RAM assigns BBB to HDFC’s Rs. 2 b listed debentures; reaffirms entity ratings
Friday, 11 October 2013 03:40
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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.
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 of Sri Lanka as well as its good capital cushioning. On the other hand, the ratings are tempered by HDFC’s below-average asset quality and performance as well as its small stature.
HDFC is a licensed specialised bank under the provisions of Housing Development Finance Corporation, Act No. 07 of 1997 and falls under the purview of Ministry of Finance and Planning. Meanwhile, the Government remains its largest shareholder accounting for a share of 51% through National Housing Development Authority (NHDA).
Notably, HDFC is one of the only two LSBs authorised to provision of housing loans backed by the borrower’s Employee Provident Fund. 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 in to arrears for over three months.
This, together with majority shareholding of the Government and its vision of providing affordable housing to the masses, underpins HDFC’s systemic important to the Government. In view of this, RAM Ratings Lanka opines that 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.
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 ratio clocked in at 20.00% as at end-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 latter stood at 7.44% 7.95% as at end-August 2013 improving from 8.14% as at end-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, RAM Ratings Lanka’s concerns on loan seasonality are also mitigated. However it notes 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, it deems that the risk is somewhat mitigated given the granularity of such loans.
Following a dampened performance in FY Dec 2012, the bank’s core performance improved in the 8M FY Dec 2013 stemming from moderate loan growth; as such, its pre-tax profits recorded Rs. 185.86 million during the period as opposed to Rs. 72.77 million recorded in FY Dec 2012.
While previously the bank suffered thinning margins owing to fixed rate loans granted, it benefited in 8M FY Dec 2013 as rates dropped enabling the bank to secure cheaper customer deposits while benefiting from the previously granted rates. Meanwhile the increasing proportion of higher interest yielding loans secured by guarantees also improved its yields. As such, overall the bank’s NIMs improved to 4.80% in 8M FY Dec 2013 compared to 4.16% in FY Dec 2012.
In tandem with improved net interest income growth, the bank’s cost to income levels improved to 72.95% in 8M FY Dec 2013 (FY Dec 2012:92.62%). However, the ratio still compared weaker than most banking peers and its historic levels. Improved credit growth as rates decline, is expected to improve the ratio going forward.
Presently, the bank’s funding needs are largely fulfilled by more stable customer deposits, which made up 72.80% as at end-August 2013 remaining relatively unchanged from end-March levels. The uptrend in deposit base is reflected in the bank’s improving LD ratio which stood at 109.34% as at the same date compared to 126.06% as at end-FY Dec 2012.
The proposed Rs. 1 billion debenture would be partly used to replace high interest borrowings while the balance is to be utilised for future loan growth. Meanwhile the funding mix is not expected to alter significantly, given the partial utilisation of the debenture to pare down high cost borrowings.
On the other hand, RAM Ratings Lanka understands that HDFC’s exposure to liquidity risk is somewhat higher compared to other LSBs given the longer tenure of housing loans that are funded by much short-term customer deposits; this has led to a sizeable ALMM in its short- and medium-term maturities. The company’s statutory liquid asset ratio stood 23.45% well above its banking peers.
