Fitch affirms Hatton National Bank at ‘AA-(lka)’; Outlook stable

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Fitch Ratings has affirmed Sri Lanka-based Hatton National Bank PLC’s (HNB) National Long-Term Rating at ‘AA-(lka)’. The Outlook is Stable.

At the same time, Fitch has affirmed the bank’s Sri Lanka rupee-denominated senior unsecured debt at ‘AA-(lka)’.

The ratings on HNB’s Basel II and Basel III compliant Sri Lanka rupee-denominated subordinated debt are affirmed at ‘A+(lka)’. Key Rating Drivers HNB’s rating is driven by its intrinsic financial strength, reflecting its strong domestic franchise as Sri Lanka’s fourth-largest commercial bank, commanding 9%-10% of system assets, loans and deposits at end-June 2019.

The rating also takes into account the bank’s adequate capitalisation and generally better-than-average financial profile. This is counterbalanced by a high risk appetite and a deteriorating loan quality. We expect HNB’s capital ratios to remain adequate in the short- to medium-term on slower balance-sheet growth, but its capital buffers remain vulnerable as asset quality deteriorates.

The last capital raising took place in July 2017 via a rights issue that brought in LKR14.5 billion (USD95 million) in cash. HNB’s high-risk appetite stems from its rapid loan expansion and dominance of higher-risk retail and SME segments, which stood at 56% of total loans at end-June 2019 and could increase in the medium term.

HNB’s reported non-performing loan (NPL) ratio deteriorated sharply to 4.7% in 1H19, from 2.8% in 2018, due primarily to an increase in SME NPLs. We expect asset-quality pressure to persist in the short term, but a significant deterioration from current levels is less probable.