HNB reports higher profits despite increase in impairment provisions

Hatton National Bank PLC (HNB) reported slightly higher earnings in the three months ended on March 31, 2022, although the bank made hefty provisions against the possible loans and other financial asset losses after the economy made a hard landing in March, with the botched rupee float causing runaway prices and other anomalies, prompting the authorities to suspend foreign currency debt. 

The second largest private lender by assets reported earnings of Rs.9.22 a share or Rs.4.94 billion for the January-March quarter, compared to Rs.8.83 a share or Rs.4.73 billion in the same period in 2021, recording a 4 percent increase. 

The bank made provisions of Rs.13.54 billion for loans and other financial asset losses to reflect the economy, which has been driven into pits, with widespread shortages in commodities, daily power cuts and hyperinflation, threatening its borrowers with insolvency, while the debt default prompted the banks to assume losses on their holdings of the dollar bonds issued by the government.

This was a multifold increase from Rs.2.92 billion provided in the same period in 2021.  
The bank said it booked an impairment provision of Rs.7.4 billion against the foreign currency-denominated loans and investments, which was set off against the position revaluations. 

HNB did not recognise the revaluation losses as part of its net other operating incomes as many other banks did in their interim results. But it made a net trading gain of Rs.7.43 billion, most of which may have come from the fair value gains made on foreign exchange derivatives on the bank’s net open positions. 

In the corresponding period, these gains were only Rs.93.5 million.   The steeper fall in the rupee against foreign currencies and the April announcement of the foreign currency debt suspension and the resulting rating downgrade made all the difference in the bank’s financial performance in the March quarter, sending provisions skyrocketing and making massive trading gains, which were largely offset by the revaluation losses.   The rising interest rates and dourer economic situation that prevailed particularly from around February made the growth in new loans anaemic, nearly stalling the growths in the bank’s balance sheets. 

The growth reported in the bank balance sheets in the first quarter was largely a result of its assets and liabilities getting revalued at the March 31, 2022 dollar/rupee exchange, which was at least 50 percent weaker than the start of the year. 

As a result, at HNB, “the advances recorded a growth of 8.8 percent since December 2021 to surpass Rs.1.0 trillion while deposits grew by 13 percent during the three months to reach Rs.1.2 trillion,” the bank said. 
But the rupee loans and deposits grew by modestly. 

For instance, at HNB, the rupee loans grew by Rs.33.6 billion or 4.06 percent and the rupee deposits grew by Rs.46.4 billion or 5.5 percent.  Meanwhile, the bank’s net interest income grew by a robust 54 percent to Rs.18.89 billion while the net fee income grew by an equally strong 51 percent to Rs.22.4 billion from the same period in 2021. The latter got a boost from the increased cards and trade incomes, the most common feature across the industry. 

The bank meanwhile managed to stretch its net interest margin to 4.71 percent, from 3.70 percent in December 2021. 

The gross non-performing loans ratio fell to 2.41 percent, from 2.55 percent in the three months. 

HNB remains one of the most well-capitalised and liquid banks to withstand the shocks stemming from the macroeconomic environment, as its regulatory capital and liquid asset ratios stand well above the regulatory minimums.