Moody’s cuts HDFC Bank, SBI to Baa3; takes rating action on 11 banks a day after India downgrade

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Published: June 2, 2020 3:43 PM

A day after it downgraded India’s sovereign rating to Baa3, rating agency Moody’s today downgraded HDFC Bank and State Bank of India’s (SBI) long-term local and foreign currency deposit ratings to Baa3.

Moody's Investors Service on Monday trimmed India’s sovereign rating by a notch to the lowest investment grade of Baa-2 and retained the “negative” outlookThe rating action taken on SBI and HDFC Bank is not expected to change in the next 12-18 months, according to Moody’s.

A day after it downgraded India’s sovereign rating to Baa3, rating agency Moody’s today downgraded HDFC Bank and State Bank of India’s (SBI) long-term local and foreign currency deposit ratings to Baa3, as it announced rating action on 11 Indian Banks. The long-term issuer rating of Export-Import Bank of India (EXIM) has also been downgraded by Moody’s. With this, the deposit ratings of these banks are now at the same level as India’s sovereign rating. Interestingly, Moody’s has changed Punjab National Bank’s (PNB) rating to positive from stable, while affirming PNB’s long-term local and foreign currency deposit ratings at Ba1 and its BCA at b1.

“The Indian banking sector has been affected given the disruptions to India’s economic activity from the coronavirus outbreak, which is weakening borrowers’ credit profiles,” Moody’s said. Along with the downgrade of India’s sovereign ratings, Moody’s said the economic disruptions caused by the coronavirus outbreak also plays a role in the rating action. The stimulus package announced by the central government and the actions taken by the Reserve Bank of India might help mitigate some of the credit pressures, but the longer and broader the economic slowdown, the more these banks will face asset quality and profitability issues, according to Moody’s.

Moody’s has placed the Baa3 long-term local and foreign currency deposit ratings of Bank of Baroda , Bank of India, Canara, and Union Bank of India while their ba3 BCAs are under review for downgrade. It has also downgraded IndusInd Bank’s long-term local and foreign currency deposit ratings to Ba1 from Baa3 and the lender’s BCA to ba2 from ba1. The rating outlook is negative. For Central Bank of India and Indian Overseas Bank, Moody’s has affirmed their long-term local and foreign currency deposit ratings at Ba2 and their BCAs at b2. The rating outlook of these issuers is maintained as stable.

“EXIM India’s issuer ratings and SBI’s deposit ratings are at the same level as the sovereign rating because of the uplift to their ratings, based on Moody’s assumption that the two banks will receive government support in times of need,” Moody’s said. In the case of SBI, Moody’s expects its asset quality and profitability to weaken, which could hurt its capitalization. As a result, Moody’s has placed its ba1 BCA under a review for downgrade. “..the strong linkages between HDFC Bank and the sovereign, including its large direct exposure to government debt and exposure to common underlying operating conditions,” resulted in HDFC Bank’s rating downgrade. Moody’s said that it expects the strain on the asset quality and profitability, due to the coronavirus outbreak, will be largely mitigated by the improvements in the PNB’S credit profile over the past year.

The rating action taken on SBI and HDFC Bank is not expected to change in the next 12-18 months, according to Moody’s. “Nevertheless, the rating outlook could be changed to stable if India’s rating outlook is stabilized. An upgrade of HDFC Bank’s BCA is unlikely, because the BCA is already at the same level as the sovereign rating,” the rating agency said. Moody’s could upgrade the BCA of EXIM India if the bank demonstrates sustained improvement in its solvency, bringing the credit profile in line with similar rated peers in the region.

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