RAM Ratings assigns BBB to HDFC

RAM Ratings Lanka has reaffirmed the respective long and short-term financial institution ratings of BBB and P3 to the Housing Development Finance Corporation Bank (HDFC). The long-term rating carries a stable outlook, a media release from RAM Ratings said.

Concurrently long-term issue ratings of BBB have been assigned to the proposed Rs 2 billion listed, secured, redeemable debenture (2013/2018). The ratings are upheld by the majority state ownership and the ongoing support derived from the government and its good capital cushioning.

On the other hand, the ratings are tempered by HDFC's below-average asset quality and performance and its small stature.

HDFC is a licensed specialised bank (LSB) under the provisions of Housing Development Finance Corporation, Act No 07 of 1997 and is under the purview of Ministry of Finance and Planning.

The Government remains its largest shareholder accounting for a share of 51% through the National Housing Development Authority. HDFC is one of the only two LSBs authorised to provide housing loans backed by the borrower's Employee Provident Fund (EPF).

The financial flexibility derived from the state is reflected by the EPF's annual reimbursement of all dues on EPF-backed loans that had fallen into arrears for over three months.

This with majority shareholding of the Government and its vision of providing affordable houses to the masses underpins HDFC's systemic importance to the government.

"We opine that the state support would be forthcoming should the need arise, however, to a lesser extent compared to other larger state-owned banks which are deemed to be more systemically important," the release said.

HDFC's asset quality is deemed below average owing to the high delinquency rates of its mortgage-backed and guarantor-backed housing loans and the inherent risks associated in housing finance, owing to possible delays in repossession and disposal of collateral.

The Bank's overall gross non-performing loans (NPL) ratio clocked in at 20.00% as at August 2013, however, is skewed by the high default rate of EPF-backed loans, which bear minimal credit risk as all dues on loans in arrears for over three months are reimbursed by the EPF annually.

The Bank's gross NPL ratio excluding the EPF-backed loans, stood at between 7.44%-7.95% as at August 2013 improving from 8.14% as at March 2013 amid recoveries.

While the management envisaged aggressive growth plans following sluggish credit demand in FY Dec 2012, its credit assets grew by only 15.63% amid slower credit growth.

"As such, our concerns on loan seasonality are also mitigated. However, we note that the Bank continues to grow its portfolio in housing loans with personal guarantees and other collateral.

While these loans bear a higher risk profile compared to its other credit assets, we deem that the risk is somewhat mitigated given the granularity of such loans," the release said.