On Monday, the credit ratings of
ICICI Bank Ltd.
HDFC Bank Ltd.
) were downgraded by Moody's Investors Service, the rating arm of
). The standalone Bank Financial Strength Rating (BFSR) for both
the banks were lowered to "D+" from "C-", in order to align them
with India's sovereign rating.
As a result of this rating revision, the hybrid debt rating of
ICICI Bank was negatively impacted, while the same for HDFC Bank
was not affected. ICICI Bank's hybrid rating was lowered to "Ba3"
from "Ba2". Moreover, Moody's stated that the outlook for these two
banks remain "Stable".
Rationale behind the Revision
ICICI Bank and HDFC Bank are fundamentally stable and the
current ratings revisions do not show that their credit worthiness
has suddenly deteriorated. The rating alterations are a part of the
global review conducted by Moody's that will affect all the banks
and financial institutions whose credit ratings are above that of
the government where they are based.
Moody's commented that the primary drivers for ICICI Bank and
HDFC Bank's ratings revision include lower degree of cross-border
diversification of their businesses and elevated balance sheet
exposure to sovereign debt compared with their capital bases.
Further, the credit worthiness of these banks is highly correlated
to the Indian economy.
Both ICICI Bank and HDFC Bank have significant direct exposure
to the government bonds, with the former having 143% of tier 1
capital, while the latter has 226% of its tier 1 capital exposed to
government securities. Hence, these banks are not insulated from
any government debt crisis.
Similar Action by S&P
In April, Standard & Poor's (S&P) had lowered its
outlook on the long-term counterparty credit ratings of ICICI Bank
and HDFC Bank. The rating agency had revised the outlook to
"Negative" from "Stable". S&P had lowered its outlook on
India's long-term debt to "Negative", and hence the resultant
outlook downgraded for both these banks.
Generally, both ICICI Bank and HDFC Bank raise their funds
domestically. Hence, the ratings downgrade will likely have minimal
impact on their cost of debt. Further, these banks have no
near-term plan of raising funds from international markets.
Additionally, ICICI Bank and HDFC Bank are subjected to
government policies and regulations. Moreover, they invest a large
part if their money in sovereign debts. Hence, if India's sovereign
rating itself gets negatively impacted; ratings and outlook of
these banks will also get affected.
Currently, both ICICI Bank and HDFC Bank retain a Zacks # 4,
which translates in to short term 'Sell' rating.
HDFC BANK LTD (HDB): Free Stock Analysis Report
ICICI BANK LTD (IBN): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
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