Hatton National Bank’s second quarter profits decline as impairments surge

Hatton National Bank PLC (HNB) saw its June quarter (2Q22) profits declining amid massive impairment charges on possible loan losses and against foreign currency denominated government securities following the foreign currency debt default by the government.

The banking group reported earnings of Rs.1.63 per share or Rs.871.4 million for the quarter under review compared to earnings of Rs.8.87 per share or Rs.4.7 billion reported for the corresponding period of the previous year.
The earnings were helped by a Rs.451 million tax reversal during the quarter under watch compared to a tax expense of Rs.1.16 billion a year ago. 

For the quarter ended June 30, 2022, the banking group provided Rs.27.2 billion for possible loans and other losses and for the first half as such provisions rose to whopping Rs.40.7 billion compared to just Rs.6.7 billion a year ago. “The total impairment charge for the period included an impairment of Rs 27.3 billion on account of the foreign currency denominated government securities held by the bank pursuant to the suspension of external debt repayment by the Government of Sri Lanka and the sovereign downgrade,” HNB said in an earnings note. 

“Considering the volatilities and the economic factors, the bank recognised an impairment of Rs. 22.7 billion on account of loans and advances for 1H22 compared to the provision of Rs. 6.1 billion made in the corresponding period of 2021. 

An amount totalling to Rs.10.8 billion relating to the exchange impact on impairment of foreign currency loans and investments was set off against the exchange income for the period,” it added. The bank’s bad loans ratio improved to 2.46 percent from 2.55 percent as at end of December 2021 while the provision coverage on stage III loans improved from 56 percent to 63 percent maintaining the position as one of the best in terms of asset quality among peers.

The bank’s net interest income rose 75 percent year-on-year (YoY) to Rs.25.2 billion amid higher interest rates in the economy, while the net fee and commission income rose 82 percent YoY to Rs.4 billion.
During the quarter under review, HNB gained R.2.2 billion through trading activities while net other operating income rose to Rs.6.1 billion from Rs.2.4 billion a year ago.

The operating expenses for the first half of the bank increased by 29 percent to Rs. 24.4 billion mainly due to devaluation of the currency, higher energy costs and increase in staff expenses subsequent to salary revisions effected at the beginning of the year. The bank’s asset base expanded by Rs. 239 billion to Rs. 1.6 trillion during the first six months, with loans and advances growing by Rs. 138 billion to Rs. 1.1 trillion. Total deposits of the bank grew to Rs. 1.3 trillion by Rs. 217 billion during the first half. 

The balance sheet growth was partly supported by the devaluation of the rupee during the period, HNB said.
The bank reported Tier I and total capital adequacy ratios of 11.39 percent and 14.54 percent respectively against the minimum requirement of 9.5 percent and 13.5 percent respectively. The Central Bank also permitted licensed commercial banks to drawdown up to 250 bps on the capital conservation buffer lowering the requirement to 7 percent and 11 percent respectively. 

Furthermore, the bank’s liquidity position continued to be strong with liquid asset ratio and all currency liquidity coverage ratio at 23.9 percent and 210.3 percent, against the statutory requirements of 20 percent and 90 percent, respectively.
LOLC-controlled Browns Investments held 9.99 percent stake in HNB as at June 30, 2022, while the Employees’ Provident Fund held 9.75 percent stake. While Harry Jayawardena-controlled Stassen and Distilleries held little over 17.8 percent stake of the bank, their voting rights have been capped at 10 percent.