Fitch affirms HNB at ‘AA-’; Outlook Stable

Tuesday, 26 October 2010 02:00 -     - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka yesterday affirmed Sri Lanka’s Hatton National Bank Plc’s (HNB) National Long-term rating at ‘AA-(lka)’. The agency has also affirmed HNB’s subordinated debentures at ‘A+ (lka )’. The Outlook remains Stable.

The ratings reflect HNB’s sound financial profile supported by good profitability, asset quality and capitalisation among local commercial banks. At end-June 2010 (H110), approximately 40% of HNB’s loan book was corporate loans, with retail/consumer loans and small and medium enterprises loans accounting for 35% and 25%, respectively. The bank’s pawning loans (classified under consumer loans) accounted for 13% of loans. HNB’s net interest margin was 6.0% in FY09 (FY08: 5.7%) — well above the local licenced commercial banks (LCB) sector average of 5.3%; its pre-tax return on assets (ROA) increased to 3.0% in FY09 (FY08: 2.5%) due to non-recurring items (NRI), which pertain to recoveries from a large NPL, an investment, and value-added tax. After adjusting for these NRI, HNB’s adjusted pre-tax ROA was 2.8% in FY09 - still comparatively good in the local context.

HNB’s loan book shrank by 5% in FY09 (FY08: 13%) similar to other banks, but has steadily increased in Q310 registering loan growth of 7% yoy as the post-war domestic economy improved (actual GDP growth in H110 was 8.5%, 2009: 3.5%). Nonetheless, credit concentrations notably in HNB’s corporate book remained high at FYE09, as the five-largest total exposures accounted for 10% of loans and 67% of equity, including related party exposures to the Stassens group at 4% of loans and 29% of equity.

The bank’s asset quality compared well with its peers. Its overall NPL/gross loan ratio declined to 5.95% at Q310 (FYE09: 6.25%) largely driven by improvements in the domestic business unit (DBU) side of the loan book. DBU NPL/gross loans reduced to 5.2% at Q310 (FY09: 5.6%) largely due to concerted recoveries. However, HNB’s foreign currency loan book in 2010 has been vulnerable to some credit exposures to Maldivian resort projects. HNB’s overall NPL ratio at Q310 would have increased by 0.73% if the credits were factored. In addition, these credits account for 5.7% of equity at Q310. HNB’s management expects that the cash-flow pressures on these credits should ease for these projects when they are fully constructed and operational in early 2011. HNB’s core and total capital adequacy ratios were 10.1% and 12.0%, respectively at Q210. Its equity/assets held at 9.4% at Q210 (9.3% at FYE09). These ratios compared well with peers.  Fitch expects HNB’s NPL/loans ratio to operate within the band of 6%-6.5% at end-2010. A sustained deterioration in HNB’s credit profile relative to ‘AA (lka)’-rated peers would add downward pressure to its rating. Incorporated in its present form in 1970, HNB is Sri Lanka’s fourth largest LCB, accounting for 12.4% of LCB assets at December 2009. It is one of six systemically important banks in Sri Lanka. The Government of Sri Lanka, entities related to the Stassen’s group (excluding CBD Exports Ltd.) and the Brown’s group held 26%, 18% and 10%, respectively, of voting equity at Q310.