S&P affirms HDFC Bank's long-term issuer credit rating at 'BBB-'

Global rating agency Standard and Poor’s (S&P) has affirmed long-term issuer credit rating “BBB-” on Indian private sector lender HDFC Bank. The bank's strong management and governance structure should help in the planned merger of mortgage lender Housing Development Finance Corporation Ltd (HDFC) with itself. The merger is expected to have limited impact on financial performance.

The rating outlook is stable. At the same time, S&P affirmed “A-3” short-term issuer credit rating on the bank. The planned merger of HDFC Bank with its parent HDFC Ltd is likely to be completed in the second half of 2023.

“The merged entity will benefit from the further consolidation of its already strong franchise and superior profitability. That said, we expect its loan-to-deposit ratio to deteriorate, compared with the industry, and take at least three years to revert to its current levels," S&P said in a statement.

As a consequence, the rating agency revised the assessment on the bank's business position to very strong from strong and its funding and liquidity to adequate from strong.

"HDFC Bank's funding aligns with our view that banks in India face low funding risk, given the high share of deposit funding, mostly from households," S&P said.

The rating agency said the planned merger will further consolidate HDFC Bank's position as the second-largest bank in India. Its post-merger market share in loans will jump to 15 per cent from about 11 per cent at present, and that of deposits to 11 per cent from about 10 per cent. Its  deposit market share could increase to about 14 per cent over the next four years in anticipation that the bank remains aggressive in its deposit ramp-up efforts.

The country’s largest lender State Bank of India ranks top at 23-24 per cent for loans and deposits. Another private lender ICICI Bank would be a distant third with a market share of about 7 per cent in loans and deposits.

The bank’s risk-adjusted capital ratio is expected to be at 9.5-10.0 per cent over the next two years, compared with about 9.5 per cent as of March 31, 2023. This would mainly be driven by the bank's high earnings retention and an increase in the share of low-risk mortgages in its total loan book, S&P added.