Hatton National Bank ‘AA(lka)’ Sri Lanka rating confirmed by Fitch

ECONOMYNEXT – Fitch Ratings has confirmed the ‘AA(lka)’ rating of Sri Lanka’s Hatton National Bank saying it had adequate capital but asset quality was under pressure.

“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,” rating agency said.

“HNB’s reported non-performing loan (NPL) ratio deteriorated sharply to 4.7 percent in 1H19, from 2.8 percent in 2018, due primarily to an increase in SME NPLs.”

The full statement is reproduced below:

Fitch Affirms Hatton National Bank at ‘AA-(lka)’; Outlook
Stable

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.

DEBT RATINGS

HNB’s Sri Lanka rupee-denominated senior unsecured debentures are rated at the same level as
its National Long-Term Rating as they rank equally with other senior unsecured obligations.
HNB’s Basel II- and proposed Basel III-compliant Sri Lanka rupee-denominated subordinated debt
is rated one notch below its National Long-Term Rating to reflect the subordination to senior
unsecured creditors. The proposed Basel III-compliant debentures include a non-viability trigger
upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

RATING SENSITIVITIES

An upgrade of HNB’s National Long-Term Rating is contingent on the bank sustaining an
improvement in its financial profile, particularly its funding and liquidity and asset quality, as well
as demonstration of a sustainable and moderate risk appetite. A rating downgrade could be
triggered by a significant increase in risk-taking and operating environment-related risks, denting
the bank’s asset quality and capital buffers.

DEBT RATINGS

The senior and subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.

Hatton National Bank PLC; National Long Term Rating; Affirmed; AA-(lka);
—-senior unsecured; National Long Term Rating; Affirmed; AA-(lka)
—-subordinated; National Long Term Rating; Affirmed; A+(lka)