Fitch upgrades Hatton National Bank’s credit outlook

May 31, 2006 (LBO) – Hatton National Bank Ltd, the island’s fourth largest lender in terms of assets, got its credit profile upgraded to ‘A+(lka)’ by Fitch Ratings Lanka. With a positive outlook, the upgrade also elevates HNBs subordinated debt to ‘A (lka)’ from ‘A-(lka)’, the rating agency said Wednesday.

Fitch gave HNB good marks for improving profitability, increasing its capital base and efforts to strengthen their credit risk management.

A key aspect is the improved quality and accessibility of information subsequent to the integration of its software systems.

“However, further strengthening is required, particularly in light of the new demands brought about by Basel II,” the agency noted.

Another point of concern was that the five largest customer exposures, represent 12 percent of HNBs total loans and 123 percent of its equity as at December ’05.

The agency notes that HNB’s asset quality continued to improve led by concerted recoveries with reported non-performing loans (‘NPLs’) reduced by 8-percent in absolute terms during 2005.

In addition, HNBs provision cover on NPLs steadily increased with loan loss reserves covering 71.3 percent of NPLs as at December ’05.

This is nearly double its comparative position as at December ’03 when loan loss reserves only covered 37.8 percent of NPLs.

Given the increased equity base (11.36 billion rupees) and higher provisioning, HNB’s solvency position, as indicated by Net NPL/Equity, improved significantly to 22.1 percent as at December ’05 in comparison to 47.7 percent as at December ’04 (86.8 percent as at December 03).

As such, HNB’s capacity to absorb future loan losses has increased significantly.

HNB’s capital formation has also increased subsequent to the improvements in profitability and the conclusion of two equity infusions totalling 2.4 billion rupees bn in 2004 and in 2005.

Equity/assets ratio increased to 6.5 percent as at December ’05 from 5.6 percent as at December ’04.

Fitch notes that the improved capitalisation will support HNB’s growth, improve its loss absorption capacity and its solvency.

Although HNB’s profitability still lags behind its major peers, the agency notes that its profitability has improved significantly with its return on assets (ROA) at 1.07 percent in 2005, doubling its comparative figure in 2004.

This was largely due to HNB’s improving margins on its lending portfolio as well as the bank’s improved cost management.

For example, its operating expenses/average assets declined to 3.71 percent in 2005 compared to 3.86 percent in 2004 (3.83% in 2003).

Fitch expects HNB’s profitability ratios to improve further in 2006.

HNB has also strengthened its balance sheet by cleaning up its bad loans and raising equity, and is well-placed to face any deterioration in market conditions.

Fitch expects continued positive trends in cost reduction, asset quality, and credit diversity, to add an upward pressure on HNB’s rating.

HNB is currently Sri Lanka’s fourth-largest bank in terms of assets and has a market share of about 10.0 percent in the banking system.

Set up in 1970, HNB is currently the second-largest private commercial bank in Sri Lanka with assets of 174 billion dollars as at December 2005.

The bank offers a full range of commercial banking activities and has lately recorded healthy growth in consumer loans, which now accounts for around 28.0 percent of total loans, and is likely to assist the bank in sustaining margins. HNB is listed on the Colombo Stock Exchange, but two large closely controlled trading houses – the Stassens Group and the Browns’ Group – together control 38.5 percent of the voting equity of the bank.