Moody's lowers outlook for SBI, HDFC Bank, 4 other financial institutions

Moody's Investor Services on Friday downgraded financial institutions closely linked to the Indian government's sovereign rating from 'stable' to 'negative' after a similar rating action on India's sovereign outlook which elicited a quick response from the government.

Moody's on Friday revised the outlook of six systemically financial institutions including the State Bank of India and HDFC Bank to negative from stable.

The outlook was revised down for EXIM India, HDFC Bank, Hero FinCorp, HUDCO, IRFC, and SBI but was maintained at stable for Bank of India (BOI), Canara Bank (CAN), Oriental Bank of Commerce (OBC), Syndicate Bank (Syndicate) and Union Bank of India (UBI).

Explaining the rational for the dowgrade of EXIM India, HUDCO, IRFC, and SBI, Moody's said that their final ratings are at the same level as the sovereign rating because of the uplift to their ratings, based on Moody's assumption that these companies will receive government support in times of need.
 

"Consequently, if Moody's downgrades the sovereign rating, it will also downgrade these companies' final ratings. The close links between the four companies and the government is the key reason why Moody's has changed the outlooks for these companies to negative from stable, after doing the same for the sovereign rating," Moody's said in a statement.

Moody's justified its rating action on the country's largest private bank, HDFC Bank by saying that the bank has large direct exposure to government debt and also as the Baseline Credit Assessment (BCA) of a bank is capped at the sovereign rating of the country that it operates in.
 

Moody's said it expects that BOI, CAN, OBC, Syndicate and UBI to continue to enjoy a very high level of support from the government. Under these support assumptions, even if the sovereign rating is downgraded by one notch to Baa3, the support uplift should be sufficient to keep the final ratings unchanged at Baa3, it said.

"This situation is the key driver of Moody's affirmation of the five banks' ratings.

Moody's does not have any particular governance concern for all the issuers impacted by today's rating action," it added.