HNB 31.12.2012

http://cse.lk/cmt/upload_report_file/373_1362042418071.pdf

HNB has done its best ever quarter ( much has come though tax management, I hope they have paid more taxes in first 9 months). with this, its the best quarterly results among the banks, better than COMB absolute terms.

Most undervalued among the top tier banking stocks
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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, the bank announced yesterday (28).

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".

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.
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