Global rating agency Moody’s on Thursday downgraded the local currency bank deposit ratings and the senior unsecured ratings of three Indian private sector banks — Axis Bank, HDFC Bank and ICICI Bank — citing a change in their rating methodology.
The ratings of these private-sector banks were changed to Baa3/P-3, which is the sovereign rating of India, from the earlier Baa2/P-2. Under the changed rating method, Moody’s said that the support from the government is restricted to its own sovereign rating and, therefore, any entity of the country cannot be rated above the sovereign.
“The change in the rating will not make a difference to our ability to borrow overseas since it’s a technicality,”” a senior executive from a private sector bank told FE.
The three big private lenders were rated one notch above the sovereign on the assumption that systemic importance will lend them the wherewithal to honour foreign currency debt and deposits notwithstanding the absence of direct sovereign support.
In a report in March detailing its changed bank rating method, the agency had said some entities can have a higher rating than the sovereign on the assumption that extraordinary government support to the banking sector beyond its capacity to repay its own debt, because of specific country support from multi-national organisations or additional resources that are available to the bank beyond the sovereign support.
“In our conversations with Moody’s, we gathered that under the old method, they assumed that senior unsecured debt would get government support, but under the current one, the rating itself is capped at the sovereign and the assumption is that government support would not go beyond its own rating,” said an official from one of the private banks.
Reflecting the direct support from the government to public sector entities, the agency has raised the outlook to positive from stable for nine PSBs and three public sector financial institutions and affirmed their long-term ratings. These are Bank of Baroda, Bank of India, Canara Bank, Export-Import Bank of India, Indian Railway Finance Corporation, Oriental Bank of Commerce, Power Finance Corporation, Punjab National Bank, Rural Electrification Corporation, State Bank of India, Syndicate Bank and Union Bank of India.
The agency said the government’s credit strength is an important input in Moody’s deposit and debt ratings for financial institutions, because it impacts its assessment of the government’s capacity to provide support in times of stress.
“As such, an improvement in the government’s own creditworthiness, as measured by its sovereign rating, has the potential to lift the supported ratings for the financial institutions,” it said, adding that the assignment of a positive outlook on the sovereign’s and the financial institutions’ ratings signals a higher probability of the sovereign providing support to the financial institutions in times of stress.