Moody's downgrades LIC, three banks

Ratings of Axis, ICICI & HDFC Bank cut due to significant direct exposure to government securities

Global rating agency Moody’s on Monday downgraded Life Insurance Corporation of India’s (LIC) foreign currency insurance financial strength rating from Baa2 to Baa3. The rating outlook is stable.

It also cut the standalone bank financial strength rating for Axis Bank, ICICI Bank and HDFC Bank from C- to D+. The rating now maps to a baseline credit assessment of Baa3 from Baa2 on the long-term scale.

Moody’s said this revision was in the context of an ongoing global review affecting financial institutions and banks whose ratings are higher than the rating of the government where they were domiciled. The review was initiated on April 30 and has been concluded.

Moody’s ratings of the Government of India's local and foreign currency bonds are at Baa3. The outlook on the ratings is stable.

India's Baa3 government bond ratings incorporate credit strengths such as a diversified economic structure, strong actual and potential growth, a high domestic savings rate and a comfortable balance of payments position. The country also faces challenges such as weak government finances and a policy process often hamstrung by domestic politics. Susceptibility to inflationary pressures and infrastructure constraints on future growth also weigh on the economic performance, it said.

About the rating action on the three banks and LIC, Moody’s said it was driven by factors like the relatively low level of cross-border diversification of their operations. They have a high level of balance-sheet exposure to domestic sovereign debt, compared with their capital bases.

Aspects like franchise resilience, intrinsic strength within the operating environment and the absence of ongoing support from foreign ownership were also factored in. There are little, if any, reasons to believe that LIC and banks would be insulated from a government debt crisis, Moody’s said. They have significant direct exposure to government securities. For Axis Bank, it is equivalent to 239 per cent of tier-1 capital. In the case of HDFC Bank, it is 226 per cent and at ICICI Bank, 143 per cent of tier-1 capital.

In addition, these three banks are primarily domestic institutions, with similar macroeconomic exposure as the sovereign government. Therefore, the lower standalone ratings — now positioned at the rating of the Indian government — are more appropriate to capture the credit profiles of the banks and LIC, Moody’s said.

STEP DOWN Moody’s downgrades are part of a global review of financial institutions
Institution	Review	Downgrade	Outlook
LIC	Foreign currency insurance financial strength	Baa3, from Baa2	Stable
Axis Bank ICICI Bank  HDFC Bank	Standalone financial strength rating	D+, from C-*	Stable
Reason
For LIC, the downgrade reflects its creditworthiness is highly correlated with that of the Indian government’s credit strength
For the banks, the key drivers were relatively low level of cross-border diversification of operations; high balance-sheet exposure to domestic sovereign debt, compared with their capital bases; franchise resilience and intrinsic strength within the operating environment; and absence of ongoing support from foreign ownership
*Maps to a baseline credit assessment of baa3 from baa2 on the long-term scale                              Source: Moody’s

On LIC, Moody’s noted the company was fully owned by the Indian government. It generates almost all its premiums in India.

This reflects concentration in one market, a high reliance on the domestic economy. And, LIC has meaningful and rapidly increasing direct or indirect exposure to the government through its holdings of government securities and equity investments in government-related entities, including banks and corporations.

As of December 31, 2011, the ratio of Indian government securities to adjusted shareholders' equity was 764 per cent (excluding unit-linked invested assets).