Moody’s forecasts 20% annual growth in new loans for HNB post-rights issue

Moody’s Investors Service this week said Hatton National Bank PLC (HNB) would grow its loan book by as much as 20 percent per annum during the two years to March 2019 as the bank would complete its rights issue that would inject as much as Rs.15.0 billion in fresh equity by the end of this month. 
The bank last week received the shareholder nod to raise up to Rs.15.0 billion in fresh equity via a rights issue. The exercise will issue one new share for every six shares held for both HNB’s ordinary voting and non-voting shareholders.

Moody’s, one of the three big global credit rating agencies, said the forthcoming capital would be credit positive because the new capital will elevate the capital adequacy levels of the bank to above the minimum required by the BASEL III accord.      

“We estimate that the rights issuance will add 230 basis points to HNB’s Tier I ratio, bringing it to 12.9 percent well above Sri Lankan banks’ new 10 percent regulatory minimum, with which banks must comply by January 2019,” Moody’s said.

The rights issuance will also position HNB’s Tier I ratio above the ratios of its domestic peers.
Moody’s also expects HNB to return a 20 percent cash dividend every year while maintaining an around 13 percent Tier I ratio by the end of 2019 even after maintaining the forecasted 20 percent growth in loans over the two years.  

“In this scenario, where we also assume 20 percent cash dividends every year, HNB’s Tier I ratio would be around 13 percent at the end of 2019,” the rating agency said.

In a different scenario where HNB recording an annual loan growth of 25 percent, Moody’s estimates the bank’s Tier I CAR to be around 12 percent at the end of 2009 – still 200 basis points higher than the regulatory minimum.   

Sri Lanka implemented the first phase of the BASEL III accord effective from July 1, which requires the banks to build its capital buffers on a staggered basis up to January 2019 when the new rules are fully implemented.   

By July 1 the banks with assets more than Rs.500 billion, identified as Domestic Systematically Important Banks (D-SIBs) under BASEL III required to have a minimum Tier I and Tier II capital adequacy ratio of 7.75 percent and 11.75 percent, respectively from the hitherto required minimum of 5.0 percent and 10.0 percent.  

This then goes up to 8.875 percent and 12.875 percent, respectively by January 1, 2018, before further going up to 10.0 percent and 14.0 percent, respectively by January 1, 2019, when Sri Lanka’s D–SIBs become fully compliant with the BASEL III rules.  

Moody’s 20 percent forecast for growth in loans translates into an exponential Rs.119 billion during 2017 and Rs.143 billion in 2018 in absolute terms by the bank on a standalone basis.

Even though the banking sector did not experience a similar growth in their loan books during 2Q17, HNB during its January – March quarter recorded a mammoth growth in loans, which topped Rs.30 billion.  

If annualized, the bank will end up disbursing as much as Rs.120 billion in new loans in 2017, but due to weak demand for credit during the 2Q17, this is somewhat unlikely.