Fitch Rates HNB Finance’s Subordinated Debt Final ‘BBB+(lka)’

Fitch Ratings-Colombo-10 December 2019:

Fitch Ratings has assigned HNB Finance Limited’s (HFL, A(lka)/Stable) proposed Sri Lanka rupee-denominated subordinated unsecured debentures a final National Long-Term Rating of ‘BBB+(lka)’.

The final rating is the same as the revised expected rating assigned on 28 November 2019 and follows the receipt of documents conforming to information already received.

The proposed debentures total LKR2 billion and have a maturity of five years with fixed coupons, paid annually and semi-annually. The company plans to use the proceeds to strengthen its Tier II capital base and support loan-book expansion. The proposed debentures are to be listed on the Colombo Stock Exchange.

KEY RATING DRIVERS

The proposed subordinated debentures are rated two notches below HFL’s National Long-Term Rating in line with Fitch’s Exposure Draft: Non-Bank Financial Institutions Rating Criteria and Exposure Draft: Bank Rating Criteria. The rating on the proposed debentures reflects Fitch’s expectation of poor recoveries arising from their subordinated status. Furthermore, we do not expect any regulatory action that would reduce losses on subordinated instruments.

HFL’s National Long-Term Rating was affirmed on 22 February 2019. The rating reflects Fitch’s expectation that support would be forthcoming from Hatton National Bank PLC (HNB, AA-(lka)/Stable), which owns 51% of HFL and is involved in HFL’s strategic direction through board representation and the common HNB brand. The two-notch rating differential between the two entities reflects HFL’s limited role in the group. HFL is engaged mainly in microfinance, which is not a major product for HNB. Furthermore, there is limited operational integration between the entities.

RATING SENSITIVITIES

The rating of the proposed notes will move in tandem with HFL’s National Long-Term Rating. The rating is also sensitive to divergence between the final Non-Bank Financial Institutions Rating Criteria and Bank Rating Criteria, when published, and the current exposure drafts.

HFL’s ratings are sensitive to changes in Fitch’s assessment of HNB’s ability and propensity to provide support.