Hatton National Bank continued its impressive performance recording post tax profit of Rs 3.22 Bn., an increase of 6.5% over last year’s Rs 3.02 Bn. Commenting on the results, HNB’s Managing Director Rajendra Theagarajah said “ We are delighted to be able to deliver such results especially against the backdrop of significant fluctuations in key macro economic variables such as interest rates, inflation and exchange rates which adversely affected the growth and profitability of the financial Industry and a global financial crisis since the great depression, which caused some of the world’s biggest financial institutions to either file for liquidation or to be bailed out on the verge of collapse.

Total income showed a significant growth of 23.9% to reach Rs 37.17 Bn., in 2008 despite the economic challenges. Interest Income was the predominant contributor towards the Bank’s top line, which grew by 23.5% to Rs 32.43 Bn., this year.  Growth in interest income was mainly driven by the increase in yields as a result of the upward movement in domestic interest rates, whilst growth in interest earning assets during 2008 stood at 12.2%.

Interest expense too witnessed a significant growth during 2008, as liabilities were re priced at higher rates and the deposit mix tilting toward high cost funds. The resultant Net Interest Income (NII) grew by 14.6% to Rs.12.68 Bn., this year.

Non interest income grew this year by 26.4% to Rs 4.73 Bn., resulting in the non interest income to net interest income ratio improving to 27% in 2008. Both commission income and exchange income witnessed a healthy growth of 13.6% and 4.7% respectively.

Income from dividends witnessed a significant growth of 330% to Rs. 538 Mn. main contributors being HNB Securities Ltd, HNB Stock Brokers (Pvt) Ltd, which made an exceptional dividend payment as a result of the restructuring that took place with the formation of the joint venture Acuity Partners (Pvt) Ltd, with DFCC Bank.

The high inflationary trends continued to be an obstacle for the Bank during the year. Having already infused some cost management best practices into our working operations, the Bank was able to stem some of the negativities that abounded on the operational side with a growth of only 17.3% (increase in operating expenses excluding provisions and financial VAT is 13.6%).

Operating expenses this year is recorded at Rs 12.27 Bn., which reflects well for our performance in comparison to general industry trends. Staff cost increased by a mere 11% during 2008 as a result of continuous improvements made in operational productivity. We managed to keep the headcount almost flat in 2008 despite expanding the customer centre network.

Provision made for the staff retirement fund increased by 74% in 2008 to stand at Rs. 787 Mn. Increase in provision for staff retirement was due to an additional provision of Rs. 290 Mn. made for the purpose of charging of 1/5th of the transitional liability created due to the introduction of Sri Lanka Accounting Standard 16 (revised 2006) – Employee Benefits. The deficit in the pension fund as at 31st December 2007 had to be charged to operating expenses over 5 years as a result of the provisions of the revised standard. Premises equipment and establishment expenses too grew by 14% to Rs. 2.42 Bn.

Despite high inflationary pressure, as a result of the prudent cost management initiatives of the Bank cost to income ratio (excluding financial VAT) improved this year to 54% compared to 56% in 2007, commented Mr. Theagarajah.

The provision for loan losses increased this year by 27.6%, to stand at Rs 1.16 Bn., maintaining a provision cover (specific provisions to non performing loans) of 66%.  Due to the prudent provisioning policy, the Bank has already achieved the 1% general provisioning requirement mandated by Central Bank ahead of the deadline of 31 March 2009. This reflects HNB’s constant emphasis on a quality credit portfolio, which has now become the primary reason for the Bank’s consistent and sustainable performance. HNB’s gross Non Performing Loan (NPL) ratio increased this year to 6.72% compared to 5.7% in 2007 due to high interest rates and inflation exerting pressure on the repayment capacity of borrowers. Further, as per the Banking Act Direction No.9 of 2008 issued by the Central Bank of Sri Lanka the criteria used for classifying loans as non performing was relaxed, however the Bank continues to adopt the more stringent method which has resulted in the Bank’s NPL ratio being 48 basis points higher. If the Bank adopted the relaxed criteria the gross NPL ratio as at 31st December 2008 is 6.24%.   The Bank has kept the NPL ratio at a manageable level due to the prudent risk management strategies, committed recovery team and excellent monitoring and control systems implemented. 

The taxation regime imposed especially on the financial services sector, remains non-conducive to growth in the industry. “This year too we observed a sizeable slice being taken off our profits by the increase in Financial Services Value Added Taxation to Rs 1.77 Bn. compared to last year’s Rs 1.24 Bn., which the Bank can ill afford especially in times where the economy has shown signs of volatility and capital in short supply. Reduction of margins, increasing operating costs and high taxation will impose a challenge for the sector to maintain required capital requirements and will limit credit growth of the banking sector” said Mr. Theagarajah.

The Bank’s total asset value depicted an increase of 9.6%, reaching Rs 255.3 Bn. retaining one of the highest bases among private sector commercial banks in the country. The total loan portfolio increased from Rs 160.58 Bn., to Rs 174.98 Bn., with pawning and short term loans being the largest contributors, recording a growth of 26% and 47% respectively.

Although deposit mobilization was a significant challenge this year, deposit portfolio displayed a growth of 7.7%. Impact of the global economic downturn was felt on the foreign currency deposits. Investors were seen converting foreign currency deposits to rupee deposits as the interest rate differential widened between local and foreign currency deposits and the rupee continued to be stable during most part of the year.

Total liabilities at end of the year are displayed at Rs 234.69 Bn. compared to last year’s Rs 214.49 Bn. a reasonable growth of 9.25% considering the macro economic conditions.

Shareholders’ funds grew from Rs 18.4 Bn. to Rs 20.02 Bn. as the Bank retained part of the profits generated during 2008 to support future business growth. The Bank paid an interim dividend of Rs. 1.00 per share in December 2008 and has proposed a final dividend of Rs. 3.00 per share to be paid in April 2009.

With the change over to Basel II in 2008, Bank’s total Capital Adequacy stood stable at 11.3% after incorporating operational risks in particular which was not risk weighted in Basel I. During the year the Bank’s core capital & total capital improved by 5% & 11% to Rs.16.2 Bn. & Rs.19.9 Bn. respectively.

Return on Average Assets this year stood at 1.32%, showing a marginal decline from 2007. Return on Average Equity (ROAE) saw a slight dip this year from last year’s standing of 19.27% to 16.5% this year.

The group income too increased by 20.73% to Rs. 38.73 Bn., however due to the setting off of the dividend paid to the bank by the subsidiaries, on consolidation after tax profit of the group recorded a decline of 9.8% over 2007 to end up at Rs. 2.89 Bn.

“While it has been a challenging year, we have always stated that the real test is not to win when things are positive, but rather to win in an environment that constantly poses trials and challenges. This is where the strong will prove its mettle and be separated from the weak” commented Mr. Theagarajah.