CSE gears for this year’s maiden listing with HNB Finance IPO

Marking the first initial public offering (IPO) for 2020, HNB Finance Limited Monday announced plans to list both voting and non-voting shares on the secondary board of the Colombo Stock Exchange (CSE). 

The issue is officially scheduled to open on February 17.

The Hatton National Bank PLC (HNB) subsidiary is offering 10 million voting shares at Rs.5.70 a share to raise Rs.57 million while a further 298.2 million non-voting shares will be offered at Rs.4.20 a share via an Introduction, the prospectus and the introductory document released to the CSE stated.

HNB Finance, which was first known as Ceylinco Grameen—as a part of the now defunct Ceylinco group—was bought over by Prime Lands Group and was re-registered as a fully-fledged finance firm as Prime Grameen Microfinance Limited.

In 2014, HNB acquired 51 percent stake in the company from Prime Lands and was renamed as HNB Finance Limited in 2018. The company is known as a pioneer of Grameen micro-financing model in Sri Lanka and is still among the leading micro-lenders in the country. 

The voting shares offered for sale are the 562.4 million or 39.567 percent held by Prime Lands, which account for only 0.7 percent of the total issued shares of HNB Finance Limited. 

Prime Lands now has its own finance company, Prime Finance PLC.  Another 7.929 percent stake is held by Developing World Markets Funds—a US-based emerging and frontier market fund manager, as the firm’s third largest shareholder.  The shares will be listed on CSE’s secondary Diri Savi Board. For the year ended March 31, 2019, HNB Finance reported earnings of Rs.831 million, down from Rs.1, 012 million a year ago, but the average growth in the bottom line during the last four years has been 11.64 percent. 

Sri Lanka’s banking and finance sector was severely affected during the last three years by rising loan loss provisions and non-performing loans. 

Weak growth and taxes exacerbated problems for the sector, hitting hard on earnings. 

The pace at which the return on equity fell from a high of 53.12 percent in 2015 to 18.96 percent in 2019 after peaking to 60.58 percent in 2016, is a clear reflection of the deeper strain on the sector.  By March 2019, HNB Finance Limited had a loan book of Rs.25.5 billion and a deposit portfolio of Rs.22.6 billion.  The company’s loans, which consist of microfinance, SSE and SME products accounted for 67 percent of the portfolio while leasing introduced in 2015/16 made quick in roads to claim 31 percent of total loans by March 2019.  The company’s non-performing loans ratio rose significantly to 8.85 percent from 3.79 percent in 2018 and the company attributed it to adverse weather, which impacted the agriculture and agri-based industries and other businesses. 

While the company currently maintains higher than required capital adequacy ratios at 9.64 percent and 11.12 percent for Tier I and Tier II capital by July 31, 2019, the minimum regulatory capital adequacy levels are set to increase to 7.0 percent and 11 percent by July 1, 2020 and further up to 8.50 percent and 12.50 percent a year later. Currently the minimum regulatory capital ratios for the licensed finance company sector stand at 6.50 percent and 10.50 percent.