Rating Rationale
August 14, 2017 | Mumbai
HDFC Bank Limited
'CRISIL AAA/Stable' assigned to Infrastructure Bonds 
 
Rating Action
Rs.15000 Crore Infrastructure Bonds CRISIL AAA/Stable (Assigned)
Rs.5000 Crore Infrastructure Bonds CRISIL AAA/Stable (Reaffirmed)
Rs.10000 Crore Infrastructure Bonds CRISIL AAA/Stable (Reaffirmed)
Rs.10000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Reaffirmed)
Rs.10000 Crore Tier I Bonds (Under Basel III) CRISIL AA+/Stable (Reaffirmed)
Rs.5000 Crore Tier I Bonds (Under Basel III) CRISIL AA+/Stable (Reaffirmed)
Perpetual Tier I Bonds Aggregating Rs.1200 Crore (Under Basel II)  CRISIL AAA/Stable (Reaffirmed)
Upper Tier II Bonds Aggregating Rs.5200 Crore (Under Basel II) CRISIL AAA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Stable' rating to the Rs 15000 crore infrastructure bonds of HDFC Bank Ltd (HDFC Bank), and has reaffirmed its ratings on the existing debt instruments at 'CRISIL AAA/CRISIL AA+/Stable'.
 
CRISIL's rating on the Tier I bonds (Under Basel III) is as per the revised criteria for these instruments (please refer to 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'). The revision in criteria follows the change in Reserve Bank of India (RBI) guidelines broadening the eligible pool of reserves for making coupon payments on these bonds.
 
The overall ratings continue to reflect the bank's established market position, and healthy capitalisation, supported by strong asset quality, comfortable resource profile, and robust earnings performance.

Key Rating Drivers & Detailed Description
Strengths
* Established market position
HDFC Bank is among the largest private-sector banks in India, with total assets of Rs 8,95,653 crore as on June 30, 2017 (Rs 8,63,840 crore as on March 31, 2017), and a share of 6% and 8% in the system deposits and advances, respectively. Retail advances constituted 52% of total domestic advances as on June 30, 2017 (53% as on March 31, 2017). The bank is a market leader in the 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; incremental branches have been primarily in semi-urban and rural areas. As on June 30, 2017, the bank had 4727 branches.
 
* Healthy capitalisation, supported by strong asset quality
The bank has healthy capitalisation, underpinned by its sizeable networth of Rs 94,258 crore as June 30, 2017 (Rs 89,462 crore as on March 31, 2017). The tier-I capital adequacy ratio (CAR) and overall CAR (under Basel III) stood at 13.6% and 15.6%, respectively, as on June 30, 2017 (12.8% and 14.6%, respectively, as on March 31, 2017, as per Basel III). Steady internal accrual supports capitalisation.
 
Asset quality is also strong, with low gross non-performing assets (NPAs) of 1.24% as on June 30, 2017 (1.05% as on March 31, 2017), and was lower than the industry average. While there was a marginal uptick in the gross NPAs during the quarter, it was largely attributed to delinquencies in the agriculture portfolio wherein recoveries were impacted on account of borrowers' expectations of farm loan waivers. Restructured assets continues to remain low at ~0.1% of total advances as on June 30, 2017. Coupled with a healthy provisioning cover, the bank has a strong coverage for asset-side risks with networth coverage for net NPAs of 37.3 times as on June 30, 2017 (48.5 times as on March 31, 2017). The bank is likely to be able to maintain its better-than-industry-average asset quality over the medium term. 
 
* Comfortable resource profile
As on June 30, 2017, the low-cost current and savings accounts (CASAs) constituted 44% (48% as on March 31, 2017) of the total deposits. Additionally, the share of retail deposits in total deposits continues to be healthy. Cost of funds remained low at 5.4% in fiscal 2017, better than the industry average. CRISIL believes that HDFC Bank will maintain its comfortable resource profile over the medium term, despite increasing competition for low-cost deposits, given its strong and established retail liability franchise.
 
* Robust earnings profile
The net profitability margin (NPM) has consistently remained above the industry average. Given the bank's higher proportion of retail segments and the cost advantages that accrue from its resource profile, interest spread is likely to remain higher than industry levels. Additionally, a healthy fee income derived primarily from the retail business should help to maintain its higher-than-industry-average profitability over the medium term. Return on assets (RoA) was comfortable at 1.8%, while return on networth was 17.9%, during fiscal 2017. Annualised RoA for the quarter ended June 30, 2017, was 1.8%. CRISIL believes HDFC Bank will maintain its relatively high profitability, given its better interest spreads and healthy fee income.
Outlook: Stable

CRISIL believes HDFC Bank will 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. The outlook may be revised to 'Negative' in case of considerable weakening of the resource profile and asset quality, adversely affecting the earnings profile.

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 a 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.

For fiscal 2017, profit after tax (PAT) was Rs 14,550 crore on a total income (net of interest expense) of Rs 45,435 crore, against a PAT Rs 12,296 crore on a total income (net of interest expense) of Rs 38,343 crore for fiscal 2016.  For the quarter ended June 30, 2017, PAT was Rs 3,894 crore on a total income of Rs 22,185 crore, against a PAT of Rs 3,239 crore on a total income of Rs 19,323 crore, for the corresponding period of the previous fiscal.

Any other information
Under the revised criteria for Tier I bonds (under Basel III), CRISIL 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 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, estimated at 6.5% as of March 2017, with adequate CET1 capital buffer of 6.04%, as on March 31, 2017 (CET1 ratio of 12.8% compared with the regulatory minimum of 6.75%). 
 
Key features of HDFC Bank's Rs 15000 crore Tier-I Bonds Issue (under Basel III)
 

  • The 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 CET-I, Tier-I, and total capital ratios at all times as prescribed by 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 CET I 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 RBI.
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
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 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's criteria (refer to 'CRISIL's rating criteria for Basel III-compliant instruments of banks').
 
The 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 common equity Tier (CET) I, 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 point of non-viability (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 Reserve Bank of India 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) Rating assigned with outlook
INE040A08252 Upper Tier II Bonds (Under Basel II) 26-Dec-08 10.85 26-Dec-23 578 CRISIL AAA/Stable
INE040A08260 Upper Tier II Bonds (Under Basel II) 19-Feb-09 9.95 19-Feb-24 200 CRISIL AAA/Stable
INE040A08286 Upper Tier II Bonds (Under Basel II) 17-Mar-09 9.85 17-Mar-24 797 CRISIL AAA/Stable
INE040A08294 Upper Tier II Bonds (Under Basel II) 7-Jul-10 8.7 7-Jul-25 1,105.00 CRISIL AAA/Stable
INE040A08195 Upper Tier II Bonds (Under Basel II)# 5-Jan-06 8.80% 5-Jan-16 300 CRISIL AAA/Stable
INE040A08211 Upper Tier II Bonds (Under Basel II)# 5-Sep-06 9.20% 5-Sep-16 300 CRISIL AAA/Stable
INE040A08237 Upper Tier II Bonds (Under Basel II)# 20-Oct-06 8.95% 20-Oct-16 35.9 CRISIL AAA/Stable
INE040A09011 Upper Tier II Bonds (Under Basel II)# 24-May-07 10.84% 24-May-17 100 CRISIL AAA/Stable
NA Upper Tier II Bonds (Under Basel II)* NA NA NA 1,784.10 CRISIL AAA/Stable
INE040A08344 Infrastructure Bonds 31-Mar-15 8.45 31-Mar-25 3,000.00 CRISIL AAA/Stable
INE040A08351 Infrastructure Bonds 15-Dec-15 8.35 15-Dec-25 2,975.00 CRISIL AAA/Stable
INE040A08369 Infrastructure Bonds 21-Sep-16 7.95 21-Sep-26 6,700.00 CRISIL AAA/Stable
NA Infrastructure Bonds* NA NA NA 17,325.00 CRISIL AAA/Stable
INE040A08229 Tier I perpetual Bonds (Under Basel II)# 8-Sep-06 9.92 8-Sep-16 200 CRISIL AAA/Stable
NA Tier I perpetual Bonds (Under Basel II)* NA NA NA 1,000.00 CRISIL AAA/Stable
INE040A08377 Tier I Bonds (Under Basel III) 12-May-17 8.85% 12-May-22 8,000.00 CRISIL AA+/Stable
NA Tier I Bonds (Under Basel III)* NA NA NA 7,000.00 CRISIL AA+/Stable
INE040A08385 Tier II Bonds (Under Basel III) 29-Jun-17 7.56% 29-Jun-27 2,000.00 CRISIL AAA/Stable
NA Tier II Bonds (Under Basel III)* NA NA NA 8,000.00 CRISIL AAA/Stable
*Yet to be issued
#Awaiting independent confirmation of redemption before withdrawing ratings on these facility
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Infrastructure Bonds  LT  30000  CRISIL AAA/Stable    No Rating Change    No Rating Change  11-03-15  CRISIL AAA/Stable    --  -- 
Perpetual Tier-I Bonds (under Basel II)  LT  1200  CRISIL AAA/Stable    No Rating Change  23-03-16  CRISIL AAA/Stable    No Rating Change    No Rating Change  CRISIL AAA/Stable 
Tier I Bonds (Under Basel III)  LT  15000  CRISIL AA+/Stable    No Rating Change  20-12-16  CRISIL AA+/Stable    --    --  -- 
Tier II Bonds (Under Basel III)  LT  10000  CRISIL AAA/Stable  23-06-17  CRISIL AAA/Stable    --    --    --  -- 
Upper Tier-II Bonds (under Basel II)  LT  5200  CRISIL AAA/Stable    No Rating Change  23-03-16  CRISIL AAA/Stable    No Rating Change    No Rating Change  CRISIL AAA/Stable 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
 
Links to related criteria
Rating Criteria for Banks and Financial Institutions
Rating criteria for Basel III - compliant non-equity capital instruments

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