HNB 1Q19 profits halved over higher impairments, taxes

The earnings at Sri Lanka’s second largest private lender by assets more than halved during the quarter ended March 31, 2019 (1Q19), amid a significant rise in provisions on bad loans and higher taxation, the interim financial accounts of Hatton National Bank PLC (HNB) released yesterday, showed. 

The banking group recorded earnings of Rs.3.89 per share or Rs.1.9 billion for the quarter under review, compared to earnings of Rs.8.64 a share or Rs.4.3 billion reported for the corresponding period, last year—a decline of 55 percent. HNB’s impairment charges on possible bad loans rose 206 percent year-on-year (YoY) to 
Rs.4.1 billion.

“The slowdown in economic growth, collection difficulties experienced by many industries as well as the impact from the extreme weather conditions experienced in previous years, has resulted in higher non-performing assets in the banking industry and it continues to affect the current portfolio. 

In addition, the introduction of the stringent SLFRS9 requirements on impairment on performing loans as well as on investments in other financial instruments has contributed to an increase in impairment charges for the period,” HNB Managing Director/CEO Jonathan Alles said in an earnings release. 

The banking group reported a net interest income of 14.6 billion for the quarter under review, up 21 percent YoY while the net income from non-core banking operations rose 5 percent YoY to Rs.2.5 billion. 

HNB’s loan book and deposit growth virtually remained unchanged from three months ago at Rs.749.8 billion and Rs.799.6 billion, respectively. The bank’s total assets on a stand-along basis also failed to record any growth. 

Meanwhile, HNB’s operating expenses increased by 17.9 percent YoY to Rs.5.9 billion and the bank reported a cost-to-income ratio of 39.6 percent for the quarter under review.  
The bank’s gross non-performing advances ratio rose to 4.63 percent from 2.78 percent, on December 31, 2018.

As at March 31, 2019, HNB remained comfortably above the regulatory capital ratios.

Meanwhile, the bank said the introduction of the Debt Repayment Levy in 4Q18 as well as the removal of certain exemptions on income from investments with effect from April 2018, resulted in an increase in the total effective tax rate to a significant 58.6 percent.

Accordingly, HNB’s total tax charge amounted to Rs.2.9 billion for the period under review.

“Amidst macroeconomic gains, Sri Lanka’s economic growth trajectory remains underwhelming and meandering below 4 percent. 

This has occurred due to a combination of tepid domestic demand, reduced government expenditure towards managing its deficit, tightening monetary policy, the political upheaval during the final quarter of 2018 and the overwhelming debt burden. Most of all this continues to exert enormous pressure on the performance of the financial sector,” HNB Chairman Dinesh Weerakkody said. 

Meanwhile, Alles added the prevalent uncertainty in the market, rising debt collection challenges, the resultant negative impact on many industries led by tourism, in particular following the tragic events of April 21, the knock-on effect on value chain business—supply, distributor and related as well as unfavourable taxation policies could inhibit growth of the banking sector. 
As at March 31, 2019, the government controlled a 25.12 percent stake in HNB through the Employees’ Provident Fund, Sri Lanka Insurance Corporation Limited and National Savings Bank. 

Harry Jayawardena-controlled Milford Exports Ceylon Limited, Stassen Exports Limited and Distilleries Company of Sri Lanka collectively held a 17.83 percent stake but their voting rights are limited to 10 percent.