"HNB's ratings reflect its strong domestic franchise in lending and deposit mobilisation as the fourth-largest bank in Sri Lanka, as well as its satisfactory capitalisation and stable operating performance," Fitch said.
"However, HNB exhibits weaker asset quality than higher-rated peers, partly owing to higher and more volatile non-performing loan (NPL) ratios and lower provisions coverage, which constrain its ratings."
HNB's Tier 1 capital adequacy ratio (CAR) was 14.1 percent at end-2012 and is strong in a domestic context, Fitch said.
The ratio fell to 11.85 percent if HNB set aside the full regulatory capital requirement against its gold-backed lending (pawning) portfolio (currently zero capital allocation based on domestic regulations).
The adjusted figure would be modest compared with systemically important banks in the region.
Pawning advances accounted for 16 percent of HN