BW Communities

Moody's Downgrades ICICI, HDFC Bank, Axis

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Global credit ratings firm Moody's on Monday downgraded the country's three largest private sector lenders -- ICICI Bank, HDFC Bank and Axis Bank -- to D+ from C- to align them with the sovereign rating. As a result, the hybrid debt ratings of these banks, except HDFC Bank, will be negatively impacted. The standalone bank financial strength rating (BFSR) of ICICI, HDFC and Axis are revised down to D+ from C-, which now maps to a baseline credit assessment (BCA) of Baa3 from Baa2 on the long-term scale, Moody's Investors Service said in a statement issued in Singapore. The agency also downgraded the hybrid ratings of Axis Bank and ICICI Bank to Ba3 from Ba2. But it said all the revised ratings carry stable outlooks. Moody's also cut its rating for state-run Life Insurance Corp of India (LIC) two weeks after it put the country's largest portfolio investor under review for a downgrade over its high exposure to sovereign debt and lack of revenue sources outside of India. The ratings agency downgraded LIC to Baa3 from Baa2 with a stable outlook, in line with its Baa3 sovereign rating for India, which is the lowest investment grade rating. Moody's in December issued a stable outlook for India. Last month Moody's had put LIC under review for a possible downgrade. The downgrade of LIC's rating reflects Moody's assessment that its creditworthiness is highly correlated with that of the Indian government's credit strength, the ratings agency said, adding that LIC generates almost all its premiums in India. "There is little, if any, reason to believe that LIC would be insulated from any government debt crisis, if it were to occur," Moody's said in a statement on Monday. "The rating action follows in the context of the ongoing global review affecting all banks whose standalone ratings are higher than the rating of the government where they are domiciled, and they conclude the review that was initiated on April 30, 2012," Moody's Investors Service vice-president and senior credit officer at financial institutions group, Beatrice Woo, said in the statement. The affected banks downplayed the rating action, saying this is in line with the sovereign rating and does not in any new way negatively reflect their credit standing. Moody's also said the other ratings of these banks are unaffected and have stable outlooks as detailed below. "Our review indicates that there are little reasons to believe that these banks will be insulated from a government debt crisis. More particularly, we note their significant direct exposure to the government securities, equivalent to 239 per cent of tier 1 at Axis Bank, 226 per cent of tier 1 at HDFC Bank and 143 per cent of tier 1 capital at ICICI Bank (based on latest publicly available data). "In addition, these banks are primarily domestic institutions with similar macroeconomic exposures as the sovereign government. Therefore, we view the lower standalone ratings -- which are now positioned at the rating of the government -- as more appropriate to capture the credit profiles of the banks," Wood said in the statement. During the January-March quarter of the last fiscal, LIC was again forced to increase stakes in state-owned banks such as Syndicate Bank, Bank of Maharashtra and IOC among others, as the cash-starved government did not have the funds to pick stakes as part of the fund infusion into banks. Accordingly, LIC's stake in many banks is above the Irda-mandated 10 per cent, and closer to 15 per cent. Moody's said since LIC is 100 per cent owned by the government and generates almost all its premia from within the country, it reflects the corporation's concentration in one market and its high reliance on the domestic economy, apart from its exposure to an evolving operating environment. "Therefore, there is little reason to believe that LIC will be insulated from any government debt crisis, if it were to occur," Moody's said. "LIC has meaningful and rapidly increasing direct or indirect exposures to the government through its holdings of government securities and its equity investments in government-related entities, including banks and corporations," it said. As of December 31, 2011, the ratio of government securities to adjusted shareholders' equity in LIC was 764 per cent (excluding unit-linked invested assets), said the agency, adding therefore it considers the lower rating, which is now positioned at the rating of the government, as more appropriate to capture the credit profile of the corporation. The agency further said these rating actions derive from our updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign, which is discussed in the rating implementation guidance. In addition, the government guarantees all of LIC's policy liabilities, including associated declared bonuses, as prescribed in the LIC Act. Thus, Moody's views that LIC's credit strength is very much closely linked to the sovereign, which justifies the insurer's current rating. Explaining the rationale for the downgrade, Woo said, "The action reflects that their credit worthiness are highly correlated with that of the government's credit strength taking, into account (a) the extent to which their business depend on the domestic macroeconomic and financial environment, (b) the degree of reliance on market-based, and therefore more confidence-sensitive, funding and (c) their direct or indirect exposures to domestic sovereign debt, compared with their capital bases." For all the banks, the key drivers for the rating action were relatively low level cross-border diversification of their operations; high level of balance-sheet exposure to domestic sovereign debt, compared to their capital bases; franchise resilience and intrinsic strength within the operating environment, and absence of ongoing support from foreign ownership. She further said these rating actions derive from Moody's updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign. On the downward revision of Axis Bank and ICICI Bank's hybrid debt, she said, "Their adjusted BCA is in line with their respective BCA as no parental or cooperative support is imputed. Therefore, a lower BCA becomes the starting point for notching hybrid securities and results in lower hybrid ratings in both banks' cases." The starting point for rating hybrid securities is the adjusted BCA, which reflects a bank's standalone credit strength as expressed through its BCA and includes uplift from parental and/or cooperative support, if applicable, but excludes systemic support, Moody's said. As of March 2012, ICICI Bank had an asset base of Rs 4.74 trillion, HDFC Bank had Rs 3.4 trillion and Axis Bank Rs 2.85 trillion. (Agencies)