Fitch Affirms Hatton National Bank at ‘AA-(lka)’; Outlook Stable
Fitch Ratings has affirmed Sri Lanka-based Hatton National Bank PLC’s (HNB) National LongTerm Rating at ‘AA-(lka)’. The Outlook is Stable. At the same time, Fitch has affirmed the bank’s Sri Lankan rupee senior unsecured debt at ‘AA-(lka)’. The ratings on HNB’s Basel II- and Basel IIIcompliant Sri Lankan rupee subordinated debt have been affirmed at ‘A(lka)’.
KEY RATING DRIVERS
HNB’s National Long-Term Rating is driven by its intrinsic financial strength and highly influenced by our assessment of the operating environment for banks in Sri Lanka. It also reflects the bank’s superior domestic franchise as Sri Lanka’s fourthlargest commercial bank and its high capitalisation relative to domestic peers that has helped to counterbalance its risk appetite.
The operating environment in Sri Lanka continues to be challenging. Sri Lanka’s real GDP contracted by 3.6% in 2020 as key economic sectors were severely disrupted due to the coronavirus pandemic and the lockdowns to control the spread. We expect economic growth to rebound by 3.8% in 2021 and 3.9% in 2022 but this will depend largely on the containment of new Covid-19 cases in the country. The outlook on the operating environment assessment is maintained at negative to reflect the potential for further risks stemming from the sovereign credit profile or pressure on domestic operating conditions beyond our expectation independent of changes in the sovereign rating.
HNB’s high-risk appetite is reflected in its significant exposure to the retail and SME segments (59% of its total loans at end-2020), which, in our view, are more vulnerable to deteriorating economic conditions. The bank also has a higher share of assets invested in the sovereign’s foreign-currency instruments (2020: 14% of assets) relative to peers. HNB’s common equity Tier 1 ratio of 15% at end1Q21 was the highest among large private banks. Capital ratios continued to benefit from slow loanbook expansion amid the challenging operating conditions.
We expect the bank to sustain its healthy capitalisation in the near term despite a potential pickup in lending as economic activity recovers. Fitch expect continued slow loan-book expansion, high share of low-yielding liquid assets and elevated credit costs to weigh on HNB’s profitability in the medium term amid thinning net interest margins (NIM). HNB’s core profitability metric - operating profit/risk-weighted assets - rebounded in 1Q21 to 3.4% after decreasing in 2020 to 2.5%, as a result of lower credit costs while its pre-provision profitability in 1Q21 remained largely unchanged from end-2020, in contrast with peers’ improvement, as its loan book contracted and NIMs declined further.