent at end-1Q16 (19.7 percent including EPF-backed loans). This is mainly due to its exposure to low- and middle-income customer segments.

Fitch sees HDFC Bank’s capitalisation as weak and believe that the bank relies on capital infusion from the state, as its internal capital generation may not be sufficient to meet the minimum capital requirement of Rs.5 billion by 1 January 2018. 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.