HNB showing Rs1bn+ trading loss in Q1 financials

This is a reversal from 800m profit last year. Does anyone know what has happened here? Fraud or rogue trading?

raptor wrote:This is a reversal from 800m profit last year. Does anyone know what has happened here? Fraud or rogue trading?

If you refer page 247 note 11 of 2012 Annual Report, you will note that this is primarily a foreign exchange loss. In fact, they lost Rs 1.5 Billion in FY 2012 too. The profit they showed in First Q 2012 must be due to the sudden revaluation in Feb 2012.

Yeah but there are no notes in the q1 2013 financials. How could they have lost this much in 3 months which were devoid of any large fx swings? I don't buy it.

Which means HNB's treasury department has done a mistake of buying Foreign currency at wrong time ?

bulk of the amount is due to classification problem. they have changed classifications.

Other operating income last year loss of (379,516) has become a profit of 830,343 this year. the difference is 1,209,859 gain

Net gain from trading profit last year 805,107 has become a loss of (1,022,199) this year. The difference is 1,827,306 loss

the net loss is 617,447

I expected better performance than this, collective impairment for Loan losses also went up.

Captain holding was up by almost 5 Million shares, during the quarter.

How can a trading loss be due to classifications? Again I don't buy it, why do you think it's such?

raptor wrote:How can a trading loss be due to classifications? Again I don't buy it, why do you think it's such?

either trading losses have been classified as other income or other income(loss) has been classified as trading losses. the error might have happened this year or last year. otherwise such a huge variances can not happen.

this is what I can think of on the face of the income statement.

Any bank will have a Treasury and it will have a trading and investment portfolio. Trading portfolio will have fixed income securities like treasury bills and it will be marked to market rate as of 31st March and any gain or loss will go into trading loss. Further, they will have equity portfolio, which also will be accounted as per market price. Further, foreign currency denominated assets in the trading or investment portfolio will be revalued and any loss will go to the trading loss.
Probably, the SLR appreciation between 31st Dec and 31st Mar would have resulted in a loss.

With Q1 2013 remaining challenging for the banking sector with demand for credit slowing down further, HNB nevertheless siad yesterday it has recorded a growth of 36% in interest income to Rs. 13,683 m in Q1 2013 from Rs. 10,035 m in Q1 2012 due to 11% yoy expansion in its loan book and relatively higher rates of interest.

Interest expenses too increased by 46% from Rs. 5,187 m in Q1 2012 to Rs. 7,584 m for Q1 2013 on account of the increase of Rs. 34 b in the deposit base, which is a growth of 11% yoy as well as the higher rate of interest compared to the previous period and the shift witnessed towards high yielding deposits.As a result, HNB’s net interest income witnessed a growth of 26% for Q1 2013 as against the corresponding period of 2012.

The net income from fees and commission recorded an improvement of 10% despite slowdown in foreign trade during the period. However, the bank incurred a loss of Rs. 1,022 m, compared to the gain of Rs. 805 m made in 2012 on account of the revaluation of forward contracts and swaps. The gain made in 2012 was largely on account of the significant depreciation of the rupee witnessed during Q1 2012 while exchange rate volatility in the current period resulted in the loss due to revaluation of forwards and swaps.

HNB Group…
HNB’s other operating income grew by Rs. 1,210 m during the first quarter of 2013 from a loss of Rs. 379 m during the first three months of 2012 due to exchange gains/losses from non-derivative assets and liabilities. The fluctuation in the exchange rates as well as the change in composition of the bank’s non-derivative assets/liabilities resulted in the bank posting an exchange gain in the current period compared to 2012.

With the implementation of SLFRSs, the bank replaced the CBSL time-based provision with an impairment loss computed based on incurred loss model and accordingly the individual impairment on individually significant loans improved by 27% while collective impairment on individually insignificant loans increased by 119% for the Q1 2013.

Operating expenses for Q1 2013 increased by 12% primarily due to salary revision to all grades of staff, fair valuation of the liability under Employee Share Benefit Trust under SLFRS and increase in general charges.
Accordingly, the profit before tax of HNB for Q1 2013 was Rs. 1.69 b compared to Rs. 1.82 b recorded in Q1 2012 while profit after tax stood at Rs. 1.16 b compared to Rs. 1.23 b.

Group pre-tax profits stood at Rs. 1.81 b compared to Rs. 1.91 b while the Group post-tax profits was Rs. 1.27 b compared to Rs. 1.32 b as at end of Q1 2012.

Commenting on the performance, HNB Chairperson Dr. Ranee Jayamaha stated that HNB had recorded good first quarter results despite challenging market conditions and sluggish credit growth. However, with the expected turnaround, HNB is poised to take advantage of all opportunities available to grow its business.
HNB Acting CEO Jonathan Alles commented that he was happy with HNB’s performance in what could be termed a somewhat flat first quarter. He too stated that HNB had made good progress in technology and process enhancements and that the execution of the 2013/15 strategic plan is on course. The launch of mobile banking is one such initiative in 1Q2013 and is in line with HNB’s strategy to advance in technology with a view to maximise operational efficiency.

The price of the voting share of HNB improved by 13% during the first quarter 2013, with the price at Rs. 167.30 as at end of the first quarter 2013 compared to Rs. 148 at the end of December 2012 while the non-voting share recorded a gain of 17.2% to Rs. 131.80 from Rs. 112.50 at the end of 2012.
HNB was awarded as the ‘Best Retail Bank in Sri Lanka’ for the sixth consecutive year by the prestigious Asian Banker at the 12th Excellence in Retail Financial Services Awards held in March 2013.
http://www.ft.lk/2013/05/14/hnb-group-records-post-tax-profit-of-rs-1-27-b-in-q1/

According to RB news

" However, the bank incurred a loss of Rs. 1,022 m, compared to the gain
of Rs. 805 m made in 2012 on account of the revaluation of forward
contracts and swaps. The gain made in 2012 was largely on account of the
significant depreciation of the rupee witnessed during Q1 2012 while
exchange rate volatility in the current period resulted in the loss due
to revaluation of forwards and swaps."

Explain the issue.

anu wrote:Any bank will have a Treasury and it will have a trading and investment portfolio. Trading portfolio will have fixed income securities like treasury bills and it will be marked to market rate as of 31st March and any gain or loss will go into trading loss. Further, they will have equity portfolio, which also will be accounted as per market price. Further, foreign currency denominated assets in the trading or investment portfolio will be revalued and any loss will go to the trading loss.
Probably, the SLR appreciation between 31st Dec and 31st Mar would have resulted in a loss.

Thanks for stating this but its pretty obvious and everyone is aware of this fact. Running huge losses in this trading unit means something is wrong with the banks internal contorls, their risk control is obiviously flawed.

Also is just checked Bloomberg and looked at the LKR USD exchange rate, for the 3 months of Q1 2013 the range is 127.6 and 125.4. Hardly volatile if you ask me and in no way able to exchnage a whopping 1bn loss. HNB had net profits of 8bn+ last year and runs a 1bn trading loss in ONE quarter? Something is wrong here, they are not disclosing what has happened properly. Someone has taken a bet that has gone wrong badly for the bank.

raptor wrote:

anu wrote:Any bank will have a Treasury and it will have a trading and investment portfolio. Trading portfolio will have fixed income securities like treasury bills and it will be marked to market rate as of 31st March and any gain or loss will go into trading loss. Further, they will have equity portfolio, which also will be accounted as per market price. Further, foreign currency denominated assets in the trading or investment portfolio will be revalued and any loss will go to the trading loss.
Probably, the SLR appreciation between 31st Dec and 31st Mar would have resulted in a loss.

Thanks for stating this but its pretty obvious and everyone is aware of this fact. Running huge losses in this trading unit means something is wrong with the banks internal contorls, their risk control is obiviously flawed.

Also is just checked Bloomberg and looked at the LKR USD exchange rate, for the 3 months of Q1 2013 the range is 127.6 and 125.4. Hardly volatile if you ask me and in no way able to exchnage a whopping 1bn loss. HNB had net profits of 8bn+ last year and runs a 1bn trading loss in ONE quarter? Something is wrong here, they are not disclosing what has happened properly. Someone has taken a bet that has gone wrong badly for the bank.

A lot of people made losses in Q1. The cause, the Forward rate has continued to be at 133 from December to May.

The forward rate at 133 seems ok -even I thought it was ok. But right now at exercise date the rate is 125. Hence loss!

So not just the banks. All the export firms as well

Raptor, using laymen language was meant for guys not exposed to banking and finance. Hope you did not get offended.

Bond, thanks. You hit the nail on its head. When forecasts go wrong, as per your figures, when the bank is on the wrong side of forward deals, a $125Mn worth of foward deals can cause the bank LKR1B in trading losses. It doesn't have to be rogue deals all the time.