Sunday 13 August 2017

Serious concerns over HDFC’s ability to raise required capital

Serious concerns were raised this week about Sri Lankan state bank HDFC Bank and its ability to meet the legislated January 2018 deadline of a capital requirement of Rs. 5 billion.

The issue was raised in an announcement by Fitch Rating which said that it “would take HDFC Bank more than four years to generate the required capital from retained earnings.”

Fitch said that the bank’s 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 re-prices regularly, and its high-cost business model.
The rating agency said it has placed HDFC Bank’s National Long-Term Rating of ‘BBB (lka)’ on Rating Watch Negative (RWN).
The media release said that the RWN reflects the risk that the state, as major shareholder, will not raise the bank’s capital to meet the minimum Rs. 5 billion capital requirement by 1 January 2018, in which case Fitch will downgrade the rating to reflect the bank’s weaker intrinsic strength.

“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 reflects Fitch’s expectation that the bank would receive extraordinary support from the sovereign, if required,” the release added.
Fitch said the bank’s profitability, funding and liquidity could also be affected by business restrictions imposed by the Central Bank (CB). Fitch expects HDFC Bank’s asset and liability mismatches to persist due to its longer-tenor loan book and short-tenor deposit base. Its deposit base is also highly concentrated.

Housing loans, mainly to low- and middle-income customers, continue to dominate the bank’s loan book, accounting for 81 per cent at end-1Q17 (2014: 91 per cent). Housing loans to members of the Employee Provident Fund (EPF), which are secured against members’ EPF balances, accounted for 24 per cent of the bank’s total loans. Non-performing loans (NPL) to EPF members are higher than for the rest of the bank’s portfolio, but the CB annually reimburses HDFC Bank for EPF-backed loans in arrears for more than three months, the release said.
Fitch said that HDFC Bank’s rating will be affirmed and removed from RWN if the state demonstrates its commitment to supporting the bank, such as by providing the Rs. 0.9 billion in additional capital required on or before 1 January 2018.

“Fitch will downgrade the bank’s rating if the sovereign does not raise HDFC Bank’s capital by the deadline or if the deadline is extended, as Fitch would question the sovereign’s willingness to provide timely support. This is likely to see the bank downgraded to the ‘BB’ category, the extent of which would depend on whether the bank’s profile remained on a negative trajectory,” it said.

The rating agency said it may also downgrade HDFC Bank’s ratings if there is a change in “our expectation of state support due to a weakening of the bank’s linkages with the state, through a dilution of the state’s majority ownership or a revision of Fitch’s view of the bank’s policy role.”
www.sundaytimes.lk

SEC after Perpetual Treasuries’ “spoils”

By Duruthu Edirimuni Chandrasekera

The Securities and Exchange Commission (SEC) is probing some trades that under-fire Perpetual Treasuries PLC had done during 2009 to 2015, informed sources say.

This is in a bid to ascertain whether there was any price-pushing and dumping the shares on the Employees Provident Fund (EPF), they told the Business Times. The Perpetual Group has been in a media blitzkrieg owing to the infamous ‘bond scam’ which saw Foreign Minister and former Minister of Finance Ravi Karunanayake resigning on Thursday.

Thurston Investments, connected to Perpetual Group had a 14 per cent stake as at 31 December 2016 in HDFC and many trades through this company also happened which the regulator is scrutinising, a source said noting that the Central Finance, Ceylon Grain Elevators and LOLC were questionable transactions by Perpetual Treasuries.

Perpetual Treasuries and Perpetual Equities held 6.52 per cent of NDB as at 31 March 2017, i.e. 11.2 million NDB shares. The stake that Perpetual has in NDB (during 4Q2016 it increased the holding to 7,352,180 shares which is 4.45 per cent of the bank – from 6,153,686 shares as at 30 September 2016) was bought by them after the bond issue surfaced in 2015.
www.sundaytimes.lk