On Monday, the credit ratings of ICICI Bank Ltd. ( IBN ) and HDFC Bank Ltd. ( HDB ) were downgraded by Moody's Investors Service, the rating arm of Moody's Corp. ( MCO ). 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.