Hatton National Bank PLC (HNB.N0000) – 2014 results

 Loan book, excluding pawning, posted 28% YoY growth in 2014: HNB’s gross loan book, excluding pawning, grew 28% YoY on the back of term loans and overdrafts growth, despite a 50% YoY contraction in the pawning portfolio. HNB was able to bring down its pawning exposure to 6% of total gross loans in 2014 from 13% a year earlier, in line with its target to limit exposure below 5%.

 Top-line boost mainly on account of non-interest income growth: The low interest rate regime has resulted in only a marginal improvement in net interest income in 2014, despite improvements in the loan book and CASA ratio. The bank’s NIM contracted by 75bps to 5.0%. However, 42% YoY growth in non-interest income – driven by increased business volumes, financial investment gains, and exchange income – offset modest growth in net interest income and boosted the top line.

 HNB records impressive operating results: HNB recorded operating profit growth of 25% YoY to LKR15.6bn in 2014, supported by top-line growth and lower impairment provisions. HNB’s net income stood at LKR9.8bn (up 28% YoY) in 2014, while EPS improved to LKR24.39 from LKR19.15 in 2013.

 HNB’s long-standing chairman to step down: Dr. Ranee Jayamaha will step down as HNB’s chairman and Mrs. M.A.R.C. Cooray has been appointed as the new chairman from 30 March 2015.

 Valuation: We maintain our current valuation multiples of 1.0x-1.2x P/B, and rolling over to 2015E BVPS and EPS values yields a valuation range of LKR192-230. HNB’s share price has run up significantly along with the recent market upswing. The BFI sector P/BV has increased to 1.7x from 1.4x in 2014 and the sector P/E has increased to 13x, from 9x a year ago, rising ahead of the market P/E to 19x from 16x in March 2014