HDFC Bank (HDFCB) informed the exchanges regarding impending modifications to the structure of all issuances done from Bahrain post a lowering of sovereign credit ratings on the Kingdom of Bahrain by S&P. We believe that the impact of this on the key financial metrics of HDFCB will not be significant, given that these instruments constitute only 1.4% of its average interest bearing liabilities.
Sovereign rating on the Kingdom of Bahrain lowered. On February 17, 2016, Standard & Poor’s (S&P) lowered its long and short term foreign and local currency sovereign credit ratings on the Kingdom of Bahrain to BB/B (stable) from BBB-/A3 (negative).
Potential rating action on HDFCB’s Bahrain bonds. The bank informed the exchanges this morning that the bonds issued by the Bahrain branch of HDFCB have a dual rating from S&P of BBB- and from Moody’s of Baa3. As the rating criteria published by S&P restrict the rating of any Bond issued in a jurisdiction to that of the host country, the bonds issued by HDFCB may also be subject to rating action by S&P.
Consequently, the bank will be carrying out modifications to the structure of all these bonds to insulate the same from any rating actions on the Kingdom of Bahrain.
We value HDFCB at 3.6x book (Dec-16) and 17x EPS (12m to Dec-17). It trades at 3.63x book (Dec-15) and 16.54x EPS (12m to Dec-16) – 10yr avg. of 4.34x and 20x, respectively. Key risks being weak loan growth and asset quality.
