Close on the heels of changing the outlook of the Indian economy from stable to negative, ratings agency Moody’s has lowered the outlook on six key financial institutions in India, including State Bank of India (SBI) and HDFC Bank to negative from stable.
The outlook was revised down for EXIM India, HDFC Bank, Hero FinCorp, HUDCO, IRFC, and SBI but, on the other hand, was maintained at stable for Bank of India (BOI), Canara Bank, Oriental Bank of Commerce (OBC), Syndicate Bank and Union Bank of India (UBI).
Explaining the rationale for the downgrade, 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 are 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.
For SBI and its DIFC Branch, Hong Kong Branch, London Branch, and Nassau Branch, Moody's has assigned foreign currency CRR of Baa2/P-2, which is at the same level as the banks' respective domestic currency CRR, which Moody's has already assigned, it added.
“As for the change in outlook for HDFC Bank, given the strong linkages between a bank's business and the sovereign credit profile, including by way of large direct exposure to government debt and exposure to common underlying operating conditions, the Baseline Credit Assessment (BCA) of a bank is capped at the sovereign rating of the country that it operates in. Consequently, for HDFC Bank, Moody's will downgrade the bank's baa2 BCA, if Moody's downgrades India's Baa2 sovereign rating. This situation in turn would lead to a downgrade of HDFC Bank's final ratings and is the key driver of the change in the bank's ratings outlook to negative from stable,” Moody’s added.