Group Profit Before Tax Rs 10.65 Bn; Group Profit After Tax Rs 8.25 Bn; Cost to income 50.5%; Return on Average Assets 1.86%; Return on Equity 18.7%; Total Capital Adequacy 16.6%;Shareholders' Funds Rs 44.4 Bn; Total Dividend of Rs 8.50 per share
In the backdrop of a slowdown in economic growth resulting in reduced credit growth and volatile market conditions, the pre-tax profit of HNB Group improved by 25.5% to Rs 10.65 Bn while Group net profit after tax recorded a year on year growth of 32.4% to Rs 8.25 Bn.
Commenting on the performance during the year 2012, Dr. Ranee Jayamaha, Chairperson of HNB PLC stated that "In the first half of the year, amidst difficulties and challenges brought by the severe and complex international environment and despite volatile domestic markets, Hatton National Bank improved its operating strategies whilst retaining a healthy growth. In the second half, the Bank proactively adapted itself to policy changes as well as financial market conditions and moved forward to seize opportunities in the real economy".
Change in accounting standards
With the new accounting standards (SLFRS / LKAS) issued in line with the International Financial Reporting Standards becoming effective from 1st January 2012, the Bank prepared its annual financial statements in line with the new standards as well as the guidelines issued by the Central Bank of Sri Lanka. However, in accordance with the second option under the ruling issued by the Institute of Chartered Accountants of Sri Lanka, the interim financial statements have been prepared based on the previous accounting standards that prevailed prior to 1st January 2012 for comparative purposes and the following is based on these previous accounting standards.
The Bank's interest income for the reporting period grew by 42.2%, prompted by increase in yields coupled with growth in interest earning assets. Interest cost mirrored this upward movement with a perceptible increase of 58.8%. Higher deposit rates, deposit growth as well as conversion of low cost deposits to fixed deposits at higher rates pushed the interest costs upwards. Nevertheless, the Bank witnessed a growth of 25.3% in net interest income amounting to Rs. 20.5 Bn during the financial year.
Increase in fee income remained a key strategic priority during the year, as per the Bank's 3 year strategic plan. Efforts in this regard yielded positive results with the Bank increasing its commission income by 36.5% in 2012 against that of the previous financial year. Income from card operations and current accounts contributed towards the growth whilst fee income from trade remained static in the face of diminished foreign trade. This growth in commission income was the main contributor towards the increase in other income which recorded a growth of 23.7% during the year. Furthermore, the foreign exchange income of the Bank increased by an impressive 55.9% largely due to increase in foreign exchange transactions and the volatile exchange rate scenario witnessed during the year. The improvement in exchange gains were recorded, despite the Bank recording a marginal exchange loss culminating from accumulated losses in the Foreign Currency Banking Unit (FCBU).
Despite the salary revisions effected to staff in the non-executive cadre, the Bank was successful in managing its costs with an increase of only 9.4% over the previous year mainly due to the giant strides taken by the Bank towards productivity improvements. Commenting on same Mr. Rajendra Theagarajah Managing Director / CEO of HNB stated that "the target in 2012 was to contract the cost to income ratio by a further 5%. By identifying the top 5 cost contributors and tackling each diligently, I am pleased to announce that we managed to better our target as the ratio improved by an outstanding 720 bps to 50.5% from 57.7% in 2011."
With interest rates rising, the Bank witnessed a concurrent increase in its non-performing assets during the first half of 2012. The gross non-performing loans which stood at Rs 11.97 Bn at the beginning of the year increased to Rs 15.02 Bn by June 2012 increasing the gross NPA ratio from 3.93% to 4.58%. However, the rigorous recovery and risk management efforts have resulted in the non-performing assets to drop to Rs 12.99 Bn in December which has also resulted in the gross non performing ratio improving to 3.66%. Further the Bank took a policy decision to fully provide for all loans that are overdue for more than 900 days irrespective of the collateral value, despite the regulation allowing the Bank to deduct the collateral value to determine the provision requirement. Accordingly, the Bank's net non-performing loan ratio improved to 1.83% from 2.33% last year.
The Bank's pre-tax profits recorded a strong growth of 28.5% to Rs 9.98 Bn compared to 2011 while post-tax profit of the Bank recorded a growth of 37.2% to stand at Rs 7.64 Bn for the year ended 31st December 2012.
The Return on Assets (ROA) for the Bank in 2012 improved to 1.86% compared to 1.61% in the previous year, while Return on Equity improved to 18.8% from 17.3% in 2011, with improved margins, higher non-interest income to net income and reduction in cost to income ratios positively contributing towards same.
The Bank's balance sheet growth slowed down to 17.2% in 2012 as a result of a slowdown in demand for credit, while gross loans and advances grew by 17.4%. The leasing portfolio witnessed a slowdown in 2012 due to an increase in import duty for vehicles while pawning continued to demonstrate the strong growth momentum witnessed in previous years. Other term loans and overdrafts too witnessed robust growth during the year.
Growth in assets was predominantly funded by deposits, which grew by a healthy 17%, while this was also supplemented by borrowings that originated mainly from foreign sources. During the year, the Bank borrowed USD 75 Mn from two reputed international lenders. The first was a USD 50 Mn long term senior debt from China Development Bank whilst the second was a USD 25 Mn subordinated loan from DEG.
Due to the rising interest rates the growth in deposits was predominantly from fixed deposits while the Bank witnessed a conversion of high cost savings to high yielding fixed deposits. However, the Bank managed to defend its low cost saving base maintaining it virtually flat during the year. On the whole, higher growth in fixed deposits resulted in the CASA ratio declining from 46.8% to 39.8% by December 2012.
The shareholders' funds of the Bank improved by 19.7% to Rs 44.4Bn through internal generation of funds and for the year 2012 the Bank has declared a total dividend of Rs 8.50 per share including the interim dividend of Rs 1.50 per share paid in December 2012 amounting to a total gross dividend of Rs 3.4Bn.
Capital adequacy position of the Bank further strengthened during the year with tier I capital ratio improving from 12.76% to 13.85% through internal generation of funds while total capital adequacy ratio improved from 14.51% to 16.63% through retained earnings and tier II funding raised through foreign sources.
The group companies HNB Assurance and Sithma Development mainly contributed towards the Group performance while Acuity Partners (Pvt) Ltd, recorded a modest profit in the backdrop of sluggish market conditions. During the year, the Bank divested its investment in Delma Exchange UAE recognizing a net disposal gain of Rs 38Mn against the investment of Rs 83.7 Mn.
Key highlights with the implementation of SLFRS
Consequent to the implementation of SLFRS the pre-tax profits of the Bank increased by 19.8% to Rs 10.0 Bn while post-tax profit improved by 23.0% to Rs 7.7 Bn. Similarly, the Group profit before tax recorded a growth of 18.1% to Rs 10.69Bn while the Group profit after tax grew by 19.9% to Rs 8.27Bn.
The impact to the Bank's net asset position under the new accounting standards amounted to approximately Rs 2 Bn on account of fair valuation of available for sale portfolio, revaluation of land and building, net impact from change in provisioning for impairment and recognition of a liability against the Employee Share Benefit Trust.
With regard to key performance indicators under SLFRS / LKAS the Return on Assets of the Bank improved to 1.86% from 1.79% while ROE was maintained at 18.2%. Cost to income ratio indicated an improvement of 300bps to 52.3% while the gross impaired asset ratio of the Bank improved to 3.32% from 3.60%. With the transition from "time based" provisioning method to "incurred loss" method on provisioning the net impaired asset ratio improved to 0.86% from 1.06% in 2011. Further under the new accounting standards the provision coverage remained strong at 74% as at end of 2012.
Achievements and accolades
During the year HNB became the first Sri Lankan bank to obtain an international credit rating and issued a foreign currency issuer rating of B1 on par with the sovereign rating of Sri Lanka.
Further in 2012 HNB was adjudged the 'Best Bank in Sri Lanka' by the prestigious Banker magazine and was recognized as the 'Best retail bank in Sri Lanka' for the fifth consecutive year by 'The Asian Banker'.