"The ratings reflect HNB's sound financial profile, supported by robust capitalization, asset quality and profitability among local commercial banks," it said.
"The ratings are, however, are constrained by HNB's loan concentrations to related parties, geographic concentrations in Maldives, and increasing loan/deposit ratios."
Fitch warned that a sustained deterioration in HNB's capitalisation and asset quality relative to 'AA(lka)' peers would put downward pressure on the ratings.
The full ratings report follows:
Fitch Ratings Lanka has affirmed Hatton National Bank PLC's (HNB) National Long-Term rating at 'AA-(lka)'. The Outlook is Stable. The agency has also affirmed HNB's subordinated debentures at 'A+(lka)'.
The ratings reflect HNB's sound financial profile, supported by robust capitalization, asset quality and profitability among local commercial banks. The ratings are, however, are constrained by HNB's loan concentrations to related parties, geographic concentrations in Maldives (23% of equity at H111), and increasing loan/deposit ratios (H111: 94%; 2010: 88%). A sustained deterioration in HNB's capitalisation and asset quality relative to 'AA(lka)' peers would put downward pressure on the ratings.
Tier I and total capital adequacy ratios (factoring un-audited profits in H111), though declined, remained satisfactory at 10.2% and 11.4%, respectively, in H111 (2010: 11.0% and 12.6%). Equity/assets ratio was 9% at H111 (2010: 9.5%). These ratios compared well with peers. In addition, HNB raised LKR6bn Tier 1 capital and LKR2bn sub-debt (Tier II capital) during May-September 2011. Fitch notes that these additional capital infusions will support HNB's future loan growth and increase capital buffers to manage potential loan losses. Management expects to target tier 1 ratios at 11% in the near term after factoring in projected asset growth.
Fitch notes that HNB's loan book steadily increased by 19% yoy in both 2010 and H111 as the post-war domestic economy improved, after a decline to 5% in FY09 from 13% in FY08, similar to other banks. Approximately 42% of the bank's loan book comprised corporate loans, with retail/consumer loans and SME loans accounting for 16% and 13%, respectively, at end-December 2010. At the same time, housing loans, leasing and pawning (gold-backed loans) accounted for 9%, 7% and 13% of loans, respectively.
The bank's asset quality compares well with its peers. Its overall non-performing loans (NPL)/gross loan ratio was 4.78% at H111 (2010: 4.55%) largely driven by improvements in the domestic business unit (DBU) side of the loan book. DBU NPL/gross loans marginally reduced to 3.8% at H111 (2010: 4.0%). However, foreign currency loan book in 2010-H111 was vulnerable due to some credit exposures to Maldivian resort projects. Fitch expects cashflow to turn positive in mid-2012, until which these credits will remain classified as NPLs on HNB's loan book. However, management expects NPL/loans ratio to range between 3% and 4% in 2012, as the bank increases its DBU exposures and remains cautious on its foreign currency business unit's balance sheet.
HNB's current and savings account improved in 2010, accounting for 54.2% of total deposits as at end-December 2010 (46.5% at end-December 2009), although these dropped to 50.3% at H111. This deposit mix helped support HNB's overall net interest margins (H111: 5.4%, 2010: 6.0%), which compared well relative to the sector.
HNB is a licensed commercial bank accounting for 8.9% of banking assets at 2010, and a systemically important bank operating in Sri Lanka. The Government of Sri Lanka and entities related to the Stassen Group held 28% and 18%, respectively, of voting equity at September 2011.