"The rating action reflects HNB's improving financial profile, supported by equity infusion, improving profitability and risk management systems," Fitch Ratings said in a statement on Friday.
Sri Lanka's largest quoted commercial bank got good marks for beefing up its capital through a local rights issue (Rs. 1.43 billion in Nov. '04) and a global depository receipts issue of Rs.
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940 million in June '05.
The equity injection, will support continued growth and improve loss absorption capacity.
HNB's post GDR capital adequacy ratio is estimated at 12.1 percent (Tier 1 – 10.6 percent).
HNB's operating profitability has grown healthily with consumer loans accounting for 28 percent of total lending. This will help the bank to sustain margins, as well as fee income in the coming months.
However, HNB's profitability still remains a weak spot, said Fitch.
"HNB's profitability still lags that of its major peers, burdened by a high overhead structure and NPL drag. HNB's cost to income ration in 2004 was 68 percent."
"While cost management has received increased attention in recent times, material improvements would be challenging given the rigid nature of certain cost items such as wages and pension costs, which now make up a sizeable share of total costs."
Higher taxations facing the banking industry will also put a squeeze on HNB's profitability.
While the bank worked hard to cut non-performing loans (NPL) to 27 percent over the last two years, its 49 percent loan loss reserve coverage falls bellow its major peers.
The bank is also exposed to some concentration risk, with the largest customer exposures representing 12 percent and 123 percent of its total loans and equity respectively as at Dec.
2004.
While the rating outlook is stable, material improvements in profitability, risk management systems and asset quality could result in an upward revision of the rating.
Downside risk to the rating largely stems from a substantial deterioration in asset quality.
This could be driven by a considerably weaker macro environment or poor loan disbursal although Fitch expects ongoing improvements to credit risk management to mitigate the latter to a large extent.
HNB has 144 customer center scattered islandwide offering a broad range of services. The bank also has subsidiaries engaged in stockbroking and insurance.
HNB is listed, but two large trading houses – the Stassens Group and the Browns Group (also listed) – together control about 38.5 percent of voting stock.
Fitch Ratings Lanka Ltd is a joint venture between Fitch Ratings, USA, the International Finance Corp., Sri Lanka’s Central Bank and several other leading local financial institutions.
-LBO Newsdesk: lboemail@vanguardlk.com