Hatton National Bank : Interim Financial Statements as at 31st December 2021

For the year ended 31st December 2021

FINANCIAL COMMENTARY FOR THE YEAR ENDED 31ST DECEMBER 2021

Hatton National Bank PLC (HNB) solidified its position as one of the most sustainable and strongest banks recording a well-rounded performance in 2021. Group Profit After Tax (PAT) increased to Rs 20Bn, representing a growth of 47% YoY while Bank PAT improved to Rs 17.3 Bn as economic activity picked up during the year.

The monetary policy loosening adopted to spur economic growth post the first wave of the COVID-19 pandemic in 2020 continued to be in place upto August 2021. Although the interest rates increased subsequent to the 50bps increase in policy rates in August, the average AWPLR for 2021 was approximately 160bps below the rate for 2020. This resulted in a decline of 5.1% in interest income to Rs

98.6 Bn, despite a strong loan growth in the second half of the year. Similarly interest expense reduced by 17.2% to Rs 49Bn, resulting in a Net Interest Income (NII) growth of 10.8% YoY to Rs 49.6 Bn.

Net Fee and Commission income of the Bank grew by 27.5% YoY to Rs 9.6 Bn driven by higher card and trade business volumes as economic activity rebounded. Other non-interest income grew by 61% to Rs 6.5Bn, largely due to the position revaluations on account of the deprecation of the LKR by 8% during 2021.

Improvements made with regard to credit underwriting standards, approval processes and recovery action has resulted in further improvements in asset quality reflected by the NPA ratio which improved to 3.38% from 4.31% in 2020 to record one of the best NPA ratios in the industry. The Net Stage III loans ratio also improved by 85 bps to 2.55% as at end of 2021. The impairment charge for the year increased to Rs 18.8 Bn as significant management overlays were recognized on account of elevated risk industries and a provision of Rs 6.9Bn was made on account of foreign currency denominated government securities as the sovereign was downgraded to CC by Fitch Ratings.

Total operating expenses increased by only 2.3% YoY mainly due to a 6.1% reduction in personnel costs. The Bank continued its policy of not laying off or cutting salaries due to the pandemic and concluded a very successful collective agreement for the non-executive staff. However, the extension of retirement age to 60 years resulted in a reversal of Rs 2.3 Bn on provision for pension and retirement benefits which led to the drop in personnel expenses. Other operating expenses which account for 52% of total operating expenses increased by 11.4% YoY. However, this was still 3.9% below the pre-pandemic level.

The growth in Total Operating Income at a higher rate of 16.7%, resulted in the cost to income ratio improving considerably to 34.4% compared to 39.3% in 2020.

Profit Before Tax (PBT) amounted to Rs 19.8 Bn, a 31,5% YoY increase from the PBT reported in 2020. The total effective tax rate for 2021 was at 28.9% as the income tax rate reduced to 24% from 28% as well as due to reversals of excess provisions from previous years. Resulting PAT of Rs 17.3 Bn generated a ROA of 1.3% and a ROE of 12.1% respectively.

Robust growth in the last two quarters of 2021 led to a gross loan book growth of 14% during 2021, to Rs 929 Bn. On the funding side of the balance sheet deposits grew by 11.1% YoY to Rs 1.1Trillion. CASA grew at a higher pace of 15% YoY improving the CASA ratio to 41.0%. Total Assets of the Bank improved to Rs 1.4 Trillion while the equity capital improved to Rs 152 Bn.

With industry leading Tier I and Total Capital Adequacy ratios of 14.53% and 18.16% respectively HNB is very well capitalized. Liquidity levels also remain strong with Liquid Asset Ratios at 28% and Liquidity Coverage Ratio at 207% against the regulatory requirements of 20% and 90% respectively.

All Group Subsidiaries complemented the Bank's results as the Group recorded a PBT of Rs 23.1 Bn, a 31.1% YoY increase compared to 2020. The Group PAT of Rs 20.1 Bn enabled a ROA of 1.42% while Profit Attributable to Shareholders, which rose by 45.3% YoY to Rs 19 Bn delivered a ROE of 11.50%. Total Group Assets improved to Rs 1.5 Trillion, recording a 6% YoY expansion.

The Board of Directors declared a final dividend of Rs 9.00 per share which is the highest dividend declared over the past few decades, consisting of a cash dividend of Rs 6.50 per share and a scrip dividend of Rs 2.50 per share.

HNB is rated AA- (lka) by Fitch Ratings and has been ranked among the Top 1000 Banks in the World over five consecutive years by the acclaimed UK based "The Banker Magazine".HNB was once again recognised among the Top 10 'Most Admired Corporates of Sri Lanka' at the CIMA/ICCSL awards, a recognition bestowed for the fourth successive year. HNB is also a 11 time winner of the 'Best Retail Bank in Sri Lanka' award by the Asian Banker Magazine and is ranked as a Top 10 company in Sri Lanka by the 'Business Today' Magazine.

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INCOME STATEMENT

		BANK			BANK			GROUP			GROUP
	For the year ended	For the 3 months ended	For the year ended	For the 3 months ended
	31st December		31st December		31st December	31st December
	2021	2020	% Increase /	2021	2020	% Increase/	2021	2020	% Increase /	2021	2020	% Increase/
	(Audited)	(Audited)	(Decrease)			(Decrease)	(Audited)	(Audited)	(Decrease)			(Decrease)
	Rs 000	Rs 000		Rs 000	Rs 000		Rs 000	Rs 000		Rs 000	Rs 000
Gross income	115,047,325	115,813,618	(1)	30,444,876	28,274,023	8	135,710,455	134,436,232	1	35,930,721	33,260,714	8
Interest income	98,600,557	103,944,602	(5)	26,065,178	24,337,276	7	107,407,723	112,825,455	(5)	28,128,247	26,608,357	6
Less : Interest expenses	49,041,200	59,235,456	(17)	12,084,991	13,441,406	(10)	50,945,355	61,988,268	(18)	12,495,467	14,201,659	(12)
Net interest income	49,559,357	44,709,146	11	13,980,187	10,895,870	28	56,462,368	50,837,187	11	15,632,780	12,406,698	26
Fee and commission income	9,893,263	7,794,929	27	3,046,909	2,179,642	40	10,676,982	8,399,641	27	3,319,442	2,306,023	44
Less: Fee and commission expenses	270,702	249,880	8	85,809	60,138	43	360,771	374,084	(4)	118,276	84,961	39
Net fee and commission income	9,622,561	7,545,049	28	2,961,100	2,119,504	40	10,316,211	8,025,557	29	3,201,166	2,221,062	44
Net interest, fee and commission income	59,181,918	52,254,195	13	16,941,287	13,015,374	30	66,778,579	58,862,744	13	18,833,946	14,627,760	29
Net gains/(losses) from trading	(522,039)	(837,108)	(38)	886,863	580,103	53	(383,772)	(816,896)	(53)	946,088	606,996	56
Net gain from financial investments at fair value through	195,927	207,321	(5)	12,720	-	-	196,167	209,217	(6)	10,280	680	1,412
other comprehensive income
Net gains arising on de-recognition of financial assets	-	1,053,543	(100)	-	1,053,543	(100)	5,874	1,106,649	(99)	(3,616)	1,080,846	(100)
Net insurance premium income	-	-	-	-	-	-	10,641,842	8,907,731	19	2,990,805	2,493,833	20
Net other operating income	6,879,617	3,650,331	88	433,206	123,459	251	7,165,639	3,804,435	88	539,475	163,979	229
Total operating income	65,735,423	56,328,282	17	18,274,076	14,772,479	24	84,404,329	72,073,880	17	23,316,978	18,974,094	23
Less: Impairment charge for loans and other losses	18,778,047	15,258,468	23	7,584,686	3,446,941	120	19,534,309	16,046,578	22	7,701,561	3,944,000	95
Net operating income	46,957,376	41,069,814	14	10,689,390	11,325,538	(6)	64,870,020	56,027,302	16	15,615,417	15,030,094	4
Less : Operating expenses
Personnel expenses	10,757,563	11,459,352	(6)	1,298,590	2,798,003	(54)	13,676,004	13,903,432	(2)	2,052,471	3,420,995	(40)
Depreciation and amortisation	2,442,963	2,359,326	4	650,545	735,601	(12)	2,905,296	2,837,073	2	771,543	923,614	(16)
Benefits, claims and underwriting expenditure	-	-	-	-	-	-	8,955,217	7,374,868	21	1,945,539	1,682,805	16
Other expenses	9,433,001	8,300,307	14	2,723,304	1,922,061	42	11,812,874	10,690,354	11	3,380,963	2,438,091	39
Total operating expenses	22,633,527	22,118,985	2	4,672,439	5,455,665	(14)	37,349,391	34,805,727	7	8,150,516	8,465,505	(4)
Operating profit before taxes on financial services	24,323,849	18,950,829	28	6,016,951	5,869,873	3	27,520,629	21,221,575	30	7,464,901	6,564,589	14
Less :Value Added Tax (VAT) on financial services	4,498,822	3,869,649	16	929,654	1,096,466	(15)	4,759,882	4,048,466	18	1,002,267	1,087,364	(8)
Operating profit after taxes on financial services	19,825,027	15,081,180	31	5,087,297	4,773,407	7	22,760,747	17,173,109	33	6,462,634	5,477,225	18
Share of profit of joint venture (net of income tax)	-	-	-	-	-	-	292,837	407,215	(28)	148,362	128,835	15
PROFIT BEFORE INCOME TAX	19,825,027	15,081,180	31	5,087,297	4,773,407	7	23,053,584	17,580,324	31	6,610,996	5,606,060	18
Less: Income tax expense	2,525,260	3,618,544	(30)	22,321	1,049,728	(98)	2,969,222	3,918,061	(24)	(85,265)	744,269	(111)
PROFIT FOR THE YEAR	17,299,767	11,462,636	51	5,064,976	3,723,679	36	20,084,362	13,662,263	47	6,696,261	4,861,791	38
Profit attributable to:
Equity holders of the Bank	17,299,767	11,462,636	51	5,064,976	3,723,679	36	19,024,882	13,095,420	45	6,051,559	4,489,939	35
Non-controlling interests	-	-	-	-	-	-	1,059,480	566,843	87	644,702	371,852	73
PROFIT FOR THE YEAR	17,299,767	11,462,636	51	5,064,976	3,723,679	36	20,084,362	13,662,263	47	6,696,261	4,861,791	38
Earnings per share
Basic earnings per ordinary share (Rs)	32.90	21.80	51	9.63	7.08	36	36.18	24.90	45	11.51	8.54	35
Diluted earnings per ordinary share (Rs)	32.90	21.80	51	9.63	7.08	36	36.18	24.90	45	11.51	8.54	35

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STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

		BANK				BANK			GROUP				GROUP
	For the year ended	For the 3 months ended	For the year ended	For the 3 months ended
	31st December		31st December	31st December		31st December
	2021	2020	% Increase/	2021	2020	% Increase/	2021	2020	% Increase/	2021	2020	% Increase/
	(Audited)	(Audited)	(Decrease)			(Decrease)	(Audited)	(Audited)	(Decrease)			(Decrease)
	Rs 000	Rs 000			Rs 000	Rs 000		Rs 000	Rs 000			Rs 000	Rs 000
PROFIT FOR THE YEAR	17,299,767	11,462,636		51	5,064,976	3,723,679	36	20,084,362	13,662,263		47	6,696,261	4,861,791	38
Other comprehensive income that will not be reclassified
to profit or loss in subsequent periods
Change in fair value of investments in equity instruments designated
at fair value through other comprehensive income	(257,524)	(1,372,363)		(81)	2,300	(238,907)	(101)	(257,524)	(1,372,363)		(81)	2,300	(238,907)	(101)
Remeasurement of post-employment benefit obligations	1,030,928	(1,556,496)		(166)	1,030,928	(1,556,496)	(166)	1,100,788	(1,608,998)		(168)	1,075,068	(1,601,491)	(167)
Revaluation gain on freehold land and buildings	4,878,773	-		-	4,878,773	-	-	8,547,116	-		-	8,547,116	-	-
Share of other comprehensive income of joint venture that
will not be reclassified to profit or loss	-	-		-	-	-	-	1,108	483		129	1,108	483	129
Less:Tax expense relating to items that will not be
reclassified to profit or loss	(576,923)	-		-	(1,155,785)	-	-	(786,036)	2,102		(37,495)	(2,033,270)	-	-
Total other comprehensive income that will not be
reclassified to profit or loss	5,075,254	(2,928,859)		273	4,756,216	(1,795,403)	365	8,605,452	(2,978,776)		389	7,592,322	(1,839,915)	513
Other comprehensive income that will be reclassified
to profit or loss in subsequent periods
Debt instruments at fair value through other comprehensive
income :
Net gains / (losses) on investments in debt instruments measured
at fair value through other comprehensive income	(2,972,433)	833,584		457	(840,501)	(1,278,972)	(34)	(3,916,786)	1,528,985		356	(1,104,680)	(1,429,401)	(23)
Reclassification of net gains on de-recognition of debt instruments at
fair value through other comprehensive income to income
statement	-	(1,053,543)		(100)	-	(1,053,543)	(100)	(5,874)	(1,106,649)		(99)	3,616	(1,080,846)	(100)
Net change in expected credit losses of debt securities measured at
fair value through other comprehensive income	186,758	(150,378)		224	160,437	358,515	(55)	186,758	(150,378)		224	160,437	358,515	(55)
Transfer (to) / from life policy holder reserve fund	-	-		-	-	-	-	851,693	(576,094)		248	236,838	153,418	54
Share of other comprehensive income of joint venture
that will be reclassified to profit or loss	-	-		-	-	-	-	61,665	26,448		133	3,445	4,113	(16)
Less:Tax expense relating to items that will be reclassified to profit or loss	754,541	61,588		1,125	201,720	653,104	(69)	763,270	54,565		1,299	196,823	654,309	(70)
Total other comprehensive income that will be reclassified to
profit or loss	(2,031,134)	(308,749)		558	(478,344)	(1,320,896)	(64)	(2,059,274)	(223,123)		823	(503,521)	(1,339,892)	(62)
OTHER COMPREHENSIVE INCOME FOR THE YEAR,NET OF TAX	3,044,120	(3,237,608)		(194)	4,277,872	(3,116,299)	237	6,546,178	(3,201,899)		304	7,088,801	(3,179,807)	323
TOTAL COMPREHENSIVE INCOME FOR THE YEAR,NET OF TAX	20,343,887	8,225,028		147	9,342,848	607,380	1,438	26,630,540	10,460,364		155	13,785,062	1,681,984	720
Total comprehensive income attributable to:
Equity holders of the Bank	20,343,887	8,225,028		147	9,342,848	607,380	1,438	25,574,417	9,892,718		159	13,135,770	1,339,117	881
Non-controlling interests	-	-		-	-	-	-	1,056,123	567,646		86	649,292	342,867	89
TOTAL COMPREHENSIVE INCOME FOR THE YEAR,NET OF TAX	20,343,887	8,225,028		147	9,342,848	607,380	1,438	26,630,540	10,460,364		155	13,785,062	1,681,984	720

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STATEMENT OF FINANCIAL POSITION

		BANK			GROUP
	As at	As at	% Increase /	As at	As at	% Increase /
	31.12.2021	31.12.2020	(Decrease)	31.12.2021	31.12.2020	(Decrease)
	Audited	Audited		Audited	Audited
	Rs 000	Rs 000		Rs 000	Rs 000
ASSETS
Cash and cash equivalents	38,185,254	34,123,562	12	40,900,372	34,898,957	17
Placements with banks	-	-	-	6,371,273	12,126,434	(47)
Balances with Central Bank of Sri Lanka	25,820,489	7,212,395	258	25,820,489	7,212,395	258
Reverse repurchase agreements	-	-	-	6,246,276	2,827,050	121
Derivative financial instruments	927,487	1,032,318	(10)	927,487	1,032,318	(10)
Financial assets measured at fair value through profit
or loss	103,365	84,499	22	862,641	1,094,827	(21)
Financial assets measured at amortised cost - loans and
advances to customers	876,254,693	772,580,720	13	911,253,345	800,815,971	14
Financial assets measured at amortised cost - debt and
other financial instruments	160,677,520	186,605,516	(14)	171,930,640	193,349,496	(11)
Financial assets measured at fair value through other
comprehensive income	203,426,433	249,271,658	(18)	210,804,487	256,394,644	(18)
Investment in joint venture	755,000	755,000	-	2,877,420	2,521,811	14
Investment in subsidiaries	3,017,285	3,017,285	-	-	-	-
Investment properties	469,774	475,109	(1)	964,854	1,028,956	(6)
Property, plant and equipment	24,953,738	20,705,056	21	49,724,473	41,827,384	19
Right-of-use assets	5,439,384	5,356,868	2	2,177,902	1,827,832	19
Intangible assets and goodwill	1,429,544	1,309,172	9	1,989,134	1,749,994	14
Deferred tax assets	4,461,561	806,539	453	4,941,105	1,728,958	186
Other assets	12,415,094	8,515,839	46	15,858,665	11,045,479	44
Total assets	1,358,336,621	1,291,851,536	5	1,453,650,563	1,371,482,506	6
LIABILITIES
Due to banks	17,075,502	89,746,709	(81)	17,075,502	89,746,709	(81)
Derivative financial instruments	353,356	337,014	5	353,356	337,014	5
Securities sold under repurchase agreements	33,524,226	10,361,383	224	33,524,226	10,361,383	224
Financial liabilities measured at amortised cost - due to
depositors	1,075,709,287	967,821,404	11	1,107,065,820	994,948,912	11
Dividends payable	989,212	962,185	3	1,013,629	980,507	3
Financial liabilities measured at amortised cost - other
borrowings	24,747,869	30,526,261	(19)	25,555,834	30,526,261	(16)
Debt securities issued	1,962,749	1,875,042	5	2,465,085	2,411,408	2
Current tax liabilities	10,051,689	7,725,731	30	10,518,569	8,093,584	30
Deferred tax liabilities	-	-	-	5,157,978	5,371,390	(4)
Insurance provision - life	-	-	-	20,378,015	17,073,033	19
Insurance provision - non life	-	-	-	3,735,921	3,309,150	13
Other provisions	3,928,598	3,917,784	-	4,550,802	4,266,262	7
Other liabilities	14,400,456	16,278,033	(12)	14,596,651	15,451,997	(6)
Subordinated term debts	23,552,323	28,298,365	(17)	24,391,912	28,945,457	(16)
Total liabilities	1,206,295,267	1,157,849,911	4	1,270,383,300	1,211,823,067	5

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