Rating Rationale
August 29, 2018 | Mumbai
HDFC Bank Limited
Ratings Reaffirmed
Rating Action
Infrastructure Bonds Aggregating Rs.30000 Crore CRISIL AAA/Stable (Reaffirmed)
Upper Tier II Bonds (Under Basel II) Aggregating Rs.2680 Crore CRISIL AAA/Stable (Reaffirmed)
Tier I bonds (Under Basel III) Aggregating Rs.15000 Crore CRISIL AA+/Stable (Reaffirmed)
Rs.10000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Reaffirmed)
Upper Tier II bonds aggregating Rs.2520 Crore (Under Basel II) CRISIL AAA/Stable (Withdrawn)
Perpetual Tier I Bonds Aggregating Rs.1200 Crore (Under Basel II)  CRISIL AAA/Stable (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has withdrawn its rating on the Rs 2520 crore Upper Tier II bonds (Under Basel II) and Rs 1200 crore Tier I perpetual bonds (under Basel II) of HDFC Bank Ltd (HDFC Bank), since the outstanding against the same was nil. The ratings on the existing debt instrument have been reaffirmed at 'CRISIL AAA/CRISIL AA+/Stable'.
CRISIL's rating on the Tier I bonds (Under Basel III) is as per the criteria for these instruments (please refer to 'CRISIL's rating criteria for BASEL III-compliant instruments of banks').  
The 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
* Established market position
HDFC Bank is among the largest private sector banks in India with total assets of Rs 10,80,409 crore as on June 30, 2018 (Rs 10,63,934 crore as on March 31, 2018), and a share of 7% and 8% in system deposits and advances, respectively. The advances and deposits were Rs 7,08,649 crore and Rs 8,05,785 crore, respectively, as on June 30, 2018 (Rs 6,58,333 crore and Rs 7,88,771 crore, respectively, as on March 31, 2018). Retail advances constituted 54% of total domestic advances as on June 30, 2018 (55% as on March 31, 2018). 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, 2018, the bank had 4804 branches.
* Healthy capitalisation, backed by strong asset quality
The bank has healthy capitalisation, underpinned by its sizeable networth of Rs 1,07,670 crore as June 30, 2018 (Rs 1,06,295 crore as on March 31, 2018). The tier-I capital adequacy ratio (CAR) and overall CAR (under Basel III) were 13.1% and 14.6%, respectively, as on June 30, 2018 (13.2% and 14.8%, respectively, as on March 31, 2018). The bank raised Rs 23,651 crore in fiscal 2019, which is expected to further strengthen capital position. Also, steady internal accrual continue to support capitalisation.
Asset quality is also strong, with low gross non-performing assets (NPAs) of 1.33% as on June 30, 2018 (1.31% as on March 31, 2018), which was lower than the industry average. While gross NPAs rose marginally during fiscal 2018, this was mainly due to delinquencies in the agriculture portfolio wherein recoveries were impacted on account of borrowers' expectations of farm loan waivers. Restructured assets remained low at around 0.1% of total advances as on June 30, 2018. This, along with a healthy provisioning cover, led to a strong coverage for asset-side risks with networth coverage for net NPAs at 37.0 times as on June 30, 2018 (40.9 times as on March 31, 2018). The bank is likely to maintain better-than-industry-average asset quality over the medium term. 
* Comfortable resource profile
As on June 30, 2018, the low-cost current and savings accounts constituted 41.7% (43.5% as on March 31, 2018) of total deposits. Additionally, the share of retail deposits continues to be healthy at around 74% as on March 31, 2018. Cost of funds remained low at 4.9% for fiscal 2018, better than industry average. Despite increasing competition for low-cost deposits, HDFC Bank is expected to maintain its comfortable resource profile over the medium term because of its strong and established retail liability franchise.
* Robust earnings profile
Net profitability margin has consistently remained above industry average. Given the bank's higher proportion of retail segments and 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 maintain profitability over the medium term. Return on assets (RoA) was comfortable at 1.8%, while return on networth was 17.9%, during fiscal 2018. Annualised RoA for the quarter ended June 30, 2018, was 1.7%. 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 earnings profile. The outlook may be revised to 'Negative' in case of considerable weakening of resource profile and asset quality adversely affecting 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 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 2018, profit after tax (PAT) was Rs 17,487 crore on a total income (net of interest expense) of Rs 55,315 crore, against Rs 14,550 crore and Rs 45,435 crore, respectively, for fiscal 2017. For the quarter ended June 30, 2018, PAT was Rs 4,601 crore on a total income (net of interest expense) of Rs 14,632 crore, against Rs 3,894 crore and Rs 12,887 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators
As on / For the quarter ended June 30,   2018 2017
Total assets Rs Crore 10,80,409 8,95,653
Total income (net of interest expense) Rs Crore 14,632 12,887
Profit after tax Rs Crore 4,601 3,894
Gross NPA % 1.3 1.2
Overall capital adequacy ratio % 14.6 15.6
Return on Assets % 1.7 1.8

Any other information
As per the criteria for tier-I capital (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 6.8% as of March 2018, with adequate CET1 capital buffer of 4.87% (CET1 ratio of 12.25% compared with the regulatory minimum of 7.38%).
Key features of HDFC Bank's Rs 15,000 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 CET1, Tier-I, and total capital ratios at all times as prescribed by the Reserve Bank of India [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 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').
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) Rating assigned with outlook
INE040A08252 Upper Tier 2 Bonds (Under Basel II) 26-Dec-08 10.85 26-Dec-23 578 CRISIL AAA/Stable
INE040A08260 Upper Tier 2 Bonds (Under Basel II) 19-Feb-09 9.95 19-Feb-24 200 CRISIL AAA/Stable
INE040A08286 Upper Tier 2 Bonds (Under Basel II) 17-Mar-09 9.85 17-Mar-24 797 CRISIL AAA/Stable
INE040A08294 Upper Tier 2 Bonds (Under Basel II) 7-Jul-10 8.7 7-Jul-25 1,105.00 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
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
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Infrastructure Bonds  LT  12675.00
CRISIL AAA/Stable      14-08-17  CRISIL AAA/Stable  20-12-16  CRISIL AAA/Stable  11-03-15  CRISIL AAA/Stable  -- 
            23-06-17  CRISIL AAA/Stable  23-03-16  CRISIL AAA/Stable       
            03-05-17  CRISIL AAA/Stable           
Perpetual Tier I Bonds  LT                  11-03-15  CRISIL AAA/Stable  CRISIL AAA/Stable 
Perpetual Tier-I Bonds (under Basel II)  LT  0.00
Withdrawn     14-08-17  CRISIL AAA/Stable  20-12-16  CRISIL AAA/Stable    --  -- 
            23-06-17  CRISIL AAA/Stable  23-03-16  CRISIL AAA/Stable       
            03-05-17  CRISIL AAA/Stable           
Tier I Bonds (Under Basel III)  LT  8000.00
CRISIL AA+/Stable      14-08-17  CRISIL AA+/Stable  20-12-16  CRISIL AA+/Stable    --  -- 
            23-06-17  CRISIL AA+/Stable           
            03-05-17  CRISIL AA+/Stable           
Tier II Bonds (Under Basel III)  LT  2000.00
CRISIL AAA/Stable      14-08-17  CRISIL AAA/Stable    --    --  -- 
            23-06-17  CRISIL AAA/Stable           
Upper Tier II Bonds  LT                  11-03-15  CRISIL AAA/Stable  CRISIL AAA/Stable 
Upper Tier-II Bonds (under Basel II)  LT  2680.00
CRISIL AAA/Stable      14-08-17  CRISIL AAA/Stable  20-12-16  CRISIL AAA/Stable    --  -- 
            23-06-17  CRISIL AAA/Stable  23-03-16  CRISIL AAA/Stable       
            03-05-17  CRISIL AAA/Stable           
All amounts are in Rs.Cr.
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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