APPLYING HATTON NATIONAL BANK PLC NATIONAL HATTON IT ALL GROWING HATTON NATIONAL BANK PLC “HNB Towers”, ADDS No. 479, T B Jayah Mawatha, (Darley Road), Colombo 10, LEARNING UP Sri Lanka. HATTON NATIONAL BANK PLC www.hnb.net ANNUAL REPORT 2008 ANNUAL REPORT 2008 ANNUAL REPORT WINNING Learning, Applying, Growing and Winning; Methodology that has shaped the way we do business and has imparted on us the importance of everything no matter how small. This is why to us; everything matters. It's why we still love to see our customers in-branch as much as we love them using our online services. It's why our customers have rewarded us with another successful year. Because from a click to a smile; IT ALL ADDS UP! Contents Key Performance Indicators 107 FinancialPerformance Highlights Highlights 4 Independent Assurance Report 108 Operational Highlights 5 The Global Reporting Initiatives (GRI) G3 109 Financial Goals & Performance 5 Financial Services Sector Supplement Social Performance (November 2002) 116 Financial Services Sector Supplement Chairman’sManagement Message Information 8 Environmental Performance (March 2005) 117 Chief Executive Officer’s Review 12 The Board of Directors 16 Financial Information Corporate Management 18 Financial Calender 121 Senior Management 21 Annual Report of the Board of Directors on the Affairs of the Company 122 Directors’ Interests in Contracts with the Bank 127 CorporateManagement Banking Discussion / Project Finance and Analysis 24 Remuneration Committee Report 129 Personal Banking 26 Directors’ Responsibility Development Banking 29 for Financial Reporting 130 International Operations 31 Chief Executive Officer's and Treasury Operations & Exchange Houses 33 Chief Financial Officer's Responsibility Statement 131 Investment Banking 35 Audit Committee Report 132 Information Technology (IT) 36 Independent Auditors’ Report 133 Marketing 37 Income Statement 134 Subsidiary Operations Balance Sheet 135 - HNB Assurance PLC 39 Statement of Changes in Equity 136 - Sithma Development (Pvt) Ltd 40 Cash Flow Statement 137 - Majan Exchange LLC 40 Notes to the Financial Statements 139 Joint Venture Operations - Acuity Partners (Pvt) Ltd 41 Supplementary Information Associate Operations Capital Adequacy 207 - Lanka Ventures PLC 42 Income Statement in US Dollars 210 - Browns Engineering (Pvt) Ltd 42 Balance Sheet in US Dollars 211 Analysis of Deposits 212 Global Correspondents 43 Analysis of Advances 213 Customer Centre Network 44 Provincewise Analysis of Deposits & Advances 214 Financial Review 46 Sources & Utilisation of Income 215 Risk Management 50 Value Added Statement 216 Corporate Governance and Compliance 62 Quarterly Statistics 217 Ten Year Statistical Summary 218 Sustainability Report Ten Year Graphical Review 219 Chief Executive Officer’s Message 78 Segmental Analysis 220 Preamble 80 Share & Debenture Information 221 Our Sustainability Strategy 80 Glossary of Financial / Banking Terms 228 Community Relations 83 Notice of Meeting 230 Environmental Relations 87 Form of Proxy (Voting) 231 Employee Relations 89 Form of Proxy (Non-Voting) 233 Investor Relations 98 Investor Feedback Form 235 Customer Relations 101 Corporate Information IBC Supplier Relations 105 Annual Report 2008 2 HATTON NATIONAL BANK PLC Annual Report 2008 HATTON NATIONAL BANK PLC 3 Financial Highlights Net Profit After Taxation 2007 2008 % Rs Mn Rs Mn Rs Mn Change 3,500 3,000 2,500 Results for the Year Income 29,995 + 23.91 2,000 37,166 1,500 Net Profit Before Income Tax 4,335 + 10.38 4,785 1,000 Income Tax on Profits 1,312 + 19.36 500 1,566 0 Net Profit After Taxation 3,022 + 6.52 04 05 06 07 08 3,219 Gross Dividends 824 + 14.32 942 Profit Available After Appropriation 2,198 + 3.59 2,277 Return On Average Assets % 1.5 At the Year End 1.2 Shareholders' Funds 0.9 (Capital and Reserves) 18,419 + 11.74 20,581 0.6 Deposits from Customers 175,660 + 6.32 186,770 Gross Advances to Customers Leasing, 0.3 Bills of Exchange & Commercial Paper 168,827 + 9.20 0.0 184,367 04 05 06 07 08 Total Assets 232,906 + 9.60 255,270 Total Deposits Information Per Ordinary Share Rs Mn Earnings (Rs) 12.83 + 6.55 200,000 13.67 Dividends (Rs) 3.50 + 14.29 4.00 150,000 Dividend Yield (%) 2.86 + 100.35 5.73 100,000 Net Asset Value (Rs) 78.20 + 11.74 87.38 Market Value (Rs) - Voting 122.50 - (43.06) 50,000 69.75 Market Value (Rs) - Non Voting 53.25 - (39.91) 0 32.00 04 05 06 07 08 Ratios Return on Average Shareholders' Funds (%) 19.28 - (14.37) Total Advances 16.51 Rs Mn Price Earning (Times) 9.55 - (46.49) 200,000 5.11 Dividend Cover (Times) 3.67 - (6.81) 3.42 150,000 100,000 Capital Adequacy Ratios 50,000 Tier 1 (%) (Statutory minimum ratio required is 5%) 10.32 - (10.37) 9.25 Tier 1 & 2 (%) (Statutory minimum ratio required is 10%) 12.08 - (5.63) 0 11.40 04 05 06 07 08 Annual Report 2008 4 HATTON NATIONAL BANK PLC Operational Highlights Automated Teller Customer177 Centres Machines260 (ATMs) 41% increase from 2007 Mobile Banking Internet Banking Enabled37% Accounts Enabled55% Accounts Increase over 2007 Increase over 2007 Financial Goals & Performance Medium Term For the Year ended 31st December 2004 2005 2006 2007 2008 Goals Return on Average Assets (%) 0.7 1.0 1.2 1.4 Over 1.5 1.3 Return on Average Shareholders' Funds (%) 12.2 16.3 18.4 19.3 Over 20.0 16.5 Cost / Net Income Ratio (Excl. Financial VAT) (%)* 66.2 60.3 57.8 56.2 below 50.0 54.3 Capital Adequacy Tier 1 Capital Ratio (%) (Statutory minimum ratio required is 5%) 9.83 10.87 10.23 10.32 9.00 9.25 Total Capital Ratio (%) (Statutory minimum ratio required is 10%) 11.26 11.55 11.32 12.08 12.50 11.40 * Operating expenses consist of personnel expenses, provisions for employee retirement benefits, premises costs and establishment expenses and other overhead expenses. Net income consists of net interest income, foreign exchange income, commission income, dividend income and other income. Annual Report 2008 HATTON NATIONAL BANK PLC 5 Management Information Decisions that all add up Chairmanʼs Message I take pleasure in welcoming you to the fortieth Annual General went through with the rising oil prices, the entire world seeking Meeting of Hatton National Bank PLC and to present the alternate sources of energy is a much needed effort to the Annual Report and a comprehensive review of the bank’s renaissance which we expect to witness in the global economy activities for the year 2008. in the current year, albeit slowly. It is a significant factor that this report has been compiled in There is also a belief that with the recovery of the worst the backdrop of a year which saw the emergence of a real recession experienced since the 1930s the balance of global economic and financial market crisis causing all of us in economic power and strength will gradually shift to the Asian the sector to face immense challenges. region. However, China, Japan and India who were billed to lead the way are also severely affected by this crisis. Despite the macro economic milieu with visible signs of Nevertheless, with their progressive attitudes, these Asian drawbacks for progress, I am happy to report a robust giants might position themselves to move on a fast track performance by your Bank in 2008. Despite this most uneven towards recovery. In such a scenario, Sri Lanka can be a and negative situation, our Bank’s inherent strengths and resultant beneficiary and could be poised to avail itself of the values maintained over the years, helped the Bank to perform opportunities that will arise through appropriate strategies. well above normal expectations. Our after tax profit of over Towards this goal, our country should make a concrete effort Rs 3.2 Bn was the highest on record. We saw modest growth to review its economic policies to take advantage of the in other areas of productivity which I believe is satisfactory in positive factors and more importantly, maintain the best of the light of the constraints faced by us in the local banking international relationships particularly with our giant neighbour. scene. Detailed information of the Bank’s performance indicators and The Sri Lankan Economy financials are presented in the CEO’s Review, other reports Amidst an environment of high inflation, prohibitive interest and the Financial Statements. rates, an exacerbating war footing, alarming oil prices and tight monetary controls, the Central Bank of Sri Lanka predicted an economic growth of approximately 6%, downgrading a Global Scenario The collapse of several financial institutions which were previous forecast of 7%. Whilst in the first half of the year, the hitherto considered organisations with enormous strengths economy displayed a robustness to continue towards the and stability, shook the very foundation of the western forecasted growth percentage, with the global recession, price economies and brought chaos to the world financial collapse of our major commodity exports like tea and rubber, community at its core. The technical reasons for the crisis can and downturn in the apparel industry, a decline in the be best understood and articulated only by those who were predicted growth rates became inevitable. involved in the policy enforcement and management of these The overall budget deficit in 2008 is approximately 7% of GDP, organisations. In my view, our immediate task is to ask despite decrease in revenue and increase in expenditure. The ourselves when the much needed recovery will occur. Though government’s revised expectation on revenues for the year predictions are many, the overriding factor is that the crisis in was recorded at Rs 709.3 Bn compared to the initial budget the United States of America and United Kingdom is taking expectation of Rs 750.7 Bn whilst the revised current time to spread to other parts of the world, particularly to the expenditure rose to Rs 743.34 Bn against the forecast of Rs Asian countries.