Sharp increase in impairments eats into HNB 4Q and full-year earnings

• Total operating income more than doubles to Rs.138bn
• Absorbs over Rs.90bn in impairment 
• Stage 3 loan ratio at 3.4%; one of best in industry

Hatton National Bank PLC (HNB), Sri Lanka’s second largest private bank in terms of assets, saw a sharp rise in impairments on possible loan losses eating into the earnings of its fourth quarter and full financial year ended on December 31, 2022.

HNB demonstrated resilience and a staunch focus on sustainable business performance, as it posted Rs.15.7 billion in group profit after tax during 2022, a year marked by extraordinary circumstances and challenges. 
HNB PLC Chairperson Aruni Goonetilleke commented, “The year under review was unprecedented, with a combination of economic stress, social unrest and political instability, which resulted in systemic shocks affecting all Sri Lankans and sectors of the economy and the banking industry in particular. 

Consequently, HNB remained vigilant, carefully recalibrating its priorities to maintain stability whilst supporting customers and keeping stakeholders closely engaged as the crisis unfolded. This focus is clearly affirmed by our performance.” 

The bank’s interest income increased by 110.0 percent year-on-year (YoY) to Rs.207.0 billion, primarily due to the increase in average AWPLR during the year by over 14 percentage points, consequent to the Central Bank’s restrictive monetary policy to arrest the inflationary pressure in the economy. Interest expense also grew at a similar rate, as the high interest rates resulted in an industry-wide shift from CASA to term deposits. The resultant net interest income expanded by 107.6 percent YoY to Rs.102.9 billion.

The bank’s net fee and commission income grew by 57.7 percent YoY to Rs.15.2 billion driven by higher credit card volumes and trade income. Exchange income also improved significantly as the rupee depreciated by nearly 80 percent during the year. However, the exchange impact of impairment provisions on foreign currency loans and investments amounting to Rs.12.3 billion was offset against the exchange gains. Consequently, the non-interest income increased to Rs.35 billion, from Rs.16.2 billion by 117 percent.

Concerted efforts on supporting our customers to revive their businesses and proactive recovery initiatives enabled the bank to maintain its Stage III loan ratio at 3.4 percent, as at end of 2022. Factoring in the economic stress, the bank proactively increased its credit-related impairments by 168 percent to Rs.31.2 billion for the year compared to Rs.11.7 billion in 2021.  

Pursuant to the announcement on suspending repayment of foreign currency debt by the government of Sri Lanka, HNB on a prudent basis recognised an impairment charge of Rs.59 billion in 2022, on account of its investments in foreign currency-denominated government securities. Accordingly, the total impairment charge for the year increased to Rs.90 billion by nearly five folds.

HNB’s total operating expenses recorded an increase of 34.3 percent for the year. However, the operating expenses for 2021 included a reversal of Rs.2.2 billion on account of the provisions made on pension and retirement benefits with the extension of retirement age to 60 years. Excluding this impact, the bank’s operating expenses recorded an increase of 22 percent, in the backdrop of inflation peaking at over 70 percent in September 2022. Despite costs increasing, the cost to income ratio improved to 22.0 percent, compared to 34.4 percent recorded 2021, as the total operating income improved at a much higher rate of 109.8 percent during the year. The bank’s standard tax rate increased from 24.0 percent to 30.0 percent during the year and a newly implemented Social Security Contribution Levy of 2.5 percent came into effect, while VAT on financial services increased from 15.0 percent to 18.0 percent w.e.f. January 1, 2022. Increase in deferred tax asset, as a result of the change in corporate tax rate to 30 percent and substantial impairment charges recognised along with the reversal of previous years’ tax provisions with the settlement of past tax assessments, the bank recognised a tax credit of Rs.2 billion for the current year. 

The bank recorded a profit after tax of Rs.14.0 billion, compared to Rs.17.3 billion recorded in 2021 while the group recorded a PAT of Rs.15.7 billion, compared to Rs.20 billion in 2021. This resulted in an ROA of 0.9 percent and an ROE of 9 percent for the bank. The board of directors of the bank has proposed a final dividend of Rs.5.00 per share in the form of a scrip dividend for both voting and non-voting shares.

Commenting on the performance, Managing Director/Chief Executive Officer Jonathan Alles of HNB PLC stated, “Following the Easter Sunday attacks in 2019 and two years of the pandemic, year 2022 saw a series of extraordinary events unfolding. Suspension of external debt repayments, sovereign downgrades, significant rupee devaluation, increase in interest rates to 30 percent level subsequent to policy rate hikes to curb rising inflation, followed by power disruptions and fuel shortages, led to social unrest and political instability. Although the situation has stabilised since, it added significant pressure on asset quality, liquidity and capital levels of the banking sector.” 

“We saw the need to reprioritise our strategies to address the crisis in hand. Our actions in terms of supporting business revival and tightening our underwriting standards, have enabled us to maintain one of the best stage III ratios in the industry. While we were restricted in supporting our customers with their imports during the height of the foreign exchange shortages, we prioritised essential medicine, food, gas imports and education-related payments. The situation has improved today and this is demonstrated in our liquidity levels which are above the minimum requirements.” 

The bank’s asset base expanded by 24.5 percent to Rs.1.7 trillion during the year, with loans and advances growing by 14.3 percent to Rs.1.1 trillion. The growth was partly due to the devaluation of the rupee during the period and excluding this the growth was limited to 6 percent, as the bank adopted a cautious approach towards lending especially during the second half of the year. Total deposits of the bank grew by 31 percent to Rs.1.4 trillion during the year, complementing the bank’s strategy of improving liquidity in the face of the crisis. Although this was partly supported by the rupee devaluation, LKR deposits saw a significant growth of Rs.191 billion, demonstrating the confidence placed by its customers. 

The bank reported Tier I and total capital adequacy ratios of 11.06 percent and 14.0 percent, respectively against the minimum requirement of 9.5 percent and 13.5 percent, respectively. The Central Bank permitted licensed commercial banks to drawdown up to 250 bps on the capital conservation buffer effectively lowering the requirement to 7 percent and 11 percent, respectively. Furthermore, the bank’s liquidity position further strengthened with the liquid asset ratio and all currency liquidity coverage ratio at 34.0 percent and 519.5 percent, against the statutory requirements of 20 percent and 90 percent, respectively.