Fitch Ratings has assigned Housing Development Finance Corporation Bank of Sri Lanka (HDFC Bank) a National Long-Term Rating of ‘BBB(lka)’ and a Stable Outlook.
At the same time, Fitch has assigned HDFC Bank’s proposed senior debentures of up to Rs.4bn an expected National Long-Term Rating of ‘BBB(lka)(EXP)’ and outstanding senior secured debentures a National Long-Term Rating of ‘BBB(lka)’.
The proposed issuance, which will have tenors of five and 10 years and carry fixed and floating coupons, will be listed on the Colombo Stock Exchange. HDFC Bank expects to use the proceeds to reduce asset and liability maturity mismatches.
HDFC Bank’s rating reflects Fitch’s expectation that the bank would receive extraordinary support from the state, if needed, given that the state effectively holds 51 percent of the bank. It also reflects Fitch’s view of the bank’s quasi-policy role in supporting the state’s initiatives to develop more housing for low- and middle-income families. However, the potential for state support is lower than for larger state-owned banks in Sri Lanka due to HDFC Bank’s lower systemic importance.
The state holds most of its stake in HDFC Bank through the National Housing Development Authority, a state-owned corporation that is tasked with formulating and implementing the national housing policy. The rest of the stake is held through the Condominium Management Authority and the Urban Development Authority. The majority of board members represent state institutions.
Housing loans accounted for 91 percent of HDFC Bank’s total loans at 1H15. The bank has the authority to grant to members of the Employees Provident Fund (EPF) housing loans that are secured against EPF balances (34.5 percent of total loans at 1H15). HDFC Bank’s reported gross NPL ratio has been extremely high (20.88 percent at 1H15) due to non-payments on EPF-backed housing loans, which are often used by individuals to access the balances in their EPF accounts. The Central Bank of Sri Lanka annually reimburses the bank for the instalments of EPF-backed loans that are in arrears for over three months.
HDFC Bank’s capital ratios have been declining alongside the expansion in its assets. Regulatory capital ratios benefit from zero risk weights accorded to housing loans backed by EPF balances. HDFC Bank is required to meet a minimum capital requirement of Rs.5bn as a licensed specialised bank by 1 January 2016. The central bank has granted approval to extend the deadline to comply with the minimum capital requirement to 1 January 2018. Fitch believes that although the bank is likely to meet the first interim target of Rs. 3billion, an infusion may be needed in order to meet the Rs.5bn requirement as internal capital generation may not be sufficient.
Interest rate risk is significant for HDFC Bank, given the maturity mismatches between its assets and liabilities. Management is looking into regular issuance of medium- to long-term debentures as a means of reducing asset and liability maturity mismatches.
HDFC Bank was established as a building society in 1984. It was converted into a government corporation in 2000 and then into a regulated licensed specialised bank in 2003.
