International ratings agency Fitch has retained the "BBB+(lka)" national long term rating with stable outlook of the Housing Development Finance Corporation Bank of Sri Lanka (HDFC), while also continuing a "BBB+(lka)" rating for its Rs. 195 million senior unsecured redeemable debentures.
According to Fitch's Rating Action & Commentary (RAC), this "demonstrated ability to contain interest rate risk to an extent by re-pricing existing loans, despite the sizeable maturity mismatches between its assets and liabilities. The ratings also factor in the Government of Sri Lanka's (GOSL, the State) 51% ownership of the bank, as well as in the latter's perceived importance to low- and middle-income housing, sizeable funds derived from the State and related entities, low ultimate credit risk of its housing loans, and inherent limitations in its current business model."
Meanwhile, also suggested was that "ratings could be upgraded if there is a sustained improvement in HDFC's maturity mismatches and sustained higher equity funding, as well as if it continues to re-price existing loans in a rising interest rate environment in a timely manner while maintaining healthy asset quality and profitability. The opposite of the above factors would result in a rating downgrade."
Also highlighted in the RAC was HDFC's loan growth of 1.8%, due to lower interest rates and increased credit demand, over the first nine months of its financial year, up to end-September 2010. Further revealed was that loan growth was as a result of mostly EPF-backed loans, 31% of loans, 13% growth, while most other options declined. However, while these loans require "minimal appraisal and carry virtually no credit risk," it was noted that this could put pressure on the bank's liquidity since "arrears on such loans (NPL ratio of 43% at 9M10) are refunded in full only once a year by the EPF."
It also emerged that HDFC "expects to improve its competitive position in housing loans backed by mortgages over property (59% of loans at 9M10) to mitigate this."
Additionally shown in the RAC was that profitability and capitalisation had improved, with return on assets having more than tripled to close to pre 2008 levels. However, it was also revealed that without "viable long-term fixed rate funds or re-finance borrowings to fund its housing loan portfolio, HDFC may require a larger equity cushion to reduce potential adverse effects that rising interest rates could pose to its credit profile."