HNB calls for EGM to obtain shareholder nod for Rs.15bn rights issue to beef up capital

Hatton National Bank PLC (HNB) is to call for an extraordinary general meeting (EGM) on July 5 to obtain shareholder approval for a rights issue to raise Rs.15 billion to improve the capital base of the bank in view of the higher capital adequacy requirements set out in the BASEL III accord, a circular issued to the shareholders said. 
The bank has proposed to issue 55,995,792 new ordinary voting shares at an issue price of Rs.220 and a further 14,086,436 ordinary non-voting shares at Rs.190 in the proportion of one new share for every six shares held. 
At last week’s market close, the HNB ordinary voting share closed at Rs.241.20, up Rs.4.10 or 1.73 percent. The ordinary non-voting share was trading between Rs.190 and Rs.200. 
HNB is the second licensed commercial bank to raise capital via a rights issue as Commercial Bank PLC, Sri Lanka’s biggest private lender by assets, recently raised Rs.10.1 billion through a similar exercise. 
Meanwhile, Sampath Bank PLC last week announced a Rs.6.0 billion convertible, subordinated debenture, also in view of the higher capital adequacy requirements under the BASEL III accord, which came into effect on July 1. 
Earlier this year, Pan Asia Banking Corporation PLC raised little over a Rs.2.0 billion via a rights issue for the purpose of partly meeting the Central Bank’s minimum capital while staying in line with the BASEL III capital adequacy requirements, which will gradually increase on a staggered basis until January 1, 2019, by which time the banks must be in fully compliant. 
According to the directive issued by the Central Bank last December, the banks with over Rs.500 billion in assets must have 8.5 percent under Common Equity Tier I, 10 percent under Total Tier I and 14 percent under Total Tier II or total 
capital adequacy. 
Under BASEL III, the latter two ratios have increased from 5.0 percent and 10.0 percent, respectively.
By March 31, 2017, HNB had a Tier I capital ratio of 10.24 percent and a Tier II capital ratio of 13.85 percent. 
“As such, immediately upon allotment of shares, the funds raised through the rights issue would result in the improvement in Tier I as well as total capital adequacy ratios of the bank thereby materializing the objective of improving capital,” the shareholder circular noted.
HNB also said they expect to fully utilize the rights issue funds within a matter of 12 months from the date of allotment for lending. 
“During the interim period, the funds shall be invested in treasury bills and treasury bonds, which is expected to yield a return of 10 to 12 percent.”
During the January-March quarter, the bank grew its advances book by as much as Rs.30.0 billion. 
Nevertheless, the bank said, “In case of an unprecedented drop in the demand for credit, the bank is unable to meet the specific objectives within a stipulated time frame, then the funds raised would be invested in government securities until such time the funds are fully on-lent.” 
As at March 31, 2017, the government held up to a 27.24 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 17.85 percent stake but their voting rights are limited to 10 percent. 
The HNB group with little under Rs.950 billion assets reported earnings of Rs.3.8 billion for the January-
March quarter.