Higher loan-loss provisions hurt HNB 4Q; full-year profit up 11%

Hatton National Bank PLC (HNB) reported lower profits for the quarter ended December 31 (4Q18) as the increased credit loss expenses upended the financial performance of the country’s second largest private lender. 

The banking group, with an asset base of Rs.1.1 trillion, reported earnings of Rs.9.47 a share or Rs.3.76 billion for the October-December quarter, compared to Rs.4.64 billion in the corresponding period last year, a decline of 19 percent. 

However, on a standalone basis, the earnings of the bank declined by as much as 57 percent to Rs.2.38 billion, as provisions made against the possible bad loans under the new reporting standard surged to Rs.4.67 billion, from Rs.645.7 million in the year earlier period. 

Further, the bank provided an additional provision of a little over a billion rupees for other financial assets and other assets, up from just Rs.100 million in the corresponding period a year ago. 

No bank could escape from significantly higher provisions made on loan and other financial losses in 2018, due to the general deterioration in the asset quality in the banking sector and the change in the provisioning method under the new accounting standard IFRS 09, which change the provisioning method from the incurred credit loss method to the expected credit loss method. 

The HNB group, which also runs a finance company, reported a pre-provision operating income of Rs.21.1 billion for the quarter, up 32 percent year-on-year (YoY). 
The operating income was supported by a strong net interest income and other operating incomes consisting of fee incomes, trading incomes and premium incomes from the banking group’s insurance subsidiary. 

The net interest income for the period rose by 29 percent YoY to Rs.14.9 billion, while the net fee and commission income rose by 28 percent YoY to Rs.17.7 billion. 
The group reported a net trading gain of Rs.863.4 million for the period, compared to a loss of Rs.949.3 million a year ago, mainly due to the revaluation of foreign exchange swaps resulted from the rupee weakness against the dollar. 

“The converse effect is presented in other operating income as foreign exchange gains on position revaluations, which remained at a static level despite the accelerated rupee depreciation,” HNB said in an earnings release. 

The other operating income dropped to Rs.503.7 million, from Rs.1.25 billion a year ago. 

Meanwhile, the group charged an additional Rs.748.5 million as the Debt Repayment Levy for the quarter as the new levy came into effect in October. 
For the year ended in December 31, 2018 (FY18), HNB reported earnings of Rs.35.80 a share or Rs.17.64 billion, compared to Rs.15.95 billion reported in the previous year. 
The net interest income for the year was Rs.53.64 billion, up 18 percent YoY and the total operating income was Rs.75.1 billion, up 23 percent YoY. 
For the full year, the bank provided Rs.8.7 billion for possible bad loans, up from Rs.3.35 billion in the previous year. 

HNB gave Rs.122.1 billion loans during the year, recording a 18.8 percent growth in the loan book, while the deposits grew by 98.5 billion or 14.04 percent. 
The bank’s gross non-performing loans ratio weakened to 2.78 percent, from 2.28 percent, at the beginning of the year. 

As at December 31, 2018, 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.