Fitch affirms Sri Lanka’s HDFC at ‘BBB(lka)’; Outlook Stable

Fitch Ratings Lanka has affirmed Housing Development Finance Corporation Bank of Sri Lanka’s (HDFC) National Long-Term Rating at ‘BBB(lka)’. The Outlook is Stable. Fitch has simultaneously withdrawn the ratings on HDFC’s Rs. 195 m senior unsecured redeemable debentures as they have been repaid.
Key rating drivers
HDFC’s rating reflects Fitch’s expectation that the bank would receive extraordinary support from the state, if needed, given the State effectively holds 51% of the bank. It also reflects Fitch’s view of the bank’s quasi-policy role in supporting the State’s initiatives to develop more housing for low and middle-income families. However, the potential for State support is lower than for larger state-owned banks in Sri Lanka due to HDFC’s lower systemic importance.
The State holds its stake in HDFC through the National Housing Development Authority (49.7%), a state-owned corporation that is tasked with formulating and implementing the national housing policy, the Condominium Management Authority (0.46%) and the Urban Development Authority (0.46%).
HDFC’s Board is appointed by the Ministry of Finance, with the majority of Board members representing State institutions. The bank has the authority to grant to members of the Employees Provident Fund (EPF) housing loans that are secured against the borrowers’ EPF balances.
The Central Bank of Sri Lanka annually reimburses HDFC the instalments of EPF-backed loans that are in arrears for over three months. These loans support HDFC’s capital adequacy because they carry a zero risk weighting as a result of their collateral. EPF-backed housing loans accounted for 36.8% of total loans at end September 2013.
Rating sensitivities
A change in Fitch’s expectation of State support to HDFC through a weakening of the linkages with the state, including a dilution of State’s majority ownership of the bank or a revision of Fitch’s view of HDFC’s policy role, could result in a downgrade of the ratings.
The ratings will also be sensitive to changes in HDFC’s profile if it merges with or is acquired by another bank as part of industry consolidation that the Central Bank of Sri Lanka has set out in its master plan for the financial sector.
HDFC was established as a building society in 1984. It was converted into a Government corporation in 2000 and then into a regulated licensed specialised bank in 2003.