Rating Rationale
August 31, 2020 | Mumbai
HDFC Bank Limited
Ratings Reaffirmed; Upper Tier II Bonds Withdrawn 
 
Rating Action
Infrastructure Bonds Aggregating Rs.30000 Crore CRISIL AAA/Stable (Reaffirmed)
Rs.10000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Stable (Reaffirmed)
Tier I bonds (Under Basel III) Aggregating Rs.15000 Crore CRISIL AA+/Stable (Reaffirmed)
Upper Tier II Bonds (Under Basel II) Aggregating Rs.1105 Crore CRISIL AAA/Stable (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
The common independent director on CRISIL's and HDFC Bank Ltd's boards did not participate in the rating committee meeting and the rating process of these instruments.
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AAA/CRISIL AA+/Stable' ratings on the existing debt instruments of HDFC Bank Limited (HDFC Bank). Rating on Rs 1105 crore Upper Tier II bonds (under Basel II) has been withdrawn since the outstanding against the same was nil. The withdrawal is in line with CRISIL's policy on withdrawal of ratings.
 
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.
 
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 nationwide lockdown, imposed by the Government of India to contain the spread of Covid-19, has impacted disbursements and collections of financial institutions. The lockdown has now been extended in containment zones, with reopening of the prohibited activities in a phased manner in other areas. However, certain states have implemented localised lockdowns. Herein, CRISIL believes that eventual lifting of restrictions may continue to be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of companies.

HDFC Bank has provided moratorium to its borrowers in line with the relief measures provided by Reserve Bank of India (RBI); around 9% of the portfolio in currently under moratorium. Any change in behavior of borrowers on the payment discipline can affect asset quality levels post the moratorium. Also, while the one-time restructuring scheme announced by RBI will aid in providing necessary support to affected borrowers in the current environment, its details and operational implementation will have to be seen.

Analytical Approach

For arriving at the ratings, CRISIL has combined the financial and business risk profiles of HDFC Bank and its subsidiaries. CRISIL expects managerial and financial support to these subsidiaries and associates to continue owing to 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 banks in India with total assets of Rs 15,45,103 crore as on June 30, 2020 (Rs 15,30,511  crore as on March 31, 2020), and a share of around 9% and 10% in system deposits and advances, respectively. Advances and deposits were Rs 10,03,299 crore and Rs 11,89,387 crore, respectively, as on June 30, 2020 (Rs 9,93,703 crore and Rs 11,47,502 crore, respectively, as on March 31, 2020). Retail advances constituted 48% of total domestic advances as on June 30, 2020 (51% as on March 31, 2020). 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, 2020, the bank had 5,326 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 offering, fixed deposits, bonds and non-convertible debentures. Further, HDB Financial Services Ltd, a non-deposit-taking non-banking financial company provides products such as loan against property, commercial vehicle and construction equipment loans and small and medium-sized enterprises financing; it had a loan book of Rs 58,431 crore as on March 31, 2020.
 
* Healthy capitalisation, backed by strong asset quality
The bank has healthy capitalisation, underpinned by sizeable networth of Rs 1,77,955 crore as June 30, 2020 (Rs 1,70,986 crore as on March 31, 2020). The Tier-I capital adequacy ratio (CAR) and overall CAR (under Basel III) were 17.5% and 18.9%, respectively, as on June 30, 2020 (17.2% and 18.5%, respectively, as on March 31, 2020). The capital position was further strengthened, with the bank raising Rs 23,651 crore in fiscal 2019. Also, steady internal accrual continues to support capitalisation.
 
Asset quality remains strong, with low overall gross non-performing assets (NPAs) of 1.4% as on June 30, 2020 (1.3% as on March 31, 2020), which was lower than the industry average. However, slight uptick during the quarter was because of accelerated recognition of potential stressed accounts as NPAs. Nevertheless, low gross NPAs, along with a healthy provisioning cover of 76.2%, led to a strong coverage for asset-side risks with networth coverage for net NPAs at 54.3 times as on June 30, 2020 (48.3 times as on March 31, 2020). The bank is likely to maintain better-than-industry-average asset quality over the medium term. However, delinquencies could inch up due to the challenging current macro environment. 
 
* Comfortable resource profile
As on June 30, 2020, the low-cost current and savings accounts constituted 40.1% (42.2% as on March 31, 2020) of total deposits. Additionally, the share of retail deposits continues to be healthy at around 77% as on March 31, 2020. Cost of funds1 remained low at 4.5% for quarter ended June 30, 2020 (on annualised basis; 5.0% for fiscal 2020), 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 interest margin of the bank, at about 4.0-4.5%, 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 assets2 (RoA) was comfortable at 1.9% during fiscal 2020. Annualised RoA for the quarter ended June 30, 2020, was also 1.7%, impacted by lower fee income (non-interest income as a percentage of average total assets at 1.1% for quarter, compared to 1.7% for fiscal 2020) due to limited activity on account of lockdown amid COVID-19 pandemic. CRISIL believes HDFC Bank is likely to maintain its relatively high profitability, given its better interest spreads and healthy fee income.
Liquidity Superior

Liquidity continues to remain superior, supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 140.12% as on June 30, 2020, against the regulatory requirement of 80%. 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.

Outlook: Stable

CRISIL 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 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.
 
For fiscal 2020, profit after tax (PAT) was Rs 26,257 crore on a total income (net of interest expense) of Rs 79,447 crore, against Rs 21,078 crore and Rs 65,870 crore, respectively, for fiscal 2019. For the quarter ended June 30, 2020, PAT was Rs 6,659 crore on a total income (net of interest expense) of Rs 19,741 crore, against Rs 5,568 crore and Rs 18,265 crore, respectively, for the corresponding period of the previous fiscal.

1Cost of funds is calculated as: Interest expense for the period/average of borrowings and deposits at the start and end of the period
2Return on assets Cost of funds is calculated as: PAT for the period/average of total assets at the start and end of the period

Key Financial Indicators
As on / For the quarter ended June 30,   Standalone Consolidated
2020 2019 2020 2019
Total assets Rs Crore 15,45,103 12,65,253 15,962,52 13,15,050
Total income (net of interest expense) Rs Crore 19,741 18,265 21,090 19,347
PAT Rs Crore 6,659 5,568 6,927 5,676
Gross NPA % 1.4 1.4 NA NA
Overall CAR % 18.9 16.9 NA NA
RoA % 1.7 1.8 1.7 1.7

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, with adequate CET1 capital buffer.
 
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 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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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) Complexity
levels		 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
NA Infrastructure Bonds* NA NA NA 11,325.00 Simple CRISIL AAA/Stable
INE040A08377 Tier I Bonds
(Under Basel III)		 12-May-17 8.85% 12-May-22 8,000.00 Highly complex CRISIL AA+/Stable
NA Tier I Bonds
(Under Basel III)*		 NA NA NA 7,000.00 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
*Yet to be issued
 
Annexure - Details of Rating Withdrawn
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size (Rs.cr) Complexity
levels
INE040A08294 Upper Tier 2 Bonds (Under Basel II) 7-Jul-10 8.7 7-Jul-25 1,105.00 Highly Complex
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
HDFC Securities Ltd Proportionate Subsidiary
HDB Financial Services Ltd Proportionate Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Infrastructure Bonds  LT  18675.00
31-08-20  		CRISIL AAA/Stable      27-08-19  CRISIL AAA/Stable  29-08-18  CRISIL AAA/Stable  14-08-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
                    23-06-17  CRISIL AAA/Stable   
                    03-05-17  CRISIL AAA/Stable   
Perpetual Tier-I Bonds (under Basel II)  LT    --    --    --  29-08-18  Withdrawal  14-08-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
                    23-06-17  CRISIL AAA/Stable   
                    03-05-17  CRISIL AAA/Stable   
Tier I Bonds (Under Basel III)  LT  8000.00
31-08-20  		CRISIL AA+/Stable      27-08-19  CRISIL AA+/Stable  29-08-18  CRISIL AA+/Stable  14-08-17  CRISIL AA+/Stable  CRISIL AA+/Stable 
                    23-06-17  CRISIL AA+/Stable   
                    03-05-17  CRISIL AA+/Stable   
Tier II Bonds (Under Basel III)  LT  2000.00
31-08-20  		CRISIL AAA/Stable      27-08-19  CRISIL AAA/Stable  29-08-18  CRISIL AAA/Stable  14-08-17  CRISIL AAA/Stable  -- 
                    23-06-17  CRISIL AAA/Stable   
Upper Tier-II Bonds (under Basel II)  LT  0.00
31-08-20  		Withdrawal      27-08-19  CRISIL AAA/Stable  29-08-18  CRISIL AAA/Stable  14-08-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
                    23-06-17  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
CRISILs Criteria for Consolidation
Rating criteria for Basel III - compliant non-equity capital instruments

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