Fitch Affirms Hatton National Bank 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 its strong capitalisation levels, asset quality and profitability among local commercial banks. The ratings are, however, constrained by the bank's exposure to weak credits in Maldives, lower loan loss reserve coverage and a rising loan/deposit ratio. Therefore, a sustained improvement of these three factors would lead to a rating upgrade. Conversely, a sustained deterioration in HNB's capitalisation and asset quality relative to 'AA(lka)' peers would result in a rating downgrade.

Fitch notes that regulatory Tier I and capital adequacy ratios improved to 12.9% and 14.8%, respectively, at end-2011 (end-2010: 11.0% and 12.7%) due to the Rs 6.1billion Tier I and Rs 2billion Tier II capital raised in 2011. Nevertheless, the low loan loss reserve cover of 31% (including general provisions coverage was 41%), amid high loan growth and associated risks with a fast growing emerging market economy, warrant a higher overall capital buffer.

HNB's return on assets has stayed above 1.6% in the last three years, supported by its high exposure to retail and SME segments. This has benefited its high net interest margins (above 5% in the last five years), despite a relatively high cost-income ratio (60% in 2011).

While the bank's increasing focus towards SME and retail loans has also diversified its domestic loan book composition, the SME sector is more vulnerable to economic cycles and sudden shocks, and may expose the bank to potential higher credit costs in future. Although reported gross non-performing loan ratio fell to 3.92% at end-2011 (2010: 4.51%), the specific low loan loss reserve cover, vulnerability of domestic loan-book to global economic slowdown, growing SME book, and exposure to Maldivian resort projects (23% of equity at end-2011) mean downside risks from asset quality remain.