Moody's upgrades SBI, HDFC Bank ratings to Baa2 from Baa3

In the case of HDFC Bank, Moody's has also upgraded the bank's baseline credit assessment (BCA) and adjusted BCA to Baa2 from Baa3.

Moody's Investors Service has upgraded the long-term ratings of four Indian financial institutions to Baa2 from Baa3. The four are Export-Import Bank of India, HDFC Bank, Indian Railway Finance Corporation Ltd, and State Bank of India.

In the case of HDFC Bank, Moody's has also upgraded the bank's baseline credit assessment (BCA) and adjusted BCA to Baa2 from Baa3.

Moody's has upgraded the Counterpart Risk Assessment (CR Assessment) of HDFC Bank and its Hong Kong branch to Baa1(cr) from Baa2(cr); and of SBI, its Hong Kong, London and Nassau branches to Baa2(cr)/P-2(cr) from Baa3(cr)/P-3(cr). In addition, Moody's has assigned a CR Assessment of Baa2(cr)/P-2(cr) to State Bank of India, DIFC branch.

In addition, Moody's has changed to stable from positive the ratings outlook for IRFC; EXIM India and its London branch; HDFC Bank, its Bahrain and Hong Kong branches; as well as SBI and its Hong Kong, London, and Nassau branches. Moody's has assigned a stable outlook to SBI's DIFC branch.

Moody's continues to assess India's Macro Profile (operating environment for the banks) as Moderate. The assessment incorporates the weak, but stable credit conditions in the country, with such a situation representing the key risk to the banks' balance sheets. Corporate leverage has started to fall and asset quality deterioration for the banks has peaked.

Furthermore, the clean-up of balance sheets is underway, with the latest effort being the asset quality review conducted by the Reserve Bank of India in December 2015 and the promulgation of the Insolvency and Bankruptcy Code 2016.

The capitalization profile of the public sector banks - a segment which accounts for nearly 70% of total banking system assets remains far below that of their private sector peers. To a large extent, the capital shortfall has been addressed by the government's announcement on October 24, 2017 of a recapitalization plan for public sector banks, which should help facilitate these banks in writing down bad loans.

However, the credit implication will depend on the hair-cuts that the banks will need to take in the resolution process and the developments in their other credit metrics after the process is complete.

Funding remains credit strength for Indian banks. The banks' funding and liquidity profiles which are largely funded by customer deposits with limited reliance on confidence sensitive market funding have remained stable.