Fitch assigns 'A+(lka)' to HNB's unsecured redeemable subordinated debentures

Fitch Ratings Lanka has assigned a national rating of 'A+(lka)' to HNB’s unsecured redeemable subordinated debentures of up to Rs 2.0 billion. At the same time, the agency has affirmed HNB's National Long-term rating at 'AA-(lka)' (AA minus (lka)), as well as the 'A+(lka)' National Long-term rating assigned to the bank's existing subordinated debentures.

Fitch said in FYE06, corporate banking and consumer loans accounted for approximately 65% and 35%, respectively, of HNB's total loans; loans to medium-sized corporates accounted for approximately 70% of the corporate loan book.

On account of the portfolio mix to higher yielding segments, the bank's overall profitability has improved, with return on assets of 1.2% in FY06 which is comparable with its peers. That said, due to a combination of higher provision charges which rose from 19% of pre-provision income in FY06 to 35% in Q107 and higher effective tax rates (taxes accounted for 61% of pre-tax income in Q107; 44% in FY06), HNB's annualized Q107 ROA dipped to 0.7%.

However, at a pre-provision level, HNB's annualised ROA remained stable at 2.24% in Q107 (2.44% in FY06).

“The five largest customer exposures represented 13.6% of loans and 150% ofequity at Q107 (12% of loans and 123% of equity at FYE06) which is on the high side in comparison to similarly rated peers. However, the entities lent to are blue-chips. Included in the top five is the related party exposure to the Stassen's Group of Companies (4.4% of loans and 48.2% of equity at Q107; 3.9% of loans and 40.3% of equity at FYE06