Fitch Ratings has affirmed India-based HDFC Bank Limited’s (HBL) national long-term (LT) Rating at ‘Fitch AAA(ind)´ with a stable outlook, and national short-term (ST) rating at ‘Fitch A1+(ind)´. HBL’s lower tier 2 debt has also been affirmed at ‘Fitch AAA(ind)´ based on Fitch’s criteria.
The affirmations reflect HBL’s sound credit fundamentals backed by its consistent superior performance compared to its domestic peers in areas of funding, asset quality, profitability and capitalization. Fitch also acknowledges the bank’s strong management team with its proven ability to manage risks, noting that the bank could be challenged in future to defend and grow its market share in an environment of slowing credit and higher competition.
A strong liabilities profile has been at the helm of HBL’s growth strategy. It has consistently maintained a robust funding profile with a significant share of low cost current-savings (CASA) deposits (fiscal year 2011: 52.7%; fiscal year 2010: 52%) over the last five years, except in fiscal year 2009 when it acquired Centurion Bank of Punjab.
Further, its low reliance on wholesale funding (top 20 deposits: 8.8% of fiscal year 2011 deposits) lends added stability to its funding franchise. New branch additions should also support HBL’s CASA levels in the future despite expected migration to term-deposits under high interest rates.
HBL’s asset quality is strong compared to local peers, driven by its stringent credit appraisal standards and timely provisioning (and write-offs) of bad assets. Its gross non-performing loan (NPL) ratio was 1.1% (fiscal year 2010: 1.4%) and net NPL ratio was 0.2% (fiscal year 2010: 0.3%) in fiscal year 2011.
HBL’s specific loss provision cover at 82.5% in fiscal year 2011 (fiscal year 2010: 78.4%) was among the highest in the industry, which along with general provisions stands well above 100%.
The risk involved in unsecured retail lending - which has grown since fiscal year 2008 - is however partly mitigated from the bank’s satisfactory track record in this space. Further, pressures on retail and SMEs from rising interest rates are expected to remain manageable given its robust asset quality.
The above strengths also flow into HBL’s earnings and profitability, which are backed by its strong net interest margins (NIMs, fiscal year 2011: 5.1%; fiscal year 2010: 4.9%), a steady fee income franchise, stable cost structure (cost-to-income ratio: fiscal year 2011: 48.1%; fiscal year 2010: 48%) and controlled credit costs.
In Fitch’s opinion, while near term pressures on NIMs and credit costs can emerge, the current dynamics would continue to comfortably support return on assets (fiscal year 2011: 1.6%; fiscal year 2010: 1.5%) at over 1%.
Capital quality is viewed strong considering the low level of hybrids and strong solvency buffer. Therefore, HBL’s tier 1 capital adequacy ratio (CAR), (fiscal year 2011: 12.2%; fiscal year 2010: 13.3%) and total CAR (FY11: 16.2%; FY10: 17.4%) are expected to reasonably support its near-term growth plans while absorbing credit quality pressures, if they arise.
HBL’s National LT rating is in the highest category of Indian banks. However, its ratings could come under pressure should it be unable to manage asset quality in the retail portfolio, which leads to material deterioration in profitability and/or capitalization; however, the same is not expected at this stage.
HBL is India’s second-largest private sector bank with over 2,100 branches in quarter one fiscal year 2012.