Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ ratings to Rs 12000 crore tier II bonds (under Basel III), of HDFC Bank Limited (HDFC Bank). It has also reaffirmed its 'CRISIL AAA/CRISIL AA+/Stable' ratings on the existing debt instruments.

 

CRISIL Ratings has also withdrawn its rating on Tier I bonds (under Basel III) of Rs 8,000 crore (See annexure 'Details of Rating Withdrawn') as CRISIL Ratings has received independent confirmation that these instruments have been redeemed. The withdrawal is in line with CRISIL Ratings withdrawal policy.

 

CRISIL Ratings has taken note of the composite scheme of amalgamation of HDFC into HDFC Bank Ltd (HDFC Bank), as announced by both the companies on April 4, 2022. The scheme has received, so far, ‘no objection’ from stock exchanges (BSE & NSE), Pension Fund Regulatory and Development Authority (PFRDA), Reserve Bank of India (RBI) and approval from the Competition Commission of India (CCI) and now awaits various other regulatory, creditors and shareholders’ approval. CRISIL Ratings will continue to monitor the progress on the announced amalgamation.

 

CRISIL Ratings believe that this amalgamation would lead to further strengthening of the market position of the Bank, wherein the net total advances for the combined entity would be Rs 20.7 lakh crore as against standalone advances of Rs 14.8 lakh crore as on September 30, 2022. The ability to directly undertake the home loan business would also enhance the retail product offering of the bank. Moreover, with a sizable, secured retail loan book coming in, the share of retail (and within that secured) segment in the overall advances of the bank would increase; as on September 30, 2022 retail advances form 39% of net advances, which would be higher at ~50[1]% for the merged entity as on same date. In turn, the portfolio of HDFC will enjoy better spreads aided by lower cost of borrowings of the bank. Further, onboarding the strong customer base of HDFC would provide cross sell opportunities with a much more comprehensive product suit to an enhanced customer base.

 

While initial integration related to systems and processes, branch rationalization, adherence to required cash reserve ratio, statutory liquidity ratio and priority sector lending norms, initial dip in share of low-cost CASA deposits etc, may take some time, the same should be normalized over medium to long term and the amalgamation should overall be a positive step ahead.

 

The ratings on the debt instruments on HDFC Bank remain unaffected by this development. Further, the importance of and the expectation of strong support to the group entities from HDFC Bank, on an ongoing basis and in times of distress, continues. CRISIL Ratings will continue to monitor the progress on the announced amalgamation.

 

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.

 

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 0.5% of advances restructured as on September 30, 2022.

[1] Based on CRISIL estimates

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 22,27,893 crore as on September 30, 2022 (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 14,79,873 crore and Rs 16,73,408 crore, respectively, as on September 30, 2022 (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 September 30, 2022 (43% 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 September 30, 2022, the bank had 6,499 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 63,112 crore as on September 30, 2022.

 

• Healthy capitalisation, backed by strong asset quality

The bank has healthy capitalisation, underpinned by sizeable networth of Rs 2,46,997 crore as September 30, 2022 (Rs 2,33,614 crore as on March 31, 2022). The overall CAR (under Basel III) was 16.92% as on September 30, 2022 (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 accrual continues to support capitalisation.

 

Asset quality remains strong, with overall gross non-performing assets (NPAs) of 1.2% as on September 30, 2022 (1.2% as on March 31, 2022), lower than the industry average. Low gross NPAs, along with a healthy provisioning cover of 73%, led to a strong coverage for asset-side risk, with networth coverage for net NPAs at 51 times as on September 30, 2022 (55 times as on March 31, 2022). 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. 

 

• Comfortable resource profile

As on September 30, 2022, the low-cost current and savings accounts constituted 45.4% (48.2% as on March 31, 2022) of total deposits. Additionally, the share of retail deposits remains healthy at around 83% as on September 30, 2022. Cost of funds[1] was low at 3.7% for six months ended September 30, 2022 (on annualised basis; 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.

 

• Robust earnings profile

The bank has maintained a net interest margin of ~4.0%, 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 2022. Annualised RoA for the six months ended September 30, 2022, was 1.8%. 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 118% as on September 30, 2022. 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 2022, profit after tax (PAT) was Rs 36,961crore on a total income (net of interest expense) of Rs 1,01,519 crore, against Rs 31,117 crore and Rs 90,084 crore, respectively, for fiscal 2021. For the six months ended September 30, 2022, PAT was Rs 19,802 crore on a total income (net of interest expense) of Rs 54,486 crore, against Rs 16,564 crore and Rs 48,383 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

As on / For the six months ended September 30,		Standalone		Consolidated
		2022	2021	2022	2021
Total assets	Rs Crore	22,27,893	18,44,845	22,83,577	18,97,520
Total income (net of interest expense)	Rs Crore	54,486	48,383	58,715	51,736
PAT	Rs Crore	19,802	16,564	20,779	17,060
Gross NPA	%	1.2	1.4	1.4	1.6
Overall CAR	%	16.9	20.0	16.8	19.6
RoA	%	1.8	1.8	1.9%	1.8%

 

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 20,000 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)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.cr)	Complexity Level	Rating assigned with outlook
INE040A08344	Infrastructure Bonds	31-Mar-15	8.45%	31-Mar-25	3,000.00	Simple	CRISIL AAA/Stable
INE040A08351	Infrastructure Bonds	15-Dec-15	8.35%	15-Dec-25	2,975.00	Simple	CRISIL AAA/Stable
INE040A08369	Infrastructure Bonds	21-Sep-16	7.95%	21-Sep-26	6,700.00	Simple	CRISIL AAA/Stable
INE040A08393	Infrastructure Bonds	28-Dec-18	8.44%	28-Dec-28	6,000.00	Simple	CRISIL AAA/Stable
INE040A08401	Infrastructure Bonds	27-Sep-21	6.44%	27-Sep-28	5,000.00	Simple	CRISIL AAA/Stable
NA	Infrastructure Bonds*	NA	NA	NA	11,325.00	Simple	CRISIL AAA/Stable
NA	Tier I Bonds (Under Basel III)*	NA	NA	NA	9,000.00	Highly complex	CRISIL AA+/Stable
INE040A08419	Tier I Bonds (Under Basel III)	08-Sep-22	7.84%	Perpetual	3,000.00	Highly complex	CRISIL AA+/Stable
INE040A08385	Tier II Bonds (Under Basel III)	29-Jun-17	7.56%	29-Jun-27	2,000.00	Complex	CRISIL AAA/Stable
NA	Tier II Bonds (Under Basel III)*	NA	NA	NA	8,000.00	Complex	CRISIL AAA/Stable
NA	Tier II Bonds (Under Basel III)*	NA	NA	NA	12,000.00	Complex	CRISIL AAA/Stable

*Yet to be issued

 

Annexure - Details of Rating Withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. Crore)	Complexity Levels
INE040A08377	Tier I Bonds (Under Basel III)	12-May-17	8.85%	Perpetual	8,000.00	Highly complex

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
HDFC Securities Ltd	Proportionate	Subsidiary
HDB Financial Services Ltd	Proportionate	Subsidiary