ICRA Lanka assigns [SL]A+ rating for Habib Bank Limited (Sri Lanka branch)
ICRA Lanka Limited has assigned the issuer rating of [SL]A+ (Pronounced SL A plus) with a Stable outlook to Habib Bank Limited’s Sri Lanka branch (HBLSL or the Bank).
The rating factors in the financial, managerial and operational support provided by Habib Bank Limited Pakistan (HBLP; rated Caa1/NP by Moody’s) to its Sri Lankan branch operations. HBLP is the largest commercial bank in Pakistan with, market share of around 14% in terms of the total deposit base, as of Jul-20. The rating takes note of HBLSL’s comfortable capitalization profile with a Tier I capital ratio and Capital Adequacy Ratio (“CAR”) of 145.89% and 147.72%, respectively in Jun-20, as compared to the regulatory requirement of 8.00% and 11.50%, healthy funding profile with a gearing (total debt including deposits/net worth) of 0.46 times in Jun-20 and healthy liquidity with a positive short-term cumulative asset and liability mismatch of 25.73% (in less than 1 year bucket).
Further, ICRA Lanka notes HBLSL’s moderate profitability profile with a return on average assets of 0.36% in CY2019 and 1.11% for H1CY2020 and weak asset quality with gross and net NPA of 8.19% and 0.91%, respectively, as in Jun-20. The rating, also, takes cognizance of its small scale and franchise, geographically concentrated presence, a highly competitive business environment, and its concentrated deposit and advances profiles.
ICRA Lanka believes that HBLSL will continue to benefit from its support through HBLP. The outlook may be revised to ‘Positive’ in case of a sharp improvement in the earnings profile as portfolio expands, while keeping the asset quality under control. The outlook may be revised to ‘Negative’ in case of sharp deterioration in asset quality and profitability indicators.
Key rating drivers
Support from Habib Bank Limited of Pakistan (rated Caa1 by Moody’s & AAA by VIS Credit Rating Company Limited); Habib Bank Limited of Pakistan (“HBLP”) is the largest commercial bank in Pakistan with a market share of about 14% in terms of the share of customer deposits, as in Jul-20. Habib Bank Limited’s Sri Lanka branch (“HBLSL”) started its operations in 1951 as the first foreign branch of HBLP. HBLP provides operational, management and financial support to HBLSL. From an operational aspect, HBLP supervises HBLSL in accounting, internal audit, risk and compliance related matters. ICRA Lanka envisages, HBLP would provide financial support by providing liquidity, whenever required.
Comfortable capitalisation profile; HBLSL has a comfortable capital profile with CET-I (including CCB) at 145.89% (regulatory requirement of 8.00%) and total CAR at 147.72% (regulatory requirement of 11.50%) as of Jun-20, as compared to 121.24% and 122.95% as of Dec-19. The bank’s core capital stood LKR 5.8 Bn in Jun-20, which complied with the regulatory minimum requirement of LKR 5.0 Bn by December 2022. The capital profile has been supported by nil dividend repatriation to HBLP over the last five years. The current capital profile would support the envisaged portfolio growth of about 20% per annum for CY2021.
Healthy funding and liquidity profile; Deposits of HBLSL constitute 94% of the borrowings as of Jun-20 as compared to 93% in Dec-19. The deposit portfolio had 19% exposure to foreign currency deposits in Jun-20 as compared to 18% in Dec-19. In Jun-20, the top ten depositors contributed closer to 70% of the total deposits of HBLSL as compared to 69% in Dec-19. The CASA ratio stood at 55.61% in Jun-20 as compared to 49.09% in Dec-19; the ratio was above the Licensed Commercial Banking sector’s average of 32.25% in Jun-20. The short term (less than 1 year) ALM mismatch was positive 25.73% in Jun-20 and the same remained positive during the last three years. ICRA Lanka expects HBLP to extend timely liquidity support to HBLSL, whenever required.
Modest size, concentrated portfolio with limited franchise; HBLSL operates with four branches and reported an asset base of LKR 9.2 Bn in Jun-20. The main concentration of the Bank is on corporates with 83.35% exposure in Jun-20 followed by 12.35% Retail and 4.31% SME segments. The portfolio is concentrated on a few large customers as the top ten group exposures accounted for 92% of the total portfolio of HBLSL. The Bank was faced with the challenge of growing its portfolio during the last three years due to the closure of HBLP’s New York branch in Sep-17, which carried out the clearances of HBLSL’s foreign trade transactions. As a result, the concentration of the foreign currency advances reduced to 1% in Dec-17 as compared to 47% in Dec-16. In May-19, HBLSL was able to restore the US Dollar transactions through its network of correspondent banks and subsequently the concentration of the foreign currency advances increased to 21% in Jun-20. Going forward, HBLSL intends to focus mainly on the corporate segment and selectively growing the SME segment while discontinuing the retail segment.
Weak asset quality; HBLSL reported a gross NPA of 8.14% in Jun-20 as compared to 7.61% in Dec-19 (23.84% in Dec-18). The Gross NPA ratio remained higher than the LCB sector’s average of 5.27% in Jun-20 as the lending portfolio of HBLSL continued to deplete in H1CY2020. In 2019, Gross NPA improved with the recovery of one of the largest NPA facility. Presently the Bank’s top ten NPA facilities contributed closer to 95% of the total gross NPA portfolio as in Jun-20. The provision coverage ratio of HBLSL was 88.89% in Jun-20 and remained higher as compared to the LCB sector’s average of 56.35%. The bank’s ability to recover its larger NPA facilities, control incremental slippages and achieve good quality growth in the lending portfolio, would be crucial from a rating point of view.
Moderate profitability; HBLSL improved its NIM to 6.49% in CY2019 as compared to 3.51% in CY2018, the same was 6.14% in H1CY2020. The NIM improved in CY2019 due to increase in yields in the investment portfolio. The bank’s operating expenses/ATA increased to 5.11% in CY2019 as compared to 4.58% in CY2018 and it was 4.58% in H1CY2020. The operating expenses of the Bank increased as a result of the increase witnessed in the service cost charge from HBLP to HBLSL. This was partly due to new systems implemented in HBLSL. The Bank’s credit costs (loan impairment expenses/ATA) decreased to 0.08% in H1CY2020 from 0.40% in CY2019 (0.86% in CY2018) due to recovery of a larger NPA facility in 2019. The profitability improved in the latest six months although remained modest as ROA and ROE of HBLSL stood at 1.11% and 1.61%, respectively for H1CY2020 as compared to 0.36% and 0.50%, respectively for CY2019 (-1.78% and -2.51% in CY2018). The profitability of HBLSL improved with the improvements witnessed on NIM and credit cost of the Bank since 2019. Going forward, HBLSL’s ability to improve operational efficiency by expanding the portfolio would help to improve profitability.
Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.
Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Banks
About the Bank:
Habib Bank Limited’s Sri Lanka branch (“HBLSL”) was established in Sri Lanka in 1951 as the first foreign branch of Habib Bank Limited Pakistan. Currently, HBLSL operates with four branches at Colombo 3, Colombo 6, Colombo 11 and Galle. The Bank currently focuses on corporate and SME segments.
During the year ended December 31, 2019, HBLSL reported a PAT of LKR 31 Mn on a total asset base of LKR 8.9 Bn as compared to a loss of LKR 152 Mn on a total asset base of LKR 8.5 Bn in the previous financial year. For H1CY2020, HBLSL reported a PAT of LKR 50 Mn on a total asset base of LKR 9.2 Bn as compared to a PAT of LKR 41 Mn on a total asset base of LKR 8.5 Bn in H1CY2019.
Key financial indicators (Audited)
Rating history for last three years:
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