HNB records robust growth in 1Q with Group profits up 89%

HNB continued its growth momentum in Q1 2011 with core banking activities contributing to strong results recorded for the period. The bank posted a pre-tax profit of Rs. 1.7 billion up by 42% while post tax profits increased to Rs. 1.13 billion, up by 74% over the corresponding period of 2010.

Commenting on the performance, HNB Managing Director and CEO Rajendra Theagarajah said the credit growth witnessed since the second half of 2010 continued in to 2011 driven by the conducive business environment.

This resulted in a growth of Rs. 12.8 billion in gross loans and advances over the first three months of the year to reach Rs. 222.3 billion as at end of March 2011.

The growth in loan book was reflected in a 7% growth in interest income from loans and advances withstanding re-pricing of assets.

Total deposits during the first quarter grew by Rs. 8.7 billion to Rs. 248.9 billion while maintaining the CASA at 51%.

During the period, the bank managed to reduce its interest expense by 9% over the last year backed by the low cost deposit base and the prevailing low interest rates. The above resulted in a growth of 10% in net interest income over the corresponding period of 2010. Non-interest income also witnessed a 25% increase contributing to overall growth with foreign exchange income increasing by a commendable 51% despite relatively stable foreign exchange rates, while other income too improved by 19%, mainly on account of commission income earned from trade-related activities.

The operating income witnessed an increase of 13% over the corresponding period of 2010 mainly on account of the aggressive expansion drive of the bank adding 20 customer centres to the network during the 12 months up to end March 2011.

The provisions on account of bad and doubtful debts decreased by Rs. 128 million over the corresponding period of 2010.

 This was primarily due to the direction issued by the Central Bank of Sri Lanka to gradually reduce the general provisioning requirement from 1% to 0.5% of the performing and overdue loan portfolio by the end of 2011.

The bank maintained its net NPA ratio at 2.63% well below the banking sector average of 3.2% while maintaining a provision cover of 47.5%.

Theagarajah further stated that in addition to the improvement witnessed in core banking activities, the reduction of taxation on the banking sector also contributed to the growth in bottom line.

The Group, comprising of the insurance subsidiary, joint venture investment banking operation and property development arm, largely contributed to the improved Group performance, recording a 50% growth in pre-tax profits to Rs. 1.83 billion and 89% growth in post tax profits to Rs. 1.24 billion.

Theagarajah added: “During the year 2010 the bank witnessed a growth of 19% in loans and advances and with the accelerated growth and development in the country, the aggregate demand for credit is expected to exceed 25% in the current year. With the economy of Sri Lanka projected to grow at a rate over 8% in the medium term, going forward the financial sector is required to be in a position to cater to the increase in demand for credit.  HNB being a premier private sector commercial bank in Sri Lanka, which is strategically positioned to capture the growth opportunities, has identified the need to raise funding to support the anticipated balance sheet growth while keeping in mind the stringent capital requirements proposed under Basel III regulations.”

Therefore, with a view to strengthening the capital base, the bank recently announced a new issue of shares by way of a Rights Issue.

The bank is offering rights for the first time since the last rights issue in 2004. During the seven-year period the bank posted an impressive compounded growth rate of 29% p.a. in PAT and a compounded growth rate of 13% p.a. in its asset base. It’s noteworthy that the above growth was achieved amidst adverse market conditions which prevailed during most part of the seven year period.

With a view of giving the existing shareholders a greater benefit from the Rights Issue of shares, the Board of Directors of the bank has recommended an allocation on the basis of 1 for every 5 ordinary shares held.

The issue of 71,507,870 new ordinary shares will comprise of 57,480,039 voting shares and 14,027,831 non-voting shares. The voting share would be offered at a price of Rs. 219/50 and non voting share at a price of Rs. 119/50. The bank is expected to raise approx. Rs.14.3 billion by way of the proposed Rights Issue of shares.