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Rating Action:

Moody's revises three Indian banks' standalone and hybrid debt ratings

14 May 2012

Downgrade of standalone ratings in line with Moody's global guidance; hybrid ratings affected

Singapore, May 14, 2012 -- Moody's Investors Service has downgraded the standalone bank financial strength rating (BFSR) of three Indian banks -- Axis Bank, HDFC Bank and ICICI Bank Limited -- to D+ from C-, which now maps to a baseline credit assessment (BCA) of baa3 from baa2 on the long-term scale. The rating actions took place in the context of an ongoing global review affecting all banks whose standalone ratings are higher than the rating of the government where they are domiciled, and they conclude the review that was initiated on 30 April 2012.

At the same time, the rating agency has downgraded the hybrid ratings of Axis Bank and ICICI Bank Limited to Ba3 (hyb) from Ba2 (hyb).

All revised ratings carry stable outlooks.

The other ratings of the three banks were unaffected and have stable outlooks as detailed below.

RATINGS RATIONALE

- DOWNGRADE OF STANDALONE RATINGS TO THE SOVEREIGN DEBT RATING LEVEL

The downward revision to the three Indian banks' standalone ratings reflects Moody's assessment that their creditworthiness are highly correlated with that of the Indian government's credit strength taking into account (i) the extent to which their business depend on the domestic macroeconomic and financial environment; (ii) the degree of reliance on market-based, and therefore more confidence-sensitive, funding; and (iii) their direct or indirect exposures to domestic sovereign debt, compared with their capital bases.

For all three banks, the key drivers for the rating action were (i) the relatively low level of cross-border diversification of their operations; (ii) the high level of balance-sheet exposure to domestic sovereign debt, compared with their capital bases; (iii) franchise resilience and intrinsic strength within the operating environment; and (iv) the absence of ongoing support from foreign ownership.

Our review indicated that there are little, if any, reasons to believe that these banks would be insulated from a government debt crisis. More particularly, we note their significant direct exposure to the Indian government securities, equivalent to 239% of tier 1 at Axis Bank, 226% of tier 1 at HDFC Bank and 143% of tier 1 capital at ICICI (based on latest publicly available data). In addition, these three banks are primarily domestic institutions with similar macroeconomic exposures as the sovereign government.

Therefore, we view the lower standalone ratings -- which are now positioned at the rating of the Indian government -- as more appropriate to capture the credit profiles of the banks.

These rating actions derive from Moody's updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign, which is discussed in the rating implementation guidance "How Sovereign Credit Quality May Affect Other Ratings" published on 13 February 2012, and further detailed in the special comment "Banks and Sovereigns: Risk Correlations Constrain Standalone Bank Credit Assessments" published on 30 April 2012.

The revised rating continues to reflect the balance of the individual banks' strengths and weaknesses.

At Axis, the revised ratings also incorporate its relatively small but rapidly expanding franchise as India's third-largest private-sector bank, as well as its improving financial fundamentals as it expands its range of business activities and customer base, as well as its strong presence in niche markets that provides sustainable business and revenue streams.

We continue to assume a high likelihood of systemic support for the bank due to its importance to the banking system so its Baa2 global local currency deposit rating benefits from one notch of support from its BCA.

With respect to HDFC, the rating reflects the bank's solid commercial and retail banking franchise as the second-largest private-sector bank in India, with 2,201 branches and 7,110 ATMs, and a market share of almost 4% in loans and deposits. The rating also reflects its consistent and strong financial metrics relative to other rated-Indian banks. Specifically, its performance in profitability, capital and asset quality has been better than the average of the Indian banking system. Its weighting towards the retail sector underpins its lower risk profile and wider net interest margin. As of 31 December 2011, the retail segment accounted for 51% of the bank's loans. Therefore, compared with its peers, HDFC Bank's loan book is less exposed to high-risk sectors, thereby reducing the threat to its asset quality amid challenging macro-economic conditions.

We also continue to assess a high likelihood of systemic support for HDFC due to its importance to the banking system so its Baa2 global local currency deposit rating benefits from one notch of support from its BCA.

For ICICI, the ratings capture the bank's solid franchise as the second largest commercial bank in India as well as its strong capitalization, liquidity, and earnings profile. At the same time, the rating also reflects the bank's high borrower concentration in the form of its mandatory government securities portfolio, weaker asset quality when compared to its peers, a difficult operating environment, and the intense competition it faces in its domestic markets.

We believe that the probability of systemic support for ICICI Bank is very high, given its sizeable retail deposit franchise, and its importance to the national payments system as India's second largest commercial bank. Therefore, it receives one notch rating uplift from its BCA.

- DOWNGRADE OF HYBRID RATINGS

In Moody's approach to rating hybrid securities, the starting point is the Adjusted BCA. The Adjusted BCA reflects a bank's standalone credit strength as expressed through its BCA and includes uplift from parental and/or cooperative support, if applicable, but excludes systemic support.

For both Axis Bank and ICICI Bank Limited, their Adjusted BCA is in line with their respective BCA as no parental or cooperative support is imputed. Therefore, a lower BCA becomes the starting point for notching hybrid securities and results in lower hybrid ratings in both banks' cases.

LIST OF RATINGS AFFIRMED

Axis Bank: Baa2 foreign currency long-term senior unsecured debt rating, (P)Baa2 foreign currency long-term senior unsecured debt program rating, Baa2 long-term local currency bank deposit rating, Prime-2 short-term local currency bank deposit rating, Baa3 long-term foreign-currency deposit rating, Prime-3 short-term foreign currency bank deposit rating, Baa3 foreign currency subordinated debt rating, (P)Baa3 foreign currency subordinated debt program rating, Ba1 foreign currency junior subordinated debt rating and (P)Ba1 foreign currency junior subordinated debt program rating. The foreign currency long --term senior unsecured debt rating is at Baa2, the same level as the foreign currency debt ceiling for India. The foreign currency deposit rating of Baa3/Prime-3 is constrained by the deposit ceiling for India.

HDFC Bank Limited: Baa2 foreign currency long-term senior unsecured debt rating, (P)Baa2 foreign currency long-term senior unsecured debt program rating, Baa2 long-term local currency bank deposit rating, Prime-2 short-term local currency bank deposit rating, Baa3 long-term foreign-currency deposit rating, Prime-3 short-term foreign currency bank deposit rating, Baa3 foreign currency subordinated debt rating, (P)Baa3 foreign currency subordinated debt program rating, Ba1 foreign currency junior subordinated debt rating and (P)Ba1 foreign currency junior subordinated debt program rating. The foreign currency long --term senior unsecured debt rating is at Baa2, the same level as the foreign currency debt ceiling for India. The foreign currency deposit rating of Baa3/Prime-3 is constrained by the deposit ceiling for India.

ICICI Bank Limited: Baa2 foreign currency long-term senior unsecured debt rating, (P)Baa2 foreign currency long-term senior unsecured debt program rating, Baa2 long-term local currency bank deposit rating, Prime-2 short-term local currency bank deposit rating, Baa3 long-term foreign-currency deposit rating, Prime-3 short-term foreign currency bank deposit rating, Baa3 foreign currency subordinated debt rating, (P)Baa3 foreign currency subordinated debt program rating, Ba1 foreign currency junior subordinated debt rating and (P)Ba1 foreign currency junior subordinated debt program rating. The foreign currency long --term senior unsecured debt rating is at Baa2, the same level as the foreign currency debt ceiling for India. The bank's foreign currency deposit rating of Baa3/Prime-3 is constrained by the corresponding sovereign ceilings for India.

All three banks are headquartered in Mumbai, India. Below are details of their assets at March 2012.

Axis Bank INR2,856.28 billion; HDFC Bank INR3,379.10 billion; and ICICI Bank Limited INR4,736.47 billion.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: Global Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's revises three Indian banks' standalone and hybrid debt ratings
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