Fitch rates Hatton National Bank’s Basel III Sub-Debt ‘A(EXP)(lka)’

Fitch Ratings has assigned Hatton National Bank PLC’s (HNB, AA-(lka)/Stable) proposed Sri Lanka rupee-denominated Basel III-compliant subordinated debentures an expected National Long-Term Rating of ‘A(EXP)(lka)’.

The notes will total LKR7 billion, mature in 10 years and include a non-viability clause. The bank plans to use the proceeds to refinance the debentures maturing in 2021, to further strengthen the Tier 2 capital base of the bank and to support bank’s balance-sheet growth.

The debentures are expected to qualify as Basel III-compliant regulatory Tier 2 capital for the bank and include a non-viability clause subject to the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka. The debentures are to be listed on the Colombo Stock Exchange.

The final rating is subject to the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS

Fitch rates the proposed Basel III Tier 2 notes two notches below the bank’s National Long-Term Rating of ‘AA-(lka)’. The two notches account for loss severity, which reflects poor recovery expectations compared with senior unsecured instruments due to the notes’ subordinated status. The notes would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

HNB’s National Long-Term Rating is used as the anchor rating for this instrument because the rating reflects the bank’s standalone financial strength and best indicates the risk of the bank becoming non-viable.

Fitch has not applied additional notching to the notes for non-performance risk according to Fitch’s criteria, as the notes have no going-concern loss-absorption features, and Fitch believes that conversion of the notes will only occur once the point of non-viability is reached.

HNB’s National Long-Term rating was revised on 25 January 2021 and is highly influenced by our assessment of the operating environment for banks in Sri Lanka. It also reflects its strong domestic franchise as Sri Lanka’s fourth-largest commercial bank and its high capitalisation relative to domestic peers that has helped to counterbalance its risk appetite.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the bank’s National Long-Term Rating will lead to an upgrade of the subordinated debt ratings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of the bank’s National Long-Term Rating will lead to a downgrade of the subordinated debt ratings.