"The ratings reflect HNB's sound financial profile supported by good profitability, asset quality and capitalisation among local commercial banks," it said.
"A sustained deterioration in HNB's credit profile relative to 'AA(lka)'-rated peers would add downward pressure to its rating."
HNB's net interest margin was 6.0 percent in the 2009 financial year - well above the local licensed commercial banks (LCB) sector average of 5.3 percent, the rating agency said.
HNB's pre-tax return on assets (ROA) increased to 3.0 percent in 2009 from 2.5 percent the year before due to non-recurring items (NRI), which pertain to recoveries from a large NPL (non-performing loan), an investment, and value-added tax.
After adjusting for these NRI, HNB's adjusted pre-tax ROA was 2.8 percent in FY09 - still comparatively good in the local context, Fitch said.
At end-June 2010 (H110), about 40 percent of HNB's loan book was corporate loans, with retail and consumer loans and small and medium enterprises loans accounting for 35 percent and 25 percent.
The bank's pawning loans, classified under consumer loans, accounted for 13 percent of loans.
HNB's loan book shrank by five percent in FY09 similar to other banks, but has steadily increased in the third quarter of 2010 with loan growth of 07 percent from a year ago as the post-war domestic economy improved.
"Nonetheless, credit concentrations notably in HNB's corporate book, remained high at the end of the 2009 financial year, as the five-largest total exposures accounted for 10 percent of loans and 67 percent of equity," Fitch said.
These included related party exposures to the Stassens group at four percent of loans and 29 percent of equity.
"The bank's asset quality compared well with its peers," the rating agency said.
HNB's overall NPL/gross loan ratio declined to 5.95 percent at the third quarter of 2010 from 6.25 percent a year ago largely driven by improvements in the domestic business unit (DBU) side of the loan book.
DBU NPL/gross loans reduced to 5.2 percent at Q310 largely due to concerted recoveries.
"However, HNB's foreign currency loan book in 2010 has been vulnerable to some credit exposures to Maldivian resort projects," Fitch said.
"HNB's overall NPL ratio at Q310 would have increased by 0.73 percent if the credits were factored."
In addition, these credits account for 5.7 percent of equity at the third quarter of 2010.
HNB's management expects that the cash-flow pressures on these credits should ease for these projects when they are fully constructed and operational in early 2011, Fitch said.
HNB's core and total capital adequacy ratios were 10.1 percent and 12.0 percent at the second quarter of 2010.
Its equity/assets held at 9.4 percent at the second quarter of 2010.
"These ratios compared well with peers," Fitch said.
Fitch expects HNB's NPL/loans ratio to operate within the band of 6-6.5 percent at end-2010.
source - www.lbo.lk
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