Moody's Investors Service announced today that it has downgraded the subordinated debt (subdebt) and junior subordinated debt ratings of 11 Indian banks. The banks' senior obligation ratings and their stand-alone baseline credit assessments were not affected.
Moody's removed one to two notches of the two to three notches systemic support uplift previously incorporated in the public sector banks' subdebt and junior subdebt ratings, concluding a review started on 3 June 2013. Moody's also removed the one notch support uplift incorporated in the private sector banks' subdebt and junior subdebt ratings.
The 11 banks affected are 8 public sector banks (with a minimum 51% government shareholding) and three private sector banks:
Public Sector Banks
- Bank of Baroda (deposits Baa3 stable, BFSR D/BCA ba2 negative)
- Bank of India (deposits Baa3 stable, BFSR D/BCA ba2 negative)
- Canara Bank (deposits Baa3 stable, BFSR D/BCA ba2 negative)
- IDBI Bank Ltd (deposits Baa3 stable, BFSR D-/BCA ba3 stable)
- Indian Overseas Bank (deposits Baa3 negative, BFSR D-/BCA ba3 negative)
- State Bank of India (deposits Baa2 stable, BFSR D+/BCA ba1 stable)
- Syndicate Bank (deposits Baa3 stable, BFSR D/BCA ba2 negative)
- Union Bank of India (deposits Baa3 stable, BFSR D/BCA ba2 negative)
Private Sector Banks
- Axis Bank Limited (deposits Baa2 stable, BFSR D+/BCA baa3 stable)
- HDFC Bank Limited (deposits Baa2 stable, BFSR D+/BCA baa3 stable)
- ICICI Bank Limited (deposits Baa2 stable, BFSR D+/BCA baa3 stable)
RATINGS RATIONALE
Moody's downgrade reflects the increasing international trend of imposing losses on holders of subdebt securities (creditor "bail-in") as a pre-condition for distressed banks to receive government support. As a consequence, Moody's assumes that Indian government support is less likely to be forthcoming for the holders of such securities.
"The global financial crisis has demonstrated that support can be provided selectively, with the costs being shared with subordinated creditors of a bank, without triggering any contagion, as it was previously feared", says Gene Fang, a Vice President at Moody's.
Moody's analysis observes that India has a modern and progressive approach to bank regulation. There is no explicit legal power allowing Indian regulators to selectively impose losses on subdebt holders outside of a liquidation process. However, as a member of the G20 and Financial Stability Board (FSB), India could move towards adopting a bank resolution framework which imposes losses on subordinated debt holders.
On balance, Moody's assumes that Indian government support will be less likely in the future. Nevertheless, we believe for public sector banks a high probability of support is still justified, resulting in a one notch subdebt rating uplift. This is an exception to the general assumption in our methodology that support should be removed from subordinated debt ratings. In contrast, we assume that the probability of support for private sector banks is now low-to-moderate from high before, which is no longer sufficient to result in a rating uplift at their current baseline credit assessments.
This rating action relates only to Moody's view on the potential for systemic support for the banks' junior securities. It does not reflect any change in the banks' intrinsic credit quality or in the support assumptions for issuer or senior debt ratings.
BACKGROUND
In recent years, losses have been imposed on the holders of junior securities during the resolution of troubled banks in crisis-hit countries. In the majority of cases, investors have suffered losses as a result of distressed exchanges, which do not necessarily require a developed resolution framework to be in place. Furthermore, experience has shown that such a framework can be developed quickly at times of stress.
As a consequence, Moody's approach globally is now to assume, as a starting point, that no government support would be extended to the subordinated debt holders of a distressed bank, except where particular circumstances justify.
In the case of Indian banks, Moody's concluded that the unique role of public sector banks in implementing Indian government policy, as well as recent government capital provided to the banks, merited a continued level of support, though at a lower level than previously assumed. In parallel, we also lowered the support assumption for private sector banks to moderate. At the lower level of support and current baseline credit assessments (BCA) of Indian private sector banks, the subordinated and junior subordinated debt ratings would not receive additional government support. Therefore, the subordinated and junior subordinated debt ratings are lowered to reflect the new methodology.
A detailed rationale explaining our decision can be found in our upcoming special comment entitled "The World Has Changed: the Support Probability for Bank Subordinated Debt in Asia-Pacific Has Significantly Diminished".
RATINGS AFFECTED
Axis Bank Limited, DIFC Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
Axis Bank Limited, Hong Kong Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
Axis Bank Limited, Singapore Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt rating downgraded to Ba2 (hyb) from Ba1 (hyb). The outlook on the new rating is stable.
Bank of Baroda, London Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency subordinated debt rating downgraded to Ba2 from Ba1. The outlook on the new rating is negative.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba3 from (P)Ba2.
Bank of India:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
Bank of India, London Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency subordinated debt rating downgraded to Ba2 from Ba1. The outlook on the new rating is negative.
Bank of India, Jersey Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba3 from (P)Ba2.
Canara Bank, London Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba3 from (P)Ba2.
-- Long-term foreign currency junior subordinated debt rating downgraded to Ba3 (hyb) from Ba2 (hyb). The outlook on the new rating is negative.
HDFC Bank Limited:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
HDFC Bank Limited, Bahrain Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
HDFC Bank Limited, Hong Kong Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
ICICI Bank Limited:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
ICICI Bank Limited, New York Branch:
-- Long-term local currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term local currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
ICICI Bank Limited, Bahrain Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt rating downgraded to Ba2 (hyb) from Ba1 (hyb). The outlook on the new rating is stable.
ICICI Bank Limited, Dubai Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
ICICI Bank Limited, Hong Kong Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
ICICI Bank Limited, Singapore Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
IDBI Bank Ltd:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba3 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)B1 from (P)Ba2.
IDBI Bank Ltd, DIFC Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba3 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)B1 from (P)Ba2.
Indian Overseas Bank:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba3 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)B1 from (P)Ba2.
Indian Overseas Bank, Hong Kong Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba3 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)B1 from (P)Ba2.
State Bank of India:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
State Bank of India, Hong Kong Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
State Bank of India, London Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
State Bank of India, Nassau Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba1 from (P)Baa3.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
Syndicate Bank:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba3 from (P)Ba2.
Syndicate Bank, London Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba3 from (P)Ba2.
Union Bank of India:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba3 from (P)Ba2.
Union Bank of India, Hong Kong Branch:
-- Long-term foreign currency subordinated debt program rating downgraded to (P)Ba2 from (P)Ba1.
-- Long-term foreign currency junior subordinated debt program rating downgraded to (P)Ba3 from (P)Ba2.
The principal methodology used in these ratings was Global Banks published in May 2013.
