CRISIL rates HDFC BANK's Upper Tier II Bonds issue as 'AAA/Stable'

Rs. 10 Billion Upper Tier II Bonds Issue AAA/Stable (Assigned)

CRISIL has assigned a rating of AAA / Stable to HDFC Bank Limited's (HDFC Bank's) Upper Tier II bonds issue. The rating reflects the bank's strong asset quality, good capitalisation levels, and a healthy earnings profile. HDFC Bank's good resource profile and strong market position across segments in the financial services sector also support the rating.

HDFC Bank's strong asset quality is reflected in its low gross non-performing assets (NPA) of 1.43 per cent (as a proportion of gross advances) as on March 31, 2006; the bank has a strong presence in the retail finance space, which has traditionally been a low-risk business. A strong asset quality, along with a healthy net worth base of Rs53 billion (as on March 31, 2006), has resulted in strong coverage levels; as on March 31, 2006, the bank's net worth coverage for net NPAs stood at a high of 34.2 times.

HDFC Bank's good capitalisation levels also reflect in its high Tier I capital adequacy ratio and overall capacity adequacy ratio, each as a proportion of risk-weighted assets, at 8.55 per cent and 11.41 per cent respectively. CRISIL expects the bank's capitalisation levels to remain strong over the medium term, backed by its healthy asset quality.

CRISIL's rating on HDFC Bank's debt instrument also derives strength from its strong and stable earnings profile. This is reflected in the bank's high return on assets of 1.4 per cent over the last four years. A high core fee income also supports the bank's profitability levels: in 2005-06 (refers to financial year, April 1 to March 31), HDFC Bank reported a core fee income of 1.9 per cent (as a proportion of average funds deployed), as against the system average around 1 per cent.

A high proportion of current and savings accounts - 55.4 per cent of the bank's deposits as on March 31, 2006 - has also shored up its resource profile. This has translated into low cost of deposits (3.38 per cent in 2005-06), supporting the bank's profitability levels. The rating is also supported by HDFC Bank's strong market position in the retail finance space; the bank is among the top three banks in India, with disbursements of Rs. 142 billion in 2005-06.

Outlook: CRISIL expects HFDC Bank to maintain its healthy capital position, supported by its strong asset quality levels in its fast-growing retail portfolio. These factors will enable the bank to maintain its good earnings profile. The rating is also based on CRISIL's expectation that HDFC Bank will maintain capital adequacy at levels higher than the regulatory requirement throughout the tenure of the instrument.

About the bank: HDFC Bank commenced operations in January 1995. The bank offers a wide range of banking services, covering both commercial and investment banking on the wholesale side and transactional and branch banking on the retail side. HDFC Bank is India's largest private sector bank, active in the retail finance business with a thrust on car finance, personal loans, commercial vehicle finance, two-wheeler finance, and credit cards. The bank's retail advances, as a proportion of total advances, stood at 61 per cent as on March 31, 2006. HDFC Bank had an asset base of Rs735.06 billion as on March 31, 2006. It reported a profit after tax (PAT) of Rs8.71 billion in 2005-06 (Rs6.66 billion in 2004-05).