Hatton National Banks plc
Executive
Summary
Hatton
national banks plc is one of the systematically important banks in Sri Lanka.
Being the first private bank in Sri Lanka, so far the bank has performed
successfully and in a healthier manner. HNB is a listed company in the Colombo
Stock Exchange.
At
present it has a strong asset base of Rs. 635,234,776,000.00 also the bank is
equipped with well distributed branch network around the county to serve the
financial needs of the population.
Hatton
National Bank Plc, while offering a wide range of traditional banking products
to its customers it has diversified its operations to many other fields such as
insurance, leasing through its subsidiary companies which are HNB assurance and
Sithma Development.
As
per the growing concern about the environment, Hatton National Bank Plc became
the pioneer to introduce eco-friendly banking to Sri Lanka by opening the first
ever green branch in Sri Lanka.
The
bank moves forward by offering their customers a quality banking experience
through a well-qualified staff. As well inorder to carter the growing need for
more innovative banking experience bank has introduced e banking, mobile
banking. More importantly the bank was able to introduce MoMo a fully fledged
mobile banking solution in 2013 for the first time in Sri Lanka.
Vision
of the bank
To be the acknowledged
leader and chosen partner in providing financial solutions through inspired
people
Mission
of the bank
Combining entrepreneurial
spirit with empowered people and leading edge technology to constantly exceed
stakeholder expectations
Values
•
Treasure professional and personal integrity at all times
• Demonstrate mutual respect in all our
interactions
• Passionate about everything we do
•
Committed to being customer centric
• Courage to change, challenge and be
different
•
Demonstrate unity in diversity
The
following can be mentioned as highlights of the company which have drawn the
attention of the bank’s management during the five years from 2010 to 2014.
The
bank is more concern towards the development in the technological sector of the
bank in order to give out a quality service to their customers. As well to
achieve the purpose they have invested a considerable amount of money during
the past few years.
Also
the bank is keen in absorbing the non-banking population to the banking sector.
Therefore they have implemented many strategies including opening of customer
centres throughout the island. Also the three year strategic plan has focused
mainly in developing the fee and commission income which the bank has attained
successfully during the past five years.
This
report will explain the performance of the bank during the past five years. The
analysis is based on the data obtained from the published financial reports for
the company from 2010 to 2014. Data were analysed using vertical, horizontal and
as a ratio analysis. Based on the calculations the comments have been made.
Analysis of the
Financial Statements
Analysis of the income statement
The composite of total revenue and growth
The
Hatton national Bank plc being company engaged in the financial sector in Sri
Lanka, the main sours of income is the interest earned by lending the money to
the customers. Apart from the interest income the other sources of income for the
bank are the foreign exchange gains, fee and commission income, dividend
income, income from the other investments. The contribution of the each type of
income has varied during the five years but interest income has been the main
sourse of income with the highest contribution each year over 80%. Following is
the summary of the contribution of interest income and the other types of
income over the last five years.
The
above diagram shows how the income for the bank has grown over the five years
and the contribution of interest income and the other types of income in
attaining the level of income.
In
2010 the contribution from interest income has contributed to earn 85% of the
total revenue while the other types have contributed only by 15%. This has held
even in 2011 with slight changes, with an interest income contribution of 87%
and other income contribution of 13%. In 2012 the proportion between the
contributions have changed hence the interest income was 91% out of the total
income and the rest 9% came from the other sourses. In 2013 again the
contribution from interest income accounted for 92% and the other income
reduced to 7% from the previous year. 2014 where there is slight drop in the
total income the contribution from interest has declined to 87%, while the
other sourses has increased their contribution up to 13%.
Placing
attaention on the growth and behaviour of the total income for the past five
years the following patteren can be observed.
There
has been a slight drop of 10% in income during in 2010 compared to 2009. .the
total income increased by 6.71% from 2010 to 2011. And this growth has
sustained even in 2012 with a very high growth rate of 35.79%. Again in 2013 the income has increased with a growth rate of
16.51%. But in 2014 again the total income has gone down slightly by -0.95%.
The pattern of the total income has been supported by the following factors.
We
can clearly note that during the years where there is high contribution from
interest income on total income, there is remarkable growth, but when the
contribution from interest income reduce the total revenue has also declined.
Interest income
Interest
income being the key source of income of the bank is accountable for 85% of the
total income on average, following is a brief presentation how the movements in
the interest income took place during past five years. The interest income, as
explained above has maintained a steady growth throughout the first four years
and has marked a slight decline in 2014.
|
Duration
|
Growth
|
|
2009 - 2010
|
-12.63%
|
|
2010 - 2011
|
9.56%
|
|
2011 - 2012
|
42.86%
|
|
2012 - 2013
|
17.75 %
|
|
2013 - 2014
|
-6.96%
|
Other sources of income
Other
income which consist mainly with foreign exchange gains, fee and commission
income, dividend income, income from the other investments have marked a
decline during the first four years and have again gained a growth in 2014.
The
other income sours are accountable only for 15% on average out of the total
income.
Thus
we can observe that fee and commission income is the category with the highest
contribution and second is the foreign exchange income. Following charts
present the contribution of each type of income to the total income.
The
composition of the expenses and the growth
The
main expense incurred by the bank is the interest expense. Apart from the
interest it has to bear the expenses which are for Personnel expenses,
Premises, equipment and establishment expenses, Fee and commission expenses,
Provision for loan losses, devaluation of investment and loans written off. The
contribution of each type is different. Following is the summary of the
expenses made by the bank from 2010 to 2014.
The
above diagram indicates how the expenses of the bank has behaved over the five
years and also it presents the classification of the interest and non-interest
expenses.
In
2010 the interest expenses is accountable for 61% of the expenses and remaining
39% is due to the other expenses. In 2011, 55.45% of the expenses are paid out
as interest and rest 44.55% is for the other expenses. During 2012 the
proportion of expenses incurred due to interest has increased further up to 64.88%
and reduced the other expenses to 35.12%. Again in 2013 the interest expenses
are 64.92% out of the total expenses and remaining 35.08% has been spent on
other expenses. Also in 2014 the interest expenses are accountable for 60.01%
and the rest 39.9% is due to other expenses.
Moving
on to analysis of growth in expenses during the period 2010 to 2014 amix
pattern can be noticed.
In
the first four years there is an increasing pattern in the expenses while in
2014 the expenses have also declined. From 2009 to 2010 there has been a
reduction in the total expenditure of 28.79%. From 2010 to 2011 the growth in
expenditure is 26.83%. The total expenditure has moved forward by another 29%
in 2012. During the period from 2012 to 2013 the expenses has gone up but with
a lower rate than the previous year, which is 23.79%. Even the expenses category there is declined
in 2014 recording a reduction of 7.1%.
Interest expenses
Interest
expenses being the key expenditure of a bank generally accounts for more than
50% of the total expenses. Therefore it is important to study the movement of
the interest expense individually since it has a significant impact in
determining the final return of the bank.
|
Duration
|
Growth
|
|
2009-2010
|
-26.63%
|
|
2010 - 2011
|
13.89%
|
|
2011 - 2012
|
51.49%
|
|
2012 - 2013
|
23.87%
|
|
2013 - 2014
|
-14.18%
|
Other
expenses
Except
for the interest expences the bank incurs expenses which occur as results of
operational and non-operational activities. These can be listed as Personnel
expenses, Premises, equipment and establishment expenses, Fee and commission
expenses, Provision for loan losses, devaluation of investment and loans
written off. Following is a presentation of composition of the other expenses
than the interest and their growth over the period under consideration.
By
observing the above diagram it can be stated that other expenses mainly consist
with personal expenses and administrative expenditure.
Profit
analysis
Profit
is an important measurement for any company’s efficiency. This section of the
report will look in to the profit of the company at net interest income, profit
before tax and profit after tax.
Net interest
income
A
bank need to earn an interest income exceeding their interest expense, since it
is the gross margin for a bank. The net interest along with the other income
must be adequate to cover the other expenses other than interest in order to
earn a profit. HNB has earnt a positive high net interest throughout 2010 to
2014.
The
net interest earnt over the time period indicate continuous growth despite of
the fluctuations in interest income and expense.
|
Duration
|
Growth
|
|
2009 – 2010
|
6.62%
|
|
2010 – 2011
|
5.47%
|
|
2011 – 2012
|
34.04%
|
|
2012 – 2013
|
10.68 %
|
|
2013 - 2014
|
2.37%
|
The
interest margin has grown by 6.62% from 2009 to 2010. It has further improved
by 5.47% in 2011 and moved the highest growth rate in 2012 by reaching 34%. In
2013 HNB has reported a growth of 10.68%, but the rate of growth is lower than
the previous year. The lowest growth rate is 2.37% which is for 2014.
Profit from
operations
Profit
from operation represent the net output of the operations by the bank. This will
be considered in calculation of the tax for the period.
The
above graph shows that bank has maintained the excess interest income with the
support from other income, even after spending out for other expenses. The
movement in the profit operations can be summarized in the following way.
|
Duration
|
Growth
|
|
2009 – 2010
|
13.75%
|
|
2010 – 2011
|
15.39%
|
|
2011 – 2012
|
45.39%
|
|
2012 – 2013
|
3.31%
|
|
2013 - 2014
|
24.84%
|
The
calculations shows that there has been a growth in the operational profit.
During 2009 to 2010 the profit from operations increased by 13.755%. In 2011 it has grown by 15.39% which is a
higher rate than the previous. In 2012 the operational profit has increased
with a higher rate of 45.39%. Again in 2013 the growth rate has declined to
3.31%. But a higher growth rate has regained in 2014 at 24.84%.
Profit after
Tax
Profit
after tax is the amount of return entitled by the owners of the company. This
profit will be distributed to shareholders according to the payout policy of
the company. Also a portion of this profit will be kept aside in order to be
reinvested to the company as retained profits. For the businesses in the
banking sector profits retained are highly significant since it forms a major
source of finance, due to the restrictions they have in raising funds through
debt capital.
Below
is a presentation of the profit after tax.
|
Duration
|
Growth
|
|
2009 – 2010
|
2.58%
|
|
2010 – 2011
|
24.78%
|
|
2011 – 2012
|
80.34%
|
|
2012 – 2013
|
-0.38 %
|
|
2013 - 2014
|
20.55%
|
Profit
after tax indicate favourable movements along the five years except for the
2013. During 2010 it has grown by 2.58% compared to the previous year. Again in
2011 it has recorded a growth of 24.78%. In 2012 a remarkable growth rate has
achieved by recording 80.34%. But the profit after tax has recorded a decline
of 0.38% in 2013 but have picked up again in 2014 by recording a growth rate of
20.55%.
Ratio
analysis
In
the above section analysed the fluctuations and the contributions of income,
expenditure and profit, giving more attention to interest income, interest
expense, net interest income, operational profit and profit after tax. This
section of the report consist with more detailed examination of the behaviour
of the variables using ratio analysis, highlighting the causes for the fluctuations.
Financial Performance
- 2010
Banking
industry as a whole have not performed in its best level during the major part
of the year. This was mainly due to slow growth in credit. Also the impact of
global recession in 2009, imposed a slight pressure in Sri Lankan economy as
well.
During
2010 the bank recorded a spread ratio of 48.16% and a net interest margin of
51.39%. During 2010 interest rate dropped down to a single digit forcing the
interest income to drop by 12.63% than the previous year. But the management of
the bank was able to convert a considerable portion of its fixed deposits to
current and savings deposits, and reduced the interest expense by 26.6%. This
helped to maintain the interest income margin without any considerable
fluctuations than the previous year. With the aid of asset and liability
management strategy of the bank.
The
net interest margin ratio was recorded to be 4.95%. This indicates that one rupee
of total assets have earnt Rs.0.495 net interest revenue. Despite of the decline
in industry’s performance the bank has managed to maintain net asset ratio in a
satisfactory level.
In
2010 the bank recorded a Return on Assets ratio of 1.42%. This has not mush
increased compared to the previous years. But has been maintained in a satisfactory
level.
The
return on equity during 2010 has been 16.37%. This indicate a slight decline
compared to the previous year’s 19.6%.
Apart
from the above mentioned financial performance indicators following are also
important in measuring the financial performance for the bank.
In
2010 the administrative expenses has utilized 55.85% of the other income
generated. Therefore the other expenses to other income ratio has been 265%,
which indicates that most of the other have been covered by the income generated
as interest.
Among
the other types of income earnt commission fee and foreign exchange profits
mark an important place by having a higher contribution to the total income.
The foreign exchange gains are recorded to be 2.86% which is due to the inflow
of foreign investment which caused strengthening the Sri Lankan rupee against
the hard currencies.
Financial Performance
-2011
2011
was a remarkable year for the whole industry of banking and finance. This was
driven by the high demand for the credit during the year. Despite the global
recession Sri Lankan economy started regaining after the conflict which last
for three decades. During 2011 the economy recorded an increase in GDP which
encouraged the investors further and investment flew to the economy.
Under
the stable economic scenario the credit grew which was also encouraged by the
reduction in interest rates. As a result the bank had a spread ratio of 50.53% in 2011. Further the net interest margin was recorded to be
49.47%. Due to the rapid growth in credit the interest income increased by
9.56% in 2011. But this was written off to a certain extent by the increase in
interest expense by 13.89% despite the slow growth in deposits in 2011. Both
to-gather caused in narrowing the interest margin to 49.47% compared to 51% in
2010.
Moving to the net interest margin ratio (Asset Turnover) it can be
noticed slight decline down to 4.34% from last year. The reduction was caused
by the decline in the net interest margin as well due to the heavy investments
by the bank on information technology during 2011 which will yield in the
future.
The return on assets has been 1.47% which indicate an improvement over
the previous year’s value. Also the
return on equity has been 15.02% with a slight decline which is due to the
increase in shareholders equity during 2011.
Apart from the above mentioned details the significant indicators of
financial performance in 2011 are as follows.
Among the other sources of income which marked a decline of -9.47%,
commission income continued to play the leading role due to the concentration
of bank on that category. As well the foreign exchange profits maintained at an
adequate level with the support of relatively stable exchange rates. But the
decline in the other income was mainly due to the reduction in investment
income which was due to divestments took place in 2011.
The introduction of deposit insurance scheme imposed a new burden on the
other expenses category from 2011 onwards. The reliance of other expenses
mainly on interest income continued even in 2011 which had a ratio of 278%.
Even in 2011 the administrative expenses have absorbed a majority of the
non interest income with a ratio of 66.12%. The ratio of interest expense to
deposits indicate a value of 5.89%.
Financial Performance – 2012
Year 2012 marked fluctuations in the key economic variables notably the
exchange rates and the interest rates. The exchange rates depreciated against
the USD by 17%, while the interest rate made an upward movement which indicated
by the average weighted prime lending rate from 10.8% to 14.4%. Banking sector
was benefited from the movements of foreign exchange and improved interest
rates. Due to the reduction in GDP the credit growth contracted 20.9% in 2012
to 31.7% in 2011.
Hatton National Bank PLC experienced a growth in their interest income
in 2012 by 42.86%, which was powered by the growth in the interest earning
assets. The interest expense also indicated an increase by 51.49% during the
year which was due to conversion of the low cost deposits to fixed deposits
with higher rates of interest, higher deposit rates and growth in deposits.
As a result the bank obtained an interest margin of 46.42%. The bank has
managed to be with in their normal level, but compared to previous year there
is a slight decline.
The interest rate margin ratio has been 4.92% which indicates a slight
improvement compared to last year. The
spread ratio for the year recorded to be 53.58%.
Return on assets during the year has been 2.25%. The increase in the ROA
was due to the increase in profits as well due to the sluggish growth in the
asset base which was due to the restriction imposed by the CBSL.Return on
equity was reported to be 21.61%.
According to the bank’s three years strategic plan, the fee income was prioritized
among the other sources of income. As per the efforts by the bank the fee
income increased by 34.56% compared to 2011. Also due to high number of foreign
exchange transactions and volatility in the forex market resulted in a growth
in the foreign exchange profits for the year. But the bearish stock market
raised a negative value for the bank in trading. As negative consequences of
increase in other expenses have caused it to mainly rely on interest income
even in 2012 with a percentage of 353.64%.
The other expenses of the bank increased by 11.00% during the year which
was mainly caused by the increase in the premises and establishment expenses
incurred due to opening of new branches.
As the overall effect the operational profit margin has been 21.90%
which has a positive movement of 45.39% and the net profit margin has been
recorded as 19.48% which is an improvement of 80.34%, compared to the previous
year.
Financial performance – 2013
2013 has been a challenging year for the banking sector
as a whole due to the high interest rates. As a result the non-performing loans
increased, decrease in demand for loans and most importantly the drop in the
gold prices affected badly to the smooth operation of the industry as a whole.
Despite of the macro economic variables
fluctuations which occurred locally and internationally the bank managed to
earn an interest income which contributed to 87.17% of total income with a
growth rate of 17.75% compared to the previous year.
The driving factor behind the increment was high interest rates prevailed at
the time. But on the other hand the interest expense for the bank increased by
23.87%. The increase in interest income
was not adequate to impose a positive effect on the total growth. Hence the net
interest increased only by 10.68% compared to previous year. Therefore in 2013
the net interest margin was recorded only a 43.63%. The interest write off from
pawning was also accountable for the decline in the net interest margin.
The net interest margin ratio has been 4.77%. The ratio is also lower
than the previous year’s value. The spread ratio has been recorded as 53.58%.
Return on assets is 2.25% which is the highest during the period of
study. And the Return on equity is 21.61% which is also the highest.
The analysis of the other income and other expenditure during the year indicates
a 2,26% increase in other income sources which is mainly powered by fee and
commission charges and gains form foreign exchange gains.
The other expenses indicates a decline of 7.81% during the year. this
has been mainly causes by the decline in the personal expenditure. Apart from
the personal costs the other costs increased largely as a result of increase in
the advertising expenditure, investments in technology.
End result of the year was an operational profit margin of 19.42% for
the year which has increased barely by 3.31% than the previous year. The net
profit margin has been 16.66% for the year which has declined by -0.38%.
Financial performance - 2014
The year 2014 has been a difficult year for the banking sector due to
the decline in the interest rates sharply and also the fall in the gold prices.
The interest income for the bank declined by 7% during the year as well
its contribution to the total income declined to 87% from 92% last year. The
drop in the interest income was mainly due to the decline in the interest
rates. A drop in interest expense also
came in line with the drop in interest income. Hence recorded a decline of
14.18% during the year. As result the interest margin was recorded at 48.01%.
The interest margin ratio was calculated as 4.32% for the year. The
spread ratio has been 51.99%.
The return on assets has recorded as 2.09% for the year while the return
on equity is 19.81%. Both the ratios indicate slight changes than 2013.
Moving on to the analysis of the expenses and other income it can be
noticed that the other income has increased and contributed to the total income
than the previous year. Other income has grown by 76% during the year. Even in
2014 the fee and commission income contributed largely to the other income
earnt with a proportion of 8.36%. The other expenses category increased by
30.84% during the year.
As the overall result the operational profit margin has been 24% for the
year with an increase of 24% from the previous year. The net profit margin for
2014 has been 20.28%, with an increase of 20.55% compared to the previous year.
The following are the diagrams which indicate the movements of the key
profitability ratios for the bank during the five years.
Analysis of Statement of Financial Position
A bank must pay its attention to the maintaining of liquidity along with
the profitability. Therefore it is important look in to the elements in the
statement of financial position of a bank. It must be noticed that unlike in
ordinary business the banks does not classify its assets and liabilities as
current and non-current. Also the banks have restriction on raising debt
capital. This section will look in to the elements in the statement of
financial position of a bank.
Assets
Hatton national
bank plc has a vide portfolio of assets which mainly consist with the following
items.
§
Cash and cash
equivalent
§
Loans and
receivables to the banks
§
Statutory
deposits with CBSL
§
Net loans and
loan advances
§
Reverse
repurchase agreement
§
Property, plant
and equipment
§
Financial
investments
§
Investment in
associates, joint ventures and subsidiaries
The bank always have to maintain a balance
portfolio of assets which consist with both liquid and less liquid assets. Not
only as a management strategy but also to comply with the directions by the
central bank as the regulator of the banking sector.
Asset growth
A key indicator of an organization is the expansion of its assets. For
bank it is more important to maintain a solid asset base. The Hatton National
Bank PLC has achieved a growth in assets during the period of 2010 to 2014.
By observing the above diagram we can see that there has been a steady
growth in the assets at HNB. From 2009 to 2010 the assets have grown by 12%. It
has recorded a growth in 2011 of 20.4%. Again 2012 the growth has been
calculated for 18.02% which is a lower rate than the previous
year. Further in 2013 the assets have grown by 14.34% declining the growth rate
further, marking another decline in the growth rate, in 2014 the assets have
increases only by 13.00%. Concluding the movement it
can be stated that during the first two years the assets have grown in an
increasing rate but from third year onwards the assets have grown in a
decreasing speed.
Composition of assets
The following diagram present the composition of various types of assets
in the balance sheet.
It is thus clear from the diagram that net loans to the customers are
the key asset the bank hold. In second the financial investments. Also a
decline in the cash and cash equivalent can be noticed over the five years.
Same pattern can be observed for statutory reserve with CBSL.
|
Asset Type
|
Contribution
|
||||||
|
|
2010
|
2011
|
2012
|
2013
|
2014
|
||
|
|
3.90%
|
1.96%
|
2.28%
|
2.28%
|
||
|
Statutory Deposited With CBSL
|
|
4.94%
|
4.47%
|
3.21%
|
2.93%
|
||
|
Net Loans And Loan Advances
|
59.90%
|
61.7%
|
67.8%
|
70.2%
|
68.6%
|
||
|
Reverse Repurchase Agreement
|
0.38%
|
0.21%
|
|
1.23%
|
2.94%
|
||
|
Property Plant and Equipment
|
2.38%
|
2.08%
|
2.11%
|
1.87%
|
1.61%
|
||
|
Financial Investments
|
30.74%
|
17.4%
|
17.4%
|
18.9%
|
18.0%
|
||
|
Investment In Associates, Joint Ventures And Subsidiaries
|
0.93%
|
0.82%
|
0.68%
|
0.59%
|
0.64%
|
||
By observing the above table it can be stated that loans and loan
advances are the major contributor of the bank’s asset base. During all the
years it has maintained an average contribution of 65%. In second it is the
financial investments. Due to adoption of different accounting standards in
2010 it has recorded a 30% contribution but in all the other years it has
contributed 17.5% in average. Cash and cash equivalents indicate a decreasing
trend in their contribution while the statutory reserves with CBSL has
fluctuated randomly but around an average of 4%.
The net loans and Loan advances
The net
loans and loan advances forms a major part in the assets of a bank. Since it is
the main sours of generating income for a bank.
The growth
in loans and loan advances can be presented by a line chart as follows
Thus it is clear from the above two diagrams the loans have grown
steadily over the five years. From 2009 to 2010 it has increased by 18.08%.
In 2011 it has recorded a growth rate of 24.19%. During 2012 the loans have
grown by 29.65%. Breaking the increasing rate of growth in 2013 the loans have
grown only by 16.26%. In 2014 the growth rate has declined further to 12.42%.
Liabilities
The liabilities of a bank is mainly to the
customers whose deposits are kept with the bank. At Hatton National Bank PLC
the liabilities mainly consist with the following
§ Deposits From The Customers
§ Borrowings From Other Financial Institutes
§ Subordinated Debentures
§
Securities Sold Under
Re-Purchase Agreements
Liabilities
growth
The trend the liabilities have moved during the
five years from 2010 to 2014 is as follows
During the year 2010 the liabilities of HNB have
grown by 11.80%. In 2011 the growth rate has been recorded
as 18.99%. In 2012 the growth rate has declined to 17.23%. Recording a further
decline in the growth rate in 2013 the rate has been recorded as 14.76%. Continuing the declining trend in liabilities
growth in 2014 it has gone down to 12.40%. It can
stated that the liabilities have grown at a decreasing rate over the five years
Composition of Liabilities
It can be clearly seen that there is an increase in
the total deposits liability over the five years, which indicate positive signs
about the capacity of the bank. This can be more clearly illustrated by the
following.
|
Type of the
Liability
|
Contribution
|
|||||
|
|
2010
|
2011
|
2012
|
2013
|
2014
|
|
|
Deposits From The Customers
|
81.66%
|
83.31%
|
|
83.98%
|
81.31%
|
|
|
Borrowings From Other Financial
Institutes
|
3.77%
|
5.86%
|
7.60%
|
7.61%
|
8.42%
|
|
|
Subordinated Debentures
|
0.95%
|
1.40%
|
1.15%
|
1.88%
|
0.86%
|
|
|
Securities Sold Under Re-Purchase
Agreements
|
4.17%
|
1.92%
|
1.15%
|
0.90%
|
3.29%
|
|
The above diagram provide evidence to show that
liabilities mainly consist with the deposits of the customers with average of
85% of all the liabilities. Also there is an upward moving trend in the
contribution from the borrowings from the financial institutes. The other two
main categories of Subordinated Debentures and Securities
Sold under Re-Purchase Agreements shows random fluctuations in their
contribution.
Deposits of the customers
The deposit of the customers are the main source of
providing funds to a bank. Even in HNB the capacity to invest in long term and
short term assets will be determined according to the ability to attract
deposits. Therefore following is the analysis for the deposits which is a key
element of a bank’s financial statement.
During 2010 the bank’s deposits have grown by 11.19%.
Even in 2011 it has recorded a growth of 21.39% which is a higher growth rate
than previous. But in 2012 the growth rate has slightly declined to 20.16%.
Marking another decline in 2013 the growth rate has been recorded at 12.87%.
2014 the deposit growth rate has gone down to 8.81%,
which is the lowest growth rate recorded for the five years.
Equity
The equity capital is more important for a bank due
to restrictions they have in raising debt capital. The following is the
analysis of equity at HNB from 2010 to 2014.
The equity at Hatton National Bank consist with
several elements, but the key elements are
§ Stated Capital
§ Statutory Reserves
§ Retained Earnings
§
Other Reserves
Growth
of equity
In 2010 the equity has gone 14.12% compared to the
previous year. In 2011 there is a drastic increase of 35.98%.Even in 2012 the
equity has gone up by 25.31% which is a higher percentage though it is lower
than the previous year. In 2013 also equity has gone up by 10.71% which is a
small value compared to the previous years. Again in 2014 the growth rate has
been recorded as 18.36%.
Composition of equity
|
Type of Equity
|
Contribution
|
||||
|
|
2010
|
2011
|
2012
|
2013
|
2014
|
|
stated capital
|
19.50%
|
30.88%
|
27.07%
|
24.94%
|
21.82%
|
|
statutory reserves
|
5.54%
|
7.49%
|
9.75%
|
13.14%
|
5.19%
|
|
retained earnings
|
16.21%
|
11.99%
|
9.09%
|
6.74%
|
12.82%
|
|
other reserves
|
58.76%
|
49.64%
|
54.09%
|
55.19%
|
60.17%
|
The above
details shows that equity comprises mainly with other reserves. More than 50%
on average they have contributed to the equity. Stated capital in the second
highest contributor of equity, which is on average accountable for 20% every
year. Retained earnings shows an increasing trend of contribution starting from
2012. And the statutory reserves has a random pattern.
Ratio Analysis
Financial Position – 2010
At the beginning of the year 2010, interest rates
fall down. This reduction in interest rates caused in slow growth in credit
during the first quarter of 2010. But in second half of the year the year push
form the leisure sector, infrastructure development, and health care sector
caused the credit to grow gradually.
The liability side of the bank grew by 11.80%
compared to 2009. An important point to note is the change in deposit mix of
the bank from high interest deposits to low interest current and savings
deposits.
Following
liquidity ratios were obtained to reflect the above mentioned factors.
|
Cash Balance With Banks To Total
Assets
|
5.74%
|
|
Total Deposits And Other Accounts To
Total Assets
|
74.57%
|
|
Debt To Asset Ratio
|
0.91
|
|
Gross Advances To Borrowing And
Deposits
|
76.79%
|
|
Current Ratio
|
78.39%
|
The bank was able to reduce the non performing
advance ratio to 4.52% which was the lowest recorded NPA ratio for decade. Also
the ratio was below the industry average of 5.3%. Further the net NPL ratio was
recorded as 1.96%.
Following
capital leverage ratios were obtained for the bank.
|
|
Following are the ratios which indicate the market
value of the company’s shares
|
Price Earnings Ratio
|
21.23
|
|
Dividend Cover
|
2.71
|
Capital adiquecy is a key concern in bank
management due to its importance to risk management as well to comply with the
regulations. Following are the obtained values for capital adequacy ratios for
HNB
|
CAR
|
|
|
Car Tier 1
|
10.99
|
|
Car Tier 1&2
|
12.64
|
|
NPL Ratio
|
|
|
Gross NPL
|
4.52%
|
|
Net NPL
|
1.96%
|
Financial Performance – 2011
The year 2011
was a successful year for the sector of banking with solid growth opportunities
in the economy which fuelled the credit growth across the country. This was further intensified by the low
interest rate regime. Also during 2011
the bank invested heavily on information technology since it was a key factor
to be successful in banking at present. In 2011 the asset base of the bank increased
by 20%.
The demamd for
loans strengthen the loan and loan advances further. The deposits of the bank
also grew during the year. among the deposits the savings deposits indicated a
healthy grow.
The following
are the liquidity ratios of the bank for 2011
|
Liquidity Ratios
|
|
|
Cash Balance With Banks To Total Assests
|
3.90%
|
|
Total Depocits And Other Accounts To Total Assets
|
75.14%
|
|
Debt To Asset Ratio
|
0.90
|
|
Gross Advances To Borrowing And Deposits
|
76.78%
|
|
Current Ratio
|
72.60%
|
The bank has
excelled in achieving a NPL Ratio of 3.9% for the year. this is considered to
be the lowest over a decade with net NPL of 2.33%.
The bank has achieved the following capital /
leverage ratios
|
Capital Ratio
|
9.81%
|
|
Deposits To The Equity
|
766.14%
|
|
Debt Ratio
|
90.19%
|
The market ratios for 2011 are as
|
Price Earnings Ratio
|
10.03
|
|
Dividend Cover
|
1.91
|
The following capital adequacy ratios were achieved
through strengthening the tier II by the subordinate debenture issue.
|
Capital Adiquicy Ratios
|
|
|
Car Tier 1
|
12.76
|
|
Car Tier 1&2
|
14.51
|
Financial position - 2012
Due to the mass demand for credit by the pubic the
Central Bank od Sri Lanka imposed restrictions on credit and obtaining foreign
loans. Eventually the credit got slow down and grew only by 17.3% also the loan
growth percentage was 18%. The liabilities side of the balance sheet also grew
in line with the assets side, hence recorded a 17% growth in total deposits. With these factors on background the bank was
able to earn the following liquidity ratios for the year.
|
|
|
|
Cash Balance With Banks To Total Assets
|
1.96%
|
|
Total Deposits And Other Accounts To Total Assets
|
76.50%
|
|
Debt To Asset Ratio
|
0.90
|
|
Gross Advances To Borrowing And Deposits
|
81.43%
|
|
Current Ratio
|
69.96%
|
The bank’s ability to maintain the NPA below 5%
continued successfully even this year. during the year NPA was recorded at
1.36%. the net NPA was 1.82%.
Following are the capital leverage ratios of the
bank
|
Capital Ratio
|
10.41%
|
|
Deposits To The Equity
|
734.63%
|
|
Debt Ratio
|
89.59%
|
The market ratios are
|
Price Earnings Ratio
|
7.64
|
|
Dividend Cover
|
2.28
|
The bank was able to strengthen the tier I ratio by
internally generated funds and total CAR was strengthen by through retained
earnings and the tier II was strengthen with the aid of foreign sources.
Following are the finally generated CAR for the bank in 2012.
|
CAR TIER 1
|
13.85
|
|
CAR TIER 1&2
|
16.63
|
Financial Position - 2013
The year 2013
came with the implications such as high interest rates, slow movement in cash
flow in the economy and drop in the gold prices. All these factors badly
affected on the asset quality of the bank. Due to the high interest rates the
industry indicated a slowdown in credit growth. But even with a lower rate of
growth HNB managed to achieve a 16.8% growth for the loan through corporate
banking.
The growth in
assets during 2013 was recorded as 14.34%. also during the year bank
raised funds through senior and subordinated debenture issues and borrowing
form Chania Development Bank. Apart from them the deposits also grew during the
year by 12.87%. The following are the resulting liquidity ratios obtained by
the bank.
|
Cash Balance With Banks To Total Assets
|
2.28%
|
|
Total Deposits And Other Accounts To Total Assets
|
75.52%
|
|
Debt To Asset Ratio
|
0.90
|
|
Gross Advances To Borrowing And Deposits
|
85.24%
|
|
Current Ratio
|
67.68%
|
The NPA of bank was satisfactory as a result of
aggressive recoveries, active monitoring and prudent lending. This year the
recorded NPA was 3.64% with a net NPA of 3.66%. The bank has managed to keep
the NPA below the industry average.
The capital leverage ratios for the year are as
|
Capital Ratio
|
10.08%
|
|
Deposits To The Equity
|
748.94%
|
|
Debt Ratio
|
89.92%
|
The market ratios for the bank during 2013 were
|
PRICE EARNING RATIO
|
8.36
|
|
DIVIDEND COVER
|
2.06
|
Following capital adequacy positions were obtained
for tier I through internal generation of funds. And for total capital adequacy
was strengthen through the subordinate debenture issue.
|
CAR TIER 1
|
12.95
|
|
CAR TIER 1&2
|
16.52
|
|
|
|
Financial position – 2014
During 2014 the bank paid more attention on
recovering the losses they incurred in gold price fluctuations. The asset base of the bank improved by 13%
during the year, this was mainly driven by the growth in the credit due to the
contribution from corporate banking and SME banking. The growth in the deposit
which is the main contributor of growth in asset base has recorded a growth of
12.4%. on the liabilities side the bank raised funds through debenture issue in
2014 also bank has obtained loans from foreign banks for attractive interest
rates. The bank reported following liquidity ratios as the final outcome of
their management in assets and liabilities.
|
Cash Balance With
Banks To Total Assets
|
2.28%
|
|
Total Deposits And
Other Accounts To Total Assets
|
72.72%
|
|
Debt To Asset Ratio
|
0.89
|
|
Gross Advances To
Borrowing And Deposits
|
85.51%
|
|
Current Ratio
|
62.14%
|
The bank
managed to achieve a NPL Ratio of 3.61% during 2014. The ratio was lowest in
the industry and was far more below the industry average of 4.8%. the key
factors which derived this ratio were the recoveries and underwriting of the
loans. The net NPL ratio was maintained
at 1.43%
Capital
liquidity ratios are recorded to be
|
Capital Ratio
|
10.56%
|
|
Deposits To The Equity
|
688.57%
|
|
Debt Ratio
|
89.44%
|
|
|
|
During 2014 HNB
has recorded the following market ratios
|
Price Earnings Ratio
|
8.67
|
|
Dividend Cover
|
2.63
|
The capital
adequacy ratios for the bank has been maintained in an adequate level as
|
CAR TIER 1
|
12.15
|
|
CAR TIER 1&2
|
14.83
|
The above
mentioned ratios can be presented more clearly graphically as follows
Trend
analysis
The trend
analysis has been done for the main variables of income, expenditure, profits,
liabilities, assets and equity.
|
|
|
|
|
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|
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