HNB profits up sharply but huge challenges ahead

Hatton National Bank (HNB) has reported a 118 percent rise in pre-tax profits to Rs 1,172 million in the three months to March 2008, driven by a robust performance in all sectors, the bank said. HNB's Chief Financial Officer Nihal Kekulawela said, "We are extremely pleased with such consistent performance which has been sustained during the past 13 successive quarters. Our team's focus on balancing business growth with profitability, improving productivity, managing costs, and enhancing asset quality has contributed towards this performance".

Net interest generated from interest bearing assets has increased by 37 percent while non interest income showed a growth of 16 percent. The 3-months have also seen the entire operating expense bill of Rs 2.19 billion being comfortably met by net interest income from core banking activity. Net income including foreign exchange, commission income and investment income grew by 21 percent during the period under review.

While recognising the impact of domestic inflation on expenses, Kekulawela stressed the need for increased focus on managing cost through better internal efficiencies. Provisioning for bad and doubtful advances has shown a sharp decline of 59 percent to Rs 177 million. Of this, Rs 92 million (decline of 51 percent over 2007) related to General Provision mainly on account of the new regulatory directions issued by the Central Bank of Sri Lanka.

Post tax profit of the bank was Rs 751 million, up138 percent compared to the same period in 2007. Taxation in the form of financial services VAT has increased by 23 percent to Rs 377 million due to a combination of an increase in taxable profits and increase in staff emoluments which are added back (excluding retirement benefits). Income Tax too increased by 90 percent to Rs 421 million.

Taxation will continue to pose a significant challenge to defending future profit targets, Kekulawela said, according to the Bank statement. The past three months have seen volatility in domestic interest rates coupled with double digit inflation nearing the 30 percent level, posing a challenge to defend interest margins and also warding off such threats to the quality of retail credit.