Moody’s Investors Service has affirmed the ratings of private sector lender HDFC Bank following the announcement that its parent HDFC Ltd would merge with it.
In a late-night release on Wednesday, Moody’s Investors Service said it has affirmed all the ratings of HDFC Bank, including the Baa3 long-term local and foreign currency deposit ratings and the Ba3(hyb) Additional Tier 1 securities rating.
It has also affirmed the HDFC Bank’s baa3 baseline credit assessment (BCA).
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“The rating affirmation with a stable outlook takes account of Moody’s expectation that the financial fundamentals of HDFC Bank will remain stable and robust after considering the financial impact of the proposed acquisition of HDFC Limited by the bank,” it said.
The two entities’ solid commercial and retail banking franchises reflected in their status as the largest private-sector bank and largest non-bank finance company in India by assets will support their funding and liquidity, it further said.
On April 4, HDFC Bank and HDFC Ltd announced that they had entered into a definitive agreement whereby the business of HDFC Ltd will be merged into HDFC Bank in an all-stock transaction.
The boards of both entities have approved the merger and expect the transaction to close by the end-2023, upon completion of closing conditions, including regulatory and shareholder approvals.
The agency noted that the proposed transaction will moderately hurt HDFC Bank’s profitability in the next two to three years driven by higher funding costs to meet the regulatory liquidity norms, including cash reserve ratio, statutory liquidity ratio as well as costs associated with compliance with the priority sector lending norms.
“Further, the share of market funding will increase in the near-term,” it noted.
Nevertheless, Moody’s expects the bank’s strong retail franchise and access to low-cost depositors will help mitigate the impact. It also expects the combined entity’s asset quality and capitalisation to remain stable.