HNB’s potential BAFL acquisition unlikely to impact ratings: Fitch

Hatton National Bank’s (HNB) potential acquisition of Bank Alfalah Limited’s (BAFL) Bangladesh operations is unlikely to affect the Sri Lankan bank’s ratings, Fitch Ratings said.

The rating agency said it believes the acquisition, if it proceeds, would have only a modest impact on HNB’s capital.

HNB announced on 26 August 2024 that it has made a non-binding offer on the acquisition. This is after Bank Asia Limited (Bangladesh) made a similar non-binding offer in April 2024. 

Both offers have been accepted in principle, subject to compliance with all applicable laws and regulations. The next step is Central Bank approval for commencement of the due diligence process.

“We see limited downside pressure on HNB’s capitalisation metrics should the acquisition proceed. At end-2023, BAFL had assets totalling nearly Rs. 80 billion and equity amounting to Rs. 15.5 billion. This is about 5 percent of HNB’s assets and 8 percent of its equity at the bank level, indicating that the possible acquisition is small relative to HNB’s overall size,” Fitch Ratings said in a commentary.

It added that it expects the acquisition would lead to less than a 1pp drop in HNB’s capital ratios due to an increase in risk-weighted assets. 

While pointing out that the bank’s capital could be exposed to exchange-rate risks, particularly in the event the taka depreciates against the Sri Lankan rupee, Fitch said it believes this would be manageable given its capital buffers. HNB’s common equity Tier 1 capital ratio stood at 16.2 percent at end-1H24 at the bank level, including 1H24 profit, the highest among Sri Lanka’s domestic systemically important banks.

The proposed acquisition provides HNB an entry into Bangladesh (B+/Stable), a much larger economy than Sri Lanka. However, Fitch do not expect this exposure to be sufficiently material in the medium term to mitigate the risks associated with the bank’s dominant exposure to Sri Lanka. 

It asserted that it expects its standalone credit profile assessment to be largely linked to the domestic operating environment, despite the risk diversification, until its operations in Bangladesh expand meaningfully. The bank currently has modest overseas exposure via its lending to entities based outside the country.

It noted that the impact on HNB’s other financial profile-related factors to be limited, should the acquisition occur, as the Bangladesh operations are likely to account for only a small share of HNB’s balance sheet. 

BAFL’s Bangladesh operations remain robust, with low default rates due to its focus on corporate clients. It is well-capitalised, with a Tier 1 ratio of over 70 percent and an operating profit/risk-weighted asset ratio of 9 percent.

Among the Sri Lankan banks, Commercial Bank of Ceylon PLC (A(lka)/Stable) already has a presence in Bangladesh following its acquisition of Credit Agricole Indosuez in 2003. The bank’s Bangladesh operations now account for 15.5 percent of its assets (2005: 8 percent) but the contribution to profitability has been higher in the past two years due to weak profitability in Sri Lanka.

BAFL, owned and operated by the Abu Dhabi Group, is a multinational bank with operations in Pakistan, Afghanistan, Bangladesh, Bahrain and the United Arab Emirates. BAFL is one of the largest banks in Pakistan, but its operations in Bangladesh are much smaller, accounting for just 2 percent of its total assets.