Housing Woes

Oct 05, 2008 (LBO) - Sri Lanka's HDFC Bank, a state-backed mortgage lender, has been downgraded a notch from 'A-(lka)' to 'BBB+(lka)', on rising interest costs, with the outlook remaining 'negative', Fitch Ratings has said. Fitch also downgraded 250 million rupees of senior unsecured debentures due in 2010, 2015 and 2020 it issued in 2005, and 125 million rupees of debentures due in 2009, which were also issued in 2005.

"The rating action reflects Fitch's view that the continued escalation of HDFC's inherent interest rate risk has weakened its financial profile to a level that cannot sustain a higher rating over the medium term," the rating agency said.

"However, Fitch derives comfort from possible state support, given the government of Sri Lanka's circa 51 percent stake in HDFC, and the bank's perceived importance to the state's housing policy."

Fitch said in took into account HDFC's sound capital adequacy, and the relatively low ultimate credit risk in its loan portfolio.

The Negative Outlook reflected Fitch's view that, while HDFC is currently in the process of implementing measures that could improve profits, the bank could find it tough to maintain profits in the next 12-18 months, if current econo