Habib Bank Limited (Sri Lanka Branch)

ICRA Lanka reaffirms the Issuer Rating of Habib Bank Limited (Sri Lanka)

InstrumentRated Amount (LKR Mn)Rating Action
Issuer RatingN/A [SL]A+ (Stable); Reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the Issuer Rating of [SL]A+ (Pronounced as S L A plus) with Stable outlook for Habib Bank’s Sri Lanka Branch (“HBLSL”/” the Bank”).

Rationale

HBLSL’s rating takes into account the strong financial, managerial and operational support provided by HBL Pakistan (HBLP; rated B3/NP by Moody’s)  to its Sri Lankan branch operations. The rating continues to consider healthy capital profile of HBLSL with a Tier 1 capital adequacy ratio of 81.6% (regulatory requirement of 8.0%) in September 2021, absolute capital of LKR 6 Bn against LKR 5 Bn regulatory requirement to be met by the end of CY2022. HBLSL reported healthy gearing level of 0.95 times in September 2021 as compared to 9.87 times of the Licensed Commercial Banking Sector (LCB) and healthy liquidity position with an all-currency liquidity coverage ratio of 690% in September 2021 against 100% regulatory requirement. ICRA Lanka, however, is cognisant of the higher than sector Gross Non-Performing ratio (GNPA %) of 7.0% as on September 2021 against 4.5% of the LCB sector. The high GNPA % is largely due to the legacy portfolio and the moderating overall portfolio as HBLSL has not witnessed fresh slippages since CY2020.

Outlook: Stable

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 its asset quality and profitability indicators.

Key rating drivers

Credit strengths

Support from Habib Bank Limited of Pakistan (rated B3/NP by Moody’s); Habib Bank Limited of Pakistan (“HBLP”) is the largest commercial bank in Pakistan and maintained a market share over 14% as on September 2021 in terms of the domestic deposits. HBLSL started its operations in 1951 as the first foreign branch of HBLP. HBLP provides operational, managerial and financial support to HBLSL. In terms of operational and management aspect, HBLP oversees accounting, internal audit, risk and compliance of HBLSL. As witnessed in the past, ICRA Lanka envisages the support of HBLP in terms of capital and liquidity, whenever required.  

Healthy capitalisation profile; HBLSL maintains a healthy capitalisation profile with a core capital above LKR 6 Bn against the LKR 5 Bn regulatory minimum which is to be met by the end of this year. Given HBLSL’s modest lending book and close to 60% of the total assets being invested in zero-risk government securities, HBLSL continues to maintain healthy Capital Adequacy Ratios (CAR). As on September 2021, HBLSL reported a Tier 1 CAR and total CAR of 81.62% and 82.75%, respectively against the regulatory requirement of 8.00% and 12.00%, respectively. ICRA Lanka takes comfort from the capital infusion by the parent entity in the past and envisages the continued support, if required.

Healthy funding & liquidity profiles; HBLSL’s current and savings deposits to total deposit ratio (CASA %) improved from CY2020 mainly due to the increase in the deposits from the Habib network and of the Chinese-related companies which HBLSL has commenced to deal with. As on September 2021, the CASA ratio stood high at 76% (LCB sector at 38% as on September 2021) as compared to 60% in December 2020 and 49% in December 2019.  The exposure of the foreign currency denominated deposits to total deposits increased to 32% as on June 2021 (18% as on December 2019) due to the same reason as above. 

The Bank’s gearing levels (adjusted for revaluation) remained healthy at 0.95 times as on September 2021 against 9.87 times of the LCB sector. In terms of liquidity too, HBLSL maintains a healthy liquidity profile with an all-currency liquidity ratio of 690% as on September 2021 against the regulatory requirement of 100%. ICRA Lanka takes comfort of the consistent track record of positive cumulative Asset-Liability Mismatch (ALM) with 18.73% as on June 2021 for the less than 1 year category. ICRA Lanka’s rating on HBLSL also draws comfort from the access to liquidity from HBL network and head office as well and notes that HBLSL has recently borrowed ~ USD 5 Mn from its head office as a contingent funding line. 

Credit Challenges:

High Gross Non-Performing Asset (GNPA %) largely due to its moderating portfolio; HBLSL reports higher than sector GNPA %, wherein it reported 7.0% as on September 2021 as against 4.5% of the LCB sector. The high GNPA % is attributed to the Bank’s moderating portfolio as it has not reported any fresh slippages since CY2020. The closure of HBL’s New York branch in CY2017 largely contributed to this moderating portfolio. ICRA Lanka also notes that majority of the NPAs belong to the SME segment (~98%) amidst weak credit underwriting and have been in NPA for the past 3-5 years while the Bank’s corporate book which accounts to ~80% of the portfolio continues to record zero NPL. In terms of other parameters, HBLSL maintains a healthy provisioning coverage with above 90% coverage compared against 58% of the LCB sector. The NPA concentration continues to remain high due to delays in legal proceedings amidst covid-related lockdown measures over the past 2 years. 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 but slightly improved earnings profile; The Net Interest Margin (NIM %) slightly moderated to 4.65% in 9MCY2021 as compared to 5.47% of 9MCY2020 which was a result of the moderating denominator as the absolute net interest income of the Bank increased during the said periods. The interest income of the Bank is largely driven by the investment income which stood at LKR 364 Mn for 9MCY2021 (LKR 278 Mn for 9MCY2020). The high CASA % (~75% in September 2021) and the low systemic interest has also benefitted the Bank’s cost of funding where it moderated to 3.12% for 9MCY2021 (4.01% in 9MCY2020). HBLSL also gained through foreign exchange transactions in 9MCY2021 amounting to LKR 78 Mn (Other income/ATA of 0.88%) as against LKR 6 Mn in 9MCY2020 (Other income/ATA of 0.12%). With nil fresh slippages being reported since CY2020, the Bank witnessed credit cost reversal with -0.01% reported for 9MCY2021 (-0.32% in 9MCY2020). Overall, profitability of the Bank remains slightly above the industry (Licensed Commercial Banking Sector- LCB) with HBLSL reporting a Return on Assets (RoA) of 1.39% for 9MCY2021 (1.29% for 9MCY2020) as compared to 1.30% of the LCB sector.

Modest Size concentrated portfolio with limited franchise; HBLSL is a small-sized LCB operating with 3 branches as on September 2021; all concentrated within the Colombo-centric Western Province. The total assets stood at LKR 12.7 Bn as on September 2021 (0.09% of the LCB sector) and the net lending book stood at LKR 2.5 Bn (0.03% of the LCB sector). HBLSL is largely focussed on corporate lending (79% as on June 2021) and is currently increasing its exposure towards trade financing whilst also increasing its reach to Chinese companies operating in Sri Lanka at the backdrop of the parent entity’s relationship with China. Given its high exposure to corporate lending, the concentration of HBLSL’s portfolio remains high with top 10 facilities accounting for more than 90% as on June 2021. Since CY2017, HBLSL faced a challenge of growing its portfolio amidst the closure of the HBL New York branch which carried out the clearance of HBLSL’s foreign transactions; however, this has fully restored now.

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 three branches at Colombo 3, Colombo 6 and Colombo 11. The Bank currently focuses on corporate, SME segments and trade financing.

During the year ended December 31, 2020, HBLSL reported a PAT of LKR 119 Mn on a total asset base of LKR 11.2 Bn as compared to a PAT of LKR 31 Mn on a total asset base of LKR 8.9 Bn in the previous financial year. For 9MCY2021, HBLSL reported a PAT of LKR 125 Mn on a total asset base of 12.7 Bn as compared to a PAT of LKR 98 Mn in 9MCY2020 on a total asset base of LKR 11.4 Bn.

Key financial indicators
LKR MnCY2019CY20209MCY2020*9MCY2021*
Net Interest Income563551417416
Profit after Tax/ (Loss)3111998125
Net worth (Adjusted for revaluation)5,9946,1196,0996,238
Loans and Advances (Net)2,8932,9032,9952,524
Total Assets8,90811,23211,42712,656
Return on Equity0.50%1.90%2.10%2.61%
Return on Assets (On PAT)0.36%1.18%1.29%1.39%
Gross NPA7.59%6.63%6.24%7.00%
Net NPA1.10%0.48%0.41%0.30%
Capital Adequacy Ratio (Tier 1)121.23%133.44%129.07%81.62%
Gearing (times)0.430.770.810.95

*Unaudited financials

Rating history for last three years:

Analysts

Sachini Costa
+94-774781595
sachini.costa@icralanka.com

Niraj Jalan
+91-33-71501146
niraj.jalan@icralanka.com


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