Moody’s Ratings on Tuesday said they have affirmed HDFC Bank Limited’s Baa3 long-term deposit ratings and baa3 Baseline Credit Assessment (BCA). The rating agency also maintained the stable outlook on the lender.
The affirmation of HDFC Bank‘s ratings with a stable outlook reflects India’s favorable operating environment, which offers the bank an opportunity to further strengthen its market position, it said.
“The bank’s diversified loan portfolio and above-industry-average profitability will support its internal capital generation and strong solvency,” Moody’s said. “Its strong retail franchise, access to low-cost deposits and sufficient holdings of liquid government securities will support its funding and liquidity.” HDFC Bank’s annualized return on assets for the quarter ended March 2024 was 1.8%, compared with the industry average of 1.3%.
The bank’s profitability has declined post-merger with its parent HDFC Limited last year because of HDFC Limited’s lower NIMs as a mortgage financier with lower asset yields and higher funding costs.
Also, costs associated with meeting the Reserve Bank of India’s liquidity norms, including the cash reserve ratio and statutory liquidity ratio, have marginally reduced its profitability.
“Its near-term margins will likely be rangebound because of competition on the lending and deposit side,” Moody’s said. “Its profitability will improve over the next few years as it replaces high-cost wholesale funding with deposits and recoups the share of low-cost current and savings accounts in its total deposit base. “
HDFC Bank’s asset quality will remain broadly stable, supported by India’s healthy economic momentum and the bank’s diversified loan portfolio and strong risk management, the rating agency said.
Banks’ Q1 profits face headwinds: Emkay Global predicts a sluggish 4% growth in pre-provisioning operating profits for the June quarter. This slowdown, affecting private lenders most, is attributed to shrinking margins and rising operational costs.
The private lender’s gross and net nonperforming loan (NPL) ratios were 1.27% and 0.34%, respectively, lower than the systemwide gross NPL ratio of 2.8% as of 31 March 2024.“The bank will likely maintain adequate internal accruals to maintain its solvency,” Moody’s said. Its consolidated core equity tier 1 ratio of 16.1% as of the end of March 2024 will provide a comfortable cushion against unexpected risks. HDFC Bank’s capitalization is the highest among the Indian banks we rate.”
Moody’s also said that HDFC Bank will continue to have stable funding and liquidity, with most of its funding coming from retail deposits, including low-cost current and savings account deposits.
Moody’s also said that an upgrade to HDFC Bank’s deposit ratings and baseline credit assessment is unlikely because they are at the same level as India’s sovereign rating.
“We would downgrade HDFC Bank’s ratings if India’s sovereign rating is downgraded or if the BCA is downgraded by more than one notch,” the rating agency said. “A downgrade of HDFC Bank’s BCA is likely if the bank’s financial fundamentals deteriorate significantly, for instance if its tangible common equity/risk-weighted assets decline to below 10.5% or if its asset quality weakens materially.”
