Earnings Report /
Sri Lanka

Hatton National Bank: Q2 CY 19: Halving impairment charges drive up results; revise TP

    Kavinda Perera
    Kavinda Perera

    Head of Research

    Asia Securities
    19 August 2019
    Published by

    We maintain our Buy rating on HNB with a revised TP of LKR 194.00/share (+15.3% TSR), while revising HNB NV to Hold with an unchanged TP of LKR 158.50/share (+14.0% TSR). HNB’s Q2 CY 19 EPS of LKR 5.94 (-14.7% yoy; +52.8% qoq) was in line with our estimates. The solid qoq improvement came on the back of halving impairment charges (LKR 2.4bn vs. LKR 4.6bn in Q1 CY 19) and we expect the cost of risk to stabilise around the current levels (c125bps). NPL stock too saw a reduction, which we consider a positive, but overall, the weak economic conditions could lead to a further increase in H2 CY 19, in our view. With a tier 1 ratio of 12.8% (end-CY 19e), we believe that additional equity is not required in the next 12 months.

    NPL stock reduced in Q2 CY 19 on better collections; a positive development

    HNB reported a gross NPL ratio of 4.69% (+6bps qoq), indicating that the NPL stock reduced by 1.4% qoq to LKR 36.5bn. Management indicated that this was driven mainly through better recoveries, which we see as a positive in the current environment. NPL stock is mainly comprised of tourism, trade and construction sectors. With slow loan growth and still weak economic conditions, we expect the NPL ratio to increase further in H2 CY 19, albeit at a slower rate than initially expected (5.0% vs. 5.2% initially).

    Impairment charges marks qoq improvement; will stabilise in H2 

    Cost of risk in Q2 CY 19 reverted to 123bps after spiking to 231bps in Q1 CY 19. This supported the qoq improvement in PAT. As the economy is slowly gaining momentum, we do not expect to see any major spikes in H2 CY 19. Management indicated that cost of risk could improve further in H2 CY 19, but, given that 1) parts of the agriculture value chain are still under pressure, 2) key sectors such as construction have not seen a major pick-up and 3) leisure and related sectors still impacted (yet slowly recovering), we believe this is too optimistic, and expect cost of risk at c125bps for H2 CY 19.

    Tepid loan growth to continue through CY 19

    Private sector credit growth remained soft (+0.8% yoy) in Q2 CY 19, and HNB’s loan book contracted by 2.7% qoq. Management indicated that the largest hit was from weak corporate borrowing, while parts of the SME segment has also shown low credit demand as investment sentiment is still weak. While clarity on the pending elections could lead to a change in this, we believe Q3 CY 19 to see only muted growth, despite trending down lending rates. Accordingly, we set our loan growth estimate for CY 19e at 2.6% (vs. -1.9% ytd).

    We revise our TP for HNB to LKR 194.00/share and maintain Buy

    HNB trades at 0.65x CY19E BV, while HNB NV is at 0.54x, recovering from the trough seen in June and in line with our expectations. While industry headwinds continue to weigh on the bottom line, we like that HNB has made progress on reducing the NPL stock. With a Tier 1 CAR of 12.8% at end-CY 19, we do not see a capital requirement in the next 12 months. We expect HNB to re-rate to 0.71x CY19E BV with a 12-month TP of LKR 194.00/share (+10.7% upside; +15.3% TSR) and reiterate Buy. We maintain our TP for HNB NV at LKR 158.50/share (8.6% upside; +14.0% TSR) and rate the non-voting share Hold.