Fitch rates HNB's Subordinated Debt Issue 'A+

Fitch Ratings has assigned Sri Lanka-based Hatton National Bank PLC's (HNB; AA-(lka)/Stable) proposed issue of unsecured subordinated redeemable debentures of up to Rs 4bn an expected National Long-Term rating of 'A+(lka)(EXP)'. HNB plans to list the debentures subject to receiving the necessary regulatory approvals. The final rating is contingent upon the receipt of final documentation conforming to information already received, including details regarding the amount and tenor.

The proposed debentures are rated one notch below HNB's National Long-Term rating of 'AA-(lka)' to reflect their subordinated status. The proposed debentures will have a five-year tenor with bullet principal repayment at maturity. Coupon payments will be at a fixed rate, and paid annually, helping the bank to reduce its exposure to interest rate risk.

HNB expects to use the proceeds to fund its projected lending activities and to strengthen the bank's regulatory Tier 2 capital base.

HNB's ratings reflect its strong domestic franchise and satisfactory financial profile, supported by healthy capitalisation levels, average asset quality and healthy profitability compared with domestic peers. The ratings are, however, constrained by the bank's higher non-performing loan (NPL) concentrations compared with higher-rated peers, most recently driven by its exposure to weak credits in the Maldives. A structurally higher loan/deposit ratio and a lower mix of current and savings deposit accounts, compared with higher-rated peers, are also constraints on the ratings.

A material reduction in HNB's NPL concentrations or a strong commitment to maintaining Tier 1 capital adequacy ratio and impairment reserve coverage above higher-rated peers' over the long-term, could lead to a rating upgrade. Sustained improvements in its current and-savings account base (2012: 45% of deposits) and loans/deposits ratio (2012: 90%) over the medium-term could also support a higher rating.

Conversely, a sustained material weakening in HNB's capitalisation or asset quality relative to its rated peers could result in a rating downgrade.