Fitch Ratings affirm Sri Lanka-based Hatton National Bank PLC’s (HNB) National Long-Term Rating at ‘AA-(lka)’
Fitch Ratings verified the Hatton National Bank of Sri Lanka’s ‘AA(lka)’ rating that it had sufficient assets, but the quality of the assets was under pressure. They expect the capital ratios of HNB to stay sufficient for slower balance sheet development in brief to medium term, but their capital buffers remain susceptible as asset quality deteriorates.
The recorded Non-performing Loan (NPL) ratio of HNB worsened significantly at 1H19 to 4.7%, from 2.8% in 2018, mainly owing to a rise in SME NPLs. The outlook seems stable. Simultaneously, at ‘ AA-(lka), ‘ Fitch asserted the Sri Lankan rupee-denominated senior unsecured debt at the bank. The scores on the Sri Lankan rupee-denominated subordinated debt compatible with HNB Basel II and Basel III are confirmed at ‘ A+(lka).
HNB’s rating is guided by its inherent economic strength, reflecting its powerful national presence as the fourth largest business bank in Sri Lanka, capturing 9%-10% of system assets, loans and deposits by the end of June 2019. The score also requires into consideration the appropriate capitalization of the bank and the economic profile that is usually better than average. A high-risk appetite and a declining credit quality counterbalance this.
HNB’s high-risk appetite arises from its fast credit development and dominance of higher-risk retail and SME sections, which at the end of June 2019 stood at 56 percent of total loans and could rise over the medium term. The recorded Non-performing Loan (NPL) ratio of HNB worsened significantly at 1H19 to 4.7%, from 2.8% in 2018, mainly owing to a rise in SME NPLs. We expect the stress of asset quality to continue in the brief term, but it is less likely that the present rates will deteriorate significantly.
HNB’s Basel II and suggested Basel III-compliant Sri Lankan subordinated rupee-denominated debt is rated one knot below its National Long Term Rating to represent subordination to senior unsecured creditors. The suggested debentures in compliance with Basel III include a non-viability trigger when a trigger event occurs, as determined by Sri Lanka’s Monetary Board.
OSL Take:
An upgrade to HNB’s National Long-Term Rating depends on the bank maintaining improvement in its economic profile, in particular its financing and liquidity and asset quality, as well as demonstration of viable and moderate risk appetite. Foreign businesses could look to form alliances with SME businesses or even set up new companies for them to launch their entrepreneurship with the economic support they currently have at their disposal.
| Article Code : | VBS/AT/03102019/Z_T1 |