HDFC Bank Limited Ratings on debt instruments transferred from Housing Development Finance Corporation Limited (HDFC) assigned at ‘CRISIL AAA/Stable/CRISIL A1+’; Existing ratings reaffirmed
Rating Action
*With warrants &Transferred from erstwhile Housing Development Finance Corporation Limited (HDFC) Note: All the transferred instruments from HDFC to HDFC Bank Limited are unsecured in nature Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings to the debt instruments transferred from Housing Development Finance Corporation Limited (HDFC) to HDFC Bank Limited (HDFC Bank) and reaffirmed its 'CRISIL AAA/CRISIL AA+/Stable' ratings on the existing debt instruments of HDFC Bank.
The rating follows the amalgamation of HDFC, with and into HDFC Bank. On June 30,2023, the Board of Directors of HDFC Bank noted the receipt of the certified copy of the order from the National Company Law Tribunal (NCLT) sanctioning the scheme. The said order was filed by HDFC Investments, HDFC Holdings, HDFC and HDFC Bank with the Registrar of the Companies (RoC) on July 1, 2023, which was approved as the ‘effective date’ of the scheme.
The following outcomes arise from the scheme,
Post consummation of the amalgamation, HDFC Bank has further strengthened its market position with total gross advances[1] of around Rs 23 Lakh crore as of March 31, 2023, on proforma basis. The amalgamation also enables higher potential for cross sell within customer segments.
CRISIL Ratings believes asset quality and capital adequacy are expected to remain solid post amalgamation. However, earnings profile may be impacted to some extent, due to higher overall cost of funds, given that share of current and savings account (CASA) deposits will see some decline. However, the impact on return on assets (ROA) may be partially offset by expectation of modest credit costs on the overall book given the addition of a largely secured mortgage portfolio.
CRISIL Ratings has noted certain forbearances/ clarifications provided by Reserve Bank of India (RBI) to HDFC Bank in the context of the amalgamation. With regards priority sector lending, Adjusted Net Bank Credit is to be calculated considering one-third of the outstanding loans of HDFC as on July 1, 2023, Effective Date for the first year. The remaining two-thirds of the portfolio of HDFC shall be considered over a period of next two years equally.
There are no exemptions granted on maintenance of Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and Liquidity coverage ratio (LCR) and thus HDFC Bank shall continue to comply with extant requirements on liquidity norms from the Effective Date without exceptions. Both HDFC and HDFC Bank have made efforts to significantly increase their government bond portfolio during the last fiscal in order to ensure adherence to liquidity norms ahead of the amalgamation.
CRISIL ratings will continue to monitor the progress in this regard.
While the impact of the integration related to aspects like systems and processes, branch rationalization, adherence to required cash reserve ratio, statutory liquidity ratio, priority sector lending norms and initial dip in share of low-cost CASA deposits, will need to be monitored; the amalgamation per se is expected to be value accretive over the long term given the addition of a robust mortgage finance business and the cross-sell opportunities that can be leveraged.
The ratings continue to reflect the established market position of the bank, and its healthy capitalisation, supported by strong asset quality, comfortable resource profile and robust earnings performance. [1] CRISIL Ratings estimate of amalgamated entity on proforma basis |
Analytical Approach CRISIL Ratings has combined the financial and business risk profiles of HDFC Bank and its subsidiaries. CRISIL Ratings expects continued managerial and financial support to these subsidiaries and associates, given their strategic importance, majority shareholding and shared brand name.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
HDFC Bank is the largest private sector bank in India, with total assets of Rs 24,66,081crore as on March 31, 2023 (Rs 20,68,535 crore as on March 31, 2022), and a share of around 9% and 10% in system deposits and advances, respectively. Advances (net) and deposits were Rs 16,00,586 crore and Rs 18,83,395 crore, respectively, as on March 31, 2023 (Rs 13,68,821 crore and Rs 15,59,217 crore, respectively, as on March 31, 2022). Retail advances (including agriculture) constituted 44% of total advances as on March 31, 2023 (44% as on March 31, 2022). The bank is a market leader in non-mortgage retail asset segments such as commercial vehicles and car financing. It has also been expanding its geographical reach over the past few years; and has set up new branches primarily in semi-urban and rural areas. As on March 31, 2023, the bank had 7,821 branches.
The bank is present in the broking business via HDFC Securities Ltd, which also operates as a third-party distributor of mutual fund products, insurance, initial public offerings, fixed deposits, bonds and non-convertible debentures. HDB Financial Services Ltd is a non-deposit-taking non-banking financial company, offering loans against property, commercial vehicle and construction equipment loans, and small and medium-sized enterprises financing; it had a loan book of Rs 70,031 crore as on March 31, 2023.
HDFC Limited has remained a market leader in the home loan segment through the years, despite intensified competition from entry of new players and greater push from banks and housing finance companies towards this segment. As on March 31, 2023, its loan book stood at Rs 6,20,507 crore, a growth of 9% over the previous fiscal. AUM has grown by 11% Y-o-Y and stood at Rs 7,23,988 crores as on March 31, 2023, from Rs 6,53,902 crore as on March 31, 2022. AUM breakup as on March 31, 2023, comprised 83% individual loans, with remaining being non-individual loans (~7% construction financing, ~6% LRD and ~4% corporate loans).
Post consummation of amalgamation, HDFC Bank is now present in asset management, life insurance, general insurance, educational loans and investment advisory businesses through subsidiaries.
The bank has healthy capitalisation, underpinned by sizeable net-worth of Rs 2,80,199 crore as March 31, 2023 (Rs 2,40,093 crore as on March 31, 2022). The overall CAR (under Basel III) was 19.26% as on March 31, 2023 (18.9% as on March 31, 2022). The capital position was further strengthened, with the bank raising Rs 23,651 crore as equity in fiscal 2019. Further, the bank raised USD 1 billion additional Tier I bonds (under Basel III) from overseas investors in August 2021. Also, steady internal accruals continue to support capitalisation.
Asset quality of the Bank remains strong, with overall gross non-performing assets (NPAs) of 1.1% as on March 31, 2023 (1.2% as on March 31, 2022), lower than the industry average. Low gross NPAs, along with a healthy provisioning cover of 76%, led to a strong coverage for asset-side risk, with net-worth coverage for net NPAs at 64 times as on March 31, 2023 (54 times as on March 31, 2022). It had restructuring outstanding at 0.31% as on March 31, 2023. While the performance of the restructured portfolio needs to be seen, the bank is likely to maintain better-than-industry-average asset quality over the medium term.
Capital adequacy for HDFC also remains strong with a net-worth (standalone) of Rs. 1,33,985 crore and Tier-I and overall CAR at 23.8% and 24.3%, respectively, as on March 31, 2023. (Rs 120251 crore, 22.2% and 22.8%, respectively, as on March 31, 2022). Adjusted gearing ratio remains in similar range and stood at 5 times as on March 31, 2023 as against 4.9 times as on March 31, 2022.
HDFC continues to maintain healthy asset quality, gross stage 3 assets at 1.44% as on March 31, 2023, down from 2.27% as on March 31, 2022. In terms of gross NPAs, these stood at 1.18% as on March 31, 2023, lower compared to 1.91% March 31, 2022. As on March 31, 2023, loans restructured under the RBI’s Resolution Framework for COVID-19 Related Stress (OTR 1 & 2.0) was equivalent to 0.6% of the loan book (as at Sep 30, 2021: 1.4% of the loan book).
As on March 31, 2023, the Bank’s low-cost current and savings accounts constituted 44.4% (48.2% as on March 31, 2022) of total deposits. Additionally, the share of retail deposits remains healthy at around 83% as on March 31, 2023. Cost of funds[1] was low at 3.9% for period ended March 31, 2023 (3.5% for fiscal 2022), better than the industry average.
Despite the increasing competition among banks for low-cost deposits, HDFC Bank is expected to maintain its comfortable resource profile over the medium term driven by its strong and established retail liability franchise. Even as the addition of HDFC’s liabilities would lower share of low-cost deposits in the overall mix (the estimated CASA of amalgamated entity is around 41% as on March 31, 2023), the Bank is expected to gradually shore up their CASA base over the medium term.
As on March 31, 2023, HDFC’s borrowings stood at Rs 5,68,222 crore and the mix primarily comprises market borrowings (45% of total borrowings as on March 31, 2023) and fixed deposits (27%). Term loans (including external commercial borrowings [ECBs]) accounted for 28% of HDFC’s borrowings as on the same date.
The bank has maintained a net interest margin of ~4.0%, consistently above the industry average. Given the higher proportion of retail business and cost advantages that accrue from its resource profile, interest spread has remained better than industry levels for the bank. There is an expected impact on NIMs in the near term due to increase in cost of funds with addition of HDFC’s borrowings. Aside from interest income, a healthy fee income, derived primarily from the retail business, should support profitability over the medium term. Return on assets[2] (RoA) was comfortable at 1.9% during fiscal 2023 (1.9% for fiscal 2022). CRISIL Ratings believes HDFC Bank is likely to maintain good profitability overall, even after absorbing the impact of the amalgamation on its NIMs.
HDFC reported PAT of Rs 16329 crore on a total income (net of interest expense) of Rs 24,229 crore in fiscal 2023 (Rs 13742 crore and Rs 21042, respectively, in previous fiscal). Profitability was supported by higher net interest income in fiscal 2023. RoA stood at 2.4% in fiscal 2023 as compared to 2.3% in previous fiscal [1] Cost of funds is calculated as: Interest expense for the period/average of borrowings and deposits at the start and end of the period [2] Return on assets is calculated as: PAT for the period/average of total assets at the start and end of the period |
Liquidity: Superior Liquidity remains superior, supported by a sizeable retail deposit base that forms a significant part of the total deposits. LCR stood at 116% for the Bank as on March 31, 2023, and 192% for HDFC as on June 30, 2023. Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the RBI, access to the call money market and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.
The SLR for HDFC Bank stood at 24-25% as on March 31, 2023, against the minimum requirement of 18%. HDFC Limited had a lower SLR requirement of 13% (applicable for NBFC HFCs). During the year, the Bank grew its investment book by 13.5% yoy to Rs. 5.17 lakh crore of which 86% comprises government securities. HDFC Limited also increased their overall government securities book in the last fiscal to Rs 1,12,400 crore. These measures will enable the Bank to continue to adhere to statutory liquidity norms from the effective date of the merger, as per regulatory directives.
ESG Profile CRISIL Ratings believes that HDFC Bank Ltd’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.
HDFC Bank has an ongoing focus on strengthening various aspects of its ESG profile.
HDFC Bank’s key ESG highlights:
There is growing importance of ESG among investors and lenders. HDFC Bank’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes HDFC Bank should maintain its leading market position in the retail asset segment and its healthy capitalisation, while the strong resource profile will continue to support the earnings profile. |
Rating Sensitivity factors Downward factors
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About the Company Incorporated in 1995, HDFC Bank offers a wide range of banking services, including commercial and transactional banking in the wholesale segment, and branch banking in the retail segment, with focus on car finance, business banking loans, commercial vehicle finance, credit cards, and personal loans. The bank acquired Centurion Bank of Punjab in May 2008. It has three overseas branches, one each in Dubai, Bahrain, and Hong Kong, as well as two representative offices, one each in the United Arab Emirates and Kenya. Further, the bank also has an Offshore Banking Unit at International Financial Service Centre (IFSC), at GIFT City, Gandhinagar in Gujarat.
HDFC, a housing finance company, was incorporated in 1977; its initial shareholders included International Finance Corporation, Washington, and the Aga Khan Trust. As on March 31, 2023, AUM stood at Rs 7,23,988 crore of which 83% consisted of loans to individuals. Loans to corporate entities, lease rental discounting, and construction finance accounted for 4%, 6% and 7%, respectively. |
Key Financial Indicators
HDFC
HDFC Bank – Post Amalgamation (CRISIL Ratings estimates)
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Any other information: As per the criteria for Tier-I capital (under Basel III), CRISIL Ratings evaluates the bank’s i) reserves position (adjusted for any medium-term stress in profitability) and ii) cushion over regulatory minimum common equity tier 1 (CET1; including CCB) capital ratios. CRISIL Ratings also evaluates the bank’s demonstrated track record and management philosophy regarding maintaining sufficient CET1 capital cushion above the minimum regulatory requirement. HDFC Bank’s eligible reserves to total assets was comfortable, with adequate CET1 capital buffer.
Key features of HDFC Bank's Tier-I bonds issue (under Basel III)
Note on Tier-I instruments (under Basel III) The distinguishing features of non-equity Tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity Tier-I instruments over those of Tier-II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the bank's corporate credit rating. The rating on the bank's tier-I bonds (under Basel III) is lower by one notch from the bank's corporate credit rating, in line with CRISIL Ratings' criteria (refer to 'CRISIL Ratings’ rating criteria for Basel III-compliant instruments of banks').
Factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III), resulting in non-payment of coupon, include: i) the bank exercising coupon discretion, ii) inadequacy of eligible reserves to honour coupon payment if the bank reports low profit or a loss, or iii) the bank breaching the minimum regulatory CETI, including counter cyclical buffer, ratio. Moreover, given their additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher than that for Tier-II instruments.
Note on Tier-II Instruments (under Basel III) The distinguishing feature of Tier-II capital instruments under Basel III is the existence of PONV trigger, occurrence of which may result in loss of principal to the investor and hence, to default on the instrument by the issuer. According to Basel III guidelines, PONV trigger will be determined by the RBI and is a remote possibility in the Indian context, given robust regulatory and supervisory framework and systemic importance of the banking sector. Inherent risk associated with the PONV feature is adequately factored into the rating on the instrument. |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*yet to be issued **with warrants &transferred from HDFC Limited |
Annexure – List of entities consolidated
*proposed divestment of 90% stake announced # RBI has permitted to continue to hold HDFC Limited’s stake for a period of two years from July 01, 2023 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
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