HNB reports modest operating performance for March; Tax cuts boost bottom line

Hatton National Bank PLC (HNB) reported modest operating performance for the March quarter (1Q20) while the bottom line received a strong boost from the removal of some taxes on financial services. HNB reported a 12 percent decline in the net interest income at bank level to Rs.11.4 billion, during the three months to March 2020 from the same period last year, on declining interest rates. 

“The interest income of the bank dropped by 7.2 percent year-on-year (YoY) to Rs.27.2 billion, due to the drop in AWPLR by nearly 300 basis points, over the past 12 months up to March 2020. The interest expense also dropped similarly by 3.5 percent YoY to Rs.15.8 billion,” HNB said in an earnings release. 

The bank saw its loans rising by Rs.16.2 billion while the deposits rose by Rs.31.1 billion, which its Managing Director Jonathan Alles attributed to the limited avenues for consumer and corporate spending, amid the pandemic leaving more money to lie in the bank, during a webinar held on the impact of COVID-19 on the banking sector, recently. The rising deposits amid loan growth, which is currently at a near standstill, could weigh on the bank’s net interest incomes and profits. 

While the early signs were visible from the little narrowed net interest margin, which came down from 4.50 percent to 4.02 percent during the three months, HNB appeared to have dampened the full impact from its higher low-cost deposit base. 

Lower interest rates shrink banking sector margins but profits are generated through a higher volume of loans.

However, the absence of a meaningful loan growth over a prolonged period could have implications on profitability. 
“HNB mobilises one of the largest CASA bases in the industry, which grew by 6.8 percent during 1Q to surpass Rs.300 billion (Rs.304.1 billion), with the CASA ratio improving to 36.2 percent, compared to 35.2 percent, as at end-December 2019,” the earnings release said.

Meanwhile, the bank reported an operating profit before taxes on financial services of Rs.4.2 billion for the three months, down 13 percent from the year earlier. However, at group level, the operating profit rose 4 percent YoY to Rs.5.3 billion.  This is despite an impairment provision of Rs.4.7 billion, little changed from the same period a year ago. 

“The bank has reassessed the Probabilities of Default (PD) and the economic factor adjustments applied in the collective impairment computation as at February 2020, with additional management overlay and continued with the cash flow assumptions used in December 2019, for the computation of impairment for individually significant loans as at reporting date,” a note accompanying the interim results on impairments said. 

Meanwhile, in an interesting, yet less surprising phenomenon, the bank said its fee incomes generated from digital channels saw an encouraging increase as clients, both retail and corporate, adopted the bank’s online payment and banking platforms, as they increasingly shifted to virtual banking. This is amid the overall net fee and commission incomes declining by 9 percent to Rs.15.5 billion, due to less activity in other areas. Meanwhile, the bank reported earnings of Rs.6.09 a share or Rs.3.05 billion for the January-March quarter, up 57 percent, from Rs.3.89 a share or Rs.1.95 billion in the year earlier period, due to the removal of the Nation Building Tax on financial services and Debt Repayment Levy imposed on the sector, after the new government came to power in November 2019. 

“The measures taken by the government to relieve the banking sector, which was taxed at around 58 percent, are greatly appreciated, as such high rates of taxes on the banking sector would have been counter-productive, especially at a time like this,” Alles said.