Fitch maintains negative rating watch on HDFC Bank
Fitch Ratings has maintained Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC Bank) National Long-term Rating of ‘Bbb-(lka)’ on Rating Watch Negative (RWN).
The agency has also maintained the RWN on the ‘Bbb-(lka)’ rating of HDFC Bank’s senior secured and senior unsecured debentures.
The RWN, first placed in August 2017, has been maintained pending a capital infusion from the Sri Lankan state (B+/stable) to help HDFC Bank meet the Rs.5 billion minimum regulatory capital requirement.
Fitch expects the state, the bank’s major shareholder, to extend its support but the timing of the capital infusion depends on regulatory clearance.
The minimum capital requirement has been in force since 2016. Fitch downgraded HDFC Bank on January 29, 2018, after the state failed to provide the capital to the bank in a timely manner.
HDFC Bank’s rating reflects Fitch’s expectation that the bank will receive extraordinary support from the sovereign, if required.
“Our assessment captures the state’s 51 percent effective holding, which includes the National Housing Development Authority’s direct ownership of 49 percent, the bank’s quasi-policy role in supporting housingdevelopment initiatives, as well as HDFC Bank’s low systemic importance,” Fitch noted.
The bank’s weak standalone profile is characterised by its above-industry exposure to low- and middle-income customers, mainly through housing loans, who tend to be more susceptible to economic cycles. The share of housing loans has declined over the years but it has remained high, at 82 percent at end-march 2018.
The bank continued to have a high reported non-performing loan (NPL) ratio, which stood at 19.7 percent at end-march 2018.
This was mainly due to defaults from housing finance backed by the Employees’ Provident Fund (EPF), which contributed slightly more than half of the bank’s total housing NPLS at end-march 2018.
Nevertheless, the Central Bank of Sri Lanka annually reimburses HDFC Bank for the Epf-backed loans in arrears for more than three months.
The bank’s NPL ratio remained high even without the Epf-backed housing loans at 8.9 percent at endmarch 2018 (9.0 percent at end-2017), which reflects the concentration of its credit risk in the low- and middle-income housing-finance market.
We see HDFC Bank’s capitalisation as weak despite the bank’s Fitch Core Capital (FCC) ratio of 16.8 percent at end-march 2018 because of the bank’s substantial unreserved NPLS.
Fitch expects HDFC Bank’s asset and liability mismatches to persist due to its longertenor loan book and short-tenor deposit base, exerting pressure on the bank’s liquidity. The bank’s dependence on highcost term deposits also weighs on its net interest margins and profitability.
The bank’s senior debentures are rated in line with its National Long-term Rating and rank equally with the claims of other senior unsecured creditors.