Fitch affirms Hatton National Bank at ‘AA-’

Fitch Ratings Lanka said yesterday it has affirmed Hatton National Bank PLC’s (HNB) National Long-Term rating at ‘AA-(lka)’. The Outlook is Stable. The agency has also affirmed HNB’s subordinated debentures at ‘A+(lka)’.

The ratings reflect HNB’s sound financial profile, supported by robust capitalisation, asset quality and profitability among local commercial banks. The ratings are, however, are constrained by HNB’s loan concentrations to related parties, geographic concentrations in Maldives (23 per cent of equity at H111), and increasing loan/deposit ratios (H111: 94 per cent; 2010: 88 per cent). A sustained deterioration in HNB’s capitalisation and asset quality relative to ‘AA(lka)’ peers would put downward pressure on the ratings.

Tier I and total capital adequacy ratios (factoring un-audited profits in H111), though declined, remained satisfactory at 10.2 per cent and 11.4 per cent, respectively, in H111 (2010: 11.0 per cent and 12.6 per cent). Equity/assets ratio was nine per cent at H111 (2010: 9.5 per cent). These ratios compared well with peers. In addition, HNB raised Rs. 6 billion Tier 1 capital and Rs. 2 billion sub-debt (Tier II capital) during May-September 2011. Fitch notes that these additional capital infusions will support HNB’s future loan growth and increase capital buffers to manage potential loan losses. Management expects to target tier 1 ratios at 11 per cent in the near term after factoring in projected asset growth.

Fitch notes that HNB’s loan book steadily increased by 19 per cent yoy in both 2010 and H111 as the post-war domestic economy improved, after a decline to five per cent in FY09 from 13 per cent in FY08, similar to other banks. Approximately 42 per cent of the bank’s loan book comprised corporate loans, with retail/consumer loans and SME loans accounting for 16 per cent and 13 per cent, respectively, at end-December 2010. At the same time, housing loans, leasing and pawning (gold-backed loans) accounted for nine per cent, seven per cent and 13 per cent of loans, respectively.

The bank’s asset quality compares well with its peers. Its overall non-performing loans (NPL)/gross loan ratio was 4.78 per cent at H111 (2010: 4.55 per cent) largely driven by improvements in the domestic business unit (DBU) side of the loan book. DBU NPL/gross loans marginally reduced to 3.8 per cent at H111 (2010: 4.0 per cent). However, foreign currency loan book in 2010-H111 was vulnerable due to some credit exposures to Maldivian resort projects. Fitch expects cash flow to turn positive in mid-2012, until which these credits will remain classified as NPLs on HNB’s loan book. However, management expects NPL/loans ratio to range between three per cent and four per cent in 2012, as the bank increases its DBU exposures and remains cautious on its foreign currency business unit’s balance sheet.

HNB’s current and savings account improved in 2010, accounting for 54.2 per cent of total deposits as at end-December 2010 (46.5% at end-December 2009), although these dropped to 50.3 per cent at H111. This deposit mix helped support HNB’s overall net interest margins (H111: 5.4 per cent, 2010: 6.0 per cent), which compared well relative to the sector.

HNB is a licensed commercial bank accounting for 8.9 per cent of banking assets at 2010, and a systemically important bank operating in Sri Lanka. The Government of Sri Lanka and entities related to the Stassen Group held 28 per cent and 18 per cent, respectively, of voting equity at September 2011.