Singapore, November 17, 2017 -- Moody's Investors Service has upgraded the long-term ratings
of four Indian financial institutions to Baa2 from Baa3. The four
are: (1) Export-Import Bank of India (EXIM India),
(2) HDFC Bank Limited (HDFC Bank), (3) Indian Railway Finance Corporation
Limited (IRFC), and (4) State Bank of India (SBI).
In the case of HDFC Bank, Moody's has also upgraded the bank's
baseline credit assessment (BCA) and adjusted BCA to baa2 from baa3.
And, Moody's has upgraded the Counterparty Risk Assessment
(CR Assessment) of HDFC Bank and its Hong Kong branch to Baa1(cr) from
Baa2(cr); and of SBI, its Hong Kong, London and Nassau
branches to Baa2(cr)/P-2(cr) from Baa3(cr)/P-3(cr).
In addition, Moody's has assigned a CR Assessment of Baa2(cr)/P-2(cr)
to State Bank of India, DIFC branch.
In addition, Moody's has changed to stable from positive the
ratings outlook for IRFC; EXIM India and its London branch;
HDFC Bank, its Bahrain and Hong Kong branches; as well as SBI
and its Hong Kong, London, and Nassau branches. Moody's
has assigned a stable outlook to SBI's DIFC branch.
Moody's rating actions follow the upgrade of the Government of India's
local and foreign currency issuer ratings to Baa2 from Baa3 on 16 November
2017. For more information on the sovereign credit rating action,
please refer to the Government of India's issuer page on www.moodys.com.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197817
for the List of Affected Credit Ratings. The list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197817
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
Newly Issued Instrument
Principal Methodologies
UPGRADE OF THE FOUR FINANCIAL INSTITUTIONS' SENIOR UNSECURED RATINGS;
OUTLOOK REVISED TO STABLE FROM POSITIVE
The rating actions are in line with Moody's upgrade of the Government
of India's local and foreign currency issuer ratings to Baa2 from Baa3
with a stable outlook. The sovereign action is discussed in greater
detail in Moody's press release dated 16 November 2017 (http://www.moodys.com/viewresearchdoc.aspx?docid=PR_374998).
The government's credit strength is an important input in Moody's deposit
and debt ratings for financial institutions, because it impacts
Moody's assessment of the government's capacity to provide support in
times of stress. As such, an improvement in the government's
own creditworthiness, as measured by its sovereign rating,
has lifted the supported ratings for EXIM India, IRFC and SBI.
Prior to this rating action, HDFC Bank's BCA and ratings were
constrained by India's previous sovereign rating of Baa3 given the
bank's significant exposure to the Indian government in common with
other Indian banks. As such, an upgrade of the sovereign
rating also drove an upgrade of the bank's BCA and ratings.
The stable outlook on the four financial institutions ratings is in line
with the stable outlook on the Indian sovereign's rating.
OPERATING ENVIRONMENT FOR THE BANKS
Moody's continues to assess India's Macro Profile (operating environment
for the banks) as Moderate. The assessment incorporates the weak,
but stable credit conditions in the country, with such a situation
representing the key risk to the banks' balance sheets. Corporate
leverage has started to fall and asset quality deterioration for the banks
has peaked. Furthermore, the clean-up of balance sheets
is underway, with the latest effort being the asset quality review
conducted by the Reserve Bank of India in December 2015 and the promulgation
of the Insolvency and Bankruptcy Code 2016.
The capitalization profile of the public sector banks — a segment
which accounts for nearly 70% of total banking system assets —
remains far below that of their private sector peers. To a large
extent, the capital shortfall has been addressed by the government's
announcement on 24 October 2017 of a recapitalization plan for public
sector banks, which should help facilitate these banks in writing
down bad loans.
However, the credit implication will depend on the hair-cuts
that the banks will need to take in the resolution process and the developments
in their other credit metrics after the process is complete.
Funding remains a credit strength for Indian banks. The banks'
funding and liquidity profiles — which are largely funded by customer
deposits with limited reliance on confidence sensitive market funding
— have remained stable.
DISCUSSION ON INDIVIDUAL FINANCIAL INSTITUTIONS
EXIM INDIA
Incorporated under the Export-Import Bank of India Act 1981,
EXIM India, in addition to servicing the needs of export-oriented
companies and promoting the government's external trade policy objectives,
plays a part in executing the government's foreign policy goals.
Around half of its loan book is composed of extending credit lines for
projects which had been agreed upon in bilateral agreements between the
Government of India and the beneficiary country, indicating the
close alignment of the bank with one of the very important functions of
the government. By law, the government has to own a 100%
stake in the bank.
Because of these features, Moody's support assumption for Exim India's
senior unsecured and deposit ratings is government-backed.
This results in a four notch uplift from its ba3 BCA.
HDFC BANK
HDFC Bank's long-term rating of Baa2 is underpinned by the
bank's BCA of baa2. Moody's also assumes a high probability
of government support in the event of financial distress, considering
HDFC's status as the largest private sector bank in India by assets,
its large retail deposit franchise and its importance to the national
payments system. Given that the bank's BCA is already at
baa2, this high support assumption does not result in any additional
uplift to the bank's deposit or debt ratings.
The upgrade of HDFC Bank's BCA and adjusted BCA to baa2 from baa3
reflects the bank's standalone credit strength and prudent underwriting
policies, which has translated into its superior financial performance
compared with similarly rated peers in India. The bank's
BCA also reflects its consistent and strong financial results.
Specifically, the bank's performance in terms of profitability,
capital and asset quality metrics has been better than the average for
the Indian banking system. Prior to this rating action, HDFC
Bank's BCA was constrained by India's previous sovereign rating
of Baa3 given the bank's significant exposure to the Indian government
in common with other Indian banks.
IRFC
IRFC's ratings are derived primarily from its close links with the government,
because the company is the exclusive borrowing arm of the Ministry of
Railways (MOR). IRFC raises funds for capital investment in Indian
railway infrastructure, which it then leases to the ministry.
Moody's has determined that IRFC's credit profile is inseparable
from the government's credit profile, given the control exercised
by the MOR over IRFC and its assets. Government policies and the
level of support provided by the ministry are, therefore,
the main factors in determining IRFC's funding costs, the growth
in its profitability and, ultimately, its overall credit quality.
The company's ratings are therefore in line with the foreign-currency
bond rating of the Government of India.
STATE BANK OF INDIA
SBI's long-term deposit rating of Baa2 is underpinned by the bank's
BCA of ba1 and a very high probability of government support for SBI,
in the event of stress, given the bank's status as the largest commercial
bank in India, with a sizeable 23% share of total system
deposits and 20% of system loans as of 30 September 2017.
The government owns a 57% stake in SBI and is visibly involved
in the management of the bank, including the appointment of senior
managers and setting of key performance indicators.
SBI's BCA of ba1 incorporates the stable but weak asset quality
metrics of the bank — with such metrics deteriorating significantly
after the merger with associate banks — and also because of the
economic disruptions in the last few quarters. These risks are
largely mitigated, given the bank's loss absorbing buffers;
specifically, its improving capitalization and loan loss reserves.
The bank's strong funding and liquidity profiles represent its key credit
strengths.
WHAT COULD MOVE THE RATINGS UP
EXIM India
EXIM India's foreign-currency debt rating could be upgraded,
if the sovereign's foreign-currency debt rating is upgraded and
the bank's financial metrics — including its asset quality —
improve materially. Moody's considers such a scenario highly
unlikely over the next 12-18 months, because of the challenging
economic environment.
HDFC Bank
HDFC Bank's deposit and senior unsecured ratings could be upgraded,
if India's sovereign rating is upgraded.
IRFC
IRFC's issuer rating could be upgraded, if Moody's upgrades
the sovereign's foreign currency debt rating.
SBI
SBI's ratings could be upgraded if Moody's upgrades India's
sovereign rating. The bank's BCA could experience upward
pressure if: (1) asset quality, as measured by new problem
loan formation, and profitability, as measured by returns
on assets, improve on a sustainable basis; and (2) capital
strengthens, with an improvement in its common equity Tier 1 ratio.
WHAT COULD MOVE THE RATINGS DOWN
EXIM India
The ratings could face negative pressure if: (1) there are signs
that suggest the bank's links with the government are weakening,
or its policy role becomes less important to the economy; (2) the
sovereign's foreign-currency debt rating is downgraded; or
(3) the bank's asset quality worsens materially.
HDFC Bank
Downward pressure on HDFC's BCA and ratings could arise from: (1)
a sustained deterioration in impaired loans or loan-loss reserves;
(2) a significantly higher new nonperforming loan formation rate than
that previously experienced; (3) a decline in earnings, leading
to a significant decrease in internal capital generation; or (4)
a downgrade in the sovereign's foreign-currency debt rating.
IRFC
The ratings could face negative pressure if: (1) IRFC's lease finance
business with the MOR changes in such a way that the company's credit
exposure to the MOR or its entities falls below 90% of its total
credit; (2) a breach occurs in IRFC's leverage limit of 10x;
(3) there is a change in the government's supportive stance toward IRFC;
or (4) Moody's downgrades the sovereign's foreign-currency
debt rating.
SBI
Downward pressure on SBI's standalone credit profile or its BCA will arise
if further credit losses worsen its capital position. Additionally,
any indications that support from the Government of India has diminished
or that additional capital requirements may arise beyond the government's
budgeted amount could put the bank's deposit and senior unsecured MTN
ratings under pressure.
Export-Import Bank of India, headquartered in Mumbai,
reported total assets of INR1.2 trillion (USD18 billion) at 31
March 2017.
HDFC Bank Limited, headquartered in Mumbai, reported total
assets of INR9.3 trillion (USD143 billion) at 30 September 2017.
Indian Railway Finance Corporation Limited, headquartered in New
Delhi, reported total assets of INR1.3 trillion (USD20 billion)
at 31 March 2017.
State Bank of India, headquartered in Mumbai, reported total
assets of INR32.4 trillion (USD496 billion) at 30 September 2017.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
The below contact information is provided for information purposes only.
Please see 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
the ratings.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Alka Anbarasu
Vice President - Senior Analyst
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
Client Service: 852 3551 3077
Gene Fang
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
