Aug 05, Colombo: Fitch Ratings (Lanka) has affirmed Sri Lanka-based Hatton National Bank PLC’s (HNB) National Long-Term Rating at ‘AA+(lka)’. The Outlook is Negative.
At the same time, Fitch has affirmed the bank’s Sri Lanka rupee-denominated senior unsecured debt at ‘AA+(lka)’. The ratings on HNB’s Basel II and Basel III compliant Sri Lanka rupee-denominated subordinated debt are affirmed at ‘AA-(lka)’.
KEY RATING DRIVERS
NATIONAL RATINGS AND SENIOR DEBT RATINGS
HNB’s National Long-Term Rating is driven by its intrinsic financial strength and is highly influenced by our assessment of the operating environment for banks in Sri Lanka. It also reflects its strong domestic franchise as Sri Lanka’s fourth-largest commercial bank and its high capitalization relative to domestic peers that has helped to counterbalance its risk appetite.
The Negative Outlook is aligned with the negative outlooks on the sovereign rating and operating environment mid-point, and reflects the constraint on HNB’s rating by the sovereign’s credit profile.
The operating environment in Sri Lanka remains challenging. We expect GDP to contract by 1.3% in 2020 due to the impact from the coronavirus pandemic. We forecast GDP growth of 4.2% in 2021, although growth prospects will depend in part on how the pandemic develops in Sri Lanka and globally.
The outlook on the operating environment assessment is maintained at negative to reflect the possibility that the effects of the pandemic are more pronounced or persist. The operating environment for Sri Lankan banks has a high influence on the banks’ ratings, as it is likely to constrain their intrinsic credit profiles through its effect on financial and non-financial key rating factors.
HNB’s high-risk appetite stems from its dominance of the retail and SME segments (54% of its total loans at end- 2019), which, in our view, are more vulnerable to deteriorating economic conditions. HNB also has a high share of assets invested in foreign-currency instruments of the sovereign relative to peers. At end-2019, this accounted for 14.5% of total assets. While market risks are mostly mitigated due to the instruments’ recognition as financial assets at amortised costs, the instruments’ exposure to a weak sovereign is high and could affect HNB’s asset quality.