ADB’s tie-up to open more market borrowings for HNB: Moody’s

Last week’s Asian Development Bank’s (ADB’s) investment in Hatton National Bank PLC’s (HNB) stock will open up further market borrowing opportunities for the latter with increased access to longer tenor funds, according to Moody’s Investors Service.

Last week ADB decided to invest US $ 50 million in an approximately 10 percent stake in HNB – the first such investment by ADB in a Sri Lankan bank.

“The tie-up with ADB, the first for a Sri Lankan bank, will likely further improve the maturity profile of HNB’s market borrowings by facilitating market access for longer-tenor funds,” the rating agency said in a brief note.
The fresh capital will improve the Tier I capital base of the bank and the funds will be used to expand the loan book, as the demand for credit still remainshigh.  
The bank grew its loan book by 23 percent year-on-year during the six months to June and this higher credit growth, which picked up from 2014, had weighed on the Tier I capital.
However, the fresh capital will put HNB’s Tier I – which increased to pro-forma 11.5 percent from 10.2 percent as of June 30 – ahead of both State lenders as well as Commercial Bank of Ceylon PLC.
HNB has a credit rating of B1, Negative, from Moody’s.

The transaction is expected to be completed during the fourth quarter of 2016 after approval is received from the Colombo Stock Exchange and the HNB shareholders.
HNB, Sri Lanka’s second largest private lender by assets, in recent times has leaned on market borrowings to fund the strong demand for lending.

The funds raised from the market boosted its assets to 14.4 percent as at June 30, 2016 from 10.6 percent at end 2014 with the share of its long-term tenor funds increasing from 43 percent to 64 percent.

ADB in 2015 loaned US $ 100 million 7-year facility to HNB, which caused this strength in the maturity profile of the market funding portfolio.
“…we expect that additional long-term funds could become available to HNB from international investors,” Moody’s opined.

Sri Lanka’s banks and finance companies, in particular, in recent times have raised capital from emerging market funds and international capital markets to fund the aggressive growth in lending, over and above the deposits they raised.

This was further exacerbated by the Central Bank credit created through printed money.
In July however, Sri Lanka tightened its monetary policy for the third time for the year by hiking the key policy rates by 50 basis points to soften the growth in credit to the private sector.
The treasury bill and bonds rates have been easing lately and the liquidity shortage has also ended with the Central Bank buying dollars.
The foreigners have also returned to the government securities,  but not at the pace seen before the surprise 50 basis point rate cut in April 2015, which chased away most of the foreigners who held Lankan rupee bonds.

Meanwhile, Moody’s said the ADB’s funding support to HNB is credit positive as it not just increases the capital buffers but also the bank’s loss absorption buffer.
“The issuance also increases HNB’s loss-absorption buffer. Its ratio of nonperforming loans to total shareholders’ equity and loan loss reserves will decrease to 12.5 percent after the capital raise from 13.4 percent at end June 2016.
This provides an additional buffer in the event of asset quality deterioration on the back of HNB’s rapid loan growth,” the rating agency added.