Fitch rates HNB’s proposed sub debt ‘A+’

Monday, 22 August 2011 00:17 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has assigned Hatton National Bank PLC’s (HNB) proposed subordinated debentures of up to Rs. 2 b a National Long-Term rating of ‘A+(lka)’.

The issue is rated one notch below HNB’s National Long-Term rating reflecting its debt-like features. The proposed debentures will have a maturity of 10 years with principal repayment as a bullet payment on maturity. Coupon payments will be semi-annual at a fixed rate and do not contain any deferral clauses. The debentures are to be listed on the Colombo Stock Exchange alongside HNB’s other listed and rated debentures.

As at June 2011, HNB’s tier I and total capital adequacy ratio (CAR) was 9.13% and 10.3%, respectively, at the bank level. The subordinated debenture issue will increase HNB’s regulatory Tier 2 capital from Rs. 2.7 b as at June 2011 to Rs. 4.7 b and enable the bank to better match projected growth in its housing loan book.

As such, Fitch estimates that the bank’s total regulatory CAR would incrementally rise by about 0.87% after the issuance in June 2011, excluding un-audited profit for the six-month period ended June 2011 and the subsequent rights issue announced by the bank.

However under Fitch’s criteria, these securities will receive zero equity credit as they do not allow for going-concern loss absorption. By itself, further expected strong growth at the bank will result in a weakening of its capitalisation, as per the agency’s measures.

Fitch notes that HNB’s loan book steadily increased by 19% yoy in 2010 and the first half of 2011 as the post-war domestic economy improved. It shrank by 5% in FY09 similar to other banks (FY08 loan growth: 13%).

Approximately 42% of HNB’s loan book comprised corporate loans, with retail/consumer loans and SME loans accounting for 29% 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. Pawning was included under consumer loans.

HNB’s current and savings account improved in 2010, accounting for 54.2% of total deposits as at end-December 2010 (46.5% as at December 2009). The comparative figure as at June 2011 was 50.3%. This secular change in HNB’s deposit mix will be positive to HNB’s overall net interest margins.

HNB is a licensed commercial bank. The Government of Sri Lanka, entities related to the Stassen Group (excluding CBD Exports Ltd.) and the Browns Group held 27%, 18% and 7%, respectively, of voting equity at December 2010.