Volatile interest rates threaten quality of retail credit -HNB

Sri Lanka’s banking sector continued to see more volatile domestic interest rates coupled with high double digit inflation, the Hatton National Bank (HNB) said this week.

“This has posed a challenge to defend interest margins and also will continue to threaten the quality of retail credit,” HNB’s Managing Director Rajendra Theagarajah noted in a press release on the bank’s performance quarterly report for the period March 2007.

Inter bank interest rates have soared in recent times upto 40 percent in recent weeks, raising costs for companies who would invariably pass it onto the consumer. The rates have risen following efforts by the Central Bank to curb credit expansion as inflation levels rose, banking analysts said.

HNB reported a 30% hike in pre-tax profits to Rs. 537 million in the 3-month period to March.

Theagarajah attributed the bank’s good performance to persistent focus on balancing business growth with profitability, improving productivity, managing costs, and enhanced asset quality.

The HNB statement noted that net interests generated from interest bearing assets had increased by 35% while non interest income showed a growth of 15%. “The three months have also seen the entire operating expense bill of Rs 1.97 billion being met by net interest income from core banking activity. Net income including foreign exchange, commission income and investment income grew by 25% during this period led by a surge in foreign exchange trading which grew by 46%,” it said.

HNB said it has maintained its tight leash on expenses with operating costs increasing by 23%. The main contributor being the revision in personnel costs which were fixed after the new collective agreement.

It said provisioning for bad and doubtful advances has shown a sharp increase of 122% to Rs 435 million. Of this, Rs 190 million related to General Provision mainly on account of the new regulatory directions issued by the Central Bank of Sri Lanka.

Post tax profits were Rs 315 million which is a 21% growth compared to the same period in 2006. Taxation in the form of financial services VAT increased by 29% to Rs 306 million due to a combination of increase in taxable profits and increase in staff emoluments which are added back (excluding retirement benefits).

Theagarajah said the results demonstrate HNB’s “clear focus on achieving its 3-year financial goals which formed part of the bank’s strategic redirection efforts rolled out in late 2004.”