Business Times

Fitch upholds HNB’s ‘AA-(lka)’ Stable

International ratings agency Fitch this week upheld an "AA-(lka)" long-term national rating with Stable outlook for Sri Lanka's Hatton National Bank (HNB), adding this reflects "sound financial profile supported by good profitability, asset quality and cpitalisation among local commercial banks".
Further, Fitch's Ratings Action and Commentary (RAC) also suggested a "sustained deterioration in HNB's credit profile relative to 'AA(lka)'-rated peers would add downward pressure to its rating". Additionally, Fitch forecasted "HNB's NPL/loans ratio to operate within the band of 6%-6.5% at end-2010" for this 26% government-owned bank, which was also noted as being the country's fourth largest licenced commercial bank holding 12.4% of all licenced commercial bank assets and "one of six systemically important" local banks.

According to Fitch, as at the end of June 2010, "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."

Also stated was that "net interest margin was 6.0% in FY09 (FY08: 5.7%) - well above the local licensed 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." Meanwhile, Fitch also indicated "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%)."

However, it was added that "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."

Additionally, Fitch was of the opinion that the bank's "asset quality compared well with its peers", noting "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" and "DBU NPL/gross loans reduced to 5.2% at Q310 (FY09: 5.6%) largely due to concerted recoveries."

At the same time, Fitch revealed "HNB's foreign currency loan book in 2010 [had] been vulnerable to some credit exposures to Maldivian resort projects." Adding this accounted for "5.7% of equity at Q310", Fitch also noted "HNB's management expects that te cash-flow pressures on these credits should ease for these projects when they are fully constructed and operational in early 2011."

Also added was that HNB's equity to assets ration was maintained at 9.4% at second quarter of 2010, compared to 9.3% during the financial year ending 2009. Ratios that were said to compare well with those of other banks.

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