Profit after tax up 21% yoy, in line with our expectations at LKR4.6bn (EPS LKR9.38). Net interest income and operating expenses were 3% and 6% better than our forecasts, respectively, but these were offset by 74% higher provision charges to LKR1.3bn. Similar to the other Sri Lankan banks, HNB’s asset quality deteriorated in Q1 18, with the NPL ratio rising to 2.72%. Hatton National Bank (HNB) remains our preferred pick in Sri Lanka banks. It has the highest margin in the sector at 4.7%, due to its low-cost deposit mix and focus on SME and consumer lending, along with improving cost efficiencies. However, lower interest rates and deteriorating asset quality is likely to keep profitability in check in the medium term.