Sri Lanka’s HNB given ‘B1’ rating: Moody’s

Apr 02, 2012 (LBO) – Sri Lanka’s Hatton National Bank has been given a ‘B1’ foreign currency rating, based on its own balance sheet and possible state support, Moody’s Investors Service said. The rating has a stable outlook.

The rating agency said HNB had maintained “above-average capitalization
Levels” compared with similarly rated bank banks in the Asia-Pacific
Region but it was vulnerable to cyclical shocks in emerging markets.

Sri Lanka has also been given a ‘B1’ rating by Moody’s

The full statement is reproduced below

Singapore, April 02, 2012 — Moody’s Investors Service has assigned
following debt and deposit ratings to Hatton National Bank, with a stable
outlook.

The detailed ratings assigned are:

Local currency deposits: B1/NP

Foreign currency deposits: B2/NP

Foreign currency senior unsecured debt: B1

Foreign currency Issuer rating: B1

Moody’s has also assigned E+ bank financial strength rating (BFSR),
mapping to a baseline credit assessment (BCA) of b1, with a stable
outlook.

This is the first assignment of international ratings for HNB. These
ratings and outlooks take into account the balance of strengths and
weaknesses characterizing HNB’s credit profile on a standalone basis, as
well as our assumptions on the probability of government support in times
of stress, which we assess as moderate.

At E+ / b1, our support assumption does not result in any rating uplift.

HNB’s business model is geared towards lending to corporates and small
and medium-sized enterprises, though it has a diversified portfolio of
retail clients and products. Its credit profile is characterized by a
significant domestic franchise, with a market share of approximately 10%
and an extensive network of branches and ATMS distributed throughout the
country.

From this platform, HNB has steadily generated strong
profitability while building and maintaining above-average capitalization
levels relative to other similarly-rated banks rated in the Asia-Pacific
region.

At the same time, the bank is inherently vulnerable to the
cyclicality typically associated with emerging markets, which exposes it
to periodic asset quality pressure, as evidenced by its non-performing
loan record. Also, for a bank exposed to such risk, we consider its
provision coverage to be low.

Although net interest margins were under pressure during 2011, they
remained high at nearly 5%. HNB also reported a relatively strong
pre-provision income level of 3.7% and a return on average risk-weighted
assets of 2.6% in 2011. Going forward, we expect HNB’s strong
profitability to continue as a result of the investments it has made in
recent years to expand its reach through the country by materially
increasing its branches and ATMs. This should also help improve its
efficiency (cost to income) ratio, which currently stands at a relatively
high level of close to 60%.

At 13% of risk-weighted assets, HNB’s core Tier 1 capitalization levels
at end-2011 would allow it to sustain an adverse downside scenario, and
the banks’ continued profitability level and internal capital generation
policy should contribute to safely maintain capital above 10% going
forward, even when assuming a 20% risk-weighted asset growth.

On the other hand, the bank’s standalone rating of b1 takes into account
the high level of non-performing loans, which is only partly offset by
the bank’s elaborate risk management framework. HNB’s asset quality
indicators compare weakly to its Asia-pacific peers in the same rating
category. Gross non-performing loans are high at 4.56%, whereas provision
coverage is low at 49%.

Although the bank has implemented risk management processes, which
include clearly laid out limits and controls established on the basis of
forward-looking internal ratings and dynamic risk-return analysis, the
asset quality indicators could rapidly deteriorate in a cyclical downturn
given the rapid credit growth during 2010 and 2011. The unavoidable rapid
increase provisioning that would result when considering the low base
from which these provisions would start would pressure the banks profits.

HNB’s rating outlook could be lowered if the core Tier 1 capital ratios
drop to below 10% and net NPL ratio exceeds 2.5%. If the profitability
drops to under 1.5% of risk-weighted assets and weighs on internal
capital generation, then the ratings would be under pressure.

To be upgraded, HNB will need a combination of two factors: a
demonstrated resilience of its core financial ratios over time; and an
upgrade of the government rating against which it would otherwise be
constrained.

The foreign currency senior unsecured debt rating of B1 factors in the
moderate level of systemic support from the government, which is also
rated B1 for foreign currency debt. As part of Moody’s joint default
analysis model, Moody’s considers Sri Lanka to be a medium support
country. In assessing the probability and likelihood of external support,
Moody’s took into account the systemic importance of the bank, as well as
the willingness and capacity of the government to provide support,
including the non-fiscal measures that could be deployed to support a
bank, if needed.

Established in 1888 and headquartered in Colombo, HNB had assets of
LKR388.59 billion at end-December 2011.