Moody’s confimrs Hatton National Bank ‘B1’ rating
COLOMBO (EconomyNext) – Moody’s Investors Service said it confirmed a B1 freign currency issuer rating of Sri Lanka’s Hatton National Bank with a stable outlook.
The rating agency said the bank had good capital adequacy and ‘healthy profitability’ levels though loans-to-deposit ratio was bove 90 percent.
Though asset quality had fallen due to defaulting gold loans, there were improvemnts in the second and third quarters of 2014. Gross bank only non performing loans was 3.7 percent by end September from 4.5 percent in the first quarter/
The full report is report is reproduced below:
Moody’s confimrs Hatton National Bank ‘B1’ rating
Singapore, January 20, 2015 — Moody’s Investors Service has affirmed thefollowing ratings of Sri Lanka-based Hatton National Bank Ltd. (HNB): B1/B2 local and foreign currency deposits, B1 foreign currency issuer ratings, as well as the E+ bank financial strength rating (BFSR, which corresponds to a baseline credit assessment of b1).
Concurrently, the bank’s Non-Prime short-term ratings were also affirmed. The outlook is stable.
The affirmation of HNB’s ratings is driven by the bank’s stable financial performance, notably its good capital adequacy position and healthy profitability levels. These positive rating drivers are somewhat offset by HNB’s comparatively tight liquidity profile as demonstrated by the loans-to-deposits ratio (LDR) above 90%, and volatility in asset quality metrics.
HNB’s asset quality deteriorated in 2013 and early 2014 due to stress in the pawning loan segment (loans secured by gold) and in some corporate exposures, before showing signs of improvements in the second and third quarters of 2014. Moody’s notes that HNB’s asset quality is superior to that of the domestic banking system. At end-September 2014, HNB reported a gross bank-only NPL ratio of 3.7%, down from 4.5% in Q1 2014.
The improvement was related to both write-offs and recoveries in some large corporate non-performing loans (NPL). Over the next 12-18 months, we expect NPL formation rates to decrease, given the reduction in credit growth in pawning loans and improved underwriting standards over the last few quarters.
While HNB’s reported Tier 1 capital ratio (excluding year-to-date profits) of 12.3% at end-September 2014 was lower than the 13.3% (including year-to-date profits) at end-2013, this deterioration was largely due to dividend payouts.
HNB’s LDR was mostly flat in 2012-2014, at around 90%-93%. However the quality of the deposit base was strengthened by a higher share of sticky current and saving accounts (CASA), which increased to 42.3% in Q3 2014 from 39% in 2012. The LDR is supported by a faster growth in deposits (11% for 9M 2014), compared to loans (9%)
The bank reported a strong bank-only net interest margin (NIM) of 4.8% for the first nine months of 2014, driven by high yields from its SME and retail pawning loans. By contrast, the system average NIM was around 3%.
Moody’s notes that HNB’s NIM decreased in 2014 and 2013 firstly because lending rates declined in response to monetary policy easing, and secondly because of HNB’s increased focus on lending to lower-yielding corporations when compared to the retail segment.
The bank’s ROAA remains relatively healthy at 1.5% for the first nine months of 2014, supported by lower credit costs (9M 2014: 0.84%, 9M 2013: 1.07%).
We expect profitability to remain stable over the next 12-18 months, as the normalisation in the cost of risk will balance somewhat the pressured NIMs. Since a major part of HNB’s loan book is linked to the prime lending rate, which has reduced to around 6.5% currently, from 14% in early 2013, lending rates on loans have been re-priced to lower levels and we don’t expect any major further drop in lending rates in the next quarters.
Moody’s views the probability of systemic support for HNB in times of stress as moderate. HNB is a private sector bank with a share of around 10% of system assets at end-September 2014. However, this does not result in any rating uplift for HNB, because the B1 rating of
Sri Lanka’s government is at the same level as HNB’s baseline credit assessment (BCA).
WHAT COULD CHANGE THE RATINGS UP/DOWN
HNB’s ratings will be upgraded if: (1) its asset quality improves and the LDR decreases substantially; and (2) the government’s bond rating is upgraded.
The combination of the following factors could result in negative rating actions: (1) reported core Tier 1 capital ratio falling below 9%; (2) gross NPL ratio exceeding 5%; (3) risk-adjusted profitability, as measured by net income as a percentage of average risk-weighted assets (RWA), falling below 1.5%, pressuring its internal capital generation; and/or (4) LDR rising above 100%, while its current account savings account (CASA) deposits and government securities reduce significantly.
Headquartered in Colombo, Sri Lanka, HNB had assets of LKR571 billion at end-September 2014.