Financial Times

HNB under-performs but long term potential seen
Hatton National Bank has significantly under-performed the market this year, along with most banking stocks, because of lower capital gains from bond trading and non-interest income, but may offer long term value, brokers said.

Its share price has fallen 44 percent since November 2, 2003. "With the steep decline in the share price, we believe the counter may offer value for longer-term investors," Asia Capital said in a research report.

This would happen as HNB gradually exploits its scale advantages, gains increased market share in leasing and enhances its revenue flows from corporate finance and longer term project finance.

HNB, the largest private commercial bank in the country, plans to expand its capital base with a rights issue and a GDR (Global Depository Receipts) issue to be listed on the Luxembourg Stock Exchange.

These are expected to raise Rs 2.5 billion and increase its share capital to 119.35 million shares. Despite a difficult year, the brokers said they believe HNB's treasury division will also rebound in the longer term, with its foreign exchange trading activities in particular likely to contribute "significantly" to sustainable earnings growth. HNB has recently taken several steps to address its lower than average loan quality, which has been a key concern for the bank.

These include the appointment of a deputy general manager for Risk Management, automation of the credit recovery system and installation of an improved credit screening and monitoring system. These initiatives have helped the bank reduce its bad loans ratio to 10.5 percent from 14 percent in 2003. However, Asia Capital said HNB's 2003 results are unlikely to be repeated in 2004. "HNB's 2003 record performance is however unlikely to be bettered in 2004. HNB in fact recorded a mediocre financial performance for 1H2004 with its net profit dipping by 35 percent YoY to Rs 575 million. HNB's "uninspiring results" are primarily due to rising interest rates since November 2003 resulting in a bearish bond market, negating opportunities for significant capital gains as in 2003.

Despite stronger foreign exchange trading gains amidst a faster depreciating currency, HNB's non-interest income has consequently eased 25 percent YoY in 1H 2004, falling to 41 percent of net interest income in 1H 2004 from 51 percent in 1H 2003.

"Given rising inflationary expectations and uncertainty over the government's budget deficit, little improvement in bond market fortunes is however expected during the short term," Asia Capital said. HNB Stockbrokers said in a previous report on the bank, its parent firm, that its wide branch network, and better asset utilization and growth in loan book could lead the way in a recovery. "We believe that HNB will offer medium to long-term value once it starts exploiting the advantages of scale."

With the loan book expected to grow at a moderate 12 - 13 percent over the next two years, the high exposure to the consumer banking would enable HNB to enjoy better interest spreads, thus boosting the bottom line.

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