HNB’s Rs. 15 b Rights to boost capital, a credit positive: Moody’s

Moody’s Investors Service said yesterday that HNB’s Rs. 15 billion Rights Issuance to boost its capital is credit positive.

Last Wednesday, Hatton National Bank Ltd. (HNB, B1 negative, b15) received shareholder approval for a Rs. 15 billion ($ 190 million) rights issue that will boost the bank’s capital buffer well above the Basel III requirements that took effect in Sri Lanka on 1 July. The bank will complete the rights issuance by the end of this month.

“We estimate that the rights issuance will add 230 basis points to HNB’s Tier 1 ratio, bringing it to 12.9% (see Exhibit 1), well above Sri Lankan banks’ new 10% regulatory minimum with which banks must comply by January 2019. The rights issuance will position HNB’s Tier 1 ratio above the ratios of its domestic peers,” Moody’s said.

It said Sri Lankan banks have been dealing with shrinking capital buffers as loan growth exceeds the growth of banks’ retained earnings. System loan growth was 17.5% in 2016, while retained earnings – particularly at State-owned banks – was negatively pressured by high cash dividend payouts that averaged 75% for that year.

HNB’s higher capital buffer will support its loan growth over the next 12-18 months. We expect HNB’s loan volume to grow by 20% annually during 2017-19, in line with its year-on-year growth rate at the end of March. In this scenario, where we also assume 20% cash dividends every year, HNB’s Tier 1 ratio would be around 13% at the end of 2019 (see Exhibit 2). In a different scenario, where annual loan growth is 25%, we estimate the capital buffer would be around 12% at the end of 2019. The shareholders’ approval of the rights issue is a positive step following HNB’s previously stalled plan to raise capital. HNB had planned to raise capital in 2016 from the Asian Development Bank (Aaa stable), but some shareholders blocked the transaction.