(Repeat for additional subscribers)
May 20 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Sri Lanka-based Hatton National Bank PLC's (HNB)
National Long-Term Rating at 'AA-(lka)'. The Outlook is Stable. The agency also affirmed HNB's
outstanding senior unsecured debentures at 'AA-(lka)' and subordinated redeemable debentures at
KEY RATING DRIVERS - NATIONAL LONG-TERM RATINGS AND DEBT
HNB's National Long-Term Rating is driven by its intrinsic financial profile,
which reflects its long and resilient operating history, strong deposit and
lending franchise and satisfactory capitalisation. In addition the rating
captures HNB's relatively higher risk appetite resulting in volatile asset
The senior unsecured debentures are rated at the same level as HNB's National
Long-Term Rating as they constitute direct, unconditional, unsecured and
unsubordinated obligations of the bank, and will rank equally with all its other
unsecured and unsubordinated obligations. HNB's subordinated debt is rated one
notch below the National Long-Term Rating to reflect its relatively lower
recovery prospects in liquidation.
HNB's loan book is shifting towards larger, mid-sized corporates from its
previous focus on retail and SME sectors, which, while adding to
diversification, results in lower returns. Exposure to large- and medium-sized
corporates increased to 35% of the loan book at end-2013 from 29% at end-2012.
This was the main reason the bank's loan book expanded by 17% in 2013, outpacing
the 9% loan growth in the wider banking sector. In 2012, HNB's loan growth was
18% compared with 21% in the banking sector. HNB is also reducing its pawning
exposure now that quality has started to deteriorate.
The marginal improvement in HNB's regulatory non-performing-loans (NPL) ratio to
3.64% at end-2013 from 3.66% a year earlier was driven by growth in the loan
book. It actually masked the 18% absolute increase in gross NPLs in 2013. HNB's
loan loss provisioning improved during 2013 as the bank started providing for
losses stemming from gold-backed pawning advances, but it remained lower than
its domestic peers'.
Capitalisation remained comparable with domestic peers', although it declined
during 2013 due to higher asset growth compared to its peers. HNB's Fitch core
capital ratio normalised to 16.8% at end-2013 from 18.4% at end-2012.
Profitability declined in 2013 as a result of higher provisioning and compressed
margins. The latter was driven by pawning interest write-offs, higher deposit
rates and lower yielding new corporate loans. HNB's margins however, remained
wider than that of peers, supported by its relatively higher exposure to retail
and SME segments. HNB's efforts in centralising its processes and use of
technology should further improve its high cost-to-income ratio.
HNB benefits from a large and fairly stable deposit base as a result of its
strong franchise - it is the fourth-largest commercial bank in Sri Lanka by
assets. Bank's loan/deposit ratio increased to 94% amid higher loan growth
during 2013 (end-2012: 91%). Fitch believes that reducing this ratio would
require the bank to slow down loan growth because deposit growth is unlikely to
keep pace with loan growth.
RATING SENSITIVITIES - NATIONAL LONG-TERM RATING AND SENIOR DEBT
Fitch views the upside potential of HNB's ratings as limited given its higher
risk appetite, which has led to weaker through-the-cycle asset quality compared
with peers'. A material increase in risk taking, unless sufficiently mitigated
through capital and financial performance, could result in a rating downgrade.
The ratings of senior and subordinated debt are primarily sensitive to changes
in HNB's National Long-Term Rating.