Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/CRISIL AA+/Stable' ratings on the existing debt instruments of HDFC Bank Ltd (HDFC Bank).

 

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.

 

In line with the relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, HDFC Bank had provided moratorium to its borrowers. Though collections declined during the initial months of the first wave, they improved subsequently. However, the second wave of the pandemic led to intermittent lockdowns and localised restrictions, which impacted collections once again. Although the impact was moderate during this phase, any adverse change in payment discipline of borrowers may lead to higher delinquencies.

 

Under the schemes announced by the RBI dated January 1, 2019, February 11, 2020, August 6, 2020, May 5, 2021, and the resolution framework for stressed accounts, HDFC Bank had 1.5% of advances restructured as on September 30, 2021. Nevertheless, the ability to manage collections and asset quality in this fiscal, is a key monitorable. Going forward, the impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration, will be closely monitored.

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

Established market position

HDFC Bank is the largest private sector bank in India, with total assets of Rs 18,44,845 crore as on September 30, 2021 (Rs 17,46,871 crore as on March 31, 2021), and a share of around 9% and 10% in system deposits and advances, respectively. Advances (net) and deposits were Rs 11,98,837 crore and Rs 14,06,343 crore, respectively, as on September 30, 2021 (Rs 11,32,837 crore and Rs 13,35,060 crore, respectively, as on March 31, 2021). Retail advances constituted 45% of total domestic advances as on September 30, 2021 (47% as on March 31, 2021). 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 September 30, 2021, the bank had 5,686 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 60,008 crore as on September 30, 2021.

 

Healthy capitalisation, backed by strong asset quality

The bank has healthy capitalisation, underpinned by sizeable networth of Rs 2,18,710 crore as September 30, 2021 (Rs 2,03,721 crore as on March 31, 2021). The Tier-I capital adequacy ratio (CAR) and overall CAR (under Basel III) were 18.7% and 20.0%, respectively, as on September 30, 2021 (17.6% and 18.8%, respectively, as on March 31, 2021). 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 accrual continues to support capitalisation.

 

Asset quality remains strong, with overall gross non-performing assets (NPAs) of 1.4% as on September 30, 2021 (1.3% as on March 31, 2021), lower than the industry average. While there was an uptick during the quarter ended June 30, 2021 because of impact of the second wave of the Covid-19 pandemic, the NPAs have come down subsequently. Low gross NPAs, along with a healthy provisioning cover of 71%, led to a strong coverage for asset-side risk, with networth coverage for net NPAs at 46 times as on September 30, 2021 (45 times as on March 31, 2021). The bank is likely to maintain better-than-industry-average asset quality over the medium term. However, delinquencies could inch up amidst the challenging macro environment currently.

 

Comfortable resource profile

As on September 30, 2021, the low-cost current and savings accounts constituted 46.8% (46.1% as on March 31, 2021) of total deposits. Additionally, the share of retail deposits remains healthy at around 82% as on September 30, 2021. Cost of funds[1] was low at 3.6% for half-year ended September 30, 2021 (on annualised basis; 4.1% for fiscal 2021), 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.

 

Robust earnings profile

The bank has maintained a net interest margin of 4.0-4.2%, consistently above the industry average. Given the higher proportion of retail segments and cost advantages that accrue from its resource profile, interest spread is likely to remain better than industry levels. Additionally, 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 2021. Annualised RoA for the half-year ended September 30, 2021, was 1.8%, impacted by limited activity on account of lockdown amidst the Covid-19 pandemic during the first quarter of fiscal 2021. CRISIL Ratings believes HDFC Bank is likely to maintain relatively high profitability, given its higher interest spreads and healthy fee income.

[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. Liquidity coverage ratio was 123.3% as on September 30, 2021. 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.

 

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:

 

• HDFC Bank has put in place a Social & Environmental Management System (SEMS) framework to assess social and environmental risks for all loan applications with a ticket size above Rs 10 crore and a tenure of five years.

 

• The bank has initiated the process of committing to Science Based Targets Initiative (SBTi). It has set a target to become carbon neutral by fiscal 2032.

 

• The targets around energy emissions and consumptions which were set in fiscal 2019 for fiscal 2022 have been met early by fiscal 2021 itself, namely 10% reduction in scope 1 and 2 emission intensity, 3% reduction in energy consumption, and 5% reduction in energy intensity. 

 

• The bank has set a gender diversity target to increase the representation of women in the workforce to 25% by fiscal 2025 (at 21% for fiscal 2021; excluding frontline workers). It has also launched various initiatives to improve representation of women in leadership positions and create a level-playing field for women employees.

 

• Majority of the board members are independent directors, none of the independent directors have tenure of more than 10 years and there is a segregation in chairperson and executive positions. The bank has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.

 

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

• Higher-than-expected deterioration in asset quality, thereby impacting earnings profile
• Decline in CAR (including CCB) with overall CAR remaining below 15% on sustained basis.

About the Bank

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.

 

For fiscal 2021, profit after tax (PAT) was Rs 31,117 crore on a total income (net of interest expense) of Rs 90,084 crore, against Rs 26,257 crore and Rs 79,447 crore, respectively, for fiscal 2020. For the half year ended September 30, 2021, PAT was Rs 16,564 crore on a total income (net of interest expense) of Rs 48,383 crore, against Rs 14,172 crore and Rs 41,610 crore, respectively, for the corresponding period of the previous fiscal.

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 Rs 15,000 crore Tier-I bonds issue (under Basel III)

• Tier-I bonds are non-convertible, perpetual, unsecured, and Basel III-compliant.
• Coupon payments shall be annual and non-cumulative.
• The bank has full discretion at all times to cancel coupon payments.
• The coupon is to be paid out of current-year profits. However, if current-year profits are insufficient, and payment of coupon may result in losses during the year, coupon payment can be made out of eligible reserves (subject to the bank meeting minimum regulatory requirements for CET1, Tier-I, and total capital ratios at all times as prescribed by the RBI, and subject to requirements of capital buffer frameworks, or credit balance in profit and loss account).
• Dividend stopper clause as defined in the guidelines is applicable.
• Loss-absorption features as per RBI's BASEL-III norms are applicable.
  • Instrument will be temporarily written down upon CET1 breaching the pre-specified trigger of 5.5% before March 31, 2019, and 6.125% on or after March 31, 2019.
  • The instrument may be permanently written off at the option of RBI on occurrence of point of non-viability (PONV) trigger.
  • The PONV trigger shall be determined by the RBI.

 

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.

Annexure - Details of Instrument(s)

*Yet to be issued