Moody's downgrades 3 private sector banks

Moody's Investor Services has downgraded the standalone bank financial strength rating of the top three private sector banks — ICICI Bank, HDFC Bank and Axis Bank.

The global credit rating agency also downgraded the Life Insurance Corporation of India's foreign currency insurance financial strength rating.

Credit Negative for Reliance

Further, the agency commented that the downward revision in Reliance Industries Ltd's assessment of its proved natural gas reserves and developed reserves are credit negative for the company.

The downward revision in the ratings of the three banks (to ‘D+' from ‘C-‘) and LIC (to ‘Baa3' from ‘Baa2') follows Moody's assessment that their creditworthiness are highly correlated with that of the Government's credit strength.

S&P outlook

Late last month, rival credit rating agency Standard & Poor's had revised the outlook on its long-term counterparty credit ratings on 11 Indian financial institutions, including Axis Bank, Bank of India, HDFC Bank, ICICI Bank, and State Bank of India, to negative from stable.

S&P revision in the outlook on the financial institutions was a result of it revising the outlook on India's long-term credit rating to negative from stable due to slow fiscal progress and deteriorating economic indicators.

Downward revision

Moody's said the key drivers for its rating action on the three banks are: the relatively low level of cross-border diversification of their operations; the high-level of balance sheet exposure to domestic sovereign debt compared with their capital bases; and ‘the absence of ongoing support from foreign ownership'.

“There are little, if any, reasons to believe that these banks would be insulated from a Government debt crisis……

“We view the lower standalone ratings, which are now positioned at the rating of the Indian Government, as more appropriate to capture the credit profiles of the banks,” said Moody's in a statement.

The agency has also downgraded the hybrid ratings of Axis Bank and ICICI Bank to ‘Ba3 (hyb)' from ‘Ba2 (hyb)'.

Reasons for LIC downgrade

The reasons for the downgrade in LIC's rating are: the extent to which its business depends on the domestic economy; the limited degree of cross-border diversification within its operation; its significant level of balance-sheet exposure to domestic sovereign debt, relative to its capitalization; and ‘the absence of strong foreign ownership'.

Moody's said LIC has meaningful and rapidly increasing direct or indirect exposures to the Government through its holdings of Government securities and its equity investments in Government-related entities, including banks and corporations.