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Fitch Ratings on HDFC Bank affirmed with a Stable Outlook

Fitch Ratings on 26th February 2008 has affirmed HDFC Bank Ltd (HBL) following its announcement to pursue a merger with Centurion Bank of Punjab Ltd (CBP) through a share swap. At the same time, CBP's Long-term, Individual and Support ratings have been placed on Rating Watch Positive.

The following ratings of HBL have been affirmed with a Stable Outlook: National Long-term at 'AAA(ind)', National Short-term at 'F1+(ind)', Individual at 'C', Support at '3', INR24 billion lower tier 2 subordinated debt at 'AAA(ind)', fixed deposit programme at 'AAA(ind)' and INR50bn certificates of deposit programme at 'F1+(ind)'.

Fitch expects HBL to maintain its post-merger financials and competitiveness amongst the best banks in India. The merger benefits HBL through the addition of CBP's branch network, which would add momentum to its increasing market share (currently seventh-largest bank in India in terms of assets). While CBP's assets are about a fifth that of HBL's, the merger would increase the latter's branch network by 50%. The merger is subject to shareholder and regulatory approvals. CBL's ratings are expected to be upgraded to that of HBL and then withdrawn as part of the amalgamation.

CBP's profitability is weaker than that of HBL and would slightly dilute the merged entity's figures. HBL should however be able to gradually leverage on the increased branch network with its superior franchise and stronger product delivery capabilities to improve its existing liability profile and business volumes of CBP and thereby its profitability.

Similarly, HBL should also be able to absorb CBP's unprovided NPLs (INR2.5bn, equivalent to 17% of HBL's annualised net income in 9MFY08). Post-merger, HBL would however continue to have a relatively higher proportion of unsecured consumer loans, while its two wheeler loan portfolio would slightly increase. The asset quality in these segments came under some pressure for the banking system in 2007 when increasing interest rates undermined the borrower's repayment capacity. HBL's risk management has so far enabled it to maintain credit losses in line with expectations at the point of origination.

HBL is the second-largest private bank in India with a nationwide presence. Strong operations in both retail and corporate banking businesses together with multiple delivery channels across India have supported HBL's loan growth and its superior earnings profile. The gross NPL ratio has remained better than that of most Indian banks and reflects the bank's strong risk management system. Regular equity infusions have helped maintain the Tier 1 ratio above 8% (end-December 2007: 10.5%) through periods of rapid growth.

CBP incorporates three private banks that merged in 2006 and 2007 - the erstwhile Centurion Bank which turned around following the induction of new shareholders and management in 2003, the erstwhile Bank of Punjab that added a strong retail liability franchise in Punjab and the erstwhile Lord Krishna Bank that helped add the branch network in Kerala. CBP's loan portfolio consists mainly of two-wheeler, commercial vehicles, residential mortgage, unsecured personal and SME loans.

HDFC Bank to acquire Centurion Bank of Punjab... Click here
S& P Ratings on HDFC Bank unaffected by proposed merger ... Click here

Lord Krishna Bank merge with Centurion Bank of Punjab... Click here
Bank of Punjab (BoP) and Centurion Bank (CB) merge... Click here
State Bank of Saurashtra to merge with State Bank of India ... Click here
Cross-border banking consolidation continues... Click here
Read about M&A in Indian Banking Industry ... Click here



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