Fitch affirms HNB at 'AA-(lka)'

Fitch Ratings Lanka has affirmed Hatton National Bank PLC's (HNB) National Long-Term rating at 'AA-(lka)'. The outlook is stable.

The agency has also affirmed HNB's subordinated debentures at 'A+(lka)'.

The ratings reflect HNB's sound financial profile, supported by robust capitalization, asset quality and profitability among local commercial banks.

The ratings are, however, are constrained by HNB's loan concentrations to related parties, geographic concentrations in Maldives (23% of equity at H111), and increasing loan and deposit ratios (H111: 94%; 2010: 88%).

A sustained deterioration in HNB's capitalisation and asset quality relative to 'AA(lka)' peers would put downward pressure on the ratings.

Tier I and total capital adequacy ratios (factoring un-audited profits in H111), though declined, remained satisfactory at 10.2% and 11.4%, respectively, in H111 (2010: 11.0% and 12.6%). Equity/assets ratio was 9% at H111 (2010: 9.5%). These ratios compared well with peers. In addition, HNB raised Rs 6 bn Tier 1 capital and Rs 2 bn sub-debt (Tier II capital) during May-September 2011. Fitch notes that these additional capital infusions will support HNB's future loan growth and increase capital buffers to manage potential loan losses.

Management expects to target tier 1 ratios at 11% in the near term after factoring in projected asset growth.

Fitch notes that HNB's loan book steadily increased by 19% yoy in both 2010 and H111 as the post-war domestic economy improved, after a decline to 5% in FY09 from 13% in FY08, similar to other banks. Around 42% of the bank's loan book comprised corporate loans, with retail/consumer loans and SME loans accounting for 16% and 13%, respectively, at end-December 2010.

At the same time, housing loans, leasing and pawning (gold-backed loans) accounted for 9%, 7% and 13% of loans, respectively.