Fitch Ratings has maintained Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC Bank) National Long-Term Rating of ‘BBB-(lka)’ on Rating Watch Negative (RWN).
The agency has also maintained the RWN on the ‘BBB-(lka)’ rating of HDFC Bank’s senior secured and senior unsecured debentures.
The RWN, first placed in August 2017, has been maintained pending a capital infusion from the Sri Lankan state (B+/Stable) to help HDFC Bank meet the Rs 5 billion minimum regulatory capital requirement. We expect the state, the bank’s major shareholder, to extend its support but the timing of the capital infusion depends on regulatory clearance. The minimum capital requirement has been in force since 2016. Fitch downgraded HDFC Bank on January 29, 2018 after the state failed to provide the capital to the bank in a timely manner. HDFC Bank’s rating reflects Fitch’s expectation that the bank will receive extraordinary support from the sovereign, if required. Our assessment captures the state’s 51% effective holding, which includes the National Housing Development Authority’s direct ownership of 49%; the bank’s quasi-policy role in supporting housing-development initiatives; as well as HDFC Bank’s low systemic importance. The bank’s weak standalone profile is characterized by its above-industry exposure to low- and middle-income customers, mainly through housing loans, who tend to be more susceptible to economic cycles. The share of housing loans has declined over the years but it has remained high, at 82% at end-March 2018. The bank continued to have a high reported non-performing loan (NPL) ratio, which stood at 19.7% at end-March 2018.
This was mainly due to defaults from housing finance backed by the Employees’ Provident Fund (EPF), which contributed slightly more than half of the bank’s total housing NPLs at end-March 2018. Nevertheless, the Central Bank of Sri Lanka annually reimburses HDFC Bank 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 8.9% at end-March 2018 (9.0% at end-2017), which reflects the concentration of its credit risk in the low- and middle-income housing-finance market.
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