Lanka Rating Agency assigns BBB+P2 financial institution ratings to HDFC Bank
Thursday, 28 August 2014 00:00
Lanka Rating Agency (LRA) has upgraded financial institution ratings of Housing Development Finance Corporation Bank (HDFC) to BBB+ and P2 from BBB and P3. The long term ratings will continue to carry a stable outlook.
Concurrently long-term issue ratings of Rs. 2 billion secured senior listed debenture (20132018) has been upgraded to BBB+ from BBB. Meanwhile, the ratings are upheld by the Stateâ€™s majority ownership of the bank and the ongoing support of the Government of Sri Lanka as well as a good capital cushioning level. On the other hand, the ratings are tempered by HDFCâ€™s below-average asset quality and its small stature.
HDFC is a licensed specialised bank under the Housing Development Finance Corporation Act (No. 7 of 1997) and falls under the purview of the Ministry of Finance and Planning. The Government remains its largest shareholder with a 49.73% stake through the National Housing Development Authority (NHDA).
Notably, HDFC is one of only two LSBs authorised to provide housing loans backed by the borrowerâ€™s Employee Provident Fund (EPF) savings.
The financial flexibility that the bank derives from the State is reflected by the EPFâ€™s annual reimbursement of all dues on EPF-backed loans in arrears for over three months. This together with the majority shareholding of the Government and its vision of providing affordable housing to the masses underpins HDFCâ€™s systemic importance to the Government.
In view of this, LRA opines that State support would be forthcoming should the need arise, albeit to a lesser extent compared to larger state-owned banks which are deemed to be more systemically important.
Asset quality is deemed below average, owing to its high gross NPL ratio, largely stemming from mortgage-backed housing loans which make up the bulk of its loan book and relatively slow recoverability of these loans is also viewed with concern.
The bankâ€™s overall gross non-performing loans ratio clocked in at 19.64% as at end-FYE 31 December 2013 (end-FY Dec 2013). The ratio was, however, skewed by the high default rate of EPF-backed loans, which bear minimal credit risk as all dues on loans in arrears for over three months are reimbursed by the EPF annually.
The bankâ€™s gross NPL ratio, excluding the latter, stood at 7.13% as at end-FY Dec 2013 (end-FY Dec 2012 7.86%), moderating slightly to 7.84% as at end-June 2014 with new NPLs. Given its aggressive expansion plans compared to, our concerns hinge on the lack of seasonality in its loan book which may give rise to NPLs.
HDFCâ€™s performance enhanced in fiscal 2013 by an improved core performance, resulting in its pre-tax profit improving to Rs. 231.37 million from Rs. 125.85 million a year earlier. The bankâ€™s per tax profits further increased to Rs. 310.56 million 2H- December 2014.
Meanwhile, HDFCâ€™s net interest margin winded to 4.46% in fiscal 2013 (fiscal 2012 4.16%) owing to the Bankâ€™s shifts to higher yielding products, the yields expanded further with the deposits repricing slower amid a lower interest environment in 2HDecember 2014 with its NIMs further broadening to 6.08%.
Elsewhere, its cost to income ratio clocked in at 76.16% in fiscal 2013, (Fiscal 2012 86.44%) and further improving to 58.96%. Nevertheless, with its intention to ramp up lending activity focusing on better-yielding products, LRA expects the bankâ€™s profitability to improve over the short to medium term.
Presently, HDFCâ€™s funding needs are largely fulfilled by more stable customer deposits, which made up 70.73% of its funding mix as at end-December 2013. The broader deposit base is reflected in the bankâ€™s diminished loan to deposit ratio of 106.34% as at the same date, compared to 110.85% as at end-FY Dec 2012. However, LRA notes that there has been a slight increase in the bankâ€™s borrowings due to the debenture issue, which has slightly altered the funding mix.
On the other hand, LRA understands that HDFCâ€™s exposure to liquidity risk is somewhat greater than that of other LSBs, given the longer tenure of housing loans that are funded by much shorter-term customer deposits; this has led to considerable Asset Liability Maturity Mismatch (ALMM) in its short- and medium-term maturities. The bankâ€™s statutory liquid asset ratio stood at 28.74%, well above its banking peers and regulatory requirements as at end-FY Dec 2013.
HDFCâ€™s capitalisation is deemed good, underscored by better capital-adequacy ratios. Its tier-1 and overall RWCARs reduced to 17.74% and 18.29%, respectively, as at end-December 2013 (end-December 2012 23.75% and 24.41%) due to increased loan growth. The ratios remained relatively unchanged at 15.43% and 16.00%, respectively as at end-June 2014.
Going forward, the bankâ€™s capital adequacy is expected to moderate with the expected loan growth. We acknowledge that its capital-adequacy levels are also upheld by the zero-risk weighted EPF-backed loans that made up around 50% of its entire loan portfolio.