State owned HDFC Bank’s intrinsic strength will be weakened if the government is failed to raise the bank's capital to meet the minimum Rs.5 billion capital requirement by 1 January 2018, Fitch Ratings agency said.
The requirement has been in force since 2016 and Fitch would see a further delay as an indication that creditors may no longer be able to rely on sovereign support in a timely manner, notwithstanding HDFC Bank's unchanged linkages with the state.
HDFC's rating of 'BBB(lka)'on Rating Watch Negative (RWN) reflects Fitch's expectation that the bank would receive extraordinary support from the sovereign, if required.
Fitch Ratings agency assessment captures the state's 51% effective holding, of which the National Housing Development Authority directly owns 49%; the bank's quasi-policy role in supporting housing-development initiatives; as well as HDFC Bank's low systemic importance.
Fitch estimates that it would take HDFC Bank more than four years to generate the required capital from retained earnings.
Its profitability, in terms of return on assets, has been declining because net-interest margins have been contracting due to higher funding costs stemming from the bank's short-tenor deposit base, which reprices regularly, and its high-cost business model. The bank's profitability, funding and liquidity could also be affected by business restrictions imposed by the Central Bank of Sri Lanka (CBSL). (LI NEWS)