Fitch rates HNB’s subordinated debt Final ‘A’

Fitch Ratings has assigned Sri Lanka-based Hatton National Bank PLC’s (HNB; AA-(lka)/Stable) issue of unsecured subordinated redeemable debentures of up to Rs. 4 billion a final National Long-Term rating of ‘A+(lka)’.

The assignment of the final rating follows the receipt of final documents which conform to information previously received. The final rating is at the same level as the expected rating assigned on 11 April 2013 (see ‘Fitch Rates Sri Lanka’s HNB’s Subordinated Debt Issue ‘A+(lka)(EXP)’’ at - www.fitchratings.com).

Rating Action Rationale

The debentures are rated one notch below HNB’s National Long-Term rating of ‘AA-(lka)’ to reflect their subordinated status. The debentures have a five-year tenor with bullet principal repayment at maturity. Coupon payments are at a fixed rate, and paid annually, helping the bank to reduce its exposure to interest rate risk. The debentures do not contain any deferral clauses and therefore Fitch has not assigned any equity credit to this issue.

HNB is to use the proceeds to fund its projected lending activities and to strengthen the bank’s regulatory tier-two capital base.

Key Rating Drivers

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 rating constraints.

Rating Sensitivities

A material reduction in HNB’s NPL concentrations or a strong commitment to maintaining tier-one 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.