Fitch Ratings has downgraded the National Long-Term Rating and senior unsecured debentures of Housing Development Finance Corporation Bank of Sri Lanka (HDFC Bank) to ‘BB+(lka)’ from ‘BBB-(lka)’. All ratings have been removed from Rating Watch Negative, and the Outlook is Stable.
The downgrade reflects Fitch’s assessment of HDFC Bank’s standalone strength, as we believe timely support from the Sovereign cannot be relied upon.
Our assessment takes into consideration that the State, as a major shareholder, has not injected new capital into HDFC that the bank would require, to meet the minimum regulatory capital requirement of LKR 5 billion that came into force on January 1, 2016.
Our view also reflects the weakening of the Sovereign’s ability to provide support following the downgrade of the sovereign rating to ‘B’/Stable from ‘B+’/Stable on December 3, 2018.
HDFC Bank’s reported Non-Performing Loan (NPL) ratio has been increasing over the past few years - standing at 20.5% at end-3rd Quarter ‘18 (3Q18), well above the industry average. This has been due mainly to defaults from housing finance backed by the Employees’ Provident Fund (EPF), which contributed more than half of the bank’s total housing NPLs at end-3Q18. Nevertheless, the Central Bank of Sri Lanka reimburses HDFC Bank annually for EPF-backed loans in arrears for more than three months. The bank’s NPL ratio remained high even without the EPF-backed housing loans, at 10.0% (9.0% at end-2017), which reflects the concentration of its credit risk in the low- and middle-income housing-finance market.
Fitch expects HDFC Bank’s asset and liability mismatches to persist due to its longer-tenor loan book and short-tenor deposit base, exerting pressure on liquidity. Dependence on high-cost term deposits also weighs on the net interest margin and profitability.