HNB records Group post tax profits of Rs.4.89 bn for 2010

The financial year 2010 was a year that presented a mix of challenges and opportunities for the financial services industry. As a consequence of the slowdown in economic activity in 2009, credit growth remained sluggish during the major part of 2010. Despite adversities faced in 2010 HNB posted robust growth for the year with pre-tax profits increasing by 13.8% to Rs. 6.7 bn and post tax profits improving to Rs. 4.46 bn.

Commenting on the growth Rajendra Theagarajah, Managing Director /CEO of HNB Plc stated that solid contribution from core banking activities driven by agility and acceleration of strategy implementation paved the way for improved financial performance.

The decline in domestic interest rates coupled with the sluggish loan growth witnessed during the first half of the year contributed towards a drop in the Bank’s top line where interest income declined by 12.6% to Rs. 30.2 bn from Rs. 34.6 bn in 2009. The drop in interest rates also enabled the Bank to contain its interest cost. The Bank’s prudent asset and liability management strategies enabled it to convert a significant portion of its fixed deposits into comparatively low cost deposits which helped improve the deposit mix where current and savings accounts balances represented 53% of total deposit base compared to 46% in 2009. This too contributed towards the further reduction of interest cost thereby achieving a 6.6% growth in net interest income despite the drop in the top line.

The Bank continued to focus on improving non-interest income which in total grew by 12.6% compared to 2009. The Bank remained one of the few in the industry to record a commendable growth of 12.5% in foreign exchange income despite the relatively stable foreign exchange rates witnessed during the year. Commission income too witnessed a notable growth with trade related income taking centre stage as international trade started to pickup after a dismal year in 2009. Divestment of non-strategic investments held also contributed towards the increase in investment income during the year. Overall the net income of the Bank grew by 8.1% in 2010 compared to the previous year, while improving the non interest income to net income ratio from 24.5% to 25.5% in 2010.

Realising the need to improve productivity to maintain profitability in a competitive environment, the Bank continued its aggressive cost management strategies both at head office as well as in the branches. The salary bill of the Bank grew by 12.3% while general expenses increased by a mere 5.4% during 2010.

The Bank continued to manage costs, curtailing the increase in cost to a minimum despite rolling out an aggressive growth strategy culminating in the commissioning of 19 new customer centres and 40 new ATMs during the year. Majority of the new customer centres opened during the year were geographically located in the rural pockets of Sri Lanka, especially in the underdeveloped and previously war ravaged Northern and Eastern Provinces.

Primarily due to the aggressive expansion drive, the cost to income ratio increased marginally to 56.5% in 2010. The Bank has laid down strategies towards managing costs and is focused on driving the cost to income ratio below 50% in the medium term.

The Bank remained extremely aggressive in its recovery efforts during 2010 resulting in its gross non performing ratio declining to 4.51% against the industry average of 5.3%, while the net non performing ratio declined to 1.95% recording one of the best ratios in the industry. The provision cover as at end of 2010 improved to 56.8%.

The corporate tax charge for the Bank increased by a substantial 44.8% to Rs.2.3 bn in 2010 compared to the previous year. The main reason for this was the exceptionally low tax charge witnessed in 2009 resulting from the Bank utilising carried forward tax losses and write-back of over provided taxes during early years. Accordingly, the effective corporate tax rate increased to 33.7% in 2010 compared to a low 26.5% in 2009 resulting in a modest growth in post tax profits despite a robust growth in the pre-tax profits.

The Group posted a pre-tax profit of Rs. 7.2 bn recording a growth of 17.6% and a net profit of Rs. 4.89 bn for the year 2010. Theagarajah further stated that majority of the Group companies contributed positively during 2010 with HNB Assurance Plc the 60% owned insurance subsidiary demonstrating a profit growth of 20% and 15% growth in gross written premium. Though a relatively new player in the highly competitive insurance industry, HNB Assurance remains one of the fastest growing insurance companies in the country. Also Bank’s timely investment in a joint venture investment bank paid off during 2010 as capital markets started performing exceptionally well during the year. The joint venture Investment Banking Group, Acuity Partners (Pvt) Ltd demonstrated a commendable profit growth of 257% during 2010 with positive contributions from all its business activities, which include corporate finance, stock broking and dealing in fixed income securities. Acuity Group was further strengthened during the year by bringing in Lanka Ventures Plc under the Acuity umbrella. The property management subsidiary of the Bank which owns the state of the art HNB Towers, also managed to positively contribute towards the Group’s bottom line. However, the two exchange houses namely Majan and Delma are yet to break-even, mostly as they are new investments. Both Majan and Delma have demonstrated great potential and have been avenues through which the Bank has increased its penetration in to the Middle East.

The Bank managed to grow its asset base by 12% during the year to Rs. 313.9 bn. The loan book of the Bank remained flat during the major part of this year due to low demand for credit. However the last 2 quarters witnessed rejuvenation in credit demand as the Bank ended the year with a yoy loan growth of 19.6% with total net loans and advances reaching Rs. 203 bn from Rs. 169.8 bn in 2009 which is quite exceptional in the context that the Bank’s loan book contracted by 1% in the first quarter of 2010.

The Bank recorded an 11.2% growth in the total deposit base during 2010 with total rupee and foreign currency deposits standing at Rs. 234.1 bn compared to Rs. 210.5 bn in 2009. It is important to note that during 2010 the Bank managed to change its rupee deposit mix by increasing its low-cost deposits of savings and current accounts by 27.1% and 60.5% respectively.

Shareholders’ funds grew by 14 % in the financial year to Rs. 27.3 bn. An interim dividend of Rs. 1.50 per share was declared for 2010 amounting to Rs. 338.6 mn. The Bank has proposed a final dividend of Rs. 5.50 per share on profits for the year under review which will amount to a total dividend payout of Rs. 1,648 mn. The total dividend of Rs. 7.00 per share is one of the highest dividends declared by the industry.

The Bank recorded a strong return on equity of 17.4% while return on average assets stood at 1.5% for the year. The Bank’s capital adequacy ratios remained healthy with tier 1 and total ratios at 10.99% and 12.64% respectively as at December 2010.

During the year the Bank was recognised by prestigious international and local bodies in all disciplines for its unparalleled overall performance. HNB was recognised as the “Best Retail Bank in Sri Lanka” for the third consecutive year by “The Asian Banker” and as the “Best Bank in Sri Lanka” by the Euromoney Finance Magazine for the second consecutive time in 2010. Also HNB was rated “Strongest Bank in the Country 2010” by Asian Banker.

The Bank was awarded 4 Gold Awards for the first time in history at the Annual Report Awards organised by the Institute of Chartered Accountants in Sri Lanka. The gold awards include the Overall award for Best Presented Annual Report 2009, Best Presented Annual Report in the Banking sector, Best Presentation in Management Discussion and Analysis and Best Presentation in Corporate Governance.