Hatton National Bank PLC’s (HNB) potential acquisition of Bank Alfalah Limited’s (BAFL) Bangladesh operations is unlikely to affect the Sri Lankan bank’s ratings, says Fitch Ratings.
“We believe the acquisition, if it proceeds, would have only a modest impact on HNB’s capital.”
HNB announced on 26 August that it has made a non-binding offer on the acquisition. This is after Bank Asia Limited (Bangladesh) made a similar non-binding offer in April 2024.
Both offers have been accepted in principle, subject to compliance with all applicable laws and regulations. The next step is central bank approval for commencement of the due diligence process.
“We see limited downside pressure on HNB’s capitalisation metrics should the acquisition proceed. At end-2023, BAFL had assets totalling nearly Rs. 80 billion and equity amounting to Rs. 15.5 billion.”
This is about 5% of HNB’s assets and 8% of its equity at the bank level, indicating that the possible acquisition is small relative to HNB’s overall size.
“We estimate the acquisition would lead to less than a 1pp drop in HNB’s capital ratios due to an increase in risk-weighted assets. The bank’s capital could be exposed to exchange-rate risks, particularly in the event the taka depreciates against the Sri Lankan rupee, but we believe this would be manageable given its capital buffers. HNB’s common equity Tier 1 capital ratio stood at 16.2% at end-1H24 at the bank level, including 1H24 profit, the highest among Sri Lanka’s domestic systemically important banks.”
The proposed acquisition provides HNB an entry into Bangladesh, a much larger economy than Sri Lanka.
However, Fitch does not expect this exposure to be sufficiently material in the medium term to mitigate the risks associated with the bank’s dominant exposure to Sri Lanka.
“As such, we expect its standalone credit profile assessment to be largely linked to the domestic operating environment, despite the risk diversification, until its operations in Bangladesh expand meaningfully. The bank currently has modest overseas exposure via its lending to entities based outside the country.”
(Fitch Ratings)