HNB September profits get boost from lower provisions

Hatton National Bank PLC (HNB) reported lower net interest income in the quarter ended in September (3Q23) as interest expenses rose at a faster pace than interest income, denting the net interest margin amid a downshift in market interest rates following Central Bank’s initiation of monetary policy easing.

HNB, the country’s second-largest private lender, reported a net interest income of Rs. 27.18 billion in the July–September period, down 18 percent from the same period in 2022, when rates were rising exponentially in response to a bumper policy rate hike by the Central Bank and the absence of liquidity in the money markets.
The net interest margin, the difference between the rate the bank charged for its loans and other financial assets and the rate it paid for deposits and other financial liabilities, slightly dipped to 6.23 percent by the end of September from 6.63 percent in June and 6.40 percent at the beginning of the year.

The easing in monetary policy and some targeted measures thereafter helped the bank reverse part of the contraction in its loan book, recording a Rs.34 billion growth in new loans in the September quarter.
However, the bank’s total outstanding loans and advances remain below the level seen at the start of the year.
Banks experienced their deepest de-growth in loans and assets since last year when they pulled back on new lending in response to restrictively higher rates and the economic crisis that pushed many borrowers to the brink and others into default.

Despite rates coming off their peaks somewhat in response to policy easing, banks are still cautious about reopening their lending taps due to potential risks to their asset quality and uncertainty over the trajectory of the economy.
HNB’s impaired loans or Stage 3 ratio stood at 4.90 percent by the end of September, still substantially higher than the 3.40 percent at the end of last year, although better than the industry average.

The bank set aside Rs.4.35 billion for possible loan defaults and other losses in the quarter, substantially down from Rs.20.63 billion provided a year ago when the risks were abundant for the banking sector.
The bank also saw its net fee and commission incomes slipping 2 percent to Rs.3.91 billion in the quarter from a year ago, reflecting still-recovering business volumes from normal times. 
Meanwhile, net trading losses contracted to Rs.1.29 billion from Rs.4.81 billion a year ago.
Net other operating income fell to Rs.2.95 billion from Rs.6.65 billion. 

HNB, with assets of just under Rs.1.9 trillion, reported earnings of Rs.8.87 billion or Rs.15.85 a share for the September quarter, compared to earnings of Rs.5.41 billion or Rs.9.66 a share in the corresponding period last year, predominantly due to significantly lower provisions.
The bank’s share ended Rs.2.75 or 1.62 percent lower at Rs.167 last Friday.
Browns Investments PLC held 9.99 percent stake in HNB as of September 30, followed by the Employees Provident Fund with 9.75 percent stake. 
The billionaire businessman Harry Jayawardena controlled entities—Milford Exports (Ceylon) (Pvt) Limited and Stassen Exports (Pvt) Limited and Distilleries Company of Sri Lanka PLC—collectively held 17.83 percent in the bank, although the voting rights of such collective shareholding are limited to 10 percent.