Moody?s downgrades ICICI, HDFC Bank, Axis and LIC

Global rating agency Moody?s Investors Service on Monday downgraded the financial strength ratings of leading private sector lenders ICICI Bank, HDFC Bank and Axis Bank to D+ from C-, saying the banks carried sizeable exposure to domestic government debt and pointing out that their creditworthiness was closely tied to that of the sovereign.

The downgrade is part of the agency’s new methodology under which it realigns the ratings of institutions to the rating of the sovereign in which they are domiciled.

Moody’s also downgraded the foreign currency rating of the country?s largest public sector insurance company Life Insurance Corporation to Baa3 from Baa2. The rating of LIC was downgraded owing to the insurer’s concentration in the domestic market, its huge holdings of domestic debt and lack of foreign holdings, Moody’s said. ?As of 31 December 2011, the ratio of Indian government securities to adjusted shareholders’ equity was 764%,? it pointed out.

Moody’s said the three private banks had sizable exposure to domestic sovereign debt, making them very vulnerable to domestic macroeconomic factors and market conditions. ?The downward revision to the three Indian banks’ standalone ratings reflects Moody’s assessment that their creditworthiness are highly correlated with that of the Indian government’s credit strength,? the agency said in a release.

Hitendra Dave, managing director and head, global markets, HSBC India said since the move is not a statement on the banks themselves but rather on the sovereign, there may not be any impact on the cost of borrowings of these banks. ?The review is entirely on account of Moody?s changed methodology and is unlikely to impact the cost of borrowings of these banks in the overseas markets,? Dave observed.

In a statement, ICICI Bank said its ALM was well-matched with asset repayments in FY2013 broadly ?covering our bond and loan repayment obligations?. A spokesperson said the bank would not need to access bond markets for refinancing. ?We will look at accessing the markets to raise funds for new lending depending on the cost and the rates at which we can deploy the funds,? it said.

The rating action, the bank pointed out, does not impact its senior unsecured ratings which stand at Baa2. As per the revised Moody’s methodology, the Baseline Credit Assessment (BCA) of banks have been revised downwards to account for the significant exposure to domestic sovereign debt and its linkage to the sovereign’s credit strength. ?Accordingly, the BCA of ICICI Bank along with the other mentioned banks, which was higher than the sovereign rating, has been revised to Baa3 from Baa2 and the hybrid debt rating to Ba3 from Ba2,? the statement noted.

In October last year, the agency had downgraded the country’s largest lender State Bank of India’s standalone rating to D+ citing similar reasons and because of the rise in non-performing assets.

The Reserve Bank of India’s statutory liquidity ratio norm under which Indian banks have to invest 23% of their deposits in government securities results in a sizable exposure to the government’s ratings.

?We note their significant direct exposure to Indian government securities, equivalent to 239% of Tier 1 at Axis Bank, 226% of Tier 1 at HDFC Bank and 143% of Tier 1 capital at ICICI,? the agency said.

The RBI considers SLR investment of banks as a cushion against a downturn or a systemic problem as these securities are risk-free sovereign bonds.

However, the government’s creditworthiness has itself come under scanner due to its inability to curb its fiscal deficit. Recently, ratings agency Standard & Poor’s cut the outlook on India’s sovereign rating to negative from stable. Moody’s warned that these banks would not be insulated from a government debt crisis given their large exposure to local sovereign bonds. Moody’s said the bank’s portfolios are not diversified enough through cross-border lending. ICICI Bank has two overseas subsidiaries ? one each in Canada and the UK. The bank’s UK subsidiary has been consolidating its loan portfolio for several quarters and its assets declined to $4.08 billion in January-March.

Axis Bank’s total overseas assets amounted to $6.35 billion as on March 31. The bank has a subsidiary in the UK. The agency further said these banks depend on market-based funding which are highly sensitive to the level of confidence of investors. Moody’s, however, said that systemic support for the three banks is highly likely in times of stress given their large share in the deposits and loans of the banking system. These banks’ strong operations in the banking sector and strong financial metrics support their ratings, the agency said.