Fitch Assigns ‘BBB+(lka)’ Rating to Hatton National Bank’s Basel III Subordinated Debt

Fitch Ratings has officially assigned a final National Long-Term Rating of ‘BBB+(lka)’ to Hatton National Bank PLC’s (HNB, A(lka)/Stable) proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures, which could total up to LKR 12 billion. This rating aligns with the expected rating given on April 4, 2024, following the bank’s submission of necessary documentation.

The proposed debentures are set to mature in five, seven, and ten years, with plans for them to be listed on the Colombo Stock Exchange. HNB intends to utilize the proceeds to bolster its Tier 2 capital base, supporting loan growth while addressing maturity mismatches within its balance sheet. The bank anticipates that these debentures will qualify as regulatory Tier 2 capital under Basel III guidelines. Notably, the debentures include a non-viability clause, which stipulates that they will convert into ordinary voting shares if a trigger event occurs, as determined by the Monetary Board of Sri Lanka.

Fitch has rated HNB’s subordinated debt two notches below the bank’s National Long-Term Rating anchor. This rating reflects the agency’s baseline notching for loss severity associated with this type of debt, coupled with expectations of poor recoveries. There is no additional notching for non-performance risk, as the notes lack going-concern loss-absorption features.

The National Long-Term Rating serves as the anchor for this instrument, reflecting HNB’s standalone financial strength and indicating the risk of the bank becoming non-viable.

Looking ahead, HNB’s subordinated debt could face a downgrade if the bank’s National Long-Term Rating is lowered. Conversely, an upgrade of the bank’s National Long-Term Rating would similarly elevate the rating of its subordinated debt.

For further insights into the key rating drivers and sensitivities affecting HNB’s National Long-Term Rating, one can refer to Fitch’s previous report published on June 6, 2024.