Fitch downgrades Sri Lanka’s HDFC Bank
View(s):Fitch Ratings Lanka has downgraded the Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC) National Long-Term Rating to ‘BBB (lka)’ from ‘BBB+(lka)’ with a stable outlook.
Its Rs 195 million outstanding senior unsecured redeemable debentures have also been downgraded to ‘BBB (lka)’ from ‘BBB+ (lka)’.
The downgrade reflects the bank’s inability to swiftly re-price its existing housing loan portfolio to avert deterioration in profits as market interest rates started to rise since end-2011, the rating agency said.
“This failure of timely re-pricing has further accentuated the interest rate risk inherent in HDFC’s balance sheet due to maturity mismatches between its assets and liabilities,” the statement added.
The current rating and stable outlook reflect Fitch’s expectations that the Government of Sri Lanka, with over 51 per cent ownership of HDFC, would provide support to the bank under extreme circumstances if required. This is based on the bank’s linkages with the state, and its quasi-policy role in supporting the government’s initiatives towards low- and middle-income housing.
HDFC’s profitability weakened sharply in the nine months to September 2012 (9M12), driven by increasing borrowing costs in line with rising market interest rates.
Consequently HDFC’s return on assets (ROA) fell to an annualised 0.07 per cent at end-9M12 (end-2011: 1.77 per cent). The bank increased interest rates on its existing housing loans with effect from 1 October 2012 – by up to 200 basis points or up to a ceiling rate of 18 per cent – which the bank expects will stem the deterioration in profits in the near-term.
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