HDFC Bank gets an A (sri) credit rating for senior debt

State housing giant HDFC Bank’s long-term unsecured senior debt got an A (sri) credit rating from Fitch Ratings Lanka. State housing giant HDFC Bank’s long-term unsecured senior debt got an A (sri) credit rating from Fitch Ratings Lanka.

An A (sri) rating reflects the capacity
to honour timely financial commitments.

HDFC’s rating reflects its strong
operations, relatively low credit risk in the housing mortgage business,
favourable non-performing loans (NPL) ageing, comfortable capital base and
profitability, says Fitch in a statement on Friday.

HDFC’s market risk is relatively low, as
the fixed rate long term housing loan portfolio is funded by similar long term
borrowings.

This has
enabled HDFC to manage its asset liability maturity to a large extent. HDFC’s
loan book has had an 80:20 mix between mortgage loans and EPF loans over the
past two years.

Despite a loan growth, HDFC’s absolute
NPL’s are declining, due to better monitoring and quicker recovery efforts which
includes focused follow-up. In 2003, NPL’s fell to 21 percent despite a 20.6
percent loan growth in the same period.

Gross NPLs/Gross loans were 11.1 percent
in 2003 and have been on a declining trend since 2001. This improvement is
largely on account of NPL recoveries and to some extent loan growth. Further net
NPL/Equity ratio was at 58.9 percent as at Dec 2003.

“Going
forward the challenge for HDFC would be to contain NPL’s in light of the high
loan growth witnessed over the last few years,” notes Fitch.

HDFC’s
operating expenses grew by 9.2 percent. Cost/income ratio has improved from 36.0
percent in 2000 to 32.5 percent in 2003. HDFC’s cost/income ratio is fairly low
when compared with the commercial banks, which have cost/income ratios ranging
from 50 percent – 70 percent.

Currently,
HDFC is comfortably capitalised with a core capital ratio of 35.4 percent and a
capital adequacy ratio (CAR) of 35.9 percent in 2003.

The comfortable CAR is largely
due to the low risk weights (50 percent) attached to housing loans, which make
up the majority of risk assets.

HDFC was incorporated as a building
society in 1984, converted to a corporation in 2000. The bank moved up to a
licensed specialised bank in 2003.

Since inception, HDFC focuses on lending
to low income segments, which presently account for the majority of housing
demand in Sri Lanka.
The average loan size is about Rs. 170,000 at
present.

However, rivals (commercial banks and other housing finance
companies) have focused largely on the middle and upper income groups. Fitch
says its unlikely that competitors will stray into HDFC’s market, due to its
unattractiveness and different skills levels.

HDFC’s continuing strategy is to target the low income
groups via its competences in providing total housing-loan solutions
encompassing legal advice, architectural and other technical support provided at
nominal charges.

Currently, HDFC has a network of 21
branches. But nearly
26 percent of funds disbursed in 2003 (42 percent in
2000) were concentrated in Colombo. HDFC’s top five districts accounted for over
50 percent of its loan portfolio in 2003 (72 percent in 2000).

Funding Mix

  2000 2001 2002 2003
Borrowings 63% 64% 73% 66%
Equity 19% 19% 16% 16%
Other 14% 11% 09% 13%
Customer deposits 05% 05% 02% 05%

(Source: Fitch Ratings)

Over the years, HDFC has raised Rs. 510.6 mn by
securitizing its housing loan receivables, at fixed rates of 15 percent, and
have five-year tenures (in order to match its loan structure).

Going forward HDFC will continue to focus on raising long
term funds from the government, multilateral organisations and other local
financial institutions in order to fund its loan growth.

The Sri Lankan government through
National Housing Development Authority (NHDA) and Employees Trust Fund (ETF)
owns 90 percent of HDFC. But an upcoming public offer to raise Rs. 600 mn will
reduce the government’s stake to around 20 percent 30 percent.

Fitch Ratings Lanka Ltd is a joint
venture between Fitch Ratings, USA, International Finance Corporation
Washington, Central Bank of Sri Lanka and several other leading local financial
institutions.

– LBO Newsdesk:
LBOEmail@vanguardlanka.com