Safe & Sound “Our Capital Adequacy is one of the highest in the entire banking sector: the assurance of an institution that’s safe and sound....” In April 2012 Hatton National Bank PLC entered into an agreement with the German Development Finance Institution DEG to raise USD 25 Mn through an eight-year subordinated loan, which forms part of the Bank’s tier II capital. DEG, a subsidiary of Germany’s KfW, is one of the largest European development finance institutions for long-term project and company financing. Together with the USD 50 Mn raised from China Development Bank by way of a long term senior loan, HNB successfully raised USD 75 Mn from foreign sources during the year. HNB also became the first Sri Lankan bank to obtain an international credit rating from Moody’s Investors Services. HNB has, for several years, been endorsed by prestigious international and local bodies for excellence in all disciplines including banking, human resources management, corporate governance and transparency. In 2012 the Bank had the distinction of being adjudged the ‘Best Bank in Sri Lanka’ by the prestigious Banker magazine. HNB was also recognised as the ‘Best Retail Bank in Sri Lanka’ by the Asian Banker for the fifth consecutive year in 2012. Safe & Sound HATTON NATIONAL BANK Annual Report 2012 Financial Highlights & Financial Goals / Performance Deposits Impaired Assets (Gross) Bank Group 2012 2011 % 2012 2011 % Rs Mn Rs Mn Change Rs Mn Rs Mn Change Rs 341 Bn 3.3% Results For the Year Income 51,559 37,066 + 39.1 55,160 40,123 + 37.5 Improved from Net profit before income tax 10,046 8,388 + 19.8 10,693 9,056 + 18.1 +17.2% Income tax on profits 2,342 2,123 + 10.3 2,421 2,156 + 12.3 Net profit after taxation 7,703 6,265 + 23.0 8,271 6,900 + 19.9 3.6% in 2011 Gross Dividends 3,378 2,914 + 15.9 3,378 2,914 + 15.9 Profit available after appropriation 4,325 3,351 + 29.1 4,893 3,986 + 22.7 At the Year End PAT Loans & Receivables Shareholders’ funds (Capital and Reserves) 46,476 37,984 + 22.4 51,624 41,575 + 24.2 (Gross) Deposits from customers 341,424 291,357 + 17.2 340,848 290,912 + 17.2 Gross loans and receivables 310,334 263,082 + 18.0 309,300 261,231 + 18.4 Rs 7.7 Bn Total Assets 446,302 380,484 + 17.3 459,399 391,297 + 17.4 Rs 310 Bn Information per ordinary share +23.0% Earnings (Rs) 19.36 16.60 + 16.6 21.19 18.65 + 13.6 Dividends (Rs) 8.50 7.50 + 13.3 +18.0% 5.74 4.96 + 15.9 Dividend Yield (%) - Voting Net asset value (Rs) 116.99 97.75 + 19.7 129.96 106.99 + 21.5 Market value (Rs) - Voting 148.00 151.30 - 2.2 Cost/Net Income Market value (Rs) - Non voting 112.50 83.20 + 35.2 Ratios Return on average shareholders’ funds (%) 18.24 18.22 + 0.1 17.41 18.06 - 3.6 52.3% Price earning (Times) - Voting 7.64 9.11 - 16.1 6.98 8.11 - 13.9 Improved by 300 bps Dividend cover (Times) 2.28 2.15 + 6.1 2.45 2.37 + 3.4 Capital Adequacy Ratios Tier 1(%) (Statutory minimum ratio required is 5%) 13.85 12.76 14.10 12.90 Total capital (%) (Statutory minimum ratio required is 10%) 16.63 14.51 16.94 14.77 Net Profit After Taxtion Return on Total Deposits Total Advances Shareholders' Note: Information is based on LKASs/SLFRSs. Average Assets Funds Rs Mn % Rs Mn Rs Mn Rs Mn 341,424 7,703 1.86 46,476 310,334 1.79 291,357 Medium 1.62 37,984 6,265 Results for last 5 years (Bank) 2008 2009 2010 2011 2012 Term Goals 1.50 263,082 239,034 Return on Average Assets ( % ) 1.3 1.6 1.5 1.8 1.9 Over 1.8 1.31 30,775 210,507 208,779 Return on Average Shareholders' Funds (%) 16.5 19.6 17.4 18.2 18.2 Over 20.0 4,464 4,352 186,770 184,425 177,229 Cost / Net Income Ratio (Excl. Financial VAT) (%) 52.6 52.7 54.9 55.3 52.3 Below 50.0 23,900 Dividend per Share (Rs) 4.00 6.50 7.00 7.50 8.50 Over 4.00 3,219 20,581 Capital Adequacy Tier 1 Capital Ratio (%) (Statutory Minimum Ratio Required is 5%) 9.3 11.1 11.0 12.8 13.9 11.0 Total Capital Ratio (%) (Statutory Minimum Ratio Required is 10%) 11.4 13.2 12.6 14.5 16.6 13.5 08 09 10 11 12 08 09 10 11 12 08 09 10 11 12 08 09 10 11 12 08 09 10 11 12 Based on SLAS (previous GAAP) Based on LKASs/SLFRSs. HATTON NATIONAL BANK PLC ANNUAL REPORT 2012 1 Safe & Sound “Safe” & “Sound”: Simple words can mean so much. At Hatton National Bank we are deeply proud of the vision and values that drive our success today. For over 120 years we have stood strong through times of change and turmoil; a tower of strength and a powerful partner to the thousands who have placed their trust in us for so long. We pride ourselves on our fundamentals. Our core strength is reflected in all we do - the way we think and the way we bank. It is in our large capital power and resources, good governance and responsible leadership. It is the invisible yet vital back office engine that drives the smoothness of our operations…and the smile with which we welcome every customer we serve. This is why we are one of Sri Lanka’s most trusted banking institutions. We’re Safe and Sound. HATTON NATIONAL BANK Annual Report 2012 2 HATTON NATIONAL BANK PLC ANNUAL REPORT 2012 Contents Management Information Financial Information Chairperson’s Statement ...........................................6 Annual Report of the Board of Directors on Chief Executive Officer’s Review .............................12 the Affairs of the Company .................................186 Board of Directors .....................................................18 Directors’ Interest in Contracts with the Bank ...195 Corporate Management ...........................................24 Human Resources & Remuneration Senior Management .................................................28 Committee Report ................................................198 Management Discussion & Analysis ......................30 Nomination Committee Report .............................199 Financial Review ......................................................56 The Board Integrated Risk Management Customer Centre Network ......................................61 Committee Report ................................................200 Main Correspondents Worldwide ............................64 Audit Committee Report ........................................201 CEO’s and CFO’s Responsibility Statement ........203 Corporate Governance Directors’ Responsibility for Financial Reporting 204 Risk Management .....................................................66 Independent Auditors’ Report ...............................205 Your Boardroom Governance Report... ...................87 Consolidated Statement of Statement of Internal Control ...............................114 Comprehensive Income .......................................206 Independent Assurance Report .............................116 Consolidated Statement of Financial Position . ....207 Statement of Changes in Equity ...........................208 Sustainability Report Cash Flow Statement .............................................212 Sound Strategy ....................................................... 119 Notes to the Financial Statements .......................214 Integrating Sustainability ..................................... 122 Sustainability as a precautionary approach ........ 124 Supplementary Information Sustainability Stewardship & Structure.............. 126 Consolidated Statement of Comprehensive Risk & Governance for Sustainable Business ..... 127 Income in US Dollars ..........................................324 Sustainability Impacts, Risks & Consolidated Statement of Financial Opportunities Identified.......................................128 Position in US Dollars .........................................325 Reporting Sustainability ........................................ 130 Analysis of Deposits ................................................326 Engaging for Inclusivity ......................................... 132 Analysis of Advances ..............................................327 Economic Wealth Creation..................................... 138 Province-wise Analysis of Deposits People Progress ....................................................... 145 and Advances .......................................................328 Environmental Citizenship ................................... 161 Sources and Utilisation of Income ........................329 Independent Assurance Report ..............................170 Value Added Statement .........................................330 GRI Statement ........................................................171 Ten Year Statistical Summary ..............................331 GRI Indicators .........................................................172 Ten Year Graphical Review ...................................332 Segmental Analysis ................................................333 Investor Relations ...................................................334 Glossary ...................................................................342 HATTON NATIONAL BANK PLC ANNUAL REPORT 2012 3 KEY PAGES Chairperson’s Statement 6 Chief Executive Officer’s Review 12 Board of Directors 18 Management Discussion & Analysis 30 Risk Management 66 Your Boardroom Governance Report 87 Sustainability Report 117 Financial Information 185 4 HATTON NATIONAL BANK PLC ANNUAL REPORT 2012 Hatton National Bank believes in building partnerships that are long-term and designed to build value and create wealth. VISION To be the acknowledged leader and chosen partner in providing financial solutions through inspired people MISSION Combining entrepreneurial spirit with empowered people and leading edge technology to constantly exceed stakeholder expectations OUR VALUES