HATTON NATIONAL BANK PLC - ANNUAL REPORT 2010
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
www.hnb.lk
SRI LANKA IS GROWING; AND HNB IS AT THE
FOREFRONT OF THIS DRIVE, DELIVERING A
SPECTRUM OF SOLUTIONS THAT HELP DEVELOP
A NATION, ECONOMY AND ITS PEOPLE ON THE RISE.
OUR NATIONAL COMMITMENT HAS ALWAYS BEEN
TO CONVERT WORLD-CLASS FINANCIAL
SOLUTIONS TO PEOPLE FRIENDLY BANKING
PRODUCTS THAT HELP INDIVIDUALS AND
BUSINESS REALIZE THEIR PROMISE. OUR
UNDERSTANDING AND OUR RESPONSE TO
NATIONAL FINANCIAL NEEDS HAS BEEN
LONGSTANDING.
THIS IS WHAT TRULY MAKES US A NATIONAL BANK.
AND WE KNOW THERE IS NO BETTER TIME THAN
NOW, TO SHARE THE NATIONAL FOCUS AND GIVE
SRI LANKANS THE IMPETUS TO SURGE AHEAD.
CORPORATE
INFORMATION
NAME OF COMPANY
HATTON NATIONAL BANK PLC
LEGAL FORM
A public limited Company incorporated on 5th March 1970 under the Laws of
the Republic of Sri Lanka. The Company was re-registered under the Companies
Act No 7 of 2007 on 27th September, 2007. It is a Licensed Commercial Bank
under the Banking Act.
COMPANY REGISTRATION NUMBER
PQ 82 (previous PBS 613)
ACCOUNTING YEAR END
31st December
STOCK EXCHANGE LISTING
The ordinary shares and the Unsecured Subordinated Redeemable Debentures
of the Bank are listed on the Colombo Stock Exchange in Sri Lanka.
Global Depository Receipts of the Bank are listed on the
Luxembourg Stock Exchange.
REGISTERED OFFICE
No 479, T B Jayah Mawatha (Darley Road),
P O Box 837, Colombo 10, SRI LANKA
HEAD OFFICE
“HNB Towers”,
No 479, T B Jayah Mawatha (Darley Road),
P O Box 837, Colombo 10, SRI LANKA
Cable Address: HATNABANK
Telephone Nos 2664664, 2662772, 4764764
Fax Nos 2662814, 2662832 International – 2446523
Telex Nos 21259 Hatnbk Ce, 2166 Haynfx Ce
Swift : Bic Code – HBLILKLX
e-mail : [email protected]
Web : www.hnb.net
CREDIT RATINGS
The Bank has been assigned AA-(lka) national credit rating for implied
long term unsecured senior debt by Fitch Ratings Lanka Limited
ASSOCIATE COMPANIES
Delma Exchange 20.00%
Remittances and Foreign Currency Related Services
Browns Engineering (Pvt) Ltd 32.63%
Construction and Engineering
JOINT VENTURE COMPANIES
Acuity Partners (Pvt) Ltd 50.00%
Financial Services
SUBSIDIARY COMPANIES
HNB Assurance PLC 60.00%
Insurance Services
Sithma Development (Pvt) Ltd 100.00%
Property Development
Majan Exchange LLC 40.00%
Remittances and Foreign Currency Related Services
Commercial Interlink Services Inc 100.00%
(O/A of Delma Exchange Canada)
Remittances and Foreign Currency Related Services
AUDITORS
KPMG Ford, Rhodes, Thornton & Co.,
Chartered Accountants
No 32A, Sir Mohamed Macan Markar Mawatha,
Colombo 3,
Sri Lanka
INVESTOR INFORMATION
Institutional Investors, Stock Brokers and Security Analysts requiring nancial
information should contact the Senior DGM - Strategy & Compliance at:
“HNB Towers”, Level 16,
No 479, T B Jayah Mawatha (Darley Road),
Colombo 10,
Sri Lanka.
Telephone : 2662705, 2664705
Fax : 2662815
e-mail : nihalk[email protected]
BOARD OF DIRECTORS
Mr Rienzie T. Wijetilleke (Chairman)
Mr Rajendra Theagarajah (Managing Director / CEO)
Mr D H S Jayawardena
Mr M V Theagarajah
Mr R K Obeyesekere
Ms Pamela C. Cooray (Senior Director)
Mr Ranjeevan Seevaratnam
Mr N G Wickremeratne
Ms M A R C Cooray
BOARD SECRETARY
Ms Indrani Goonesekera
Attorney-at-Law & Notary Public
BOARD AUDIT COMMITTEE
Mr Ranjeevan Seevaratnam (Chairman)
Mr D H S Jayawardena
Ms Pamela C. Cooray
Mr N G Wickremeratne
BOARD NOMINATION COMMITTEE
Mr Rienzie T. Wijetilleke (Chairman)
Mr D H S Jayawardena
Mr M V Theagarajah
Mr R K Obeyesekere
BOARD REMUNERATION COMMITTEE
Ms Pamela C. Cooray (Chairperson)
Mr Rienzie T. Wijetilleke
Mr R K Obeyesekere
Mr N G Wickremeratne
BOARD INTEGRATED RISK MANAGEMENT COMMITTEE
Mr M V Theagarajah (Chairman)*
Mr Rienzie T. Wijetilleke*
Ms M A R C Cooray*
Mr Rajendra Theagarajah (Managing Director / CEO)**
Mr J D N Kekulawala – Senior DGM - Strategy & Compliance**
Mr D P N Rodrigo – DGM - Risk**
* Representatives of the Board
** Representatives of the Management
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VISION
OUR VALUES
MISSION
TO BE THE ACKNOWLEDGED LEADER
AND CHOSEN PARTNER IN PROVIDING
FINANCIAL SOLUTIONS THROUGH
INSPIRED PEOPLE
• TREASURE PROFESSIONAL & PERSONAL
INTEGRITY AT ALL TIMES
• DEMONSTRATE MUTUAL RESPECT IN
ALL OUR INTERACTIONS
• PASSIONATE ABOUT EVERYTHING WE DO
• COMMITTED TO BEING CUSTOMER CENTRIC
• COURAGE TO CHANGE, CHALLENGE
AND BE DIFFERENT
• DEMONSTRATE UNITY IN DIVERSITY
COMBINING ENTREPRENEURIAL SPIRIT
WITH EMPOWERED PEOPLE AND LEADING
EDGE TECHNOLOGY TO CONSTANTLY
EXCEED STAKEHOLDER EXPECTATIONS
Management Information
Financial Goals and Performance 2 • Financial Highlights 3 • Chairman’s
Message 4 • Chief Executive O cer’s Review 8 • Board of Directors 14 •
Corporate Management 16 • Senior Management 19 • Corporate Banking 22 •
Small And Medium Enterprises 23 • Personal Financial Services 24 •
Development Banking 27 • International Operations 29 • Treasury Operations
31 • Information Technology 32 • Marketing 33 • HNB Assurance PLC 35 •
Sithma Development (Pvt) Limited 36 • Exchange Houses 37 • Acuity Partners
(Pvt) Ltd 38 • Main Correspondents Worldwide 39 • Customer Centre Network
40 • Financial Review 42
Coporate Governance
Risk Management 48 • Corporate Governance 59 •
Statement of Internal Control 76
Sustainability Report
Chief Executive O cer’s Statement 80 • Report Parameters 82 •
Strategic Sustainability Review 84 • Customer Responsibility 94 •
Employee Responsibility 100 • Investor Responsibility 108 • Community
Responsibility 112 • Supplier Responsibility 119 • Environmental Responsibility
121 • Key Performance Indicators 126 • Independent Assurance Report 127 •
The Global Reporting Initiative (GRI) G3 128
Financial Information
Financial Calendar 139 • Annual Report of the Board of Directors on the A airs
of the Company 140 • Directors’ Interest in Contracts with the Bank 146 •
Remuneration Committee Report 150 • Nomination Committee Report 151 •
The Board Integrated Risk Management Committee Report 152 • Audit
Committee Report 153 • CEO’s and CFO’s Responsibility Statement 155 •
Directors’ Responsibility for Financial Reporting 156 • Independent Auditors’
Report 157 • Income Statement 158 • Balance Sheet 159 • Statement of
Changes in Equity 160 • Cash Flow Statement 161 • Notes to the Financial
Statements 164
Supplementary Information
Capital Adequacy 246 • Income Statement in US Dollars 249 • Balance Sheet in
US Dollars 250 • Analysis of Deposits 251 • Analysis of Advances 252 •
Province-wise Analysis of Deposits and Advances 253 • Sources and Utilisation
of Income 254 • Value Added Statement 255 • Quarterly Statistics 256 •
Ten Year Statistical Summary 257 • Ten Year Graphical Review 258 • Segmental
Analysis 259 • Share and Debenture Information 260 • Glossary 268 •
Notice of Meeting 270 • Form of Proxy - Voting 271 • Form of Proxy - Non
Voting 273 • Investor Feedback Form 275 • Corporate Information IBC
2 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
FINANCIAL GOALS
AND PERFORMANCE
2006 2007
2008 2009
2010
Medium Term
Goals
Results For the Year
Return on Average Assets (%)
1.2 1.4
1.3 1.6 1.5 Over 1.5
Return on Average Shareholders' Funds (%)
18.4 19.3
16.5 19.6 17.5 Over 20.0
Cost / Net Income Ratio (Excl. Financial VAT) (%) *
57.8 56.2
54.2 54.3 56.5 Below 50.0
Dividend per Share (Rs)
5.00 3.50
4.00 6.50 7.00 Over 4.00
Capital Adequacy
Tier 1 Capital Ratio (%) (Statutory Minimum Ratio Required is 5%)
10.23 10.32
9.25 11.10 10.99 9.00
Total Capital Ratio (%) (Statutory Minimum Ratio Required is 10%) 11.32 12.08 11.40 13.16
12.64 12.50
* Operating expenses consist of personnel expenses, premises equipment and establishment expenses, fee and commission expenses and other expenses.
Net income consists of net interest income, foreign exchange pro t, Fee and commission income, dividend income and other income.
GROSS
NPA RATIO
4.5%
MARKET
CAPITALISATION
Rs 76.5 Bn
+137%
DEPOSITS
Rs 234 Bn
+11.2%
PBT
Rs 6.7 Bn
+13.8%
ADVANCES
Rs 210 Bn
+18.5%
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 3
FINANCIAL
HIGHLIGHTS
Bank Group
Results For the Year
2010
Rs. Mn
2009
Rs. Mn
%
Change
2010
Rs. Mn
2009
Rs. Mn
%
Change
Income 35,582 39,358 - 9.6 38,105 41,301 - 7.7
Net pro t before income tax 6,731 5,918 + 13.7 7,252 6,167 + 17.6
Income tax on pro ts 2,267 1,566 + 44.8 2,365 1,613 + 46.6
Net pro t after taxation 4,464 4,352 + 2.6 4,887 4,553 + 7.3
Gross Dividends 1,648 1,533 + 7.5 1,678 1,556 + 7.9
Pro t available after appropriation 2,816 2,819 - 0.1 3,209 2,998 + 7.0
At the Year End
Shareholders' funds (Capital and Reserves) 27,274 23,900 + 14.1 29,978 26,374 + 13.7
Deposits from customers 234,071 210,507 + 11.2 233,881 210,363 + 11.2
Advances to customers including Leasing,
Bills of Exchange & Commercial paper (Gross) 210,068 177,229 + 18.5 208,070 174,476 + 19.3
Total Assets 313,913 280,289 + 12.0 323,258 287,208 + 12.6
Information per ordinary share
Earnings (Rs.) 18.84 18.47 + 2.0 20.20 19.03 + 6.1
Dividends (Rs.) 7.00 6.50 + 7.7
Dividend Yield (%) 1.75 3.82 - 54.2
Net asset value (Rs.) 114.61 101.37 + 13.1 125.97 110.83 + 13.7
Market value (Rs.) - Voting 399.90 170.25 + 134.9
Market value (Rs.) - Non voting 214.60 104.75 + 104.9
Ratios
Return on average shareholders' funds (%) 17.45 19.57 - 10.8
16.99
18.19 - 6.6
Price earning (Times) 21.23 9.22 + 130.3
19.80
8.95
+
121.3
Dividend cover (Times) 2.71 2.84 - 4.6
2.91
2.93
- 0.5
Capital Adequacy Ratios
Tier 1 (%) (Statutory minimum ratio required is 5%) 10.99 11.10 - 1.0 10.96 10.85
+ 1.0
Tier 1 & 2 (%) (Statutory minimum ratio required is 10%) 12.64 13.16 - 4.0 12.73 12.92
- 1.5
Net Prot
After Taxation
2006
2007
2008
2009
2010
Return on
Average Assets
Total
Deposits
Total
Advances
Shareholders’
Funds
0
1,000
2,000
3,000
4,000
5,000
Rs.Mn
2006
2007
2008
2009
2010
0.0
0.5
1.0
1.5
2.0
%
2006
2007
2008
2009
2010
0
50,000
100,000
150,000
200,000
250,000
Rs.Mn
2006
2007
2008
2009
2010
0
50,000
100,000
150,000
200,000
250,000
Rs.Mn
2006
2007
2008
2009
2010
0
5,000
10,000
15,000
20,000
25,000
30,000
Rs.Mn
4 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
MESSAGE
In the year 2010, our nation witnessed
an encouraging economic rebound.
It is without doubt that Sri Lanka is
on the throes of economic resurgence,
with surety of economic boom
evidenced through positive
indications prevalent in the year
2010.
It gives me great pleasure to welcome all of you, our
valued shareholders, to the forty second Annual
General Meeting of Hatton National Bank PLC and to
present to you the audited Financial Statements and
Annual Report for the year 2010. For Hatton National
Bank, the year 2010 has been yet another formidable
year. As a nancial institution that has a long history
and reputation as a corporate that works in the
national interest, your Bank has once again
substantiated its status as an integral element in the
CHAIRMAN’S
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 5
nation’s engine of growth. Our legacy by
far establishes us not only as a pioneer
but also a revolutionary force in shaping
the future of Sri Lanka’s economic and
commercial intent.
Sri Lanka’s economy rebounds post-con ict
In the year 2010, our nation witnessed an encouraging economic
rebound. It is without doubt that Sri Lanka is on the throes of
economic resurgence, with surety of economic boom evidenced
through positive indications prevalent in the year 2010. The
national economy grew by an estimated 8%, over and above the
growth expectations for the year 2010, with in ation at 6.9% and
unemployment down to 4.9%. Most encouragingly, the all island
poverty rate declined to 7.6% in 2010 from 15.2% in 2006. It is
indeed heartening to note that the Government is pursuing
economic growth in a manner that is inclusive of the rural
economy. Indeed, as Hatton National Bank has demonstrated
over the decades, growth can only be sustained through wealth
creation that is far reaching and equitable.
Fundamentals for a robust growth trajectory
Most importantly, the future outlook for the nation is brightened
by the strategic approach to national development adopted by
the Government of Sri Lanka, an approach that was amply
demonstrated by the government’s budgetary proposals for the
year 2010 / 2011. Pragmatism and a concerted strategic
approach are indeed the tools with which our nation can once
again rise above and overcome the drudgery of economic
underachievement that was imposed on us through three
decades of con ict. In the year 2010, the Government of Sri
Lanka demonstrated its will to put into action its vision for the
nation, through broad budgetary and economic proposals that
call for reform and reconstruction. Moreover, the Government
has perceptively understood and accepted that progressive and
sustainable national development can only be achieved through
private-public sector partnership. This I concur, is a robust and
sustainable foundation for the future, and is a call that must be
heeded by the nation’s business community to collaborate as
integral partners of national development. The national outlook
in the medium and long term, I believe, will be the outcome of
remedial steps undertaken through such a partnership. Indeed,
the private sector has the experience and far more success
stories as implementers of strategy. Thus, it is critical going
forward that we transfer this available expertise to realise more
potent outcomes through the collaboration of private initiatives
with public resources.
The late Sir Arthur C. Clarke shared with me this nugget of
wisdom once, “the private sector must not only do well but also
do good”. This statement truly resonates my sentiments on the
need for private-sector leadership for our nation’s future
development and prosperity. Of course, for national progress to
be realised, we as a nation must also accept that transparency
and governance in every institution – be it private or public
– must be upped to that of global standards. Bureaucracy has to
be curbed, with the public sector machinery becoming more
e cient and agile. The private sector needs to embrace positivity
and be corporates that truly demonstrate entrepreneurial spirit
and leadership.
Allocation of resources, of the State as well as the private sector,
to rural communities is imperative for equitable wealth creation,
wherein perceptible evidence of growth in rural Sri Lanka should
be the fulcrum of the drive for development. Whilst the
Government of Sri Lanka must be recognised and given due
credit for taking the appropriate measures towards controlling
in ation, stabilising the exchange rate and curbing domestic
interest rates, we need to accept that these measures will be
conducive for short and medium term progress. For long-term
economic stability, the creation of incremental wealth therefore,
is imperative. There is undoubtedly room for growth. The nation’s
critical sectors – tourism, construction, agriculture, health,
education, infrastructure and industry – are all presently under
capacity. As a nation we have enormous scope for capacity
building in a foray of sectors including those
mentioned above. Going forward, the
Government and the private sector need to
come together as partners to identify and
hone sector speci c growth strategies,
demarcating the most feasible opportunities
from a growth perspective and therein
invest decisively with the intention of
reaping long-term returns. Our forward
march as an economy too should be one
that imbues solidarity and friendship with
nations across the globe.
6 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Consistency in regulation as a pivot for
strong economic growth
We have witnessed over the past few years tighter regulation
of the nancial services industry. With the adoption of global
standard Basel II by the nancial services sector, industry players
have progressed towards meeting risk and capital management
requirements to ensure adequate protection from overexposure
to lending, investment practices and challenges of the operating
environment. In addition, rigorous regulation and supervision by
the Central Bank of Sri Lanka have brought greater stability and
transparency to the sector. However, it is equally important that
the same ethical standards and levels of governance are applied
to Public Sector Financial Institutions (PSFIs), especially since
PSFIs enjoy a signi cant share of the nancial services sector and
all of us are part of the same playing eld.
Global trends indicate the need to self-assess values
Consumerism as a precept has given rise to overspending as
opposed to savings. Thus, the nations that were looked upon as
the leaders of the global economy are in fact nations that are
steeped in the concept of consumerism. As the past few years
have demonstrated, those economies that are fuelled by
consumerism have experienced a nancial fall-out that has been
marked as grave as the Great Depression. The global economic
crisis, though salvaged and reversed before reaching its climax,
was protracted and pervaded every nation designated as a
western economic icon due to inherent weaknesses in the
systems and processes that characterise these economies.
In retrospect, nations that are steeped in the value of savings,
desisted the domino e ect of the global nancial crisis. Thus,
I strongly believe that as a nation we need to self-assess our value
systems and be true to those values that have been our strength
in the past.
The role of your Bank
Hatton National Bank has always been a leader and proponent of
national priorities. In much the same way, it will continue to play
a catalyst role in achieving the economic objectives of this new
Sri Lanka. Through the conceptualisation of new products and
services that target growth sectors and which will contribute
towards the achievement of national priorities, the Bank will
continue to align its business strategy with the achievement and
implementation of national goals and strategies. It will continue
to accelerate its e orts towards socially mobilising rural Sri Lanka
with special focus on the people of the Northern and Eastern
provinces who need to be empowered towards the achievement
of self-sustenance. At Hatton National Bank we are con dent of
what our nation can achieve and committed towards playing a
vital role in achieving economic success.
Appreciations
I would like to take this opportunity to thank my fellow Directors
who have at all times extended their fullest support and shared
their valued expertise towards the betterment of the Bank. My
deep appreciation is extended to the Management and Sta for
their unstinted cooperation and for their tireless pursuit of the
Bank’s strategic expectations.
Our customers, who have stood by us for many decades have
truly demonstrated the meaning of loyalty. We are proud and
privileged to serve you. Thank you for placing your trust in us.
I would like to take this opportunity to thank His Excellency the
President and Minister of Finance Mahinda Rajapakse and o cials
at his Ministry, the Governor of the Central Bank of Sri Lanka,
Mr Ajith Nivard Cabraal and his o cials for their guidance and
continued support during the year.
CHAIRMAN’S
MESSAGE
Hatton National Bank has always
been a leader and proponent of national
priorities. In much the same way, it
will continue to play a catalyst role in
achieving the economic objectives
of this new Sri Lanka. Through the
conceptualisation of new products
and services that target growth sectors
and which will contribute towards the
achievement of national priorities, the
Bank will continue to align its business
strategy with the achievement and
implementation of national goals
and strategies.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 7
Our shareholders have been the very pillars of strength upon
which we have built this Bank. I would like to thank you all for your
investment into this Bank, your belief in its potential is a re ection
of our passion to achieve.
We stay committed to serve all our stakeholders. On behalf of the
Board of Directors, I pledge that we will continue to add
shareholder value through the execution of prudent business
strategies whilst ensuring that we contribute towards the
achievement of national priorities.
Ladies and Gentlemen, having served HNB for a period of 34 years
of which the last 24 years was as your MD / CEO for 17 years and
7 years as the Chairman, I will be stepping down from the
Chairmanship as well as from the Board on the 31st March 2011.
I have watched with much satisfaction the great value addition
that has occurred to our organisation over this long period. This
has been mainly due to the prudent management, e ciency and
transparency displayed by your Board of Directors in
enthusiastically formulating and directing policy for the
organisation. As I bid goodbye to the Bank, I am quite pleased to
leave behind lasting memories of my long stay with an abundance
of hope and faith on the excellent prospects that HNB has for
further growth and rapid progress in the future.
Rienzie T. Wijetilleke
Chairman
Colombo, Sri Lanka
18th February 2011
8 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Hatton National Bank, as a stalwart of national
banking heritage continued its progression as
a Bank that operates in the interests of the
nation. During the year, the Bank continued to
map its 3-year corporate strategy with the
national vision, in the process seeking,
identifying and strategising operational
pillars which re ect the Bank’s core
competencies and yield competitive
advantages.
Economic resurgence transcends challenges
The nancial year 2010 was essentially a year where challenges
were juxtaposed with optimism for the future. The nation’s
economy buoyed by con dence resurged commendably during
the year. The cessation of hostilities in 2009, and sound progress
towards reconstruction of lives and livelihoods in the primarily
a ected Northern and Eastern provinces of Sri Lanka catalysed
economic activity in an area which for over 3 decades had stood
OFFICER’S REVIEW
CHIEF EXECUTIVE
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 9
still in time. The progressive actions taken
by the Government of Sri Lanka to set in
motion greater economic activity, drawing
in communities and individuals to
contribute towards economic
development was the fundamental crux of
the economic gain in 2010. The optimism
displayed in 2009 for Sri Lanka’s future in a
post con ict era continued to be a
constant in the future sentiments for the
nation.
National vision mirrored in corporate strategy
Hatton National Bank, as a stalwart of national banking heritage
continued its progression as a Bank that operates in the interests of
the nation. During the year, the Bank continued to map its 3-year
corporate strategy with the national vision, in the process seeking,
identifying and strategising operational pillars which re ect the
Bank’s core competencies and yield competitive advantages. Hatton
National Bank followed a concerted drive in contributing towards
the national vision in tandem with the realisation of speci c
corporate objectives.
Financial and Operational performance
At Hatton National Bank, challenges have never been an
impediment to our growth. In 2010, as in the past, by strategising
proactively, setting the tone at the top, by integrating business focus
with needs of stakeholders and by being consistently transparent
through continuous disclosures, the Bank was able to augment its
operation to one of enhanced wealth creation.
Thus, agility and acceleration of strategy implementation paved the
way for greater growth in 2010. Despite the adversities, our nancial
performance proved to be robust with the Bank posting a pre tax
pro t of 6.73 Bn and post tax pro t of 4.46 Bn. The Group posted an
after tax pro t of Rs 4.89 Bn.
Solid contribution from core banking activities contributed towards
the expansion of nancial performance during the year. Group
performance was enhanced considerably during the year with a
majority of the subsidiaries posting commendable returns. The
Insurance subsidiary – HNB Assurance PLC - posted robust growth in
business and pro tability. Likewise, Sithma Development (Pvt) Ltd
(Sithma), performed exceptionally, posting a commendable
Rs 170.7 Mn after tax pro t in 2010. It was a milestone year for
Sithma which recouped its entire accumulated losses. Overseas
investments performed with promise; Majan Exchange (Oman)
performed well and is expected to break-even in the rst half of the
upcoming nancial year. Delma Exchange (UAE) continued to garner
a greater share of business through enhanced accessibility and
distribution. Delma Exchange (Canada) however proved to be an
operational challenge, largely due to the market context where the
presence of a large grey market for remittances limited the scope for
continuity. As a result, commercial operations of the subsidiary were
ceased in October 2010. Acuity Partners (Pvt) Ltd., which was newly
formed in 2008, as a Joint Venture with DFCC Bank incorporating the
businesses of stock brokering , xed income securities, corporate
nance and venture capital, posted excellent returns with a
consolidated after tax pro t of Rs 301 Mn. After the acquisition by
Acuity Partner ( Pvt) Ltd, Lanka Venture PLC was repositioned during
2010 , with the venture capital company’s main operational lines
focused towards healthcare and renewable energy; an initiative that
is directly in line with meeting national developmental priorities. The
Lanka Ventures Group posted commendable returns of Rs 102.6 Mn
(after tax) during the nine months to December 2010.
In last quarter of 2009, the Government of Sri Lanka instituted a
reduction in domestic interest rates amongst the State banks with a
view to precipitate post con ict development. In the rst quarter of
2010, the nancial services industry witnessed a pervasive reduction
of domestic interest rates as the Government looked to bolster and
accelerate the rate of investment. However, as consequence
nancial institutions grappled with the dilemma of balancing
re-pricing of assets whilst liabilities partly remained contracted to
pre-agreed rates. Whilst liability re-pricing
was a key concern for the Bank over the rst
half of the year, concentration on asset
re-pricing was a key area of focus over the
remaining quarters.
As a direct outcome of the interest rate
decline, the rst half of the nancial year was
characterised by declining asset and liability
books, due largely to sluggish domestic
credit growth, thus precipitating a dip in the
net interest income and a ecting the top
line targets for the year. However, in the
second half of 2010 domestic credit growth
witnessed a commendable recovery, placing
10 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
the Bank’s performance for the year in better light. In particular, the
expectations for 2011 remain high should the credit growth trend
continue with the same momentum witnessed during the last
quarter of 2010. From a macro perspective, the nancial services
industry as a whole was negatively a ected with credit growth at a
marginal 3.8% during the rst quarter of the year. Credit growth did
however, recover aggressively to end the year with a 22.6% growth.
A stable exchange rate scenario in 2010 saw the Sri Lankan Rupee
strengthen against the greenback. Despite the lack of a scenario of
exchange uctuations that normally sets the stage for exceptional
exchange income, the Bank remained one of the few in the industry
to achieve commendable foreign exchange income which re ected
12.5% growth over the previous year.
On a macro level, the year was de ned by commendable
achievements. Despite the challenges posed during the year and
the somewhat discouraging credit growth scenario during the rst
half of 2010, the Bank continued to execute its strategies for future
growth with urgency and priority with the intention to build
capacity in readiness for future growth. As such, the Bank’s plans to
increase accessibility were well executed with the opening of 19
customer centres and the commissioning of 40 additional
Automated Teller Machines (ATM), sustaining an equitable rural, semi
urban reach of the Bank’s services. The enhanced distribution
network is undoubtedly a platform for greater mobilisation of
services going forward and is a strategic initiative that is well aligned
with the national vision for rural empowerment.
As in previous years credit quality remained an area of critical focus.
The Bank worked tirelessly towards the achievement of a
signi cantly reduced Non Performing Advances portfolio (NPA). Its
strategies towards this end enabled the Bank to successfully
constrain NPAs to achieve a gross NPA below 5 percent for the year,
the lowest achieved in over a decade. The excellence in NPA
management placed the Bank well above the industry norm of 5.3%
for NPA. The Bank’s diligent and relentless pursuit of portfolio quality
continued to pay dividends in 2010 as in the previous nancial year.
However, in 2010 the cost to income ratio increased marginally to
56.5%, and remained below expectations. Cost to income remains a
critical area of concern, with the need to break through the 50%
psychological barrier imperative in the medium term.
During the year asset growth was managed through internal
sources, with primary dependence on the plough back of internally
generated pro ts. However, going forward, the Bank may objectively
consider external nancing options to add impetus to growth in the
medium term.
Risk management and governance took centre stage during the
nancial year, with the Bank placing due emphasis on the full
integration of BASEL II whilst being mindful of the recent
announcements on the requirements of the BASEL III road map. In
addition, the Bank is steadfastly pursuing preparations for the
adoption of Sri Lanka Accounting Standards 44 –“Financial
Instruments: Presentation” and Sri Lanka Accounting Standards 45
–“Financial Instruments: Recognition and Measurement”. The Bank
remains on target to adopt the Standards by January 2012.
Recognition of Excellence
In 2010, the Bank received numerous accolades as recognition for its
outstanding performance and service excellence. In this review,
I wish to make mention only of a few of these accolades as these
alone vividly portray the successes of the Bank in diverse areas of
operational and performance excellence
Hatton National Bank was the winner for the “Best Retail Bank in
Sri Lanka 2009” presented by “The Asian Banker” in The Asian Banker
Excellence in Retail Financial Services Awards 2010 for the third
consecutive year. Likewise, Euromoney Finance Magazine
recognised the Bank as the “Best Bank in Sri Lanka” at the Euromoney
Awards for Excellence 2010 for second consecutive year. The Bank
swept the prestigious Institute of Chartered Accountants of
Sri Lanka (ICASL) Annual Report Awards 2009 Competition
organised by the Institute of Chartered Accountants of Sri Lanka
winning four Gold Awards including the Cyril Gardiner Memorial
On a macro level, the year was de ned by
commendable achievements. Despite the
challenges posed during the year and the
somewhat discouraging credit growth
scenario during the rst half of 2010, the
Bank continued to execute its strategies for
future growth with urgency and priority
with the intention to build capacity in
readiness for future growth.
CHIEF EXECUTIVE
OFFICER’S REVIEW
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 11
Trophy for Overall Excellence and Edmond J Cooray Memorial
Trophy for Banking Sector Excellence for the second consecutive
year. It was the rst time in the history of ICASL Annual Report
Awards, that a participating institution won 4 gold awards in one
particular year and is indeed a feat that demonstrates the Bank’s
commitment to the highest levels of transparency and accuracy.
During the year, the Bank garnered further recognition by being
ranked First in Asia in terms of “Total Shareholder Return” in the last
ve years (2005-2009) under the category of ‘Small Cap Banks’
according to the Investor Audit Services of The Asian Banker.
These awards and accolades recognise the Bank for an array of
achievements – nancial performance, sustainability, business
model and strategy, and reporting initiatives - and therefore are a
sound representation of the Bank’s all round focus on achieving
excellence.
Future outlook
The Government’s budget proposals for 2011 placed the nancial
services sector on a strong footing for robust growth. The
Government proposed to abolish the bank debit tax so that
withdrawals from banks will not be liable for any tax, to reduce VAT
on nancial services to 12% from 20% and to implement a reduced
income tax structure on pro ts (with cap of 35% reducing to 28% )
of banking and nancial institutions applicable uniformly to all
o -shore and domestic banks as well as to nance companies,
leasing, insurance and other specialised banking and nancial
services. The Bank intends to reciprocate the Government’s gesture
of goodwill by ably leveraging its balance sheet towards the
national development agenda in particular, by taking longer term
tenor risk on project and development banking lending activity.
In moving forward, the Bank will continue to expand the distribution
network to bene t from the opportunities in post con ict Sri Lanka
whilst continually strengthening the Bank’s capital base.
In 2010 an industry-consolidated framework became reality and
going forward, it is hoped that the framework will be consistently
strengthened. It is the Bank’s intention to be involved from a
leadership standpoint in the future development of this initiative by
actively pursuing opportunities for growth through mergers and
acquisitions.
Appreciations
I would like to extend my sincere appreciation to the Governor of
the Central Bank of Sri Lanka and his able sta for their tremendous
support throughout this nancial year. My deepest gratitude to the
Chairman and my fellow Board of Directors for their continuous and
consistent support, encouragement, wisdom, input and guidance.
A special appreciation to my Chairman Mr Rienzie T. Wijetilleke for
his invaluable wisdom and advice which will be missed as he does
not intend seeking re- election to the Board of Directors at the forth
coming Annual General Meeting. To the HNB team, thank you for
your persistent perseverance and passion, you have been the
engine of our Bank’s success. We have many more great things to
achieve for the future, and I am con dent that we will leave Hatton
National Bank’s indelible mark on Sri Lanka’s future prosperity.
Rajendra Theagarajah
Managing Director / CEO
Colombo, Sri Lanka
18th February 2011
12 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
MANAGEMENT INFORMATION
EMPOWERING DELIVERY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 13
Board of Directors 14
Corporate Management 16
Senior Management 19
14 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
BOARD
OF DIRECTORS
Mr Rienzie T. Wijetilleke
Chairman
Mr Rajendra Theagarajah
Managing Director / Chief Executive O cer
Mr R K Obeyesekere
Director
Mr D H S Jayawardena
Director
Mr M V Theagarajah
Director
Mr N G Wickremeratne
Director
Ms Pamela C. Cooray
Director
Mr Ranjeevan Seevaratnam
Director
Ms M A R C Cooray
Director
Ms Indrani Goonesekera
Board Secretary
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 15
Chairman
Mr Rienzie T. Wijetilleke
F.C.I.B. (London), F.I.B. (Sri Lanka)
Managing Director & Chief Executive O cer
from July 1988 to December 2004. He counts
over fty years as a practicing Banker, including
overseas assignments. Appointed Chairman in
March 2004. He is also the Chairman of HNB
Assurance PLC, Sithma Development (Private)
Ltd and Sunshine Holdings PLC and a Director
of Nawaloka Hospitals PLC, Ceylon Biscuits Ltd
and Mahaweli Reach Hotels PLC. He was
Chairman of HNB Stockbrokers (Pvt) Ltd (up to
3rd November 2008) and HNB Securities Ltd
(up to 4th November 2008). He was former
Chairman of the Colombo Stock Exchange.
Managing Director/
Chief Executive O cer
Mr Rajendra Theagarajah
F.C.M.A. (U.K.), F.C.A (Sri Lanka), M.B.A. (Cran eld),
F.I.B. (Hon) Sri Lanka
Appointed Director/General Manager/Chief
Executive O cer in December 2004. He was
appointed Managing Director in December
2005. Member of the Corporate Management
of HNB since 1997. He counts over 26 years in
Banking including overseas assignments. He is
a Director of HNB Assurance PLC, Acuity
Partners (Private) Ltd, Sithma Development
(Pvt) Ltd. He is the Chairman of Acuity
Securities Ltd, Acuity Stockbrokers (Pvt) Ltd
and Lanka Financial Services Bureau Ltd. He
was a past Chairman of Sri Lanka Banks’
Association (Guarantee) Ltd and Financial
Ombudsman Sri Lanka (Guarantee) Ltd and
Chairman of the Asian Bankers Association.
Member of the Sri Lanka Accounting &
Auditing Standards Monitoring Board, Ceylon
Chamber of Commerce and Chartered
Institute of Management Accountants
Governing Board Sri Lanka. Council Member of
the Institute of Directors of Sri Lanka.
Director
Mr D H S Jayawardena
Director since 1988. He is the Chairman of
Stassen Group of Companies, Aitken Spence
Group of Companies, Lanka Bell (Pvt) Ltd,
Periceyl (Pvt) Ltd, the Chairman and Chief
Executive O cer of Distilleries Company of Sri
Lanka PLC, Lanka Milk Foods (CWE) PLC,
Balangoda Plantations PLC, Madulsima
Plantations PLC and Browns Beach Hotels PLC
and the Chairman of the Ceylon Petroleum
Corporation. He is also the Consul-General for
Denmark in Sri Lanka. He was awarded the
Knight Cross of Dannebrog by Her Majesty the
Queen of Denmark.
Director
Mr M V Theagarajah
F.C.M.A. (U.K.), F.C.I.A.A., F.I. Mgt. (London)
Associated with the Bank since its inception
and a Director since 1979. He retired as
Chairman of the Browns Group of Companies
on 30th June 2006. He has over 45 years
experience in commerce, nance, industry and
management.
Director
Mr R K Obeyesekere
Director since 1998. He was former Deputy
Chairman - Sri Lanka Insurance Corporation.
He is a Director of Stassen Group of
Companies, Lanka Milk Foods (CWE) PLC,
Distilleries Company of Sri Lanka PLC,
Madulsima Plantations PLC and Lanka Dairies
(Pvt) Ltd.
Director
Ms Pamela C. Cooray
LL.B.
Appointed Director in April 2004. She was a
past Director of the Board of Investment of
Sri Lanka and Associated Battery
Manufacturers (Ceylon) Ltd.
Director
Mr Ranjeevan Seevaratnam
B.Sc (London), F.C.A. (England & Wales), F.C.A. (Sri Lanka)
Appointed Director in March 2007. Former
Partner of KPMG Ford Rhodes Thornton & Co
– Chartered Accountants. He is a Director of
Haycarb PLC, Dipped Products PLC, Diesel &
Motor Engineering PLC, Acme Printing &
Packaging PLC, Acme Packaging Solutions
(Pvt) Limited, Metecno Lanka (Pvt) Limited,
Classic Teas (Pvt) Limited, Tea Small Holders
Factories Limited, Green Farms Limited,
Hayleys MGT PLC, Tokyo Cement PLC, Nestle
Lanka PLC, Shaw Wallace & Hedges PLC, Shaw
Wallace Marketing Ltd, Lanka Aluminium
Industries PLC, Kelani Valley Plantations PLC,
Colombo Fort Land & Building Co PLC.
Director
Mr N G Wickremeratne
B.Sc University of Ceylon, Peradeniya, Sri Lanka
Appointed Director in July 2009. Former
Chairman of Hayleys PLC. and Chief Executive
of Dipped Products PLC from its inception to
2007. He is a Director of Finlays Colombo PLC.
He had chaired the Sri Lanka Association of
Manufacturers and Exporters of Rubber
Products, served as a Committee Member of
the Ceylon Chamber of Commerce and had
been its representative on the National Labour
Advisory Council. He is past President of the Sri
Lanka-France Business Council.
Director
Ms M A R C Cooray
B.A. (Hons,) University of Ceylon, Peradeniya, Sri Lanka
Msc. Strathclyde University, U.K.
Appointed Director in February 2010. She is a
retired Deputy Governor of the Central Bank of
Sri Lanka after a period of service of over 35
years. She is a Director of Ceylon Guardian
Investment Trust PLC and Ceylon Investment
PLC .
On release from the Central Bank, she had
served the Ministry of Finance in the capacity
of Director General Fiscal Policy and Economic
A airs Department for nearly 6 years,
represented the Government on the Boards of
DFCC Bank, Sri Lanka Institute of Information
Technology, Sri Lanka Telecom, Ceylon
Electricity Board, De La Rue Currency and
Security Print (Pvt) Ltd., Export Development
Board, National Housing and Development
Authority, and represented the Monetary
Board on West Coast Power (Pvt) Ltd.
She has served as the Vice Chairperson of the
Institute of Bankers of Sri Lanka for 5 years.
Board Secretary
Ms Indrani Goonesekera
Attorney-At-Law
Appointed Board Secretary in April 2001. She is
the Deputy General Manager (Legal) of the
Hatton National Bank PLC and is a member of
the Corporate Management of the Bank for
over 14 years. She is also the Board Secretary of
HNB Assurance PLC, Sithma Development (Pvt)
Ltd and was the Board Secretary of Acuity
Securities Limited (formerly HNB Securities
Limited) up to 31st December 2010).
16 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
CORPORATE
MANAGEMENT
Rajendra Theagarajah
M.B.A. (Cran eld), F.C.M.A.(UK), F.C.A. (Sri Lanka)
Managing Director / Chief Executive O cer
J D N Kekulawala
M.B.A. (Manchester), F.C.I.B.(London),
F.C.A.(England & Wales)
Senior Deputy General Manager
- Strategy & Compliance
Ms D C Cooke
F.C.A.(Sri Lanka)
Deputy General Manager
- Operations & Systems
A J Alles
M.B.A. - Finance (Stirling), A.I.B. (Sri Lanka)
Chief Operating O cer
J M J Perera
F.C.I.B. (London)
Senior Deputy General Manager - Business
Development & International Relations
C P Abeywickrema
B.Com. (Special) Sri Lanka
Deputy General Manager
- Marketing & Retail Banking
Ms I Goonesekera
Attorney-at-Law & Notary Public
Deputy General Manager (Legal ) /
Board Secretary
Ms I R D Thenabadu
F.C.I.B. (London), F.C.M.A.(UK)
Deputy General Manager
- Corporate Banking
J R P M Paiva
B.A. (Hons) Ceylon
Deputy General Manager
- Human Resources & Administration
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 17
Ms L L C C Thambiah
Deputy General Manager
- Network Management
P Sridharan
Assistant General Manager
- Personal Financial Services
M Asokan
F.C.A. (Sri Lanka), A.C.M.A. (UK),
C.I.S.A. (USA), C.I.A (USA)
Head of Internal Audit
P D Hennayake
M.B.A. (A.I.T) Thailand, P.G. Dip (Eng.), B.Sc. Eng.
(Hons) Moratuwa , C.Eng., M.I.E. (Sri Lanka)
Deputy General Manager - Services
D P N Rodrigo
M.B.A. (Cran eld), F.C.M.A.(UK), F.C.C.A.
Deputy General Manager - Risk
R H Abayasekara
Assistant General Manager - Correspondent
Banking & International Operations
A Ratnasabapathy
F.P.M.A.
Assistant General Manager
- Corporate Banking
A P L Fernando
M.B.A. (Colombo), F.I.B. (SL),
Dip. in Bank Mgmt. (IBSL)
Assistant General Manager - Recoveries
& Credit Quality Management
D A de Vas Gunasekara
A.C.A, F.C.M.A. (Sri Lanka)
Chief Financial O cer
18 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
CORPORATE
MANAGEMENT
D St E Fernando
Assistant General Manager - Operations
R M P Dayawansa
M.B.A. (Sri J.), F.I.B. (SL), F.C.I.M. (UK), F.S.L.I.M.
Assistant General Manager
- Specialised Financial Services
Ms K A L T Ranaweera
Attorney at Law, LL.M. (Cambridge),
Dip. in Int’l. A airs (BCIS)
Assistant General Manager
- Legal
N U Jumat
F.I.B. (Sri Lanka)
Assistant General Manager - Trade Services
R J Thambirajah
Assistant General Manager
- Network Management
Ms S Gnanapragasam
BSc. (Hons), F.C.M.A.(UK)
Assistant General Manager
- Treasury & Markets
Ms L C Cooray
Dip. in HR (IPMSL), I.P.M.A. - CP (USA)
Assistant General Manager
- Human Resources
S N Wijeratne
M.B.A. (Sri J.), B.Sc. (IT) - UK
Assistant General Manager
- Information Technology
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 19
SENIOR
MANAGEMENT
1 K L Wijesooriya
LL.B (Sri Lanka)
Chief Manager - Remittances
2 V Vijayakumar
M.Sc. (I.T.) UK, A.I.B. (SL), M.I.M.I.S. (Lond.),
A.M.I.A.P. (Lond.), M.A.A.T. (SL), M.B.C.S.
Chief Manager - IT Operations
3 B K Wijeratne
B.Sc. (Physical Science) Colombo
Chief Manager - Leasing
4 P G Wilson
B.Sc. (Kelaniya), Dip. in IT (N.I.B.M), M.C.S.E. - Security
Chief Manager - Network Infrastructure
5 S Sivalingam
A.C.I.B. (London)
Chief Manager - Procurement & Logistics
6 A Goonesekere
M.B.A. (Sri J.),F.C.A. (Sri Lanka), F.C.M.A. (Sri Lanka)
Chief Accountant
7 R B Warnakulasuriya
M.B.A. (Sri J.), B.Com. (Special) Kelaniya, M.A.A.T, A.I.C.M.
Chief Manager - Greater Colombo Region
8 V Ratnasabapathy
A.C.I.B. (London)
Chief Manager - Credit Risk
9 U N I Elapata
B.A. (Hons) - Uni. of Texas (Austin)
Chief Manager - Card Centre
10 Ms R Prabhakaran
A.I.B. (Sri Lanka)
Chief Manager - Treasury / International Operations
11 Ms N M C P Wettasinha
Attorney-at-Law & Notary Public
Senior Manager - Legal
12 S Udayakumar
D.B.A. (UK), B.Sc. (AM), M.C.M.I. (Lond), M.S.L.I.M, Dip. in Busi. Mgmt & Admin
(UK), M.C.P.M.(SL), Dip. in Sales Mgmt & Marketing (UK), A.I.T.D. (SL)
Deputy Regional Head - Greater Colombo Region
13 J T M Weeresinghe
Senior Manager - Credit Risk
14 Ms M K Rambukwella
M.B.A. (Sri J.), M. Sc. (Pera.), B.A. (Hons)- (Pera.)
A.C.I.M. (UK), M.S.L.I.M., A.M.I.T.D.(SL)
Senior Manager - Training & Development
15 A G Gomez
Senior Manager - Treasury
16 Ms K Balasubramaniam
LL.B (Sri Lanka)
Senior Manager - Human Resource Management
17 H J A Ferdinando
Senior Manager - Centralized Operations
18 L S C L R Fernando
A.I.B. (Sri Lanka)
Senior Manager - Central Region
19 N M Kulatunga
M.B.A. (Sri J), A.I.B. (Sri Lanka)
Senior Manager - Credit Administration
20 W J T Fernando
M.B.A. (Sri J), A.I.B. (Sri Lanka)
Senior Manager - North Western Region
21 D S L Ferdinando
Senior Manager - Corporate Account Relationship
22 A R Uduwela
M.B.A. (Sri J), B.Sc. Special (Pera.)
Senior Manager - City O ce
23 P H K S C Ranasinghe
B.Sc. (Eng.) Moratuwa, A.C.M.A. (UK)
Senior Manager - IT Strategy & Solutioning
24 W M C O Panditharatne
Senior Manager - Employee Remuneration & Bene ts
25 L S Sameera
C.Eng., M.B.C.S., C.I.T.P., M.C.S. (SL),C.M.A. (Australia)
Senior Manager - IT Software Development
26 R L Maheswaran
Senior Manager - Pettah
27 Ms G Arjuna
F.C.M.A. (UK)
Senior Manager - Personal Financial Services
28 N Y Liyanage
N.D.T. (Civil Eng.) - Moratuwa, P.G. Dip. in Project Mgmt. (Moratuwa),
A.M.I.E (Sri Lanka), M.S.S.E.(Sri Lanka)
Senior Manager - Premises & Engineering
29 P Parananthan
P.G. Exe. Dip. in Bank Mgmt. (IBSL)
Senior Manager - Pawning
30 A V Abeygunasekara
M.B.A. (Colombo), B.Sc. (Hons.) (Colombo), A.C.M.A. (UK)
Senior Manager - Treasury
31 B K Achan
M.Sc. (Bombay) B.Sc. (Hons) (Calcutta),C.A.I.I.B.(India)
Chief Representative O cer - Chennai
32 Kausar Ali
B.Com.
Chief Representative O cer - Karachi
20 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
MANAGEMENT DISCUSSION
DELIVERING STRATEGIES
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 21
Corporate Banking 22
Small And Medium Enterprises 23
Personal Financial Services 24
Development Banking 27
International Operations 29
Treasury Operations 31
Information Technology 32
Marketing 33
HNB Assurance PLC 35
Sithma Development (Pvt) Limited 36
Exchange Houses 37
Acuity Partners (Pvt) Ltd 38
Main Correspondents Worldwide 39
Customer Centre Network 40
Financial Review 42
22 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
As the year 2010 progressed, Sri Lanka’s economy
geared itself for a revival on the back of sound
economic policy and governmental stimuli
steering the nation towards greater prosperity.
The high interest rate scenario which has by large
been attributed for the lack of economic inertia
in the past, was reversed with interest rates
reduced to a six year low in the fourth quarter of
2010. However, despite the aura of future
economic con dence and expectations for
accelerated investment, the corporate banking
sector as an industry demonstrated slow growth
in the 1st half of the year. This trend is of course
expected to reverse in 2011 with the full impact
of interest rate cuts and other governmental
policy stimuli accelerating the rate of investment,
as was witnessed in the fourth quarter of 2010,
where precipitated growth pushed overall
performance upwards.
Whilst in the previous year the Bank has
opportunely utilised the year to revisit and
reinforce business processes, in 2010 the focus
lay on strengthening customer relations.
Extensive customer portfolio evaluations, market
and sector based analysis and strategic
development of key growth drivers were
emphasised upon as fundamental bases in
readiness for the future.
Corporate Banking
Despite the low appetite for corporate funding in
the rst half of 2010, the portfolio was
maintained and grown with aggressive recovery
strategies contributing to the maintenance of a
healthy portfolio. The depressed demand for
capital despite an increased interest in speci c
core sectors such as tourism, hospitality and
infrastructure contributed towards high market
liquidity. The lack of conversion of interest to
action remained a key concern during the year,
although expectation of these conversions to
investment in 2011 remains probable, especially
in light of the accelerated growth witnessed in
the nal quarter of the year under review. The
Bank continued to spearhead the entry of private
sector nancing into large-scale infrastructure
development projects such as utilities and road
development.
The Division actively facilitated capital for share
trading as interest in the share market grew
exponentially during the year whilst vehicle
nance also remained a key area of interest
especially with respect to nancing of vehicles
that are in the high-end price tier.
Project Finance
Project Financing continued to be focused on
renewable energy and power generation
projects during the year under review, as has
been the norm in the previous nancial year.
Continued interest in the sector has been
precipitated by the growing global, socio-
economic debate on the need for green energy,
and the Bank’s emphasis on garnering a greater
level of involvement in the energy sector,
speci cally as it has been recognised as a
strategic value driver, going forward.
In the latter half of the year 2010, as the tourism
industry gained momentum, a spike in tourism
sector related nancing opportunities arose and
have been undertaken for facilitation in 2011,
consequent to appraisal. The healthcare sector
remained bullish during the year with the Bank
nancing healthcare and hospital projects in the
Northern province, including the construction of
a full service hospital in Ja na.
New market development was judiciously
explored during the year with planned entry into
Bangladesh as a new market for project
nancing, subsequent to successful project
implementation in the Maldives and the African
continent in previous years.
Astute yet innovative strategies, a focus on quality,
enhanced monitoring, controls and continuous
prudent evaluations were the hallmark for
Corporate and Project Finance operations during
the year under review.
Small and Medium Industries (SMI)
Financing for the Small and Medium Industries
category gathered further momentum in 2010 with
renewed accessibility to enterprises in the Northern
and Eastern provinces as well. The Bank has viewed
this geographic area as a viable growth market for
decades, and consistent and sustained emphasis in
the development of this market through nancial
accessibility has led to the establishment of strong
relations with Small and Medium Industries (SMIs).
SMIs such as Agriculture including Tea and Fisheries,
Construction and Tourism demonstrated capacity
for growth and have been key areas where Hatton
National Bank actively facilitated capital investment
in view of the strategic importance of these sectors
to the national economy.
Future Outlook
In the short term, the Bank will look towards
capitalising on the growing interest of customers
on the Colombo Stock Exchange as a viable
investment tool. Thus, in 2011 the launch of margin
trading as a new product is under consideration.
The product will be fully developed with formalised
processes and will be o ered as a cohesive
corporate banking service.
In the medium term, focus will remain on the
growth of international markets as a key pillar for
future sustainability of the business. Thus, new
markets such as Bangladesh will continue to be
explored. On the domestic front, focus on the
above sectors as catalysts to economic recovery will
no doubt necessitate adequate nancial support.
The Bank plans to facilitate and meet these needs
especially in national priority sectors such as Dairy,
Agriculture, Tourism, Port & Aviation and Hospitality.
MANAGEMENT
DISCUSSION
Focus:
Fundamental bases
strengthened to
overcome industry
slack
CORPORATE
BANKING
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 23
From the inception of the Bank over a century
ago, Hatton National Bank’s focus on Small and
Medium Enterprises (SME) has been one
driven by the desire to grow and develop the
small scale entrepreneur. In 2010, the Bank
took this focus a step further, in full alignment
with the national vision to develop the SME
sector to be core contributors to national
wealth creation.
During the year, in recognition of the
importance of small and medium scale
entrepreneurs to the growth of Sri Lanka’s
national economy, the Bank proactively
positioned itself as the Small and Medium
Enterprise Development Partner through the
development of a nancial solution that meets
the full range of nancial needs of SMEs. This
sectoral product is expected to be launched in
the rst quarter of the upcoming nancial year.
Through the utilization of the product the
Bank is expected to, accelerate its reach to
SMEs in the rural pockets of Sri Lanka. Through
the o er of a full range of nancial solutions to
the SME sector, the Bank expects to engage
the sector e ectively in capacity building,
thereby ensuring not only its long-term
sustainability but also the sustainability of its
contribution to the national economy. The
Bank views its strong brand equity, branch
network and retail banking expertise as core
competencies for the future success of the
product.
Garnering experience and strength from its
operations in the sector, the Bank continued to
pursue a strategy of qualitative portfolio
management comprising mainly of improved
credit evaluation techniques and the utilisation
of a variety of risk management tools,
including credit scoring, to identify viable
ventures. Over the past ve years, the Bank’s
lending strategy has shifted primarily to
working capital nance and cash ow
management moving away from the
traditional security oriented lending. In line
with this move, the Bank advises customers to
undertake business planning in a systematic
manner, thereby assisting them in viable
business management.
Future Outlook
In the short term, the launch of the new SME
product in 2011 will energise the Bank’s
operations in the sector, sharpening the focus
and increasing the scope and scale of SME
services. It is expected that in the medium
term, SME will contribute signi cantly to the
Bank’s overall business performance whilst
acting as a catalyst in the economic
performance of the nation.
Focus:
Activating economic
development
through pro-active
partnerships
SMALL AND
MEDIUM
ENTERPRISES
24 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Hatton National Bank from its inception has
been a Bank driven by the needs of its retail
customer base. The Bank’s retail banking
service and product portfolio is composed of a
wide spectrum of personal nancial services
that endeavour to meet every nancial need of
a retail customer. In 2010, the Bank persisted
with its two-fold strategy of retail banking
service penetration whilst preserving the
quality of the lending portfolio.
National well-being has been at the pinnacle
of Hatton National Bank’s concerns throughout
its operational history. Whilst in the past, the
Bank strived to cater to the people of Sri Lanka
– across every stratum of demography and
geography – through nancial solutions that
embraced people who had previously been
excluded as non-bankable, in 2010, the Bank
made headway in assisting the realisation of
the national strategy for reconstruction of the
Northern and Eastern provinces. Accelerated
penetration into the region with nancial
solutions and nancial literacy programmes
has enabled Hatton National Bank to truly
justify its market position as a leader and a
“partner in progress”.
The Bank’s national-focused strategy drew
international accolades in the year under
review. Hatton National Bank was recognised
for the third consecutive year as Sri Lanka’s
Best Retail Bank - winning the award for the
year 2009 in the ninth Asian Banker Excellence
in Retail Financial Services Awards Programme.
The Bank received the award at The Asian
Banker Excellence in Retail Financial Services
Awards 2010 ceremony, held in conjunction
with the region’s foremost retail banking event,
the Excellence in Retail Financial Services
Convention. The international Euromoney
Finance Magazine also recognised the Bank as
the “Best Bank in Sri Lanka” for the second
consecutive year at the Euromoney Awards for
Excellence 2010. The Bank’s role in acting as
the foundation of the banking industry
through pervasive personal nancial services
within the periphery of sustainable business
practice continued to be the bed-rock of its
success in the year under review.
Providing accessibility to every
customer across the nation
In the year 2010, the Bank accelerated its
network expansion to cater even to the most
remote villages across the nation. At the end of
the nancial year, 205 customer centres were
open for business, enabling people across the
nation to have access to a ordable nance
and nancial services. During the year, in
support of the national strategy for re-
integration of the Northern and Eastern
provinces and with a view to catalyse
economic activity in the Region, the Bank
focused its network expansion e orts on the
North-East whilst penetration into the less
accessible regions of the Southern and North
Western Provinces was also focussed on.
In line with the overall business strategy, the
Bank initiated a drive to upgrade the network
with customer centres enhanced to meet the
standard requirements of a Branch while
extension o ces were upgraded to operate as
separate business units, responsible for their
pro tability. The network upgrade has been
implemented during the year with a view to
enhance the customer service at every point
of customer access. With greater responsibility
meted out to extension o ces, the Bank
believes that the customers will be better
served with access to a larger portfolio of
services even in the most remote of locations.
In the medium term, Hatton National Bank will
execute an enhanced network strategy with
the intention of operating extended-hour
banking across all regions. This will entail the
operation of seven day banking branches,
Sunday banking centres, and the
commencement of specialist centres that
focus on a limited number of nancial services
for the retail customer.
One of the widest Automated Teller
Machine (ATM) penetrations in the
country
The Bank, during the year under review
furthered its strategy of greater accessibility
through the aggressive expansion of electronic
delivery channels, speci cally through
enhanced penetration of the ATM network.
With the commissioning of the 350th ATM in
2010, Hatton National Bank is widely regarded
as having one of the widest ATM penetrations
in Sri Lanka. The network caters not only to the
Bank’s own debit and credit card holders but
also provides accessibility to holders of Visa
and MasterCard credit and debit cards,
Maestro debit cards and Cirrus ATM cards.
The Bank currently maintains 287 on-site (at
customer centre premises), and 63 o -site
ATMs spread across the island. This number
also includes two “drive-thru” ATMs located at
the Bank’s Head O ce, “HNB Towers”, and at its
Priority Banking Centre. In the ATM expansion
process during the year, priority consideration
was given to the establishment of stand-alone
ATMs in a bid to enhance the accessibility and
service at strategic locations across the
country. During the year 2010, 40 new ATMs
were commissioned in total, out of which 27
locations are out of Colombo, at key public
places.
The ATM network was further upgraded during
the year with a view to providing a stable
backbone required to facilitate the aggressive
ATM expansion drive. An advanced ATM
monitoring system with the highest levels of
on-site security a ords customers the
reassurance of secure transactions. A 24-hour
customer help desk has also greatly improved
service levels by reducing response time. The
Focus:
Providing access to
nance to stimulate
national wealth
creation
PERSONAL
FINANCIAL
SERVICES
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 25
introduction of several value additions to the
ATM services enabled the expansion of the
service o ering via electronic channels.
E-Banking as an alternate channel
for service delivery
Hatton National Bank recognises the need to
look beyond traditional delivery channels in
an era where consumers are gaining
sophistication in the manner in which they
transact and interact with service providers.
Whilst the Bank’s traditional brick and mortar
service delivery – the branch network, micro
banking infrastructure etc – reaches out to
the majority of the Bank’s customer base, a
growing demand for alternate delivery
channels has driven the growth of Bank’s
E-banking solutions. With the growth of
Internet and mobile telephony penetration in
Sri Lanka, this trend is expected to grow.
The Bank’s Internet Banking Service, “Virtual
Branch” was revamped during the year with
the introduction of a new User Interface to
facilitate a more user-friendly online
experience for customers. The migration of
the Internet Banking solution to “Finacle” – the
Bank’s core banking platform was completed
on schedule during the year, and has enabled
the Bank to o er a wider range of services via
its Virtual Branch. The migration has also
enhanced the service through lowered
transactions costs, greater exibility and
greater security in transactions.
The Virtual Branch continued to garner
increased tra c and transactions with over
154,000 nancial transactions exceeding
Rs 2.7 Bn completed during the year. The
usage of SMS and Mobile Banking evidenced
a growth of 32% during the year with over
1,500 transactions carried out monthly on
average at a total transaction value of Rs 3.2
Bn over the year.
Deposit Mobilisation
The year 2010 was a commendable year from
the perspective of Rupee deposit
mobilisation. The Bank witnessed sound
growth spurred primarily by savings, lifestyle
and products targeting minors. In 2010 the
Bank’s rupee deposit mobilisation drive
garnered a deposit base of approximately
Rs 25 Bn. Thus, Year on Year (YOY) deposit
growth was a commendable 15% from that
of 2009, a growth trend that is indicative of
the success of the Bank’s deposit mobilisation
strategy for the year.
Driven by Hatton National Bank’s agship
deposit mobilisation tool – HNB Pathum
Vimana- that has been the key stimulus for
savings mobilisation over the past 17 years,
the Bank’s savings base grew exceptionally in
the year under review. Pathum Vimana has
been an e ective means to rally low interest
cost savings accounts from across the nation.
It has e ectively enabled the Bank to expand
the savings deposits as a result of the
successful appeal of the Draw, and in the year
2010 Pathum Vimana stimulated a 23%
growth. Savings products – Singithi Kirikatiyo
and Singithi Lama – aimed at inculcating the
habit of thrift amongst children e ectively
drew in substantial deposits during the year.
The interest rate decline in the latter half of
the year, led to contracted returns from term
deposits which in the previous year had
already been experiencing sti ed growth due
to intense market competition. In 2010, Term
deposits contracted by 3%. However, the
impact of the contraction in Term Deposits
was considerably o set by the Bank’s ability
to strategically utilise the Pathum Vimana
Draw to convert existing Term Deposits to
Savings upon maturity, thus retaining the
deposits within the Bank.
Capital Savings performed commendably to
post a 64% growth. Capital Savings has been
a bene cial tool in attracting savings from the
more urban market and is a critical tool in
penetrating the Socio-Economic Class A and
B demographics even though the product is
less pro table to the Bank due to the relative
high cost of capital.
Foreign Currency deposits witnessed a
marginal decline in growth due to declining
interest rates. NRFC and RFC deposits were
marketed aggressively through the relaunch
of HNB Pathum Udanaya Draw as HNB World,
with greater brand appeal and reach to a
greater global audience.
Pawning
Pawning as a product has seen tremendous
growth in terms of its contribution to the
Bank’s bottom-line and has emerged as a
pivotal product in the retail-banking sector
from an industry perspective. In 2010, Hatton
National Bank retained its leadership position
as one of the top 3 in the Banking sector.
Deploying a strategy aimed at growing the
scale of the business through initiatives to
enhance the awareness of the product,
extended banking hours as well as improved
customer service in tandem with revisions to
the scale of advances to customers, the Bank
completed the nancial year with a
commendable performance contribution
from Pawning.
During 2010 the pawning portfolio witnessed
a signi cant increase aiding in the growth of
approximately Rs 6.05 Bn in business for the
year equivalent to 28% YOY growth from
2009. The rising prices of gold in the global
market continued to aid the growth of the
business in 2010.
In recognition of the strategic importance of
the product in the immediate and medium
term, the Bank carried out a series of strategic
evaluations comprising of a comprehensive
competitor and industry analysis, and
undertook primary research to e ectively
understand the needs of the customer in
relation to pawning. Drawing from these
insights to determine a concerted strategic
direction, the Bank aims to grow the pawning
business in the upcoming nancial year.
The Bank’s pawning portfolio retained its high
level of quality despite the aggressive
marketing of the product. The Bank’s strict
compliance and stance towards responsible
lending have ensured that the Bank persists in
strict quality evaluations prior to lending. Due
to keen focus on the quality of the portfolio,
the Bank continued to enjoy a Non
Performing Advances (NPA) ratio below 1%,
and has maintained minimal capital losses
during the year.
26 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Leasing
Leasing as a product rebounded in the year
2010, stimulated by the Government’s
relaxation of duty on vehicle imports. The
market opportunity for the product grew
exponentially with the growth in the market
for new and reconditioned vehicles. As a
result in 2010, the Bank’s leasing products
performed commendably and recovered
from lackluster performance in the previous
nancial year. Witnessing a 49% overall
portfolio growth, the Bank experienced a
signi cant growth in new business as well.
Improved economic conditions realised an
increase in recoveries and overdue payments,
thereby improving the overall cash ows
during the year.
The Bank focused its marketing of the leasing
products mainly in the rural and outstation
areas across Sri Lanka with particular
emphasis on the Northern and Eastern
Provinces. Joint promotions with automotive
dealers and leasing fairs in key locations
constituted the crux of the marketing drive
whilst one on one campaigns with vehicle
importers were also carried out. With the
support of the Bank’s extensive distribution
network, Hatton National Bank retained its
leadership position amongst the
commercial banks. However, specialised
leasing and nance companies continued to
dominate the market and increased their
competitiveness in the marketplace. Going
forward, the Bank looks to implement key
strategies to maintain the momentum of
growth in the upcoming nancial year.
Housing Loans
The housing loan portfolio witnessed a
remarkable growth in the second half of the
year on the back of domestic interest rate
reductions and reversed the stagnation that
was evident in the rst half of the year. As a
result, by the end of the nancial year 2010,
the Bank disbursed Rs 5.1 Bn worth of
housing loans, which is a commendable 81%
growth over the previous year. The push was
possible through the twin e ects of the
interest rate reductions – which bene ted the
industry as a whole – and the positive
outcome of a concerted promotional drive,
which e ectively enhanced the appeal of the
Bank’s housing loan product “Shanthi”. The
NPA improved dramatically in the face of
measures undertaken in 2009 to contain the
growth of NPAs as a result of which the
portfolio quality improved during the year.
Personal Loans
The personal loan portfolio demonstrated a
remarkable growth with loan disbursements
increasing by 158% during the year propelled
by the introduction of two new products
targeted at Executives and Medical Specialists.
The decline in interest rates further stimulated
the growth of the portfolio. NPA in the
personal loan portfolio was reduced during
the year in both volume and value, thereby
increasing overall health of the portfolio
during 2010.
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 27
In living up to its stance as the private sector
commercial bank with the national outlook,
Hatton National Bank has for over four
decades focused on Development Banking as
a tool to catalyse the rural economy. In its role
as the “national” Bank, the Hatton National
Bank has made a signi cant impact on the
micro and SME sectors of Sri Lanka, assisting
small-scale enterprises to rise and sustain
themselves over time and remains the only
private commercial bank that has customised
operations to meet the needs of the micro /
agriculture nance market.
Rural/Agri Lending and Micro
Finance
In the year 2010, the Bank furthered its own
strategy for development banking by catering
to agriculture / agro based SMEs and micro
nancing sectors.
The Bank continued to promote a number of
rural sector re nance and non-re nance
credit lines and provides a comprehensive
package of nancial services for the
development of the rural economy through
its linkages as a ‘Participating Credit
Institution’ for almost all credit lines funded by
the Asian Development Bank, World Bank,
International Fund for Agricultural
Development and Japan Bank for
International Cooperation apart from the
concessionary credit lines introduced by the
Government of Sri Lanka.
The focus of the Bank’s own micro nancing
programmes lay in the growth of national
wealth across all provinces of the country,
although the emphasis on the Western
province was even less than in previous years.
Rebuilding and resettlement of the
communities in the Northern and Eastern
provinces was a key priority during the year,
with Development Banking taking the lead in
spurring economic recovery. The Bank
accelerated the provision of Micro / Agri
nance to the two provinces in turn
accelerating economic activity to commence
commercial recovery. Focus on providing
nancial assistance by promoting credit and
building nancial literacy and technical
know-how among the micro entrepreneurs
and farming community via the Bank’s strong
developmental banking resources - branch
managers, agricultural o cers and micro
nance o cers serving in the areas – in 2010
is expected to complement economic
progression in the provinces.
In view of the national priority to uplift the
rural economy, the Bank continued to follow
a strategy to achieve micro entrepreneurial
capacity building, with the objective of
elevating the rural community from poverty
twinned with youth empowerment. To this
end sta development programmes were
undertaken during the year to build
capacities with a view to better meet the
needs of customers from focal industries and
sectors.
Moreover, in the previous nancial year the
Bank pioneered a concept for long-term
surety of farmer produce through corporate
collaboration. By establishing linkages and
partnerships that allow for the optimisation of
farmer produce, the Bank networked with
corporates to assure long-term market
viability for rural farmers. In 2010, the Bank
furthered this concept of gearing its micro
entrepreneurs / farmers for “to-market”
readiness by continuing to collaborate with
major corporate partners who are established
household names among rural communities.
The corporate partner collaborations
strengthened the payback of the Bank’s micro
customers with surety for their produce
through buy-back agreements. Capacity
building and the Bank’s “to market” strategy
for micro enterprises is expected to generate
employment opportunities in the agricultural
sector and related elds, create awareness for
entrepreneurs to move towards new
technology, techniques and market
opportunities and provide opportunities to
entrepreneurs to move from grass root level
to commercial level, thus graduating the
micro entrepreneur to the next level of
commercial enterprise.
In the year under review, the rural agri
lending and micro nancing portfolio grew
by 33% to Rs 8.5 Bn with disbursement of
loans amounting to Rs 4.2 Bn during the year
to a total of 16,000 rural entrepreneurs.
Portfolio quality remained a key consideration
in loan disbursement in 2010.
The Bank is e ectively drawing into the
national economy the productive labour of
thousands of individuals, who otherwise
would not have contributed to economic
growth. With over 130 dedicated micro / agri
nance experts on the eld, Hatton National
Bank has taken banking to the doorstep of
the rural community.
Financial Literacy as a means to
nancial inclusiveness
During the year under review, the Bank’s
nancial literacy programme “Divi Saviya”
which comes under the purview of the
Development Banking Division furthered
nancial education and awareness amongst
the rural masses. The main features of this
programme are Financial Literacy, Technology
Transfer, Personal Development and Health
Education. In 2010, over 28 projects were
conducted under the programme covering
all four key areas of the programme with the
intention of inculcating responsibility and
accountability amongst customers and
potential customers. The Programme’s main
intention is to grow each customer from his
current life situation to a better economic and
emotional state. During the year, the project
Focus:
Support to national
development
programmes
furthers the Bank’s
involvement in rural
wealth creation
DEVELOPMENT
BANKING
28 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
has facilitated over 39,000 micro-
entrepreneurs across the island.
Housing for underserved sectors
During the year 2010, the Bank partnered
with Lanka Financial Services for Underserved
Settlements (LFSUS) to provide housing for
low income families. In total 88 families from
Hambantota and Nuwera Eliya were provided
houses in an e ort to elevate their livelihoods.
LFSUS and the Bank collaborated to play a
pivotal role in contributing towards the
development of rural low income societies in
Sri Lanka. The primary aim of the Bank and
LFSUS initiatives is assisting people in rural
areas of the country in order to generate new
prospects through housing nance, leading
to the development of the rural economy and
creation of new employment in the area.
Micro Insurance
The Bank’s Micro Insurance product launched
in association with HNB Assurance PLC
posted a signi cant growth during the year
with an increase of 66% in policy holders from
that of 2009. Volume wise the product
garnered 2,141 policies as against 1,286
policies in 2009. The growth momentum of
the product during the year indicates a strong
market potential for the product in the year
ahead.
Future Outlook
In the medium term, the Bank envisages
opportunity to further strengthen the
Development Finance sector in the Northern
and Eastern provinces. It foresees its role as a
catalyst in infusing sustainable business
practices to the communities of these
provinces thereby precipitating development
of the socio-capital and the livelihoods of the
people. The Bank will also continue to work
in close partnership with the Central Bank of
Sri Lanka with the objective of achieving
national priorities. In view of this in the year
ahead, the Bank plans to further strengthen
its eld force with the addition of
approximately 20 eld o cers of whom
majority will be graduates in agricultural
studies, and therefore better equipped to
assist customers through greater technical
expertise in nance and sector speci c
know-how.
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 29
Remittances Demonstrate
Healthy Growth
The volume and velocity of inward
remittances to Sri Lanka continues to be
crucial to support economic activity in the
year 2011.
Foreign remittances which is one of the main
foreign exchange earning channels reached
USD 3.3 Bn in 2009 and is expected to be
around USD 4 Bn in 2010 with expatriate
worker remittances from the Middle East
region being the highest contributor.
In 2010 HNB augmented its present
remittance partnerships network through the
appointment of two more commercial banks
in Korea and remittance houses in Jordan
and Italy.
Remittance in ow in 2010 surpassed the
gure for 2009 by recording a 16% growth to
reach an absolute value of USD 679 Mn
during the year 2010 as opposed to
USD 573 Mn the previous year.
The Bank’s existing operations in Oman and
UAE continue to act as key catalysts in
propelling growth in inward remittances from
these corridors.
The online remittance system HNB Cash
Xpress which is proprietary to the Bank
greatly supported the delivery of remittances
during the year and remains the critical value
addition to customer service. Overall
initiatives toward strengthening the
distribution channels through strategic
alliances with a portfolio of Exchange Houses
/ Money Transfer agencies within key “Send
Countries” are expected to fortify HNB’s
position as a remittance handler.
MoneyGram
HNB has operated as a Super Agent for
MoneyGram since 2008 and this relationship
has enabled many Sri Lankans overseas to use
this channel to send remittances from over
207,000 agent locations in 190 countries and
territories.
During the year under review the Bank
teamed up with MoneyGram to create
awareness amongst the Sri Lankan Expatriate
community in Cyprus resulting in an
encouraging growth in remittances from
Cyprus to Sri Lanka via MoneyGram.
In recognition of HNB’s commitment to
MoneyGram and excellent delivery of
remittances, the Bank was presented the
award “Excellence in Customer Care -2009”
during the conference held in April 2010 in
Cochin, India for MoneyGram Agents from
South Asia and Middle East. During the year
the Bank appointed another sub-
representative for MoneyGram in the capacity
of Super Agent for MoneyGram bringing the
number of sub-agents to two.
Infrastructure Development
continues to drive International
Operations portfolio
As in the previous years, particularly the
services for Letters of Guarantee relating to
infrastructure development projects in the
country were sought after and contributed
signi cantly recording an increase of 15% on
fee based income in 2010 under this
segment. Increased focus on infrastructure
development particularly in the areas of water
management, sewerage and power
generation across the nation has been the
key driver of this component of business.
Future Outlook
With the Sri Lankan Government disclosing its
intentions to continue to focus on inward
remittances and encouraging international
participation in domestic infrastructure
development, the Bank views these two areas
as critically important and will continue to
formulate strategies to match national
objectives, while ensuring a substantial
growth in volumes. In the medium term the
Bank will follow a strategy of expansion with
focus on growing strategic alliances and
partnerships to harness inward remittances.
The Bank is evaluating new markets for
inward remittances and these include Israel
and Australia. On the short term the focus
will continue to be on ensuring that the
Exchange Houses in which the Bank has
invested and has management control reach
breakeven within predetermined timelines.
Trade Services
International trade operations in 2010
witnessed a marked turn-around from the
decline evident in the previous nancial year.
The market situation improved on the back of
import duty reductions on consumer
electronics and motor vehicles. The resulting
surge in imports was propelled further by the
positive economic outlook and government
impetus, particularly in infrastructure
development and reconstruction e orts in
the Northern and Eastern provinces. This
placed trade as a buoyant component of the
national economy during the year.
Consequently, demand for import nancing
as a product increased with a marginal
increase in demand for export nancing.
This resulted in non fund income from trade
business increasing by about 40%.
Nevertheless, low interest rates prevalent
throughout the nal three quarters of the
year led to a scenario of lower returns on fund
income in value terms.
The Bank’s Trade Services operation was
re-certi ed as compliant with ISO 9001:2008
in 2010, whilst the Division underwent
Focus:
Strengthened
remittance network
adds momentum to
meet future national
goals
INTERNATIONAL
OPERATIONS
30 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
restructuring initiatives to allow for future
growth through enhanced operational
e ciency.
In 2010, the Division organised a well-
attended international trade seminar
intended to create awareness and to educate
the Bank’s customer base with the
participation of 120 trade customers. The
seminar opened for discussion a range of
pertinent topics from the economy;
regulations; to shipping and customs; with
four authoritative guest speakers, two of
whom were from overseas, outlining the key
issues for each topic.
Future Outlook
In the short and medium term, the scope for
International Trade operations is encouraging
especially in light of positive economic
growth expectations. As Sri Lanka takes full
advantage of the prevalent economic revival
and increases the momentum of economic
growth through agriculture, infrastructure
development and commercial activity, by and
large trade is forecasted to continue its
growth trajectory. Full exploitation of the Free
Trade Agreements between India and
Pakistan will further the opportunities for the
Bank’s International Trade operations.
From an operational perspective, the Division
looks to continue its focus on employee
quality with emphasis on Certi ed
Documentary Credit Specialist (CDCS)
quali cations. Meanwhile, customer
education through seminars and workshops
will remain a key strategy for business
development, especially in the regions.
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 31
By the end of the nancial year 2009,
con dence in the global economic recovery
waned with the re-emergence of recessionary
pressures jeopardising economies particularly
in Europe. In early 2010, fears of a sovereign
debt crisis, termed the “2010 Euro Crisis”
emerged concerning European Union
members Portugal, Ireland, Greece and Spain.
Despite expectations for the United States
economy to rebound in early 2010, growth
momentum there too remained shrouded by
rising unemployment, and further
quantitative easing.
However, against the backdrop of global
uncertainty, the Sri Lankan economy in 2010
performed commendably, riding on a wave
of optimism arising from the many
opportunities for the post-con ict economy.
However, the scope for proprietary Treasury
Operations remained somewhat limited due
to a scenario of thin interbank volumes, the
steady exchange rate and low volatility that
prevailed during the year. Market interest
rates and in ation declined gradually during
the year until the nal quarter when both
stabilised.
During the year under review, focus remained
on Forex trading whilst continuous
improvements to service remained a key
priority especially in consideration of the
need to strengthen client relationships as a
strategy for future growth. In 2010 the Bank
enhanced its focus on its corporate client
portfolio as a measure to sustain business in a
stable market context and thus grew foreign
exchange income by 12.5% over the previous
year. Closer ties and improved
communications with the customer were
further augmented by the provision of
advisory services to international trade
participants. As a result, the cumulative
outcome of prudent and proactive risk
management policies, focus on fundamentals,
and continuous customer service
improvements enabled the Bank to maintain
its position as a signi cant player in Forex
and Money Markets. Ongoing attention to
funds and balance sheet management as well
as yield enhancement initiatives also paid
dividends.
Future Outlook:
The Bank views relationships as the key to
future business sustainability especially in the
arena of Treasury Operations. It looks to utilise
the synergies and linkages from the Bank’s
other operational sectors for business
development and will direct its energies
towards rigorous management of assets and
liabilities, trading in xed income and Forex as
well as the introduction of new products
going forward.
Focus:
Rising above market
uncertainty to
overcome
challenges
TREASURY
OPERATIONS
32 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Information Technology and its strategic
implementation across the nancial services
industry have widely changed the function of
banking, leading to greater uidity and agility
in an industry that has traditionally been
looked upon as conservative. In the last two
decades, IT has propelled the speed of
delivery of nancial services not only in
Sri Lanka but the world over. Now considered
a dynamic industry, the use of technology in
varying avenues by banks have led to greater
communication and connectivity whilst on
the other hand it has rede ned the very
foundations of the banking industry through
streamlining and process reengineering.
Technological innovations have allowed the
banking industry to achieve sophisticated
product development, to open up e cient
delivery channels, implement reliable
techniques for control of risks while aiding
nancial intermediaries to reach
geographically distant and diversi ed markets
in a cost e cient manner.
It is widely acknowledged that IT has helped
the banking industry in Sri Lanka to deal with
the challenges of the new economy –
globalisation, proli c competition, greater
regulatory demands and internationalisation
of business. At Hatton National Bank, over the
past decade technology has been a change
agent. It has changed the contours of three
major functions performed by the Bank;
access to liquidity, transformation of assets
and monitoring of risks.
In the year under review, the focus of the IT
strategy was in essence to graduate the use
beyond mere transaction processing to
exploit strategic business use. In this respect,
the Bank determined strategies to establish
and stabilise the core operating platform with
a view to implement a series of system
improvements and process optimisations that
will radically improve the Bank’s business
orientation. Going forward, Hatton National
Bank is con dent that through some of these
initiatives, the Bank will garner several
competitive advantages through its
leadership in technology implementation.
Future Outlook
In 2011, the Bank will e ectively plan to
leverage on the existing foundation to
determine a strategic IT plan that supports
the Bank’s overall “go to market” strategy with
focus on implementing initiatives that will
take the Bank beyond the realm of
transaction processing to utilise IT for
analytics, business intelligence and
optimisation.
In essence, the foundation will be laid for the
addition of:
• business intelligence and data
warehousing modules to the existing
information repository, so that the Bank
will be in a position to better assimilate
customer insights whilst also having the
ability to maintain data quality.
• anti-money laundering (Know Your
Customer) systems and processes that are
primarily driven by regulatory needs. This
process will address concerns raised by
regulatory bodies on the need for
pre-emptive systems and processes to
curtail fraud. The processes that will be
implemented in 2011 will include fraud
and crime management, risk
management through management of
operational, and nancial risk, as well as
compliance requirements for BASEL II.
• streamlined systems where there are
coherent synergies arising from
integration, such as optimised back-o ce
operations. These simpli ed and
streamlined systems are expected to
lower cost of operations and gear up the
scale to provide greater accessibility to
customers through enhanced customer
touch-points and delivery channels.
In the upcoming year, the full realisation of
the system implementations outlined above
will give greater agility to the Bank’s
operations. In the medium term IT
enhancements will lend the Bank a
competitive edge whilst in the long term the
full implementation of the IT strategy will see
greater utilisation of business intelligence and
product speci c enhancements which will
allow Hatton National Bank to optimise its
business not only operationally but also
performance-wise, with perceptible positive
impacts on the bottom-line.
Focus:
Leveraging IT
beyond transaction
processing for
strategic business
optimization
INFORMATION
TECHNOLOGY
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 33
Hatton National Bank’s extensive involvement
in national development has been a
conscious and intrinsic component of the
Bank’s own corporate strategy. The Bank’s role
as a stimulant of the national economy has
been at the core of the Bank’s operations. This
symbiotic relationship has over the years
bene ted both the Hatton National Bank as
well as the national economy.
As such in 2010, stemming from the
corporate strategy, the marketing and
marketing communications strategies
evolved from this need to further the
developmental platform. The marketing
strategy objectively focused on retaining the
Bank’s identity as a propagator of national
wealth creation. Marketing initiatives during
the year aimed at creating a more pervasive
distribution of wealth across the nation,
objectively reaching out further to low access
areas whilst o ering a range of nancial
solutions to suit every geo-demographic
stratum through strategic pro ling of the
customer.
Strategic marketing and marketing
communications together proved to be key
contributors to the performance of the Bank
in the nancial year 2010. The thrust of the
communications strategy during the year
under review, therefore, was to communicate
and rea rm the Bank’s role as a partner in
national progress. This was a continuation of
the communication strategy employed in
2009, wherein the Bank’s heritage and its
association with national development was
communicated through the campaign idea
“through every change, we changed for you”,
reinforcing the role of the Bank as a constant
in the developmental journey of every
individual and the nation as a whole.
With the utilisation of a mixed bag of above
the line and below the line communication
tools, the communications strategy for the
year was e ectively implemented through an
integrated communications plan. In the arena
of sponsorships, the Bank partnered with a
number of institutions that have a greater
developmental value as national wealth
creators. As such the Bank o ered its services
as the “Main Banker” to the Construct Sri
Lanka Conference and Exhibition organised
by the National Construction Association of
Sri Lanka and the fore most educational
exhibition Adyapana 2010 organised by the
Lanka Exhibition and Conference Services and
was the Platinum Sponsor of the Annual HRM
Conference organised by Association of HR
Professionals.
Aligning the Bank’s strategic interest in
Micro nance as a long-term driver of both
corporate and national priorities, the Bank
was the local host of the Asia Micro Finance
Forum which was convened by the Banking
With The Poor Network (BWTP) and organised
by the Foundation for Development
Cooperation. The Asia Micro Finance Forum is
held every two years and is considered to be
one of the largest gatherings of all
stakeholders involved in micro nance
activities in Asia including practitioners,
investors, policymakers as well as other
capacity builders. The rationale for the Bank’s
partnership with the conference was largely
in view of the bene ts arising from the event
to the national economy, particularly through
the image enhancement of Sri Lanka as an
emerging nation post-con ict, and the
opportunities for micro level development.
The Conference also served as an ideal forum
to showcase Hatton National Bank’s
leadership position in micro nance and to
re-a rm its position as the only commercial
bank in the country to develop a sustainable
micro nance strategy that has over the last
two decades contributed towards bringing to
life over 100,000 micro nance entrepreneurs,
successfully mobilising over Rs 4 Bn in micro
level savings, whilst nancing over Rs 7 Bn to
the sector. The Bank’s association with the
Conference emphatically elevated its
standing as a national leader in micro nance
development.
Integrated Marketing converts
interest to action
As in previous years the Bank unveiled a series
of integrated marketing e orts to activate
speci c sub-brands. Whilst many of the
promotions are ones that have been a
constant in previous years, others were
conceptualised to stimulate consumer
interest during the year under review.
HNB Pathum Vimana
The HNB Pathum Vimana draw was held for
the seventeenth consecutive year in 2010.
The promotional tool holds the distinction of
being the biggest deposit draw in the
nancial services and banking industry in Sri
Lanka, and incentivises customers to save on
a regular basis to build substantial savings
accounts. The scheme, which is multi-
pronged, provides customers with multiple
chances to win. In 2010, the draw was
immensely successful in growing the savings
base, whilst also acting as a stimulus to
convert term deposits to savings thus
enabling the Bank to grow its deposit base. In
2010 a large number of winners collected in
excess of Rs 100 Mn in prizes.
HNB World
Pathum Udanaya, the Bank’s NRFC and RFC
promotional tool was re-launched in 2010 as
HNB World with the prime objective of
creating greater awareness amongst the Sri
Lankan diaspora on the numerous
opportunities of HNB World. The Bank’s prize
draw was promoted extensively in key cities
across the world and with the relaunch has
Focus:
Communicate and
re-a rm the Bank’s
role as partner in
national progress
MARKETING
34 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
witnessed a greater a nity amongst Sri Lanka
expatriates due to the new brand identity.
HNB Singithi Lama and Singithi
Kirikatiyo
The Bank’s minor savings scheme was
successfully marketed by way of two product
o erings namely Singithi Lama and Singithi
Kirikatiyo. As a cohesive product o ering the
Singithi product progressively caters to stages
across the childhood of a minor from
newborn to toddler to child.
In 2010, the Bank organised and sponsored
for the third consecutive year “Lowa Dinana
Singitho” an island wide inter school
competition which saw an impressive
participation of over 300,000 children
competing in di erent aspects of the
competition from regional to national level.
HNB Shanthi
The Bank’s housing nance brand Shanthi
saw enormous returns from a promotional
draw conducted during the year. The draw
further propelled the popularity of Shanthi
housing loans e ectively providing customers
with an added reason to opt for the product
despite intense competition and conducive
interest terms being prevalent across the
industry.
HNB Privilege
The Bank unveiled a new “Privilege Current
Account” as the latest addition to its strong
product portfolio. HNB Privilege is a current
account that provides its target audience of
executives of blue chip companies in
Sri Lanka with an array of bene ts, and
noticeably spans the highest de nition of
“service” in a current account. A direct and
integrated communications campaign
launched the product into the market place
during the year to create awareness amongst
the target audience.
ATM penetration
With the integration of the Bank’s ATM
network to the Finacle platform, an integrated
cohesive communications campaign was
conducted to communicate the core
functionality of the ATM network and the
added bene ts ranging from utility bill
payments to fund transfers, etc. Further the
campaign positioned the HNB ATM
distribution as one of the most wide spread
networks in Sri Lanka whilst enhancing the
image of the product as technologically
superior.
HNB Leasing
The Bank conducted a number of Joint
Promotions with leading automotive dealers
and importers with a view to promote the
Bank’s leasing product. As such the Bank
partnered with leading motor vehicle
importers such as Diesel & Motor Engineering
PLC (DIMO) to promote the TATA Commercial
Vehicles, Indra Traders to promote FOTON
trucks, United Motors Lanka PLC to promote
Mitsubishi commercial vehicles amongst
many others. Top of mind recall for HNB
Leasing as a leader in leasing among banks,
was maintained through regular advertising
and branch level activations such as road
shows.
HNB Pawning
The HNB Pawing brand was active
throughout the year with a promotional drive
to maintain high brand visibility, familiarity
and brand re-call. The aggressive marketing
initiatives saw us maintaining a position
within the top 3 among banks.
HNB Credit cards
The Bank’s card operations during the year
included launching a co-branded credit and
loyalty card in collaboration with fashion retail
inspiration ODEL with a view to reward the
customer base. During the year a number of
merchant driven and seasonal promotions
were carried out with the aim of driving card
usage up and building loyalty.
Customer network expansion
The Bank’s network expansion e orts were
duly communicated under the theme of “HNB
team” giving recognition to the teams at each
customer centre whilst also creating an aura
of service excellence for the customer.
Future Outlook
Increasing competition and fragmentation of
the marketplace will call for greater focus on
marketing in the years ahead. Whilst
maintenance of loyalty and consolidation of
existing customer bases will remain critical for
the Bank, consumer relevant advertising
incorporating the Bank’s ethical beliefs and
shaping of promotional activity will lead the
approach towards customer retention. To this
end, the Bank will continue to gear itself for
precision in marketing whilst continuing to
do what it has done best in the years past;
that is building and retaining relationships
with the critical masses of Sri Lanka and the
future generation of customers, through
nancial inclusion of the rural and youth
segments of Sri Lanka.
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 35
HNB Assurance demonstrated commendable
growth in the year 2010, persisting with
excellence in nancial performance through
the execution of strategic plans as a
cumulative outcome of prudent business
practices in risk management and
governance. During the year, the Company
achieved a turnover growth of 15% and a
pro t growth of 20% recording a pre-tax
pro t of Rs 269.5 Mn and a post tax pro t of
Rs 241.7 Mn for the year ended 31st
December 2010. The Company’s stability and
overall performance excellence was evident
in 2010 with HNB Assurance surpassing a
market capitalisation of Rs 3 Bn during the
year, posting considerable growth from the Rs
2 Bn mark reached in 2009.
The Company’s market penetration strategy
led the growth momentum in the year under
review. With a network of 51 branches – of
which 4 new branches were opened in 2010
in Balangoda, Thambuthegama, Nelliady and
Manipay – HNB Assurance e ectively reached
out to rural communities as viable target
markets. Rebranding in the Northern and
Eastern provinces was e ectively followed
through with a concerted marketing drive in
the region with a speci c focus on push
strategies for Life and Home insurance
products. In addition, 98 centres across the
country actively promoted Bancassurance
through the Hatton National Bank branch
network with the aid of dedicated sta
members stationed at HNB branches. The
aggressive push of the channel precipitated a
135% growth in GWP contribution from
Bancassurance during the year. The channel
continued to witness exceptional growth
rates and is expected to demonstrate further
acceleration in growth in 2011.
From a business continuity perspective, HNB
Assurance persisted with the implementation
of an IT system upgrade embarked on in
2009. The Life Insurance business was fully
converted to the new system during the year,
whilst a considerable part of the General
Insurance system implementation has also
been completed. In the upcoming nancial
year, the Company expects to reap optimal
e ciencies arising from full system
implementation, including increased
management transparency through the
availability of greater information across the
organisation’s decision makers.
During the year HNB Assurance retained the
Fitch National Long-term Rating ‘A (lka) with a
stable outlook whilst also retaining the
National Insurer Financial Strength (IFS) rating
at ‘A’ (lka). In 2010, HNB Assurance won the
bronze award for its innovative product “My
Life” -which was launched in the previous
nancial year- in the category “Best new
entrant” at the SLIM Brand Excellence Award
2010. It was also awarded the second place in
Corporate Governance Disclosures at the
SAFA Best Presented Accounts Award 2010
held in Katmandu, Nepal and the rst
runner-up position in the Insurance Category
at the Annual Reports Awards 2010 held by
the Institute of Chartered Accountants of Sri
Lanka.
Review of operations: General
Insurance
The Company posted a Gross Premium
growth of 19% for General Insurance,
achieving the targets set for the year whilst
superseding the industry growth rate. From a
pro tability perspective, the combined ratio
was improved despite a contraction in
contribution to premiums from terrorism
cover, which witnessed a sharp decline in the
scenario of post-con ict recovery. This is
perceived as an on-going challenge to the
overall pro tability in the medium term. The
interest rate decline witnessed throughout
the year of 2010 also exerted pressure on
pro tability, but the Company overcame
these challenges to post a 20% growth in
pro ts from General Insurance.
Review of operations: Life
Insurance
Life Insurance posted an overall growth of
10%, though the GWP growth rate from
endowment policies and mortgage reducing
policies recorded 27% and 55% respectively
in 2010. However, GWP from investment
policies witnessed a contraction as a direct
outcome of the interest rate decline
experienced in the nancial year. Premium
persistency grew consistently to over 80% by
the year-end. However, the gross premium
growth in Life Insurance was comparatively
low during the year and yet remained on
course to achieve predetermined
expectations for 2010. The overall
performance of Life from an industry
perspective remained marginally below
industry standard for the year.
Future Outlook
In the medium term HNB Assurance will
employ a concerted strategy of market
penetration with the intention of improving
the quality and pro tability of the business. As
such the Company will pursue strategies to
garner a greater proportion of micro and SME
customers with a focus towards regional
business development. The selective
expansion of corporate business will also be
targeted bene tting, in particular, from HNB’s
focus on large scale infrastructure nancing.
Aggressive growth is expected from the Life
business through the deployment of a series
of strategic initiatives to catalyse greater
returns, particularly through product and
market development strategies in the short
and medium term.
Focus:
Strategy of
innovation and
market penetration
leads to consistent
growth
SUBSIDIARY OPERATIONS
HNB Assurance
PLC
36 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Performance Review
Sithma Development in 2010 demonstrated
robust returns with pro tability up by 151%
from that of the previous year to stand at Rs
170.7 Mn by the end of the nancial year.
Containment of operational costs combined
with a favourable interest rate scenario
culminated in a commendable pro tability
outlook for 2010. The deployment of prudent
operational strategies furthered the viability
of the business in the medium term.
HNB Towers, Sithma’s agship project
continued to be an icon of modern
construction for Colombo. During the year,
initiatives were taken to optimise space
utilisation at the Towers by the Bank, with the
prime objective of revenue enhancement.
Sithma thereby objectively leased the
remaining oor space to leading local and
international commercial enterprises. As such
in 2010, the HNB Towers reached over 95%
occupancy.
Spathodea Residencies, Sithma’s
condominium development project has been
completed and sale and purchase
agreements have been signed for over 55 per
cent of the apartments by December 2010.
Spathodea Residencies is considered a
prestigious and high quality construction in
Colombo.
Future Outlook
Looking at the immediate future, Sithma
Development will concentrate its e orts on
maximising its return from Spathodea
Residencies whilst seeking and evaluating
attractive new real estate development
opportunities. In the medium term, the
Company will continue to utilise its
experience and acumen in the construction
of energy e cient buildings.
Focus:
Pro tability through
prudent operational
strategies
SUBSIDIARY OPERATIONS
SITHMA
DEVELOPMENT
(PVT) LIMITED
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 37
Majan Exchange LLC, Oman
Majan Exchange completed its second
operational year in 2010 and is on target to
breakeven in early 2011. During the year a
fresh infusion of capital to Majan Exchange
amounting to OMR 40,000 was made, in
keeping with regulations in Oman pursuing
its second outlet in Ghala scheduled for the
rst quarter of 2011. Plans are in motion to
open two more branches during the course
of the year 2011.
Majan Exchange, while focusing on
remittances to Sri Lanka also caters to
corridors such as India, Nepal, Bangladesh,
Pakistan and Philippines. As a send agent for
MoneyGram, Xpress Money, EzRemit, Majan
possesses the capability to serve many other
corridors.
In the medium term Majan Exchange is
expected to contribute to the Bank,
consequent to breaking even and building on
its viability.
Delma Exchange
United Arab Emirates
Commenced commercial operation in April
2009, at Abu Dhabi, UAE. Opened its rst
branch in April 2010 in an industrial zone
locality in Al Quoz followed by a branch in
Musa ah City in July 2010. The fourth outlet
was opened in December 2010 in Karama
and the fth outlet is to be opened in
Hamdan Street during the rst quarter of
2011.
Delma Exchange also focuses on remittances
to Sri Lanka while catering to the expatriate
communities of Indians, Nepalese and
Filipinos. As a send agent for Western Union,
Delma Exchange caters to remitters to a
variety of other destinations.
In the medium term four additional outlets
have been planned to commence operations
in 2011. Focus is concentrated on improving
e ciency and margins to accelerate returns
and breakeven before the end of 2011.
Delma Exchange
Canada
From an operational standpoint the market
though indicative of promise due to the high
concentration of the Sri Lankan community
proved to be too sensitive to penetrate as a
regulated establishment. Due to the non
viable status of operations, Delma Exchange,
Canada reluctantly ceased its commercial
operations at the end of October 2010.
Focus:
Market expansion to
propel growth
EXCHANGE
HOUSES
38 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The nancial year 2010 was a de ning year in
the short history of Acuity Partners.
Operational since February 2009, Acuity in the
year under review validated beyond doubt
the viability of its operations. Moreover, the
success of the Company and its ability to
garner a high ROI through exceptional
performance, despite the short time frame,
places Hatton National Bank and DFCC Bank
as visionary corporates for their foresight in
conceptualising and moulding Acuity at a
time when the investment climate was low.
Acuity was formed during the height of the
con ict, yet as business proponents, Hatton
National Bank and DFCC Bank, looked beyond
the market and the economic turbulence to
the opportunities and the promise of a post
con ict era. This far-sighted approach to
business has today enlarged the shareholder
value of the investors.
In 2010, the Sri Lankan economy rebounded
strongly reaping the peace dividend. The
momentum of growth that commenced
immediately post con ict in mid 2009,
accelerated precipitously during the year and
was most strongly evident in the stock market
performance. The Colombo Stock Exchange
(CSE) continued to perform exceptionally
during 2010 to record a return of 90.6% YTD.
As an outcome of the vibrancy of the stock
market, Acuity’s brokering operations were
greatly enhanced and recorded an
exceptional performance during the year. The
Group posted a pre-tax pro t of Rs 450 Mn
and post tax pro t of Rs 301 Mn, indicating a
growth of 229% and 257% respectively over
the previous nancial year. On 18th January
2010, Acuity acquired investment and venture
capitalist Lanka Ventures PLC for a purchase
consideration of Rs 719 Mn and currently
holds a 79.6% stake of the company. The CSE
performed at an almost daily record-breaking
trend in 2010, however, in the nancial year
ahead, the market is expected to strengthen,
recovering from minor overheating
experienced during the year. The securities
aspect of business continued to show
progress during 2010 despite rate stability.
The Corporate Finance services during the
year enabled Acuity to be at the forefront of
the nancial services industry, leading and
managing a number of core projects
including a series of high-pro le Initial Public
O erings in a range of sectors; from tea and
nancial services to banking and diversi ed
holdings. The mandate for Corporate Finance
Services for the year outlined key focus areas
of engagement, all of which were successfully
achieved during the year 2010. By signing an
agreement with Millennium Capital
Management of Maldives, Acuity in the year
under review laid the foundation for the
enlargement of its operations in the future. As
a result of this association with Millennium
Capital, Acuity has already been mandated to
secure loan syndications for two leading hotel
chains based in the Maldives.
Future Outlook
The conducive post con ict scenario will only
further the opportunities for Acuity in the
medium term. As the CSE strengthens and as
Sri Lanka’s business community gathers
further con dence in the economy, a
multiplier investment e ect is expected.
Economic development will precipitate and
catalyse foreign direct investment, placing Sri
Lanka as the centre of international attention
in the long term. Going forward, Acuity is
geared to grasp these opportunities to add
further value to its stakeholders through the
introduction of new business lines such as
Margin Trading and Asset management to
add to the existing products and services
portfolio, whereby Acuity furthers its capacity
to become Sri Lanka’s premier ‘one stop’
Investment banking rm.
Focus:
Sustain growth
momentum to
continue exceptional
performance
ACUITY
PARTNERS
(PVT) LTD
MANAGEMENT
DISCUSSION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 39
MAIN CORRESPONDENTS
WORLDWIDE
1
72
9
11
50
2
19
3
15
22
45
64
65
52
55
59
56
53
62
47
16
20
6
21
7
42
10
71
35
43
28
44
46
4
48
54
69
57
49
37
27
14
17
39
31
38
68
34
23
60
24
30
70
25
32
18
13
5
12
36
33
26
66
67
73
29
51
40
61
41
58
8
63
74
1 Argentina
2 Australia
3 Austria
4 Bahrain
5 Bangladesh
6 Belgium
7 Bermuda
8 Botswana
9 Brazil
10 Canada
11 Chile
12 China
13 Colombia
14 Cyprus
15 Czech Republic
16 Denmark
17 Egypt
18 Ethiopia
19 Fiji Islands
20 Finland
21 France
22 Germany
23 Ghana
24 Gibraltar
25 Greece
26 Hong Kong
27 Hungary
28 India
29 Indonesia
30 Ireland
31 Israel
32 Italy
33 Japan
34 Jordan
35 Kenya
36 Korea
37 Kuwait
38 Lebanon
39 Libya
40 Malaysia
41 Mauritius
42 Mexico
43 Maldive Islands
44 Nepal
45 Netherlands
46 New Zealand
47 Norway
48 Oman
49 Pakistan
50 Peru
51 Philippines
52 Poland
53 Portugal
54 Qatar
55 Romania
56 Russian Federation
57 Saudi Arabia
58 South Africa
59 Serbia & Montenegro
60 Sierra Leone
61 Singapore
62 Spain
63 Swaziland
64 Sweden
65 Switzerland
66 Taiwan
67 Thailand
68 Turkey
69 United Arab Emirates
70 United Kingdom
71 United States of America
72 Uruguay
73 Vietnam
74 Zambia
40 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Northern
Province
Central
Province
North Central
Province
North
Western
Province
Uva
Province
Southern
Province
Western
Province
Eastern
Province
Sabaragamuwa
Province
CUSTOMER CENTRE
NETWORK
Customer Centre Network - As at 31/12/2010
Province Customer Centres ATMs
Central 21 32
Eastern 16 25
North Central 7 10
North Western 16 23
Northern 13 19
Sabaragamuwa 10 15
Southern 17 21
Uva 10 15
Western 95 190
Total 205 350
HNB Customer Centres to be opened during the
1st quarter of the year
Kinniya
Udappuwa
Siyambalanduwa
2009 2010
Customer Centres 186 205
HNB Student Banking
Centres
153 159
HNB Gami Pubuduwa
Banking Centres
Village Based Units
Branch Based Units
Micro Banking Units
111
18
92
1
117
8
108
1
HNB Mobile Banking
Service Units
Kandalama
Heritance Hotel
Amaya
Lake Hotel
(Dambulla)
Kandalama
Heritance Hotel
Amaya
Lake Hotel
(Dambulla)
Overseas
Representative Offi ces:
Chennai
– India
Karachi
– Pakistan
Chennai
– India
Karachi
– Pakistan
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 41
Western Province – 95
North Western Province – 16
Northern Province – 13
North Central Province – 7
Sabaragamuwa Province – 10
Uva Province – 10
Southern Province – 17
Eastern Province – 16
Central Province – 21
• Airport Offi ce
• Aluthgama
• Aluthkade
• Athurugiriya
• Avissawella
• Bambalapitiya
• Beruwela
• Biyagama
• Boralesgamuwa
• Borella
• Cinnamon Gardens
• City Offi ce
• Dehiwela
• Delgoda
• Dematagoda
• Divulapitiya
• Ekala
• Gampaha
• Ganemulla
• Grandpass
• Green Path
• Gunasinghepura
• Hanwella
• Head Offi ce Branch
• Hendala
• Homagama
• Horana
• Hulftsdorp
• IWMI – Pelawatta
• Ja-ela
• Jampettah Street
• Kadawatha
• Kaduwela
• Kalutara
• Kandana
• Katunayake
• Kelaniya
• Kiribathgoda
• Kirindiwela
• Kirullapone
• Kochchikade
• Kohuwala
• Kollupitiya
• Kotahena
• Kottawa
• Kotte
• Lanka Hospitals
• Maharagama
• Malabe
• Maligawatte
• Maradana
• Marandagahamula
• Mathugama
• Minuwangoda
• Mirigama
• Mirihana
• Moratumulla
• Moratuwa
• Mt. Lavinia
• Mutwal
• Narahenpita
• Nawala
• Nawaloka Hospital
• Nawam Mawatha
• Negombo
• Negombo Extension
Offi ce
• Negombo Metro
• Nittambuwa
• Nugegoda
• Overseas School of
Colombo
• Padukka
• Panadura
• Panchikawatte
• Pettah
• Pettah – 2nd Offi ce
• Piliyandala
• Ports Authority
• Pugoda
• Ragama
• Ratmalana
• Sea Street
• Seeduwa
• Sri Jayawardenapura
Hospital
• Sri Lankan Airlines
Admin Complex
• Talangama
• Thalawathugoda
• The Cental Hospital
• Thimbirigasyaya
• Wattala
• Weliweriya
• Wellawatte
• Wellawatte Extension
Offi ce
• Wijerama
• World Trade Centre
• Yakkala
• Alawwa
• Chilaw
• Dankotuwa
• Galgamuwa
• Giriulla
• Hettipola
• Kuliyapitiya
• Kurunegala
• Marawila
• Madampe
• Nikaweratiya
• Norochchole
• Nawinne - Kurunegala
• Puttalam
• Wennappuwa
• Wariyapola
• Chankanai
• Chavakachcheri
• Chunnakam
• Jaff na
• Jaff na – 2nd Offi ce
• Kilinochchi
• Mannar
• Manipay
• Nelliady
• Point Pedro
• Thirunelvely
• Vavuniya
• Velanai
• Anuradhapura
• Anuradhapura Ext. Offi ce
• Kekirawa
• Madawachchiya
• Nochchiyagama
• Polonnaruwa
• Thambuttegama
• Balangoda
• Embilipitiya
• Godakawela
• Kahawatte
• Kegalle
• Mawanella
• Pelmadulla
• Pinnawela
• Ratnapura
• Warakapola
• Badulla
• Bandarawela
• Bibile
• Buttala
• Haputale
• Mahiyangana
• Moneragala
• Passara
• Welimada
• Wellawaya
• Agunakolapelassa
• Akuressa
• Ambalangoda
• Ambalantota
• Deniyaya
• Elpitiya
• Galle
• Karapitya
• Kataragama
• Hambantota
• Koggala
• Matara
• Middeniya
• Pitigala
• Suriyawewa
• T
angalle
• Tissamaharama
• Akkaraipattu
• Ampara
• Batticaloa
• Chenkaladi
• Kaluwanchikudy
• Kalmunai
• Kantalai
• Kattankudy
• Ninthavur
• Pottuvil
• Sammanthurai
• Thandavenveli
• Trincomalee
• Trincomalee – Courts Road
• Thirukkovil
• Valachchenai
• Akurana
• Bogawantalawa
• Dambulla
• Digana
• Gampola
• Galewela
• Geli Oya
• Hatton
• Kandy
• Kandy City Centre
• Katugastota
• Maskeliya
• Matale
• Nawalapitiya
• Nuwara Eliya
• Peradeniya
• Pilimathalawa
• Pussellawa
• Ragala
• Rikillagaskada
• Thalawakelle
42 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
FINANCIAL
REVIEW
Industry overview
The nancial year 2010 was a year that presented a mix of challenges
and opportunities for the nancial services industry. As a consequence
of the slowdown in economic activity in 2009, credit growth remained
sluggish during the major part of 2010. In fact, the negative credit
growth witnessed by the industry in 2009 continued in to the early part
of 2010. However, the prospects for the industry remained promising
with interest rates declining to single digits during the year. Moreover
the return to economic activity and contribution from approximately
one third of the country’s land mass after three decades of unrest,
augurs well for the future.
The Sri Lankan economy recovered commendably in 2010 despite the
persisting negative e ects of the global nancial crisis witnessed during
2009. The robust in ow of foreign funds improved foreign reserves,
assisting towards the strengthening of the Sri Lankan Rupee against
hard currencies, in particular the US Dollar.
Financial Performance
Income
The decline in interest rates coupled with the sluggish loan growth
witnessed during the rst half of the year contributed towards a drop in
the Bank’s top line where interest income declined by 12.6% to Rs 30.2
Bn from Rs 34.6 Bn in 2009. The drop in interest rates also enabled the
Bank to contain its interest cost. The Bank’s prudent asset and liability
management strategies enabled it to convert a signi cant portion of its
xed deposits into comparatively low cost deposits which helped
improve the deposit mix where current and savings accounts (CASA)
balances represented 53% of total deposit base compared to 46% in
2009. This too contributed towards the further reduction of interest cost
thereby achieving a 6.6% growth in net interest income despite the
drop in the top line.
The Bank continued to focus on improving non-interest income which
in total grew by 12.6% compared to 2009. The foreign exchange income
grew by 12.5% which is a commendable performance considering the
relatively stable foreign exchange rates witnessed during the year.
Commission income too witnessed a notable growth with trade related
income taking centre stage as international trade started to pickup after
a dismal year in 2009.
During the year under review the Bank disposed its non-strategic
investments in Commercial Bank of Ceylon PLC and Distilleries
Company of Sri Lanka PLC while the direct holdings in Lanka Ventures
PLC and Acuity Securities (Pvt) Ltd were brought under the Acuity
umbrella as part of the long term strategy. The divestments resulted in
an increase in the investment income during the year.
Other income witnessed a drop in 2010 despite the recovery of
Rs 421.4 Mn from non performing loans, largely due to 2009 having
been an exceptional year for recoveries. In the preceding year the Bank
e ectively recovered a substantial amount from its largest non
performing account at the time, namely Kabool Lanka. The lack of such
a scenario in 2010, therefore, accounted for the decline in the volume of
recoveries during the year. The persistence towards e ective recoveries,
however, remained high.
Overall the net income of the Bank grew by 8.1% in 2010 compared to
the previous year, while improving the non interest income to net
income ratio from 24.5% to 25.5% in 2010.
2006
2007
2008
2009
2010
Rs.Mn
Prot Before Tax
Prot After Tax
Non Interest Income
Net Interest Income
Net Income
Operating Expenses
to Net Income (%)
Operating Expenses
(Excl. provisions & VAT)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Prot
2006
2007
2008
2009
2010
Rs.Mn
0
5,000
10,000
15,000
20,000
Income
2006
2007
2008
2009
2010
Rs.Mn
%
0
5,000
10,000
15,000
20,000
25,000
0
10
20
30
40
50
60
Operating Income
& Operating Expenses
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 43
Operating expenses
Realizing the need to improve productivity to maintain pro tability in a
competitive environment, the Bank continued its aggressive cost
management strategies both at head o ce as well as in branches. The
salary bill of the Bank grew by 12.3% while general expenses increased
by a mere 5.4% during 2010. The Bank continued to manage costs,
curtailing the increase in cost to a minimum despite rolling out an
aggressive growth strategy culminating in the commissioning of 19
new customer centers and 40 new ATMs during the year. Majority of the
new customer centers opened during the year were geographically
located in the rural pockets of Sri Lanka, especially in the under-
developed and previously war ravaged Northern and Eastern provinces.
Primarily due to the aggressive expansion drive, the cost to income ratio
increased marginally to 56.5% in 2010. The Bank has laid down strategies
towards managing costs and is focused on driving the cost to income
ratio below 50% in the medium term.
The Bank remained extremely aggressive in its recovery e orts during
2010 resulting in its gross non performing ratio declining to 4.51%,
while the net non performing ratio declined to 1.95%. To maintain this
ratio below 5% the Bank persisted with the implementation of a three
pronged strategy - aggressive recoveries, post credit monitoring and
integrated risk management techniques - for credit evaluation. The
provision cover as at end of 2010 improved to 56.8%.
The Bank managed to grow its pre-tax pro ts by a healthy 13.8% to
Rs 6.7 Bn compared to the previous year, while the Group posted a
pre-tax pro t of Rs 7.2 Bn recording a growth of 17.6%.
Group Companies
Majority of the Group companies contributed positively during 2010
with HNB Assurance PLC leading the way. The 60% owned insurance
subsidiary demonstrated a pro t growth of 20% with its gross written
premium improving by 15%. Though a relatively new player in the
highly competitive insurance industry, HNB Assurance remains one of
the fastest growing insurance companies in the Country.
The Bank’s timely investment in a joint venture investment bank paid o
during 2010 as capital markets started performing exceptionally well
during the year. The joint venture Investment Banking Group, Acuity
Partners (Pvt) Ltd demonstrated a commendable pro t growth of 257%
during 2010 with positive contributions from all its business activities,
which include corporate nance, stock broking and dealing in xed
income securities. Both the Bank and DFCC together further
strengthened the Acuity Group during the year by bringing in Lanka
Ventures PLC under the Acuity umbrella. The Bank will continue to
invest in this space as it has identi ed capital markets as one of the key
bene ciaries in Sri Lanka’s post con ict economy.
The property management subsidiary of the Bank which owns the state
of the art HNB Towers, also managed to positively contribute towards
the Group’s bottom line. However, the two exchange houses namely
Majan and Delma are yet to break-even, mostly as they are new
investments. Both Majan and Delma have demonstrated great potential
and have been avenues through which the Bank has increased its
penetration in to the Middle East.
2006
2007
2008
2009
2010
Rs.Mn
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Assets
2006
2007
2008
2009
2010
Rs.Mn
0
50,000
100,000
150,000
200,000
250,000
Deposits
2006
2007
2008
2009
2010
%
0
1
2
3
4
5
6
7
8
NPA Ratio
Advances (Net)
Cash & Short Term Funds
Long Term Investments
Total Assets
Local Currency Deposits
Foreign Currency Deposits
Total Deposits
Gross NPA Ratio
Net NPA Ratio
44 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Taxation
The corporate tax charge for the Bank increased by a substantial 44.8%
to Rs 2.3 Bn in 2010 compared to the previous year. The main reason for
this was the exceptionally low tax charge witnessed in 2009 resulting
from the Bank utilising carried forward tax losses and write-back of over
provided taxes during early years. Accordingly, the e ective corporate
tax rate increased to 33.7% in 2010 compared to a low 26.5% in 2009.
The net pro t after tax stood at Rs 4.46 Bn recording a modest growth of
2.6 % in 2010 compared to the previous year despite a reasonable
growth in the pre tax pro t mainly due to the Bank enjoying a low
e ective tax rate in 2009 as explained above. The Group net pro t for
2010 amounted to Rs 4.89 Bn which represents a 7.3% growth YoY.
Balance sheet
The Hatton National Bank balance sheet is re ective of the Bank’s
position as a robust and sustainable business, and is a demonstration of
the strategic foresight and prudent decision making that have been the
hallmarks of the way the bank is managed.
Asset growth
The Bank managed to grow its asset base by 12% during the year to
Rs 313.9 Bn.The loan book of the Bank remained at during the major
part of this year due to low demand for credit. However the last 2
quarters witnessed rejuvenation in credit demand as the Bank ended
the year with a YoY loan growth of 19.6% with total net loans and
advances reaching Rs 203 Bn from Rs 169.8 Bn in 2009 which is quite
exceptional in the context that the Bank’s loan book contracted by 1%
in the rst quarter of 2010. The growth in credit was driven primarily by
leisure, infrastructure, health sectors as well by leasing and retail credit.
Liability growth
The Bank recorded a 11.2% growth in the total deposit base during 2010
with total rupee and foreign currency deposits standing at Rs 234.1 Bn
compared to Rs 210.5 Bn in 2009. It is important to note that during
2010 the Bank managed to change its rupee deposit mix as mentioned
earlier by increasing its low-cost deposits of savings and current
accounts by 27.1%and 60.5% respectively. During the year the foreign
currency deposits of the Bank marginally declined by 2.8% to Rs 42.1 Bn.
Shareholders’ funds
Shareholders’ funds grew by 14 % in the nancial year, from Rs 23.9 Bn
to Rs 27.3 Bn. An interim dividend of Rs 1.50 per share was declared for
2010 amounting to Rs 338.6 Mn. The Bank proposes a nal dividend of
Rs 5.50 per share on pro ts for the year under review which will amount
to a total dividend payout of Rs 1,648 Mn.
Capital adequacy
During 2010 the Bank did not infuse fresh capital and the growth in the
asset book was supported purely by retained earnings. The Bank’s
capital adequacy ratios remained healthy with tier 1 and total ratios at
10.99% and 12.64% respectively as at December 2010.
Return on Average Assets
The Bank’s return on average assets stood at 1.5% and return on average
equity at 17.4% in 2010.
FINANCIAL
REVIEW
Tier 1
Total Tier 1 & 2
2006
2007
2008
2009
2010
%
0
3
6
9
12
15
Capital Adequacy Ratio
2006
2007
2008
2009
2010
Rs.Mn %
0
5,000
10,000
15,000
20,000
25,000
30,000
0
4
8
12
16
20
Shareholders' Funds
Total Assets
Return on Average Assets (%)
Return on Equity (%)
Shareholders’ Funds
2006
2007
2008
2009
2010
Rs.Mn
%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
0.0
0.5
1.0
1.5
2.0
Return on Average Assets
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 45
Future Outlook
Hatton National Bank has aligned its corporate strategy in line with the
government’s national developmental strategy for Sri Lanka. The Bank’s
core business pillars are re ective of areas that are deemed as priority in
the national agenda. The North and East continue to be among the
bank’s priorities – as one of the main private commercial banks that
consistently maintained a signi cant presence in the region over the
past forty years, even during the height of the con ict, the bank has
built meaningful relationships with the people of the region. As such,
HNB is determined to play a signi cant role in the ongoing
reconstruction and development e orts in the two battered provinces.
Furthermore, the Bank will continue to promote and facilitate the
nancial inclusion of grassroot communities at the heart of the nation.
In 2011, the nancial outlook for the Bank will, to a considerable degree
be shaped and de ned by its role in supporting infrastructure
development, agriculture and sheries sectors through SME
empowerment, micro nance to generate economic activity, remittance
based services to support the migrant workers and their families as well
the revival of post war areas.
As always, the Bank will follow its prudent strategies and continue to
demonstrate nancial acumen in steering itself towards sustainable
growth.
46 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
RISK & GOVERNANCE
ENABLING RELIABILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 47
Risk Management 48
Corporate Governance 59
Statement of Internal Control 76
48 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
RISK
MANAGEMENT
Vision and Strategy for Risk Management
Risk management is a fundamental part of HNB’s business activities. To
keep risk management at the centre of the executive agenda, it is
embedded in the everyday management of the business.
The vision for Risk Management is to proactively assist the business in
delivering superior shareholder value by ensuring an optimal trade-o
between risk and return. HNB’s Risk Management Strategy is based on a
clear understanding of various risks, disciplined assessment,
measurement and continuous monitoring of such risks in the context of
a predetermined risk appetite approved by the Board. The
implementation of the Integrated Risk Management Strategy is a
function of four pillars, namely a conducive organization structure,
periodically updated policies re ecting ongoing assessment of key risks,
regulatory and internal standards, an objective oriented meeting
schedule and relevant and timely Analytics to assess performance
improvements. Following a diagnostic review in 2007 with the
assistance of external consultants a 5 year roadmap was developed to
implement best practices in Risk Management and we are on track in
the implementation e orts.
HNB’s Integrated Risk Management Division, reports to Board Integrated
Risk Management Committee (BIRMC) and Chief Executive O cer and
comprises six units; whilst retaining its independence e ectively
integrates with business functions to ensure Risk Management is
seamlessly ingrained in HNB’s culture.
The Integrated Risk Management Division provides the BIRMC the
assurance that the performance of the overall risk management
framework and Risk Management Initiatives meet the requirements of
the Risk Charter, which is reviewed annually for balanced coverage.
Organisational Control and Board Governance
HNB’s Board has ultimate responsibility for risk management. In
discharging its governance responsibility for overall risk management
and control, the Board has established two key Committees, the BIRMC
and the Audit Committee.
The Audit Committee assists the Board in overseeing internal audit and
the appropriateness of HNB’s accounting policies and nancial
reporting.
The BIRMC assists the Board in ful lling its responsibilities relating to the
oversight of HNB’s risk management strategies, policies and processes
that have the potential to impact signi cantly on earnings performance,
reputation and capital protection. BIRMC also assists the Board to assess
and to approve signi cant credit transactions and other matters beyond
the discretion of executive management.
The following Executive Management Subcommittees, each with
specialized focus, support the BIRMC and are responsible for the
co-ordination of risk matters for each of the areas of risk management:
• Executive Risk Management Committee
• Asset and Liability Committee (ALCO)
• Credit Policy Committee
• Operational Risk Committee (business unit level)
• Investment Committee
• IT Steering Committee
• Corporate Social Responsibility Trust
• Provide post
sanction
support to
maintain quality
of Corporate
Banking Portfolio
• Custodian
for Credit
Management
Information
System
• Driving Credit
Policy decisions
a ecting back
o ce across the
network
• Independent
credit portfolio
reviews
• Review
Performance
against credit risk
appetite
• Capture, report
and understand
the operational
risks taken by the
Bank
• Minimise the
frequency of
operational
loss events by
proactive action
• Robust
monitoring of
treasury positions
and limits
• Implement
Information
Technology
systems and
business
intelligence tools
in support of risk
management
activities
Credit Risk
(Commercial / Retail)
Credit
Administration
Credit Risk
Monitoring
Operational
Risk
Treasury
Middle O ce
Special
Projects
• Plan and control
taking credit risk
based on clear
risk parameters
regularly updated
from time to time
• Independent Risk
approval in credit
committees
Integrated Risk Division
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 49
HNB’s approach to managing key risks
Credit Risk
Credit risk relates to a borrower unable to meet its nancial obligations
to the lender. HNB has a well diversi ed credit portfolio in terms of
concentration, business segments and industry representing a major
source of income and over 2/3rd of its Asset base, consequently
safeguarding portfolio quality is of paramount importance. The credit
risk that the Bank faces arises mainly from corporate banking and retail
loans and advances, while exposure to credit risk from trading activities
is low in relative terms.
In managing credit risk, the Bank adopts a four pronged focus. Speci c
Objectives include:
1. Establishing an appropriate credit risk philosophy
The credit approval structure broadly sets out HNB’s Credit Strategy
and discretionary lending limits. This document is reviewed at least
annually and approved by the Board. A monthly Credit Policy
Meeting chaired by the Chief Executive O cer, drives policy
decisions and implementation.
2. Operating a sound credit granting process
We adopt a committee based approval structure, where all approval
signatories carry equal responsibility for credit risk. Individual credit
facilities beyond a threshold, requires an independent risk signatory
with no revenue targets in respective committees. The structure
ensures business development and credit administration functions
are clearly separated.
Our Credit Risk Monitoring unit periodically reviews conformity with
internal risk parameters based on credit portfolio reviews.
At corporate level an Executive Risk Committee is in place with
balanced representation of business managers and risk managers to
review performance against a prede ned risk charter.
3. Maintaining an appropriate credit administration, measurement and
monitoring process
Centralized Credit Administration Division provides e cient and
e ective post sanction support to corporate banking in order to
maintain requisite quality of bank’s credit portfolio. It also ensures
adequate segregation of duties from business origination.
An internally developed online MIS (known as ‘KPI Wizard’) is in
place to evaluate credit risk indicators at branch, regional, zonal and
bank level. Accountability for Credit Risk performance is vested with
individual business units and unhealthy trends addressed at all
levels.
Early warning systems, age analysis of temporary unsecured facilities
and new additions to delinquent portfolio are key focus areas in the
review process.
At Corporate Level, a Credit Risk Dashboard indicates performance
against the risk appetite for necessary action by business heads.
4. Controls over credit risk
We measure, monitor and manage credit risk for each borrower and
also at the portfolio level. We have standardised credit approval
processes, which include a well-established procedure of
comprehensive credit appraisal and rating. We have implemented
BOARD OF DIRECTORS
Board Integrated Risk Management Committee/ Board Audit Committee
• Risk Assessment of Internal control environment
• Monitors the risk pro le in respect to Risk Appetite
1st Line of Defence
BUSINESS LINE OPERATIONS
GOVERNANCE
TONE AT
THE TOP
PERFORMANCE RISK MANAGEMENT
Real time focus
• Contributes towards sound risk management
practices and standard operating procedures within
the risk management framework
• Monitors compliance with internal risk management
procedures
2nd Line of Defence
RISK MANAGEMENT
Real time review focus
• Develops and implements risk management
frameworks, policies, systems, processes and tools
• Ensures framework encompasses
- event identi cation
- risk assessment
- risk measurement
- risk response
- control activities
- information & communication
- mentoring and
- reporting
• Independent review of the process of exercising
credit approval in accordance with delegated
authorities
3rd Line of Defence
ASSURANCE
Compliance
• Regulatory adherence
• Regulatory reporting
Internal Audit (Reporting Directly)
Review Focus
• Reviews e ectiveness of risk management practices
• Con rms level of compliance
• Recommends improvements and enforces
corrective actions where necessary
External Audit
(Reporting to the shareholders)
• Issue an opinion on the true and fair view of the
nancial statements
• Review the internal controls over nancial reporting
process
HNB’s Three lines of Defence Framework
50 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
internal credit rating methodologies for Large Corporate, Middle
Market and Small and Medium Enterprises (“SME”) customers. The
rating factors include quantitative and qualitative issues and credit
enhancement features speci c to the borrower. The rating for each
borrower is an input to the approval process and reviewed at least
annually. Industry knowledge is constantly updated through eld
visits and interactions with clients, regulatory bodies and industry
experts. Signi cant strides have been made to internalize the
concept of Credit ratings with a view to giving due prominence to
lending based on cash ow repayment ability as distinct from
availability of collateral. However, comfort can be derived from the
fact that the credit portfolio is largely secured by tangible collateral
and bank guarantees with adequate internally de ned margins in
our favour. (see page 252)
A post disbursement review process is in place to assess
performance by approval committee to ensure necessary learning
and strengthen controls where appropriate.
Liquidity and Interest Rate Risk
At a portfolio level the Bank’s loan book is comfortably nanced by retail
deposits, therefore reliance on wholesale deposits and interbank market
is minimal. The non existence of long term borrowing instruments at
a ordable cost results in some maturity mismatch in the asset book
(borrow short and lend long) however, this is considerably mitigated by a
large stable and growing low cost deposit base. In these circumstances
Bank remains highly liquid comfortably exceeding minimum statutory
liquid asset ratios.
Conceptually the Bank is exposed to interest rate risk arising from a
predominantly xed rate liability book where repricing is signi cantly
slower than the largely xed rate lending portfolio in a reducing interest
rate scenario. However empirical results indicate ability to protect its Net
Interest Margins despite an almost 7% reduction in interest rates for the
year ended August 2010.
HNB is committed to strengthen its risk management capabilities in this
area with the implementation of an Asset Liability Management System
and Fund Transfer Pricing System in 2011.
Operational Risk
Operational risk is the risk of direct or indirect losses resulting from
human factors, external events, and inadequate or failed internal
processes and systems. Operational risks in the Bank are managed
through a comprehensive internal control framework.
An Operational Risk Policy is in place comprising risk identi cation,
implementation of controls for measurement, monitoring and mitigation
of Operational risks. The Operational Risk Unit facilitates its
implementation through internally de ned Operational Risk Guidelines
and Operational Risk Meetings conducted across the network.
HNB has a comprehensive Loss tracking database analysed by business
function and loss incident as per BASEL requirements. A high level
Operational Risk Dashboard is circulated to keep BIRMC and Senior
Management appraised of key operational losses on a monthly basis.
Furthermore, an e ective feedback loop is in place to ensure that
learning from loss incidents, is regularly disseminated across the network
to prevent / minimise recurrence.
Insurance continues to be the key risk mitigant for Operational Risks and
adequacy and e ectiveness of insurance is independently evaluated by
Operational Risk, at least annually.
Market Risk
Market risk is the possibility of loss in ‘on and o -balance sheet’ positions
arising from changes in the value of nancial instruments due to
movements in market variables such as interest rates, exchange rates,
equity and commodity prices.
A comprehensive Board approved Treasury Policy is in place and is
regularly updated to re ect regulatory and market developments.
The Treasury Middle O ce monitors the asset-liability position under the
supervision of the ALCO. It also independently reviews activities of the
Treasury Front O ce and adherence to regulatory / internal policy
guidelines.
Following the strengthening of the Treasury Front O ce to take more
aggressive positions within stipulated regulatory limits, the Bank is
committed to augment its Market Risk Infrastructure in terms of skills,
systems and controls to support Treasury’s expansion plans. (Presently
exposure to Trading Book is only 2% of the Banking Book which is
indicative of the regulatory climate and minimal opportunities in FX
market.) Initiatives taken during the year include developing country
limits, duration based limits and Value At Risk (VAR) based limits for
currencies and bond portfolios. A Market Risk Dashboard was developed
to indicate performance against risk appetite and continues to be re ned
in line with best practice.
Compliance Risk
The Board expects HNB’s business to be conducted in accordance with
the Bank’s Code of conduct, laws, and regulations and has zero tolerance
for failure to identify and escalate breaches of these obligations.
In the wake of the global nancial crisis, the local regulator has
predictably strengthened regulations particularly in the areas of Treasury,
Governance and Risk, Micro nance and Mobile payments among others.
HNB continues to assess the impact of these developments on business
and takes steps to ensure conformity.
HNB bi-furcated Compliance function from Risk Management during the
year to ensure greater focus and independence. Compliance ensures
regulatory conformance including Anti Money Laundering (AML) / Know
Your Customer (KYC) and its responsibilities are set out in HNB’s
Compliance Policy.
RISK
MANAGEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 51
Conformity to New Regulations introduced during the year (Table 1)
Mandatory Regulations
Obtaining KYC Data from customers (August 2008 update)
- New Customers
- Existing
Already Compliant
Data collection in process, progress monitored monthly
Contribute to a Deposit Insurance Fund – allocation of 0.25% of
Deposit Base each year commencing 2010
Compliant
Reduce General Provision on Advances to 0.5%
Directions on Risk Management relating to Forex Business
(September 2009)
Compliant
Signi cantly Compliant, Treasury Policy amended to re ect where necessary
and internal timelines developed to ensure compliant per Regulatory deadlines
Direction on Outsourcing (October 2010) Signi cantly Compliant, Gaps identi ed for resolution by March 2011
Adoption of SLAS 44 and 45 by January 2012 Hired external consultancy rm to assist in implementation e orts, on track for
parallel reporting by mid 2011 and full compliance by regulatory deadline.
Mandatory Lending to Agricultural Sector – achievement of 10% of
Total Advances annually w.e.f December 2009
Compliant
Guidelines
AML Risk Pro ling of all Customers (May 2007)
(AML – Anti Money Laundering)
AML system implementation will be a pre-requisite, expected to commence
post implementation, prior to end 2011.
Draft Guidelines on Integrated Risk Management Systems in Banks
(September 2009)
An Internal Gap Analysis is in place with plans to bridge the identi ed gaps. This
analysis is part of HNB’s BASEL Advanced Risk Management Implementation Roadmap
Credit Card operational Guidelines An internal gap analysis is in place with plans to bridge the identi ed gaps.
Simultaneously, clari cations from regulator being sought where necessary.
Draft Mobile Payment Guidelines
Guidelines on Micro nance
Our roadmap towards implementing best
practices in Risk Management
Despite the overhang of the global economic crisis and the contagion
impacts in Europe, local business activity picked up signi cantly
particularly in the second half of the year buoyed by growth in
transport, construction and leisure sectors. Risk Management focus this
year was to further consolidate initiatives taken last year to quantify risk
appetite for principal risk areas – credit, operational and market in the
form of dashboards and galvanize action across the network to address
these risks.
Capacity Building for the future
HNB views BASEL 2 Risk Management Practices as an opportunity to
embrace best in class Risk Management Practices in our continuing
quest of Learning, applying, Growing and developing Winning
Strategies to achieve Sustainable Pro ts.
As a systemically important bank in Sri Lanka, HNB has made signi cant
strides to put in place Basel 2 Internal Risk Based (IRB) infrastructure
ahead of the regulatory deadline and is largely on track on the roadmap
developed for its implementation. The key focus areas for 2011 will be
on further re ning the structure and analytics to support
decentralization e orts in credit, inculcating best practices in liquidity
and interest rate risk management and improving the risk infrastructure
in Treasury to support signi cant position taking.
Global regulatory developments are moving in the direction where
banks will be expected to maintain even higher levels of liquidity and
capital with the advent of Basel 3 guidelines. HNB will continue to follow
developments in this sphere to ensure necessary strategic alignment.
52 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Stress Testing
A fundamental role of risk management is to ensure organisations do not neglect to prepare for the worst event as they plan for success. Stress testing
helps HNB to understand how its portfolios would react if business conditions became signi cantly more challenging.
The following stress tests have been computed based on the Central Bank of Sri Lanka Risk Management guidelines issued in September 2009.
Base Data (All gures in Rs Mn)
Capital Adequacy Ratio (CAR) 12.64%
Capital as at December 2010 26,060
Risk Weighted Assets 206,184
Total NPA 11,087
Net Open Position (929)
Equity Market Value 9,029
Liquid Assets / Liquid Liabilities 23.55%
Stress Tests
Exposure
Rs Mn
Original Position
31st December 2010
Magnitude of Shock
5% 10% 15%
CAR% Revised CAR %
A. Credit Risk
Non Performing Advances
11,087 12.64% 12.40% 12.17% 11.93%
B. Equity Price Risk
Fall in stock market prices
9,029 12.64% 12.45% 12.25% 12.06%
C. Exchange Rate Risk
Adverse movement in exchange rate
(929) 12.64% 12.62% 12.60% 12.58%
D. Commodity Price Risk
Adverse movement in Gold Prices
27,970 12.64% 12.52% 12.40% 12.16%
Note 1: A reduction in gold prices of 5%, 10% and 15% over the year assumes an incremental NPA on Pawning Portfolio of 2%, 4% and 8% respectively.
Stress Tests
Liquidity Risk
Exposure
Rs Mn
Original Position
31st December 2010
Magnitude of Shock
5% 10% 15%
LAR% Revised Liquid Asset Ratio %
A. Fall in liquid liabilities 257,771 23.55% 19.53% 15.06% 10.06%
Stress Tests
Credit Risk
Exposure
Rs Mn
Original Position
31st December 2010
Magnitude of Shock
50% 80% 100%
CAR% Revised CAR %
A. Negative shift in NPL categories
Weighted NPA’s (Note 2)
7,218 12.64% 12.37% 12.20% 12.09%
Note 2: Composition of NPA categories Special Mention, Substandard, Doubtful and Loss are 21%, 13%, 7% and 59% respectively.
RISK
MANAGEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 53
Key Risk Management Initiatives implemented during 2010
Development of Risk
Dashboards for Credit,
Operational and Market Risks
Risk Dashboards incorporating performance against Board Approved risk appetite are tabled for review on a periodic basis.
These dashboards serve as a business intelligence tool to communicate risk performance indicators, adherence to regulatory
limits / internal targets and assess impact of stress testing on key variables.
Vendor selection for Credit
and ALM Systems
The Bank was able to identify a strategic solution provider to
a) Overhaul existing credit system – loan origination, rating system with requisite Basel 2 infrastructure which will enable the
Bank to accommodate multiple internal risk ratings for its customer base, risk based pricing and carry out necessary
statistical computations required
b) Implement a new Asset and Liability / Fund Transfer Pricing system – with a view to developing the necessary
infrastructure to manage liquidity risk and interest rate risk more e ectively
Capacity Building – Talent
and Systems
A comprehensive program on Risk Management was conducted for Risk Management Sta in two phases in December 2009
and Jan 2010 by a team of foreign trainers.
Successfully completed Credit Risk Modular training for third batch of Corporate Banking Relationship Managers and Branch
Managers / Credit O cers. Accordingly 55 associates have successfully completed Omega Credit Skills program and possess
a globally accepted credit quali cation.
Developed full day Risk Management Program for Branch Managers which was rolled out across the network
Priorities for 2011
Implement new Credit and
ALM Systems
Implementation of these two essential capacity building initiatives will take place driven by cross functional steering
committees supported by training and necessary changes to structure, systems and accountabilities to accommodate the
new systems.
Business Intelligence and
Analytics tool
The internally developed KPI Wizard system which enables business performance to be assessed at branch, regional and Bank
level will be further upgraded to a business intelligence and analytics tool with greater depth and drill down capabilities.
Adoption of SLAS 44 and 45
for adoption by June 2011
HNB has engaged the assistance of an external consultancy rm to assist in implementation e orts ahead of the regulatory
deadline.
Our roadmap towards BASEL 2 compliance
Develop IRR
of Commercial
Portfolio
Operational Loss
Data Tracking
Capacity Building
Organisation
Structure and
Meetings
2005/06
Link IRR’s to
Credit Decisions
2009
Independent RM
Approvals
Develop suite
of Rating Models
Form dedicated Risk
Dept
Focus on loss
prevention and
governance
Focus on Risk
Quanti cation
Focus on link to Performance
& capital e ciency
Diagnostic Study
& Roadmap
Capacity Building
Develop SME
Scoring model
2007
Develop Highlevel
Risk Dashboards
2010
Credit Cell
& CMIS
Vendor selection
for Credit and
ALM systems
Commence Data
Integrity Initiatives
Training and
Accountability
Implement Credit
and ALM Systems
PD Computations
2008
Upgrade KPI
Wizard System
2011
Launch SME
Rating Model
Fair value
Accounting
Parallel run
BASEL 1 BASEL 2 Standardised
KPI : Key Performance Indicator ALM : Asset and Liability Management System
EL : Expected Loss PD : Probability of Default
SME : Small and Medium Enterprises IRR : Internal Risk Ratings
CMIS : Credit Management Information System RM : Risk Management
Our Roadmap Towards BASEL II
54 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Risk Console
Risk Category Risk Rating
Mitigating Actions Implemented in 2010
Risk Assessment Risk Mitigating Strategies
Credit Risk
Risk of borrower default
This Year
(Last Year)
E ectiveness of Credit
Policy
Risk arises where Credit
Policy amendments do
not keep pace with
changes in local and
global environment
Low
(Moderate)
Adequacy and E ectiveness of Credit Policies evaluated in Monthly
Meetings
Regular review of Credit Approval Structure based on feedback from
Regional Management / Network
Credit Policy and Discretionary Lending
Limits regularly updated.
Risk Evaluation of new products prior to
launch.
Performance against internally de ned risk
appetite reviewed monthly in Credit Risk
Dashboards.
Miscellaneous Reports developed for policy amendments as necessary.
e.g. Impact of Basel 3, Industry Risk Reviews, Impact of Sri Lanka external
rating upgrade, Recommendations to improve Capital Adequacy
Ratio etc.
Reports circulated among relevant business
segments, Credit Policy Members and Board
as necessary.
Adequacy of Portfolio
monitoring
Risk arises where systems
and controls are not in
place to regularly assess
the health of the credit
portfolio.
Low
(Low)
Internalised KPI Wizard, a standardized MIS is used to track Risk
Performance across business units. This will assist in improving overall
management of Credit Risk through greater focus on Key Risk Ratios,
improved sharing of best practices through performance benchmarking
and improved accountability at all levels.
Risk Managers independently review Branch
/ Regional Performance and provide
monthly feedback highlighting areas for
improvement to line management
Independent Regional Credit Reviews to assess e ectiveness of
monitoring and adherence to internal policies. 1155 client facilities were
reviewed as a part of this exercise. In addition 65 corporates were
reviewed as part of the Concentration Risk Analysis, below.
Responses to our observations from
business units obtained and followed
through to implementation. General control
weaknesses were shared across the network.
Credit Quality Based on Internal Risk Ratings
2009
2010
Corporate Banking Portfolio Based on Internal Risk Rating
AAA
AA
A
BBB
BB
B
CCC
CC
C
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Focusing on High Risk Accounts (Internally
Risk Rated B and below) reviews by Risk
Managers
Quarterly Review of Watch listed accounts
to ensure adequate assessment of quality
across the network and timely identi cation
of account strategies.
Almost a 40% reduction in Gross NPA evident over the last 6 years.
2005 2006 2007 2008 2009 2010
Non - Performing Advances
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
NPA Gross as a % of
Loans and Advances
NPA Net as a % of
Loans and Advances
8.37%
7.05%
5.78%
6.73%
2.28%
2.90%
6.16%
4.52%
1.95%
1.41%
1.85%
2.87%
Quarterly review of new additions to Non
Performing Advances (“NPA”) by action
category(i.e. housekeeping issues, legal
action, negotiation etc.) for follow up
Quarterly review of Commodity Price Trends
for circulation to network with
recommendations
RISK
MANAGEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 55
Risk Category Risk Rating
Mitigating Actions Implemented in 2010
Risk Assessment Risk Mitigating Strategies
Credit
Concentration Risk
Risk arises where Credit
Portfolio is not
su ciently diversi ed
Low
(Low)
Industry Concentration
Industrywise Exposure
Other
Pawning
Credit card
Other Services
Infrastructure
Financial and Business Services
New Economy
Traders
Construction
Transport
Tourism
Manufacturing
Agriculture & Fishing
2009
10%
14%
7%
3%
18%
12%
2%
6%
2%
11%
1%
12%
2%
2010
12%
12%
6%
6%
16%
16%
1%
7%
3%
6%
1%
11%
3%
Industry Limits developed / updated for key
industries with a view to communicating
risk appetite and monitoring actual
exposure on a periodic basis.
Strategies developed to gradually improve
penetration of low risk industries and
conversely reduce exposure to high risk
industries.
High
(High)
Geographical Concentration Largely inevitable, given development
e orts have been historically focused in
Western Province. With the improvement in
infrastructure and recent development
e orts in Northeast and South HNB is ideally
placed with its extensive, ever expanding
branch network to leverage on emerging
opportunities thereby reduce the level of
concentration in any one geographical area
over time.
Low
(Low)
Exposure by Counterparties
Exposure by Counterparties
Leasing
Personal Loans
Housing
Micro nance
SME 35 Mn -10 Mn
Corporates 35 Mn -100 Mn
Corporates 100 Mn - 1 Bn
Corporates >1 Bn
12%
22%
8%
9%
4%
9%
29%
7%
10%
24%
8%
8%
4%
10%
31%
5%
2010
2009
HNB has a well diversi ed portfolio
comprising Corporate, SME, Retail and
Micro nance segments.
Moderate
(Moderate)
Material Exposures An increase in exposure to Top 20 customers
is evident.
It is relevant to mention that
a) Aggregate of ‘Material Exposures’
(Lending Exposures above 15% of
capital base) is well below the
regulatory guideline of 500% of Tier 2
capital
b) Exposure to Related Parties represents
only 20% of Top 20 Exposures and
below 5% of the total portfolio
Geographical Distribution
OverseasCentralSabaragamuwaNorthernEastern
North WesternNorth CentralUvaSouthernWestern
2%
5%
5%
9%
3%
4%
3%
5%
4%
60%
2%
4%
2%
4%
2%
3%
2%
5%
4%
72%
2009
2010
Top 20 Exposure as a % of Total Exposure (On Balance Sheet only)
Top 20
2009
19%
2010
21%
56 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Risk Category Risk Rating
Mitigating Actions Implemented in 2010
Risk Assessment Risk Mitigating Strategies
Operational Risk
Risk of Losses arising
from faulty control
systems, human
negligence, internal and
external fraud and acts
of god
E ectiveness of
Operational Risk Policy
Low
(Low)
Adequacy and e ectiveness of Operational Risk Policies regularly
assessed at Risk Committee Meetings.
Updated operational risk policy in line with
regulatory developments
Risks arising from a poor
Control Environment
Low
(Low)
A comprehensive Operational Loss database is in place to track losses by
incident type and business line per BASEL 2 Guidelines.
Total Gross Operational Losses Reported for the Year was Rs 82.18 Mn
(Against Rs 222 Mn last year) represents 0.39% of Net Income, and
analyzed as follows.
7. Execution, Delivery,
& Process Management
6. Business Disruption
& System Failures
5. Damage to Physical Assets
4. Clients, Products
& Business Practices
3. Employment Practices
& Workplace Safety
2. External Fraud
1. Internal Fraud
31%
8%
2%
2%
29%
59%
9%
9%
2%
49%
2010 2009
Note : No losses were recorded under events 3 & 4.
Material Losses regularly analysed by cause
and actions taken to improve systems and
controls to prevent recurrence in the future.
Regular meetings with Regional
Management and Support Functions to
ensure e ectiveness of Operational Risk
Meetings across the network and adequate
follow up of issues identi ed for
implementation
Technology Risk arising
from New Core Banking
System implementation
and consequent risks
arising from system
breakdowns and
disruptions following
implementation
Moderate
(Moderate)
Access Control reviews and e ectiveness of interest and other
computations through specialized audit software was conducted by
internal audit during the year.
An automated Performance Monitoring
system in place.
Technology Risk of not
keeping abreast of latest
technology and delivery
channels in banking
Moderate
(Moderate)
The emergence of cost e cient alternative delivery channels (ie. Internet,
mobile banking) threatens the traditional brick and mortar banking
model
The bank is committed to aggressively
penetrate market share in alternative
delivery channels and are making the
necessary investments in people, structure
and systems to ensure competitive
advantage.
High Impact
Unforseen Events
Risk arising from lack of
preparedness to Natural
Disasters and Terrorism
Risk Assessment and Contingency Plans are in place across the
organization, including.
- Branch Network
- Payments and Settlements
- Treasury
- Systems
These documents were tabled at Board Risk
Committee and subject to ongoing review
RISK
MANAGEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 57
Risk Category Risk Rating
Mitigating Actions Implemented in 2010
Risk Assessment Risk Mitigating Strategies
Risk arising from
inadequate risk
mitigation strategies
Moderate
(Moderate)
Insurance is identi ed as the key mitigant for operational risk and
consequently, a strong interaction between the two departments is in
place to ensure adequacy and e ectiveness of insurance cover in key
areas. Analysis of last 5 years operational losses indicate over 40% are
recovered through insurance or other means.
A culture where Operational risk reviews /
challenges e ectiveness of Insurance in
place.
People Risk
Risk arising from inability
to attract and retain skilled
sta at middle to senior
management levels
Moderate
(Moderate)
The twin impact of the end of the Northeast con ict and the contagion
e ects of the Global economic crisis, expected to re ect in a reversal in
the brain drain which was a considerable issue in the nancial services
sector.
Talent development, Retention of Top
performers and Succession Planning for all
departments are key focus areas.
Performance Related Share Options in place
for Management grade Sta and upwards
Preference given to Bank sta for overseas
job placements within bank
Market Risk
Risks arising from
uctuations in interest
rates, foreign exchange
positions and prices of
equity investments
General appetite for
Market Risk based on
Treasury activity
Low
(Low)
Treasury Management Focus is on covering Corporate Banking Positions
with minimal trading on own account under the guidance of ALCO and
Treasury Committee. Trading Book accounts for just 2% of Banking Book.
Treasury Policy amended to re ect
regulatory developments.
Foreign Exchange
Risk
Risk arising from
unhedged foreign
exchange positions and
poor treasury controls.
Low
(Low)
Very little exposure to unhedged positions given internal policy and
strengthened supervision by the regulators on minimizing open foreign
currency positions
New Treasury Trading System with new
functionalities have been rolled out with
new Core Banking System implementation.
Monthly tabling of Market Risk Dashboard at
ALCO.
Liquidity Risk
Risk arising from inability
to meet maturing deposit
liabilities as they fall due.
Moderate
(Moderate)
Regular review of Asset and Liability Yield Analysis by product monitored
at ALCO to ensure optimal Net Interest Margins.
Bank maintains a Loans to Deposit ratio of well over 90% and is a net
lender in the call money market.
As a key remittance player in the country, foreign currency deposits of
HNB exceed foreign currency lending by over 100%. Therefore, the
reliance on interbank borrowing is low, which is a considerable strength.
The absence of a long term yield curve, results in having to borrow short
to lend long for both rupee and dollar exposures.
Speci c Strategies developed to retain and
grow Local and Foreign currency (low cost)
deposit base
Marketing of longer term Deposit products
with a view to bridging the maturity
mismatch gap.
Interest Rate Risk arising
from Maturity Mismatch
Moderate
(Moderate)
Contractual Maturity Mismatch of Rupee and FCY Earning Assets and
Liabilities reviewed and implications identi ed. The absence of a long
term yield curve, results in having to borrow short to lend long for both
rupee and dollar exposures.
Ensuring long-term lending on oating rate
basis whilst ensuring regular re-pricing of
xed priced loans
The investment in an ALM System as
described under Priorities for 2011 above.
Regulatory Risk
Risks arising from not
conforming to statutory
and regulatory
requirements
Low
(Low)
In a continually changing regulatory environment, the Compliance unit
centrally monitors adherence.
Quarterly checklist con rming adherence to
regulatory requirements submitted to Board
Audit Committee.
A Compliance Policy is in place.
58 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Risk Category Risk Rating
Mitigating Actions Implemented in 2010
Risk Assessment Risk Mitigating Strategies
Risk arising from non
Compliance with Anti
Money Laundering
legislation
Low
(Low)
In today’s environment AML Risks are an integral element of bank risks
and HNB has played a critical role in spearheading industry e orts in this
area. Bank continues to maintain sound relationships with regulators and
law enforcement agencies
The bank has a dedicated AML unit which
submits reports to FIU per regulations. The
bank’s intranet hosts an E-Learning module
on AML which has been completed by all
branch sta involved in customer centres
across the network
An AML System will be implemented before
end 2011, which will signi cantly improve
monitoring and reporting e orts in this area
Legal Risk
Risk arising from litigation
against the bank or faulty
legal documentation
Low
(Low)
HNB runs a full edged legal department. Specialist legal advice is
obtained from external consultants on a need basis.
No signi cant court cases awarded against
HNB during the year.
Legal Charter developed supported by an
executive committee.
Reputation Risk
Risk arising from an
event or behaviour that
could adversely impact
market ‘perception’
thereby a ecting its
going concern.
Risk arising from poor
external and internal
surveillance to identify
strategic risks in a timely
manner
Moderate
(Moderate)
Corporate Management meets at least annually at ‘o site’ strategy
meetings, to develop / review medium term goals and strategic priorities
in the context of the environment.
Speci c action plans with accountabilities
and timelines developed to address each
Strategic goal / Risk area identi ed.
Risk to Brand / Reputation
arising from lack of /
inadequate Corporate
Social Responsibility
practices
Low
(Low)
An active Corporate Social Responsibility (“CSR”) Committee is in place
with cross- functional representation to oversee implementation of CSR
Projects
CSR Allocation
Health related assistance
Climate Change Project
Assistance to Cancer Patients
Safe Drinking Water & Sanitation
School Libraries and Computer Centres
36%
25%
8%
23%
8%
2010
5%
20%
47%
17%
11%
2009
Key Performance Indicators have been
developed to conceptualise goals and
assess progress on CSR initiatives
RISK
MANAGEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 59
CORPORATE
GOVERNANCE
YOUR BOARD ROOM
LEADERSHIP REPORT...
Chairman’s Statement
After recovering from the shellshock of 2008/09, the banking industry
started to rebuild the stakeholder trust it had lost in 2010, globally and
locally. Your Board of Directors would like to reiterate its appreciation for
the support received from you during these di cult times. Certainly the
New Year will see more progress being made in this domain, driven by
the di erent regulatory measures that are being initiated. Changes are
being proposed and implemented in both domains of Risk and
Governance, Financial Reporting and Disclosures and many other topics.
Of late, our counterparts in the United Kingdom have taken many
Governance initiatives based on Sir David Walker’s Review on the
Corporate Governance of Banks and Other Financial Institutions. This
prompted the Financial Reporting Council to revise the Combined Code
and issue the UK Corporate Governance Code in June 2010. As we go
along we will embrace the best practices prescribed in these two
pronouncements as part of our framework.
As Chairman, a key part of my role is to ensure that the composition of
the Board is appropriate. To this end, the Bank has strengthened the
independence on issues of strategy, performance, risks and resources by
inclusion of another Independent Non Executive Director, this year as
well bringing the total number of Independent Non Executive Directors
to ve.
Our goal is to retain an undisputed position as the most respected bank
in the country. As part of that e ort, we want to set the standard for
Corporate Governance amongst our peers. We are guided by
commitment to leadership, corporate responsibility and our dedication
to serve and cater to the best interests of our stakeholders.
We report below on how we have embraced and complied in 2010 with
the Code of Best Practice on Corporate Governance issued jointly by the
Securities and Exchange Commission of Sri Lanka and the Institute of
Chartered Accountants of Sri Lanka in 2008 and the Banking Act
Direction No 11 of 2007 and subsequent amendments thereto on
Corporate Governance for Licensed Commercial Banks in Sri Lanka
issued by the Central Bank of Sri Lanka in 2008 e ective from 1st
January 2008, and requiring full compliance by Licensed Commercial
banks by 1st January 2009, except where extended compliance dates
have been speci cally provided for by the Central Bank of Sri Lanka. As
required by the above Code I con rm that, I am not aware of any
material violations of any of the provisions of the Code of Business
Conduct and Ethics of the Bank.
I hope that this report will assist you to gain a better understanding on
how Corporate Governance works at HNB. For Corporate Governance
structures to work e ectively, shareholders must be active and prudent
in the use of their rights. As in the last year I urge you to exercise your
rights and provide constructive feedback on our Governance initiatives.
Sincerely Yours,
Rienzie T. Wijetilleke
Chairman
Colombo, Sri Lanka
18th February 2011
CORPORATE GOVERNANCE FRAMEWORK
Good Corporate Governance practices are not just a matter for the Board but are at the heart of everything that we do within the Bank.
The Bank operates within a comprehensive Governance framework, which is outlined in the diagram below and set out in the report that follows
Board of Directors
(Non Executive Chairman,
1 Executive Director and
7 Non Executive Directors)
Board Audit
Committee
Board Nomination
Committee
Strategic Review
Committee
Asset Disposal
Committee
Board Integrated
Risk Management
Committee
Board Remuneration
Committee
Credit
Committee
Procument
Committee
MD / Chief Executive O cer
Corporate Management
Management Committees
60 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
CORPORATE GOVERNANCE
Corporate Governance is the system of internal controls and procedures
by which HNB is managed. It provides a framework that de nes the
rights, roles and responsibilities of di erent groups within the Bank,
namely - Board, Management and Sta within the Bank, so as to
promote the credibility and soundness of the Bank, which will lead to
the overall stability of the banking sector in Sri Lanka. The Board is
responsible and accountable for the management of the a airs of the
Bank, conduct of business and maintenance of prudent risk
management and soundness of HNB.
The Board ensures that all shareholders have the same right to
participate in the Governance of the Bank and receive fair treatment
from the Board and Management, and all rights of shareholders and
others are clearly delineated and communicated. The Board’s role is to
provide entrepreneurial leadership to the Bank within the framework of
prudent and e ective controls which enables risks to be identi ed and
managed. The Board sets the Bank’s strategic aims, ensuring that the
necessary nancial, human and physical resources are in place for the
Bank to meet its objectives. The Board de nes the Bank’s values and
standards and ensures that its obligations to its stakeholders are clearly
understood and met. The Board is also responsible for ensuring that
management maintains an e ective system of internal controls that
provides assurance on e cient operations and compliance with
applicable laws and regulations. In carrying out this responsibility, the
Board gives regard to what is appropriate for HNB’s business and
reputation, the materiality of nancial and other risks inherent in the
business and the relative costs and bene ts of implementing speci c
controls. The Board is also the policy-making body for all matters that
are of strategic importance to HNB.
Corporate Governance is a fundamental part of the culture and business
practices of HNB. Our report this year comprises of two sections. This
year’s report does not include a section on compliance with CSE listing
rule on Corporate Governance, as Listed Banks are exempted from
complying with the said rule from this year onwards as the Bank is
governed by the Corporate Governance Direction of the Monetary
Board of the Central Bank of Sri Lanka and makes the required
disclosures of the said Direction.
SECTION ONE
SECTION ONE covers Bank’s level of adoption of the Code of
Best Practice on Corporate Governance issued jointly by the Securities
and Exchange Commission of Sri Lanka and the Institute of Chartered
Accountants of Sri Lanka.
SECTION TWO
SECTION TWO covers HNB’s level of compliance with the
Banking Act Direction No 11 of 2007 and subsequent amendments
thereto on Corporate Governance for Licensed Commercial Banks in
Sri Lanka issued by the Central Bank of Sri Lanka.
“The Board ensures that all
shareholders have the same right
to participate in the Governance
of the Bank and receive fair
treatment from the Board and
Management…. “
CORPORATE GOVERNANCE - HOW IT WORKED IN 2010
FEBRUARY - Further strengthened the Board with the appointment of another Independent
Non Executive Director.
MARCH - Re-composition of the Board Integrated Risk Management Committee, for more independence.
MAY - Revision of the Audit Committee Charter.
OCTOBER - Appointed a dedicated three member Board Committee on Strategic Review, majority of who are
Independent Non Executive Directors.
NOVEMBER - Improvement to the framework of Internal Controls over Financial Reporting.
DECEMBER - Appointed a Senior Independent Non Executive Director as recommended in the
Banking Act Direction No 11 of 2007.
CORPORATE
GOVERNANCE
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 61
SECTION ONE
SECTION ONE
CODE OF BEST PRACTICE ON CORPORATE GOVERNANCE ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA
& THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
Statement of Compliance
The disclosures below re ect HNB’s level of conformance to the above Code which comprises of six fundamental principles. These are namely:
A. Directors
B. Directors’ Remuneration
C. Relations with Shareholders
D. Accountability and Audit
E. Institutional Investors and
F. Other Investors
The structures in place and the conformance to the requirement and expectations are tabulated below under the said six fundamental principles.
Corporate
Governance
Principles
SEC &
ICASL Code
Reference
Adoption
Status
HNB’s Extent of Adoption
in 2010
A. DIRECTORS
A.1. The Board
The Code requires that the company should be headed by a Board, which should direct, lead and control the company. HNB’s Board consists of
professionals in Banking, Accounting, Management, Law, Economics and Business Leaders. They possess the skills and experience and knowledge to set the
directions and oversee the operations of the Bank. The Board re ects sound balance of independence and anchor shareholder commitment.
1. Meetings A. 1.1 Adopted The Board met 14 times during the year, at approximately monthly intervals. Strategy is reviewed
regularly at these meetings with updates at each meeting on execution of the agreed strategy.
Scheduled Board and Committee meetings are arranged well in advance and all Directors are
expected to attend each meeting. Any instances of non-attendance at Board meetings are
generally related to prior business or personal commitments or illness. The attendance at Board
meetings held in 2010 is set out on page 74.
2. Board responsibilities A. 1.2 Adopted The Board is responsible to the shareholders for creating and delivering sustainable shareholder
value through the management of business. The Directors act in a way that promotes the long
term success of the Bank for the bene t of the shareholders. The Board is also responsible for
determining the nature and extent of the signi cant risks it is willing to take in achieving its
strategic objectives. The Board is collectively responsible for the success of the Bank. The MD / CEO
is directly responsible for business operations and supported by the Corporate Management of
the Bank. The Non Executive Directors are responsible for bringing independent judgment and
scrutiny to decisions taken by the Board. The Non Executive Directors must satisfy themselves on
the integrity of nancial information and that nancial controls and systems of risk management
are robust. Through the above process the Board ensures that the integrity of nancial information,
nancial controls and systems of risk management are robust and the Bank complies with all
applicable laws, regulations and ethical standards.
3. Compliance with laws and
access to independent
professional advice
A. 1.3 Adopted The Directors are mindful of their duties as set out in the laws and regulations a ecting the Bank.
The procedure for Directors to seek independent professional advice, in furtherance of their duties,
at HNB’s expense, is coordinated through the Board Secretary, as and when it’s necessary.
4. Board Secretary A.1.4 Adopted All Directors have access to the Board Secretary, who is an Attorney-at-Law by profession. Her
services are available to all Directors, particularly the Non Executive Directors who may need
additional support to ensure they receive timely and accurate information to ful ll their duties.
Directors may also take independent professional advice on request at the Bank’s expense.
5. Independent judgment A. 1.5 Adopted Non Executive Directors are responsible for bringing independent judgment and scrutinising the
decisions taken by the Board on issues of strategy, performance, resources and business conduct.
The Board promotes an environment whereby challenging contribution from the Non Executive
Directors is welcomed and encouraged, combined with full support for and empowerment of the
MD / CEO in implementing decisions.
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HNB’s Extent of Adoption
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6. Dedication of adequate time
and e ort by the Board and
Board Committees
A. 1.6 Adopted The Chairman and members of the Board dedicate adequate time for the ful llment of their duties
as Directors of the Bank. In addition to attending Board meetings, they attend Sub-committee
meetings and also make decisions via circular resolution.
The Board Sub-committees include:
- Audit Committee
- Integrated Risk Management Committee
- Human Resources / Remuneration Committee
- Nomination Committee
- Credit Committee
- Procurement Committee
- Asset Disposal Committee
- Strategic Review Committee
7. Training for new Directors A. 1.7 Adopted Directors recognize the need for continuous training and expansion of knowledge and undertake
such professional development as they consider necessary in assisting them to carry out their
duties as Directors. Presentations are made to the Board by the Corporate Management of HNB
from time to time on industry related matters. Ms M A R C Cooray, the new Director appointed was
provided with training on the general Director’s responsibilities and speci c banking related
concerns.
The entire Board attended the Annual Bank Directors’ Symposium conducted by CBSL in
December 2010.
A.2. Chairman and Chief Executive O cer
The Code requires a clear division of responsibilities between the Chairman and Chief Executive to ensure a balance of power and authority, in such a way
that any individual has no unfettered powers of decisions. The roles of the Chairman and Chief Executive O cer are functioning separately at HNB. The
Chairman’s main responsibility is to lead and manage the work of the Board to ensure that it operates e ectively and fully discharges its legal and regulatory
responsibilities. MD / CEO is responsible for the day-to-day operations of the Bank.
8. Division of responsibilities of
the Chairman and MD / CEO
A. 2.1 Adopted The roles of the Chairman and Chief Executive are separate. The role of the Chief Executive is to
manage the day-to-day running of the Bank. The Board has delegated this responsibility to the
Chief Executive and he then leads the Corporate Management team in making and executing
operational decisions. The Chief Executive is also responsible for recommending strategy to the
Board.
A.3. Chairman’s Role
The Code requires the Chairman to lead and manage the Board, ensuring that it discharges its legal and regulatory responsibilities e ectively and fully and
preserves order and facilitates the e ective discharge of the Board function.
9. Role of the Chairman A. 3.1 Adopted The Chairman is responsible for leadership of the Board and ensuring its e ectiveness of all aspects
of its role. The Chairman of HNB is a Non Executive Director, elected by the Board. The Chairman’s
role encompasses:
- Ensuring that Board members undertake appropriate induction, covering terms of
appointment, duties and responsibilities.
- Facilitates and encourages discussions amongst all Directors where decisions are needed
on matters of risk and strategy.
- Representing the views of the Board to the public.
- Ensuring regular meetings, the minutes of which are accurately recorded and where
appropriate included the individual and collective views of the Directors.
- Encouraging e ective participation of all Directors in the decision making process to
optimize contribution.
- Approving the agenda prepared by the Board Secretary; and conducting Board meetings.
- Initiates the process for self assessment of the Board from its members and uses the
meaningful feedback to further improve the e ectiveness of the Board.
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Adoption
Status
HNB’s Extent of Adoption
in 2010
A.4. Financial Acumen
The Code requires the Board to ensure the availability within it of su cient nancial acumen and knowledge to o er guidance on matters of nance.
The Board is equipped with su cient nancial acumen as three out of nine of the Board members have appropriate nancial background and hold fellow
membership of their respective professional accountancy bodies.
10. Availability of su cient
nancial acumen and
knowledge
A. 4 Adopted The MD / CEO is a fellow member of the Institute of Chartered Accountants of Sri Lanka, a fellow
member of the Chartered Institute of Management Accountants – UK and is an appointed
member of the Sri Lanka Accounting and Auditing Standards Monitoring Board. In addition, the
Board includes a fellow member of the Chartered Institute of Management Accountants – UK, and
a Director who is a fellow member of the Institute of Chartered Accountants of Sri Lanka & also a
fellow member of the Institute of Chartered Accountants in England and Wales. These members of
the Board have the ability to o er guidance on matters of nance to the Board.
A.5 Board Balance
The Code recommends having a balance of Executive and Non Executive Directors so that no individual or small group of individuals can dominate the
Board’s decision-making.
11. Presence of Non Executive
Directors
A. 5.1 Adopted Eight of the nine Directors of the Board are Non Executives. The MD / CEO is the sole
Executive Director.
12. Independent Directors A. 5.2 Adopted Four out of the eight Non Executive Directors are independent as de ned by the Code.
13. Independence Evaluation
Review
A. 5.3 Adopted The Board considers Non Executive Director’s independence on an annual basis, as part of each
Director’s performance evaluation. The Board reviewed the independence of each Non Executive
Director in 2010 and concluded that each of them continues to demonstrate these essential
behaviors.
14. Signed declaration of
independence By the Non
Executive Directors
A. 5.4 Adopted All Non Executive Directors of the Bank have made written submissions as to their independence
against the speci ed criteria set out by the Bank, which is in line with the requirements of
Schedule H of this Code.
15. Determination of
independence of the
Directors by the Board
A. 5.5 Adopted The Board has determined that the submission of declaration by the Non Executive Directors, as to
the independence of them, as a fair representation and will continue to evaluate their submission
annually. Circumstances have not arisen for the determination of independence by the Board,
beyond the criteria set out in the Code. The following Directors are deemed to be Independent
Directors;
Ms Pamela C. Cooray
Mr Ranjeevan Seevaratnam
Mr N G Wickremeratne
Ms M A R C. Cooray
16. Senior Independent Director A. 5.6 N/A The requirement to appoint a Senior Independent Director does not arise as the roles of Chairman
and CEO are separated.
17. Con dential discussion with
the Senior Independent
Director
A. 5.7 N/A Please refer above comment.
18. Meeting of Non Executive
Directors
A. 5.8 Adopted Chairman meets with the Non Executive Directors without the presence of MD / CEO, on a need
basis.
19. Recording of concerns in
Board Minutes
A. 5.9 N/A There were no concerns raised by the Directors during the year, which needed to be recorded in
the Board Meeting Minutes.
A.6. Supply of Information
Management is required to provide time bound information in a form and of quality appropriate to enable the Board to discharge its duties. Financial and
non nancial information are analyzed and presented in a form for the Board to make informed and accurate decisions.
20. Information to the Board by
the Management
A. 6.1 Adopted The Board was provided with timely and appropriate information by the management by way of
Board papers and proposals. The Board sought additional information as and when necessary.
Members of the Corporate Management made presentation on issues of importance. The
Chairman ensured that all Directors were briefed on issues arising at Board meetings.
64 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
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HNB’s Extent of Adoption
in 2010
21. Adequate time for e ective
Board meetings
A. 6.2 Adopted The Board papers were sent to the Directors at least a week before the respective Board meetings,
giving adequate time for Directors to study the related papers and prepare for a meaningful
discussion at the meeting.
A.7. Appointments to the Board
The Board is required by the Code to adopt a formal and transparent procedure for the appointment of new Directors to the Board. During the year an
additional Independent Non Executive Director was appointed to the Board.
22. Nomination Committee A. 7.1 Adopted The Nomination Committee makes recommendations to the Board on all new appointments. The
terms of reference for the members of the Nomination Committee are similar to the one set out in
Schedule A to this code. Nomination Committee of HNB is comprised of the following four
Directors. MD / CEO attends these meetings by invitation.
Mr Rienzie T. Wijetilleke – Non Executive Chairman
Mr D H S Jayawardena – Non Executive Director
Mr M V Theagarajah – Non Executive Director
Mr R K Obeyesekere – Non Executive Director
23. Assessment of Board
Composition by the
Nomination Committee
A. 7.2 Adopted The Nomination Committee carried out continuous review of the composition of the Board, which
includes identifying, evaluating and recommending candidates for suitable positions to ensure
succession planning within HNB for the approval of the Board. More than 1/3rd of the existing
Board comprises of Independent, Non Executive members. New appointments are made to
strengthened the Board composition to respond to the challenges and take advantage of the
opportunities in the Banking sector.
24. Disclosure of details of new
Directors to shareholders
A. 7.3 Adopted Details of new Directors are disclosed to the shareholders on their appointment by way of public
announcements as well as in the Annual report. Prior notice on appointment of new Directors is
given to the Director of Bank Supervision of CBSL as well as to the Colombo Stock Exchange. All
new appointments as well as continuing Directorships are reviewed by the Nomination
Committee. The Directors are required to report any substantial change in their professional
responsibilities and business associations to the Nomination Committee, which will examine the
facts and circumstances and make recommendations to the Board.
A.8. Re- election
The Code requires all Directors to submit themselves for re-election at regular intervals and at least once in every three years. It also requires that all
Non Executive Directors to be appointed for a speci c terms and subject to re-election.
25. Appointment of
Non Executive Directors
A. 8.1 Adopted Articles of Association of the Bank requires, each Director other than the MD / CEO and any
nominee Director, to retire by rotation once in every three years and is required to stand for
re-election by the shareholders at the Annual General Meeting. The proposed re-election of
Directors is subject to prior review by the full Board.
Mr R K Obeyesekere, Ms Pamela C. Cooray and Mr Ranjeevan Seevaratnam retire by rotation at the
AGM under the Articles of Association of the Bank. Mr R K Obeyesekere and Ms Pamela C. Cooray
o er themselves for re-election, with the unanimous support of the Board. Mr Ranjeevan
Seevaratnam has informed the Board that he would not o er himself for re-election.
Mr Rienzie T. Wijetilleke and Mr M V Theagarajah – Directors having attained the age of 70 years
retire at the AGM under the provision of the Companies Act. The Directors have declared that they
would not be o ering themselves for re-appointment at the AGM.
26. Election of Directors by the
shareholders
A. 8.2 Adopted Please refer comments above.
A.9. Appraisal of Board Performance
The Board is required by the Code to periodically appraise its own performance against the pre set targets in order to ensure that the Board responsibilities
are satisfactorily discharged.
27. Appraisal of Board
performance
A. 9.1 Adopted The performance of the Board is evaluated by the Chairman. The Sub committees, except for the
Audit Committee, carry out a self assessment process annually, in accordance with the preset
criteria, to ensure they function e ectively and e ciently with the objective of facilitating
continuous improvement in conformance and performance related areas. The Audit Committee
evaluation is conducted by the Non Executive Chairman, with the assessments from the
Committee members, CEO, SDGM - Strategy and Compliance, CFO, the Head of Internal Audit and
the External Auditor in accordance with International best practices.
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HNB’s Extent of Adoption
in 2010
28. Annual self evaluation of the
Board and its Committees
A 9.2 Adopted Refer comments given for Section A. 9.1 on page 64.
29. Disclosure of the Appraisal of
Board and Board Sub
Committee performance
A 9.3 Adopted Refer comments given for Section A. 9.1 on page 64.
A.10. Disclosure of Information in respect of Directors.
The Code requires that the details in respect of each Director to be disclosed in the annual report for the bene t of the shareholders.
30. Details in respect of Directors A. 10.1 Adopted Details of the Directors are given on pages 14 and 15 Directors attendance of Board and Board Sub
Committee meetings are given on pages 74 and 75.
A.11. Appraisal of the CEO
The Board of Directors is required, to evaluate annually to, assess the performance of the Chief Executive O cer.
31. Targets for MD / CEO A.11.1 Adopted MD / CEO’s performance scheme is aligned with business sustainability of the Bank. The
performance targets for the MD / CEO are set at the commencement of every year by the full
Board which are in line with the short, medium and long term objectives of the Bank.
32. Evaluation of the
performance of the
MD / CEO
A.11.2 Adopted There is an ongoing process to evaluate the performance of MD / CEO against the nancial and
non nancial targets set as described above, which is followed by a formal annual review by the
Board at the end of each nancial year.
B. DIRECTORS’ REMUNERATION
B.1. Remuneration Procedures
The Code requires companies to have a formal and transparent procedure for developing policy on executive remuneration and xing the remuneration
packages of individual Directors and also recommends that no Director should be involved in deciding his / her remuneration in order to avoid the self
review threat.
33. Remuneration / Human
Resources Committee
B. 1.1 Adopted The Remuneration Committee is responsible for assisting the Board with regard to the
remuneration policy for the Executive Director and the Corporate Management, and for making all
relevant disclosures.
The Committee determines and agrees with the Board, the broad policy framework for the
remuneration of the MD / CEO. The MD / CEO participates in meetings by invitation in deciding
the remuneration of the Corporate Management in order to recruit, retain and motivate the
Corporate Management team.
34. Composition of the
Remuneration Committee
B. 1.2
B. 1.3
Adopted
Adopted
The Remuneration Committee comprises of the following four Non Executive Directors
Ms Pamela C. Cooray – Independent Non Executive Chairperson
Mr Rienzie T. Wijetilleke – Non Executive Director
Mr R K Obeyesekere - Non Executive Director
Mr N G Wickremeratne- Independent Non Executive Director
35. Remuneration of the
Non Executive Directors
B. 1.4 Adopted The Board as a whole decides the remuneration of the Non Executive Directors.
The Non Executive Directors receive a fee for being a Director of the Board and additional fee for
either chairing or being a member of a Committee, working on special Committees and / or
serving on Subsidiary Boards. They do not receive any performance related / incentive payments.
36. Consultation of the Chairman
and access to professional
advice
B. 1.5 Adopted Input of the Chairman is obtained by his involvement as a member of the said Sub committee.
External professional advice is sought by the Remuneration Committee, on a need basis through
the Board Secretary.
B.2. Level and make up of Remuneration
The Code recommends that the level of remunerations of both Executive and Non Executive Directors to be su cient to attract and retain the Directors
needed to run the company successfully.
37. Level and makeup of the
remuneration of MD / CEO
B. 2.1 Adopted The Board is mindful of the fact that the remuneration of Executive and the Non Executive
Directors should re ect the expectation of the Bank and su cient enough to attract and retain the
quality of Directors needed to run the Bank. The remuneration package of the MD / CEO is
structured to link rewards to corporate and individual performance.
The Bank’s remuneration framework for CEO is designed to create and enhance value for all HNB’s
stakeholders and to ensure there is strong alignment between the short term and long term
interest of the Bank.
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HNB’s Extent of Adoption
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38. Comparison of remuneration
with other companies
B. 2.2 Adopted The Remuneration Committee in deciding the remuneration of the Directors (including the
compensation package of the MD / CEO) takes into consideration the level of remuneration paid
by the other comparable companies, performance and risk factors.
39. Comparison of Remuneration
with other companies in the
Group
B. 2.3 N/A The size and scale of the Bank is not comparable with any other Group companies.
40. Performance related
payment to MD / CEO
B. 2.4 Adopted Please refer section B. 1.5 on page 65.
41. Executive share options B. 2.5 Adopted Share options o ered to the Executive Director is not on a discounted basis. The details of which
are given in Note 48 of the nancial statements on pages 224 and 225.
42. Deciding the Executive
Directors remuneration
B. 2.6 Adopted In deciding the remuneration of the MD / CEO the Bank took note of the provisions set out in
Schedule D.
43. Early termination of Directors B. 2.7 N/A Not applicable to the Board except for the MD / CEO who is an employee of the Bank, and his
terms of employment is governed by the contract of service.
44. Early termination not
included in the initial
contract
B. 2.8 N/A Refer comments above.
45. Remuneration of the Non
executive Directors
B. 2.9 Adopted Non Executive Directors receive a nominal fee in line with the market practices as disclosed in this
Annual Report. Non Executive Directors do not participate in the current share option plans of the
Bank and / or other performance related incentive schemes.
B.3. Disclosure of Remuneration
The Code requires every company to disclose the remuneration policy and the details of remuneration of the Board as a whole.
46. Disclosure of remuneration B. 3.1 Adopted Please refer section B 1.2 on page 65 for the details of the Committee. Remuneration Committee’s
report setting out the policy of the Committee is given on page 150.
The Compensation paid to the Board of Directors is disclosed in aggregate in note no 15 to the
Financial Statements on page 180 of the Annual Report.
C. RELATIONS WITH SHAREHOLDERS
C.1 Constructive use of the Annual General Meeting and Conduct of General Meetings.
The Code requires the Board to use the Annual General Meetings to communicate with shareholders and encourage their active participation.
47. Use of proxy votes C. 1.1 Adopted The Bank has a mechanism to record all proxy votes and proxy votes lodged on each resolution.
48. Separate resolution for all
separate issues
C. 1.2 Adopted The Board, remains mindful of being accountable to the shareholders and the need for
transparency at all levels, striving to maintain it’s value framework in all shareholder dealings and
communications.
HNB proposes a separate resolution for each item of business, giving shareholders the opportunity
to vote on each such issue, separately.
49. Availability of all Board Sub
Committee Chairmen
C. 1.3 Adopted The Board, which includes the Chairmen of the Audit, Remuneration, Nomination and Integrated
Risk Management Committees, is present at the AGM to answer any questions.
50. Adequate notice of the AGM C. 1.4 Adopted The primary modes of communication between HNB and the shareholders are the Annual Report
and AGM. Information is provided to the shareholders prior to the AGM to give them an
opportunity to exercise the prerogative to raise any issues relating to the business of HNB, either
verbally or in writing prior to the AGM.
All shareholders irrespective of their voting status are encouraged to attend the AGM.
The Annual Report including nancial statements and the notice of the meeting are sent to
shareholders at least 15 working days prior to the date of the AGM.
51. Procedures of voting at
General Meetings
C. 1.5 Adopted Voting procedures at General Meetings are circulated to the shareholders.
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HNB’s Extent of Adoption
in 2010
C.2. Major transactions
Directors are required to disclose to shareholders all proposed material transactions which would materially alter the net asset position of the Bank, if
entered into.
52. Major transactions C. 2.1 Adopted During 2010 there were no major transactions as de ned by Section 185 of the Companies Act No
07 of 2007 which materially a ected HNB’s net asset base.
Transactions, if any, which materially a ect the net assets base of HNB, will be disclosed in the
quarterly / annual nancial statements.
D. ACCOUNTABILITY AND AUDIT
D.1. Financial Reporting
The Board is required to present a balanced and understandable assessment of the Bank’s nancial position, performance and prospects.
53. Statutory and Regulatory
reporting
D 1.1 Adopted HNB has reported a true and fair view of its position and performance for the year ended 31st
December and at the end of each quarter of 2010.
In the preparation of quarterly and annual nancial statements, HNB had strictly complied with the
requirements of the Companies Act No 07 of 2007, the Banking Act No. 30 of 1988 and
amendments thereto, and are prepared and presented in conformity with Sri Lanka Accounting
Standards. HNB has complied with the reporting requirements prescribed by the regulatory
authorities such as the Central Bank of Sri Lanka and Colombo Stock Exchange.
As HNB’s Global Depository Receipts (GDRs) are listed in the Luxemburg Stock Exchange, HNB has
also complied with all the reporting requirements of the Luxemburg Stock Exchange.
54. Directors’ report in the
Annual Report
D 1.2 Adopted The Directors’ report given on pages 140 to 145 of the annual report covers all areas of this section.
55. Statement of Directors’ and
Auditor’s responsibility for
the Financial Statements
D 1.3 Adopted The statement of Directors’ responsibility for nancial reporting is given on page 156 of the Annual
Report.
Auditor’s reporting responsibility is given in their report on the Financial Statements given on page
157.
56. Management Discussions
and Analysis
D 1.4 Adopted The Management Discussion and Analysis is given on pages 22 to 45 of the Annual Report.
57. Declaration by the Board that
the business as a going
concern
D 1.5 Adopted This is given in the Directors’ report on pages 140 to 145 of the Annual Report.
58. Summoning an EGM to
notify serious loss of capital
D 1.6 Adopted Likelihood of such occurrence is remote. However, should the situation arise, an EGM will be called
for and shareholders will be noti ed.
D.2. Internal Control
The Code requires the Board to have a sound system of internal controls to safeguard shareholders’ investments and the company’s assets.
59. Annual evaluation of the
internal controls system
D 2.1 Adopted The Board is responsible for establishing a sound framework of internal controls and monitoring its
e ectiveness on a continuous basis. Through such an e ective framework, HNB manages business
risks and ensures that the nancial information on which business decisions are made and
published is reliable.
The system of internal controls is evaluated by the Audit Committee. In the year 2010, the Board of
Directors was satis ed with the e ectiveness of the system of internal controls, which is evidenced
through the report by the Board of Directors on the Internal Control over Financial Reporting given
on page 76 .
60. Need for internal audit
function
D 2.2 Adopted The Bank’s internal audit function is managed by capacity which has been developed in house.
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HNB’s Extent of Adoption
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D.3. Audit Committee
The Code requires the Board to have a formal and transparent arrangements in selecting and applying the accounting policies, nancial reporting and
internal control principles and maintaining an appropriate relationship with the Bank’s External Auditor.
61. Composition and terms and
conditions of the Audit
Committee
D. 3.1 Adopted The Audit Committee of HNB is comprised of four Non Executive Directors, three of them are
independent including the Chairman of the Committee. The said committee met 5 times during
the year. The Board Secretary functions as the Secretary to the Audit Committee. The CEO, SDGM-
Strategy & Compliance, DGM Risk, Head of Internal Audit, CFO and External Auditor attend
meetings on invitation.
62. Duties of the Audit
Committee
D. 3.2 Adopted The Audit Committee monitors and reviews the External Auditor’s independence, objectivity and
the e ectiveness of the audit process taking into account relevant professional and regulatory
requirements. The Committee also sets out the policy for the engagement of the External Auditor
to provide non-audit services, taking into account relevant regulations with regard to the provision
of non-audit services and the guidelines issued by the Central Bank of Sri Lanka on “Prohibited
Services”. The Audit Committee has the primary responsibility for making recommendations on the
appointment, re-appointment or removal of the External Auditor in-line with professional
standards and regulatory requirements.
63. Terms of reference of the
Audit Committee
D. 3.3 Adopted The Audit Committee is guided by the Committee Charter which sets out authority and
responsibility of the said Committee. The Charter was reviewed in the current year, as part of the
continuing evaluation of the terms of reference of the Audit Committee. The Audit Committee
monitors and reviews the e ectiveness of HNB’s Internal Audit function. The Head of Internal Audit
reports to the Audit Committee. The Audit Committee reviews and approves the Internal Audit
plan and resource requirements. It ensures that the Internal Audit plan adequately covers the
signi cant risks of the Bank, reviews the important Internal Audit ndings and follow-up
procedures.
Duties of the committee also encompasses:
- Assisting the Board in the preparation and presentation of Financial Statements
- Bank’s compliance with applicable regulations
- Assess the processes to ensure internal controls are adequate, specially in relation to nancial
reporting
- Assess the Bank’s ability to continue as a going concern
The Board also considered the Code of Best Practice on Audit Committees of the ICASL in de ning
the terms of reference for the Audit Committee.
64. Disclosures of the Audit
Committee
D. 3.4 Adopted The names of the members of the Audit Committee are given on the Audit Committee Report on
page 153.
The Committee ensures that the rotation of External Audit Engagement Partner, once in
every 5 years, is met.
The External Auditor has provided an Independence con rmation in compliance with the
“Guidelines for Appointment of Auditors of Listed Companies” issued by SEC.
D.4. Code of business conduct & ethics
The Code requires the Bank to develop a code of business conduct & ethics for Directors and members of the Corporate Management team.
65. Code of business conduct
and ethics
D. 4.1 Adopted The Bank has developed a code of business conduct and ethics for all employees, which addresses
con ict of interest, corporate opportunities, con dentiality of information, fair dealing, protecting
and proper use of the Bank’s assets, compliance with applicable laws and regulations and
encouraging the reporting of any illegal or unethical behavior etc.
66. A rmation of the code of
conduct & ethics
D. 4.2 Adopted Please refer the Chairman’s Statement on page 59 for details.
D. 5. Corporate Governance Disclosures
The Code requires the Bank to disclose the extent of adoption of best practice in Corporate Governance.
67. Disclosure of Corporate
Governance
D. 5.1 Adopted This report addresses this requirement.
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HNB’s Extent of Adoption
in 2010
E. INSTITUTIONAL INVESTORS
E.1. Shareholders voting
Institutional shareholders are required to make considered use of their votes and encouraged to ensure their voting intentions are translated into practice.
68. Institutional shareholders E. 1.1 Adopted Annual General Meeting is used to have an e ective dialogue with the shareholders on matters
which are relevant and concern to the general membership. The Investor Relations team headed
by the MD/CEO has regular discussions with key institutional shareholders to share highlights of
the Bank’s performance and also with the view of obtaining constructive feed back.
E.2. Evaluation of Corporate Governance initiatives
Institutional investors are encouraged to give due weight to all relevant factors in Board structure and composition.
F. OTHER INVESTORS
F.1. Investing / Divesting decision
69. Individual Shareholders F. 1 Adopted Individual shareholders are encouraged to carry out adequate analysis or seek independent advice
on investing, holding or divesting decisions.
F.2 Shareholder Voting
70. Individual shareholders
voting
F. 2 Adopted Individual shareholders are encouraged to participate in General Meetings and exercise their
voting rights.
70 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
SECTION TWO
SECTION TWO
Statement of Compliance
Central Bank of Sri Lanka issued the Direction on Corporate Governance (Banking Act Direction No 11 of 2007 and subsequent amendments thereto),
in order to improve and sustain the Corporate Governance processes and practices of the Licensed Commercial Banks in Sri Lanka. The disclosures
below re ect HNB’s level of conformance to the above Direction which comprises of eight fundamental principles, namely:
1 The responsibilities of the Board
2 The Board’s composition
3 Criteria to assess the tness and propriety of Directors
4 Management functions delegated by the Board
5 The Chairman and Chief Executive O cer
6 Board appointed Committees
7 Related Party Transactions and
8 Disclosures
The structures in place and the conformance to the requirement and expectations are tabulated below under the said eight fundamental principles.
Corporate
Governance
Principles
CBSL Rule
Reference
Compliance
status
Level of Compliance in 2010
3 (1) The responsibilities of the Board
1. Strengthening the safety and
soundness of the Bank
Rule 3(1)(i) Compliant The Board is responsible for formulating strategy, ensuring the adequacy of the risk
management processes, review of the internal control system and de ning the responsibility
of the Corporate Management. Please refer section A.1.2 of the SEC & ICASL Code table on
page 61 for further details.
The Board is in the process of nalizing the formal documentation of the Board Charter which is to
be approved by the Board in 2011.
2. Chairman and CEO Rule 3 (1)(ii) Compliant The Board has appointed the Chairman and the Chief Executive and the roles of the Chairman
and the Chief Executive are separate. Please refer Rule 3(5) on page 71 for the respective
responsibilities of the Chairman and Chief Executive.
3. Board Meetings Rule 3 (1)(iii) Compliant Please refer section A.1.1 of the SEC & ICASL Code table on page 61 for further details.
4. Inclusion of proposals by all
Directors in the agenda
Rule 3 (1)(iv) Compliant Proposals from all Directors on promotion of business and management of risk and other areas
relevant to the progress of the Bank are included in the agenda for regular meetings
5. Notice of Meetings Rule 3 (1)(v) Compliant Directors are given adequate time and at least 7 days of notice for regular Board meetings. For
all other meetings a reasonable notice period is given.
6. Non attendance of Directors Rule 3 (1)(vi) N/A This situation has not arisen.
7. Board Secretary Rule 3(1)(vii)
Rule 3(1)(viii)
Compliant
Compliant
Please refer section A.1.4 of the SEC & ICASL Code table on page 61 for details.
8. Minutes of the Meetings Rule 3 (1)(ix)
Rule 3 (1)(x)
Compliant
Compliant
Minutes of the Board meetings are maintained in su cient detail by the Board Secretary.
9. Independent professional
advice
Rule 3 (1)(xi) Compliant Please refer section A.1.3 of the SEC & ICASL Code table on page 61 for details.
10. Con ict of Interests Rule 3 (1)(xii) Compliant The Board is conscious of its obligations to ensure that Directors avoid con icts of interest
(both real and apparent) between their duty to HNB and their other interests. The Board has
taken steps to ensure that con icts and potential con icts of interest of Directors are disclosed
to the Board. Any Director with a material personal interest in a matter being considered by the
Board declares his / her interest and unless the Board resolves otherwise, he / she does not
participate in discussions or vote on that speci c matter. Independent Directors do participate
in such meetings.
The above process will be further strengthened through formal documentation.
11. Formal schedule of matters Rule 3(1)(xiii) Compliant The Board distinguishes the matters reserved for it from the matters reserved for the
Corporate Management team.
The Board is in the process of nalizing the formal documentation of the terms of reference of the
Corporate Management, which will be approved in 2011.
CORPORATE
GOVERNANCE
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 71
Corporate
Governance
Principles
CBSL Rule
Reference
Compliance
status
Level of Compliance in 2010
12. Situation of Insolvency Rule 3(1)(xiv) N/A This situation has not arisen during the year.
13. Capital adequacy Rule 3 (1)(xv) Compliant The Bank is fully compliant with the capital adequacy requirements of the Monetary Board.
14. Corporate Governance
Report
Rule 3 (1)(xvi) Compliant This report addresses this requirement.
15. Annual self assessment by
the Directors
Rule3 (1)(xvii) Compliant The Directors provide an annual self assessment to the Board to assess the t and propriety to
hold o ce as Directors of the Bank. Please refer section A.9.1 of the SEC & ICASL Code table on
page 64 for details of the evaluation of the Board and the Sub-committees.
The process is being continuously improved.
3 (2) The Board’s Composition
16. Number of Directors Rule 3 (2)(i) Compliant The Board comprises of nine Directors.
17. Period of service of a Director Rule 3 (2)(ii) N/A This section of the Rule is not applicable for the year under review and will become e ective
from 01st January 2012.
18. Appointment of an
employee as a Director
Rule 3 (2)(iii) N/A This situation has not arisen except in the case of the MD / CEO.
19. Independent Non Executive
Director
Rule 3 (2)(iv) Compliant The Board includes ve Independent Non Executive Directors as per the de nition of this
Direction, which is more than one third of the Board. The Board considers Non Executive
Director’s independence on an annual basis, based on the self declaration and as part of each
Director’s performance evaluation.
20. Alternative Director Rule 3 (2)( v) Compliant This situation has not arisen.
21. Credibility, skills and
experience of Non Executive
Directors
Rule 3 (2)(vi) Compliant Please refer pages 14 and 15 for the pro les of the Non Executive Directors.
22. Presence of Non Executive
Directors in Board Meetings
Rule 3 (2)(vii) Compliant No meetings of the Board ware constituted without the presence of one half of the
Non Executive Directors.
23. Details of Directors Rule 3 (2)(viii) Compliant Please refer page 74 for the details of the Directors and their categories.
24. Appointment of new
Directors
Rule 3 (2)(ix) Compliant Please refer section A.7.1, A.7.2 and A.7.3 of the SEC & ICASL Code table on page 64 for details
25. Appointment to ll a casual
vacancy
Rule 3 (2)(x) N/A This situation has not arisen.
26. Resignation / removal of a
Director
Rule 3 (2)(xi) N/A This situation has not arisen.
27. Appointments to other Banks Rule 3 (2)(xii) Compliant None of the Directors nor employees are Directors of another Bank.
3 (3) Criteria to assess the tness and propriety of Directors
28. Directors over 70 Years of age Rule 3 (3)(i) N/A This section of the Rule is not applicable for the year under review and will become e ective
from 1st January 2012.
29. Holding of o ce in more
than 20 companies
Rule 3 (3)(ii) N/A This section of the Rule is not applicable for the year under review and will become e ective
from 1st January 2012.
3(4) Management function delegated by the Board
30. Delegation of work to the
management
Rule 3 (4)(i) Compliant The Board annually evaluates the delegated authority process to ensure that the delegation of
work does not materially a ect the ability of the Board as a whole in discharging its functions.
The process is being continuously improved.
31. Extent of Delegation Rule 3 (4)(ii) Compliant Please refer comments above.
32. Evaluation of the delegated
process
Rule 3 (4)(iii) Compliant Please refer comments on rule 3(4)(i) above.
3(5) The Chairman and Chief Executive O cer
33. Division of Responsibilities of
the Chairman and MD / CEO
Rule 3 (5)(i) Compliant The roles of Chairman and Chief Executive O cer are separate Please refer section A.2 and A.3
of the SEC & ICASL Code table on page 62 for further details.
72 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Corporate
Governance
Principles
CBSL Rule
Reference
Compliance
status
Level of Compliance in 2010
34. Chairman preferably be an
Independent Director and if
not designate a Senior
Director
Rule 3 (5)(ii) Compliant The Chairman of HNB is not considered as independent as per the de nition set out in the
Direction on Corporate Governance for Licensed Commercial Banks issued by the CBSL.
The Board has recognized this area and appointed Ms Pamela C. Cooray as Senior Director as
required by the said Rule.
35. Relationship between
Chairman and CEO and other
Directors
Rule 3 (5)(iii) Compliant There are no material relationship between the Chairman / CEO and / or other members of the
Board which will impair their respective roles.
36. Role of the Chairman Rule 3 (5)(iv) to
Rule 3 (5)(xi)
Compliant Please refer section A.3 of the SEC & ICASL Code table on page 62 for detailed information of
the role of the Non Executive Chairman.
3(6) Board appointed Committees
37. Board appointed four
Sub committees
Rule 3 (6)(i) Compliant There are eight Board appointed Sub-committees including the four Committees prescribed
by the CBSL Direction. Please refer section A.1.6 of the SEC & ICASL Code table on page 62.
above for the names of the Board Sub-committees.
38. Audit Committee Rule 3 (6)(ii) Compliant Please refer section D.3 of the SEC & ICASL Code table on page 68 for details of the Audit
Committee.
39. Human resources /
Remuneration Committee
Rule 3 (6)(iii) Compliant Please refer section B.1.1 of the SEC & ICASL Code table on page 65 for details.
40. Nomination Committee Rule 3 (6)(iv) Non-
Compliant
Please refer section A.7.1 and A.7.2 of the SEC & ICASL Code table on page 64 for details for the
composition of the Committee. The committee considers and recommends the re-election of
the Directors. The committee also set criteria of the succession of the CEO and other key
management personnel.
As the Chairman of the committee is not independent, the Bank is non compliant with this
Rule to that extent. The Bank is in the process of rectifying this aspect of non compliance.
41. Integrated Risk Management
Committee
Rule 3 (6)(v) Compliant Board Integrated Risk Management Committee comprises of the following personnel
Mr M V Theagarajah - Independent / Non Executive Director (Chairman)
Mr Rienzie T. Wijetilleke- Non Executive Director
Mr R Theagarajah – Managing Director / CEO
Ms M R A C Cooray – Independent / Non Executive Director
Mr J D N Kekulawala – SDGM - Strategy and Compliance
Mr D P N Rodrigo – DGM - Risk
The Committee assesses, reviews and takes action to mitigate the e ects of the speci c
identi ed risks in credit, market, liquidity, strategic and operational areas. The Committee also
oversees the compliance function. The designated compliance o cer also reports to the
Committee.
The process is being continuously improved.
3 (7) Related Party Transactions
42. Avoiding con ict of interest
in related party transaction
and favorable treatment
Rule 3 (7)(i)
Rule 3 (7)(ii)
Rule 3 (7)(iii)
Compliant Steps have been taken by the Board to avoid any con ict of interests, that may arise, in
transacting with related parties as per the de nition of this Direction and Sri Lanka Accounting
Standard- 30 on “Related party Transactions”. Further, the Board ensures that the no related
party bene ts from favorable treatment. The pricing applicable to such transactions is based
on the assessment of risk and pricing model of the Bank and is comparable with that what is
applied to transactions between the Bank and its unrelated customers.
The process to identify the related parties and collate all relevant details of transactions with related
parties is currently being further strengthened.
43. Accommodations to
Directors and / or their close
relatives
Rule 3 (7)(iv) Compliant All accommodations to Directors and / or their close relatives are approved by all Directors
who are available in the Country at the time the said accommodation is considered, other than
the Director concerned.
44. Appointment of Director
subsequent to approval of
facilities to him / her
Rule 3 (7)(v) N/A This situation has not arisen.
CORPORATE
GOVERNANCE
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 73
Corporate
Governance
Principles
CBSL Rule
Reference
Compliance
status
Level of Compliance in 2010
45. Accommodation to
employees
Rule 3 (7)(vi)
Rule 3 (7)(vii)
Compliant
Compliant
Accommodation has not been given to employees on a favorable basis other than the general
schemes applicable to all employees of the Bank.
3(8) Disclosures
46. Financial reporting, statutory
and regulatory reporting
Rule 3 (8) (i) Compliant The Financial Statements for the year ended 31st December 2010 are in conformity with all
rules and regulatory requirements and for the quarters then ended have been published in all
three languages.
47. Minimum disclosure in the
Annual Report
Rule 3 (8) (ii) Compliant (a) Compliance with applicable accounting standards and regulatory requirements has been
reported in the Directors’ Responsibility Statement for Financial Reporting on page 156
and CEO and CFO’s responsibility statement for nancial statements on page 155.
(b) Directors’ report on the e ectiveness of the internal control system over nancial
reporting, “Statement of Internal Control” is given on pages 76 and 77.
(c) The Bank has obtained an Assurance Report on the internal controls over nancial
reporting based on the auditing framework issued by ICASL for this engagement. The
recommendations made by the Auditors where relevant, will be dealt with in 2011.
(d) Details of the Directors are given on pages 14 and 15 Directors transactions with the Bank
and their remunerations have been disclosed in note 48 to the Financial Statements on
pages 228 to 240.
(e) Accommodation granted to the related parties is given in note 48 to the Financial
Statements on pages 228 to 240. The net accommodation granted to each category of
related parties is given below as a percentage of the Bank’s regulatory capital.
CATEGORY OF RELATED PARTY TRANSACTIONS Amount (Mn) %
– Credit Card balances outstanding from KMP’s 3.85 0.01
– Facilities to KMPs 7.50 0.03
– Loans and advances outstanding from subsidiaries 2,184.52 7.98
– Advances and guarantees to subsidiaries 33.00 0.12
– Guarantees to Associates 79.00 0.29
– Transactions with concerns in which a Director of the
Bank or material shareholder has a substantial interest 3,145.00 11.48
(f ) Please refer (d) and (e) above.
(g) The Bank has obtained the a Factual Findings Report from the Auditors on annual
Corporate Governance Report, based on the auditing framework issued by ICASL for this
engagement, The recommendations made by the Auditors where relevant will be dealt
with in 2011.
(h) There were no material non compliance to prudential requirements, regulations, laws and
internal controls a ecting the Bank.
(i) There were no supervisory concerns on lapses in the Bank’s risk management system or
non compliance with this direction that have been pointed out by the Director of the
Bank Supervision Department of the CBSL and requiring disclose to the public.
* During the year the Director of the Bank Supervision Department of the CBSL identi ed two
shareholding entities of the Bank as being related to another shareholding group, and
directed;
- the Bank to remove the said two entities from the register of members
- the Bank to aggregate any accommodation extended to the said two entities with that
of the other shareholding group
- the said two entities to divest their respective shareholdings in the Bank within a period
of six months from the said direction.
The Bank has complied with the rst two aspects of the said direction as at balance sheet date
and formally communicated the third aspect of the said direction to the said two entities for
their attention.
48. Transitional and other
general provisions
Rule 3 (9) Compliant The Bank has complied with the transitional provisions.
74 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
BOARD AND THE COMMITTEE ATTENDANCE
The number of meetings of the Board, Board appointed Sub committees and individual attendance by members is shown below.
Names Directorship Status Board Audit
Committee
Nomination
Committee
Remuneration /
HRM
Committee
Integrated
Risk
Management
Committee
Strategic
Review
Committee
Total No. of Meetings 14 5 1 7 4 2
Mr Rienzie T. Wijetilleke Non Executive Chairman 14/14 - 1/1 6/7 3/4 -
Mr Rajendra Theagarajah Managing Director / CEO 14/14
4/5
a
1/1
a
5/7
a
2/4
2/2
a
Mr D H S Jayawardena Non Executive Director 13/14 5/5 1/1 - - 0/2
Mr M V Theagarajah
Independent
Non Executive Director
b
14/14 - 1/1 - 4/4 -
Mr R K Obeyesekere Non Executive Director 12/14 - 1/1 4/7
1/1
c
-
Ms Pamela C. Cooray
Senior / Independent
Non Executive, Director
13/14 5/5 - 7/7 - -
Mr Ranjeevan Seevaratnam
Independent
Non Executive Director
12/14 4/5 - - - -
Mr N G Wickremeratne
Independent
Non Executive Director
13/14 5/5 - 7/7 - 2/2
Ms M A R C Cooray
d
Independent
Non Executive Director
12/12 - - - 3/3 2/2
CORPORATE
GOVERNANCE
J D N Kekulawala
Senior DGM - Strategy & Compliance
Colombo, Sri Lanka
18th February 2011
Rienzie T. Wijetilleke
Chairman
REPORT FROM EXTERNAL AUDITORS
The external auditors have performed procedures set out in Sri Lanka Related Services Practice Statement 4750 issued by the Institute of Chartered Accountants of
Sri Lanka (SLRSPS 4750), to meet the compliance requirement of the Corporate Governance directive. Their ndings were not materially di erent to the matters
disclosed above and did not identify any signi cant inconsistencies to those reported above by the Board.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 75
The papers relating to Credit, Asset Disposal and Procurement are circulated to the members of the respective Board appointed Sub-committees set
out below. If a Director has an interest in the relevant subject matter under consideration, he / she declares his / her interest to the respective
committee and withdraws from the approval process.
Names Credit Asset Disposal Procurement
Total No. of papers approved in 2010 397 5 20
Mr Rienzie T. Wijetilleke 349 5 20
Mr Rajendra Theagarajah 389 5 20
Mr D H S Jayawardena 160 - -
Mr M V Theagarajah 233 - 20
Mr R K Obeyesekere 197 3
1
e
Ms Pamela C. Cooray 263 5 -
Mr Ranjeevan Seevaratnam 188 - -
Mr N G Wickremeratne 195 5 18
Ms M A R C Cooray 214 - -
Key
a
Mr Rajendra Theagarajah attended 4 Audit Committee, 1 Nomination Committee, 5 Remuneration / HRM Committee and 2 Strategic Review
Committee meetings by invitation.
b
The above table gives Directorship Status as per the CBSL Direction on Corporate Governance, Mr M V Theagarajah is considered as an Independent
Director under this. As per the ICASL & SEC Code Mr M V Theagarajah is not considered as an Independent Director.
c
The Director resigned from the Integrated Risk Management Committee on 31st March 2010. There was only one meeting up to that date.
d
Ms M A R C Cooray was appointed to the Board on 15th February 2010. There were 12 meetings after her appointment, she has attended all 12
meetings. The Director was appointed to the Integrated Risk Management Committee on 31st March 2010. There were 3 meetings after her
appointment, she has attended all 3 meetings.
e
Mr R K Obeyesekere was co-opted to approve a paper in the absence of a regular committee member.
- Chairman / Chairperson of the respective committee.
76 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
RESPONSIBILTIY
The Board of Directors (“Board”) is responsible for the adequacy and
e ectiveness of the Hatton National Bank PLC (“the Bank”) system of
internal controls. However, such a system is designed to manage the
Bank’s key areas of risk within an acceptable risk pro le, rather than
eliminate the risk of failure to achieve the policies and business
objectives of the Bank. Accordingly, the system of internal controls can
only provide reasonable but not absolute assurance against material
misstatement of management and nancial information and records or
against nancial losses or fraud.
The Board has established an ongoing process for identifying,
evaluating and managing the signi cant risks faced by the Bank and this
process includes enhancing the system of internal controls as and when
there are changes to business environment or regulatory guidelines.
The process is regularly reviewed by the Board and accords with the
guidance for directors of Banks on the Directors’ Statement of Internal
Control issued by the Institute of Chartered Accountants of Sri Lanka. As
per the said guidance, signi cant processes a ecting signi cant
accounts of the Bank were assessed along with the key risk areas of
the Bank.
The management assists the Board in the implementation of the Board’s
policies and procedures on risk and control by identifying and assessing
the risks faced by Bank, and in the design, operation and monitoring of
suitable internal controls to mitigate and control these risks.
The Board is of the view that the system of internal controls in place is
sound and adequate to provide reasonable assurance regarding the
reliability of nancial reporting, and that the preparation of nancial
statements for external purposes and is in accordance with relevant
accounting principles and regulatory requirements.
KEY INTERNAL CONTROL PROCESES
The key processes that have been established in reviewing the
adequacy and integrity of the system of internal controls include
the following:
• The Board Sub Committees are established by the Board to
assist the Board in ensuring the e ectiveness of the Bank’s daily
operations and that the Bank’s operations are in accordance
with the corporate objectives, strategies and the annual budget
as well as the policies and business directions that have been
approved.
• The Internal Audit division of the Bank checks for compliance
with policies and procedures and the e ectiveness of the
internal control systems and highlights signi cant ndings in
respect of any non-compliance. Audits are carried out on all
units and branches, the frequency of which is determined by
the level of risk assessed, to provide an independent and
objective report on operational and management activities of
these units and branches. The annual audit plan is reviewed
and approved by the Audit Committee and the ndings of the
audits are submitted to the Audit Committee for review at their
periodic meetings.
• The Audit Committee of the Bank reviews internal control issues
identi ed by the Internal Audit Division, the external auditors,
regulatory authorities and management, and evaluates the
adequacy and e ectiveness of the risk management and
internal control systems. They also review the internal audit
function with particular emphasis on the scope of audits and
quality of the same. The minutes of the Audit Committee
meetings are tabled for the information of the Board on a
periodic basis. Further details of the activities undertaken by the
Audit Committee of the Bank are set out in the Audit Committee
Report on page 153.
• The Board Integrated Risk Management Committee (BIRMC) is
established by the Board to assist the Board to oversee the
overall management of principal areas of risk of the Bank. The
Management Risk Committee which includes representation
from all key business and operating units of the Bank, assists the
Board with the implementation of policies advocated at the
BIRMC.
• Operational committees have also been established with
appropriate empowerment to ensure e ective management
and supervision of the Bank’s core areas of business operations.
These committees include the Human Resource Committee, the
Credit Committee, the Investment Management Committee,
and the Information Technology Steering Committee.
In assessing the internal control system, identi ed o cers of the Bank
collated all procedures and controls that are connected with signi cant
accounts and disclosures of the nancial statements of the Bank.
These in turn were observed and checked by the Internal Audit division
for suitability of design and e ectiveness on an ongoing basis. Due to
time constraints, areas with respect to the processes that provided
disclosures to the nancial statements such as related party
transactions, contingencies and commitments were not fully
completed.
The assessment covered only the process applied by the Bank and did
not include the processes carried out by its subsidiaries.
Comments made by the external auditors in connection with internal
control system will be dealt with in the future.
STATEMENT OF
INTERNAL CONTROL
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 77
CONFIRMATION
Based on the above processes, the Board con rms that the nancial
reporting system of the Bank has been designed to provide reasonable
assurance regarding the reliability of nancial reporting and the
preparation of nancial statements for external purposes has been done
in accordance with Sri Lanka Accounting Standards and regulatory
requirements of the Central Bank of Sri Lanka.
REVIEW OF THE STATEMENT BY EXTERNAL
AUDITORS
The external auditors have reviewed the above Directors Statement on
Internal Control for the year ended 31 December 2010 and reported to
the Board that nothing has come to their attention that causes them to
believe that the statement is inconsistent with their understanding of
the process adopted by the Board in the review of the design and
e ectiveness of the internal control system of the Bank.
By order of the Board
Ranjeevan Seevaratnam
Chairman - Audit Committee
Rajendra Theagarajah Rienzie T. Wijetilleke
Managing Director / Chairman
Chief Executive O cer
Colombo, Sri Lanka
18th February 2011
78 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
SUSTAINABILITY REPORT
CARING PARTNER
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 79
Chief Executive O cer’s Message 80
Report Parameters 82
Strategic Sustainability Review 84
Customer Responsibility 94
Employee Responsibility 100
Investor Responsibility 108
Community Responsibility 112
Supplier Responsibility 119
Environmental Responsibility 121
Key Performance Indicators 126
Independent Assurance Report 127
The Global Reporting Initiative (GRI) G3 128
80 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
CHIEF EXECUTIVE OFFICER’S
STATEMENT
Social Responsibility as an enabler of national
development
At Hatton National Bank we rmly believe that strategic social
responsibility is a catalyst to long-term development of the nation. Our
sustainability ethos is one that is deeply embedded in the overall
business strategy and therefore intrinsic to the way in which the Bank
conducts its business. Sustainability at Hatton National Bank has long
been a way of life but what is critical is the fact that we view
sustainability as an enabler of national development, an avenue for
wealth creation and as a means of inclusion. Therefore, social
responsibility is at the very core of the Bank’s corporate DNA and is an
element that transcends mere philanthropy to become a holistic and
cohesive component of the long-term corporate strategy, which in turn
is re ective of strategic national priorities.
The year under review was a signi cant year for the nation with Sri
Lanka embarking on post con ict reconstruction and development. Our
role, in this path of economic and social development of Sri Lanka, is
one that is etched rmly in the Bank’s own corporate strategy. We rmly
believe that sustainable economic and social development is
dependant on the contribution of Corporate Sri Lanka as partners in
national progress. We continue to demonstrate our support to the
national economy through Hatton National Bank’s unique approach to
social inclusion, through which we have actively drawn thousands from
less privileged nancial circumstances to be contributors to the national
economy. Post-con ict Sri Lanka has witnessed the re-integration of the
northern and eastern provinces with the rest of the economy. This will
open approximately two thirds of the nation’s maritime and coastal
resources and one third of untapped fertile land for productive use, thus
enabling approximately fteen percent of the country’s population to
fully participate in rejuvenated economic activity. Hence we are
con dent that our model for nancial and social inclusion will have far
and wide-reaching possibilities.
As a leader in the nancial services sector, we have constantly sought to
inspire and motivate our peers in the industry to take the initiative to
migrate boldly from defensive banking – where inclusive banking is
considered a negative impact on the bottom-line - to sustainable
banking. Having moulded our strategy for nancial inclusion for over
two decades, we are con dent that our peers will take our o er of
support in goodwill and journey towards strategic, sustainable banking
to precipitate the national economic agenda.
Commitment towards Sustainability Reporting
Sustainability reporting projects our commitment towards
sustainability; it underlies our responsiveness to those who want to
know us better, our customers and suppliers, shareholders and the
community, and our present and future employees. Our greatest pride
in undertaking sustainability reporting stems from the fact that as a
corporate that has a rich tradition of engaging in sustainability, we are
now able to through the integration of strategic Corporate Social
Responsibility (CSR) with the Bank’s business strategy, catering to the
nation and its societal needs in a reportable and quanti able manner.
Moreover, it also provides us the opportunity to express the Bank’s
commitment to a range of wider goals, in particular the United Nations
Millennium Development Goals. To further validate the authenticity and
the transparency of our sustainability reporting e orts, you will nd that
this sustainability report has been submitted this year to the Global
Reporting Initiative (GRI) for formal checking as a show of commitment
towards the sustainability reporting process.
This year as part of our commitment to the Environment, we have
endeavoured to make this Annual Report a carbon neutral publication
and have obtained certi cation from the Carbon Consulting Company a
Carbon Footprint Expert certi ed company that operates under the
aegis of the Carbon Neutral Company, UK. This is a signi cant step in our
e orts to live the HNB Green Pledge.
Our sustainability focus in 2010
In the year under review, our sustainability focus was honed on four
strategic pillars in support of the United Nations Millennium
Social responsibility is at the very
core of the Bank’s corporate DNA
and is an element that transcends
from mere philanthropy to a
holistic and cohesive component of
the long-term corporate strategy,
which in turn is re ective of
strategic national priorities.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 81
Development Goals, which are, education; healthcare; environmental
protection; nancial inclusion and entrepreneurship. The Sustainability
Foundation established in 2009 institutionalised our sustainability
e orts instilling transparency and governance practices to every aspect
of the sustainability process. The Foundation has broadened the
interaction of the Board of Directors in strategic CSR, invigourating a
top-down approach to sustainable practices and thereby furthering the
relationship between corporate and sustainability strategies.
Most importantly, the Sustainability Foundation has been pivotal in
garnering partners and collaborators to further strengthen the thrust of
our sustainability strategy and tactics, thus enlarging the scope and
impact of each sustainability initiative. The Bank views collaboration as a
favourable and viable means to transcend barriers in precipitating
sustainability e orts through enhanced linkages, capital and human
resources.
Recognition and Rewards
The most gratifying reward for our sustainability e orts lies in the
knowledge that our present actions will create a future that is better
endowed through natural preservation and social mobilisation. Yet,
recognition for our sustainability reporting process serves to inspire us
to report better in line with international best practices, improving every
nancial year to instill greater transparency and governance to the
reporting process. In 2010, the Bank received several accolades for its
sustainability reporting and corporate responsibility e orts for the
previous nancial year:
• Emerged as winner in the Large Scale Category at the ACCA
Sustainability Reporting Awards 2009 organised by the Association
of Chartered Certi ed Accountants, Sri Lanka.
• Recognised among the Top 10 Best Corporate Citizens of Sri Lanka,
identi ed by the Ceylon Chamber of Commerce at the Best
Corporate Citizen Awards, winning 1st Runner Up – Best Corporate
Citizen, Winner – Employee Relations Category
Future Outlook
Going forward, we recognise that the main challenge for our nation is
economic empowerment of less privileged communities. We believe
entrepreneurial development through nancial inclusion and
opportune development of linkages enabling small and medium
entrepreneurs better access to markets will accelerate national
economic activity. With a signi cant percentage of the national
economy comprising of small and medium entrepreneurs, it is
necessary to nurture these enterprises to become larger and more
gainful businesses, thus augmenting the wealth creation and enhancing
better distribution of wealth amongst every tier of society. As such our
own corporate and sustainability strategies will contribute towards the
realisation of equitable wealth creation across Sri Lanka. We will of
course continue to focus on embracing green practices, nancing of
“green” investments, motivating the adoption of sustainable business
practice amongst our customers and suppliers and energising our
employees to inspire others to propagate our vision for a sustainable
future.
I would also like to take the opportunity to invite our shareholders and
stakeholders to actively engage with us. Your response to the feedback
form attched to this report will greatly assist us towards enhancing our
sustainability approach in the years ahead.
Rajendra Theagarajah
Managing Director / CEO
Colombo, Sri Lanka
18th February 2011
82 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
REPORT
PARAMETERS
Sustainability Reporting serves as a window into the performance of the
Bank across economic, social and environmental dimensions, primarily
as the Bank’ sustainability strategy is in full alignment with its core
business strategy. As such, this Sustainability Report has been
developed within the context of the Bank’s overall business strategy,
with due consideration of sustainability-related risks and opportunities.
Sustainability Reporting Frameworks
Reporting Principles and Reporting Guidelines: GRI
The Bank’s Sustainability Report has been developed based on the
Sustainability Reporting Framework proposed by Global Reporting
Initiative (GRI). Through the adoption of this universally recognised
framework for disclosure of information, the Bank in its Sustainability
Report strives to comply with speci c ‘Reporting Principles’ and
‘Reporting Guidance’ as laid down by the G3 guidelines and indicator
protocols for economic, environment, human rights, labour, product
responsibility and societal performance.
The following have been utilised to develop this Report:
• Indicator Protocols for each of the Performance Indicators contained
in the G3 Guidelines;
• Financial Sector Supplement which includes nancial sector speci c
performance indicators;
• Technical Protocols to set the report boundary.
This report has been submitted for a compliance check to the GRI and
has been con rmed that it ful lls the requirements of Application Level
B+ (refer page 128).
De ning the Report Content:
(A) Issue of Materiality
In the preparation and compilation of this Sustainability Report,
materiality proved to be a challenge. To develop an approach that
provides relevant data and information expected by a cross-section of
stakeholders coupled with the need to identify and understand the
sustainability related aspects and issues that de ne the success of the
Sustainability Report proved to be a dilemma.
However, in the year under review the Bank followed a systemised
approach to determine the materiality of issues to be reported in the
sustainability report, thus largely overcoming the dilemma. The diagram
below outlines the criteria that are used by the Bank as a guide in the
deliberation process to determine materiality.
By assessing each of the Bank’s actions during the year against the ve
broad criteria shown, key actions and initiatives that fall as material to
each of the stakeholder groups have been reported on in this
Sustainability Report. Based on the answers to these strategies, actions
by the Bank have been evaluated for materiality in the context of each
stakeholder. Further, as outlined in the GRI guidelines, the Bank
recognises and accepts the importance of materiality. Thus, in this light,
our Report covers topics and indicators that re ect the Bank’s signi cant
economic, environmental and social impacts or that would
substantively in uence the assessment and decisions of its stakeholders.
(B) Stakeholder Inclusiveness and Engagement
Sustainability Reporting a ords the Bank a means to communicate and
engage with its stakeholders. Given the disparate nature (and interests)
of various stakeholders, the Bank is compelled to strategically de ne its
key stakeholder audience to ensure materiality in engagement and
reporting. Thus, the Bank de nes its key stakeholders as investors,
customers, employees, suppliers, communities and the environment.
Through stakeholder inclusiveness and engagement, the Bank
objectively aims to achieve a conclusive, positive outcome for each of
the identi ed stakeholders.
MATERIALITY TEST
Issues raised
as important
by
stakeholder
Issues
considered to
constitute an
opportunity /
a future
challenge /
signicant
risk to the
sustainability
of the Bank
Issues
connected to
relevant laws,
regulations,
international
agreements
with strategic
signicance to
the Bank/
stakeholders
Alignment of
issues with
overall
implementation
of corporate
strategy or with
the “values” of
the Bank
Assessment of
the Bank’s
availability of
specialised
knowledge/
competencies
to contribute
to
sustainability
in the area
under
consideration
Stakeholder Group Objective
Investors
Create sustainable wealth for shareholders,
whilst setting benchmarks for the industry and
contributing towards the achievement of
national macro economic objectives
Customers Ensure that service excellence remains a
fundamental in the delivery of superlative
products and services
Employees
C
reate two way relationships that inculcate
team spirit within the Hatna Family concept,
whilst consciously enhancing the tangible and
intangible worth of employees
Suppliers
Focus on long lasting partnerships on
qualitative platforms
Community
Create sustainable communities through
Education, Entrepreneurial assistance and
Health
Environment Ensure a sustainable planet through
conservation and preservation of the
environment by introducing best practices
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 83
The selection of key stakeholders for engagement is driven by the
Bank’s desire to exemplify its role as a “Partner in Progress”, by exploring
circumstances that require judgement relating to business transactions.
Investors – The Bank needs to meet the con dence of its investors
and maintain balance between pro ts and the ability
to sustain a long-term, stable stream of earnings. It is
the Bank’s responsibility to judge whether a business
decision will generate superior pro ts without
compromising on integrity.
Customers – For the business to be sustained it is the responsibility
of the Bank as the “lender” to judge whether a
customer’s aspiration to borrow is a ordable and
meets with the Bank’s assessment of risk and pricing
model. Further extending the lending to the lesser
a uent with the view of improving quality of life and
assisting small businesses to grow without
encouraging over indebtedness which could impact
both the customer and the Bank.
Employees – For sustenance of the business it is imperative that the
Bank fosters a talent pool that delivers superior
e ciency and performance. It is the Bank’s
responsibility to judge and ensure that such e ciency
is not achieved at the expense of work-life balance or
corporate values.
Suppliers – Businesses are today required to meet ever-increasing
standards of sustainable behaviour. It is important that
the Bank balances cost considerations and sustainable
procurement practices.
Community – With the wide spread branch network it has been
possible for the Bank to engage with the community
at every level. The responsibility of the Bank is to
ensure that its internal policies are maintained, as no
amount of philanthropy will substitute for failure to
combat nancial crime or poor lending.
Environment – It is the responsibility of every individual and
organisation to ensure the sustainability of our planet.
The Bank has taken steps to implement environment
friendly policies within the Bank as well as by
customers and suppliers as well as encourage such
initiatives by lending to speci c environmental friendly
projects.
(C) Sustainability Content
This Report presents the Bank’s performance in the wider context of
sustainability, providing an insight into the Bank’s contribution towards
the enhancement of economic, environmental and social conditions
within which it operates.
De ning the Report Quality
(A) Balance, Accuracy and Clarity
This Report endeavours to present an unbiased presentation of the
Bank’s performance by re ecting positive and negative aspects of the
Bank’s performance to enable a reasonable assessment of overall
performance.
As far as possible, the Report provides accurate information in a manner
that is understandable and accessible to its readers.
(B) De ning the Report Boundary
This Report covers only the sustainable performance of the Bank and
has not been extended to cover its subsidiaries, joint ventures or
associates.
Standard Disclosures in the Report
(A) Strategy and Pro le
In this section we provide a high level strategic view of the Bank’s
relationship to sustainability in order to provide context for
understanding the Bank’s performance such as its strategy, pro le and
governance.
(B) Management Approach & Performance Indicators
The Performance Indicators are organised by Economic, Environmental
and Social categories as set out in the GRI Table.
Independent Assurance
Independent Assurance is a widely accepted norm within the process of
Sustainability Reporting. The Bank recognises that independent
assurance enhances the transparency and credibility of its Sustainability
Reporting process through the delivery of superior value to the Bank,
users of the Report and broader stakeholder groups and individuals.
M/s KPMG Ford Rhodes Thornton & Company has provided an
Independent Assurance Report on Hatton National Bank’s Sustainability
Report. The Auditors review engagement was carried out in accordance
with the Sri Lanka Standard on Assurance Engagements 3000
“Assurance Engagements Other Than Audits or Reviews of Historical
Financial Information” (International Standard on Assurance
Engagements (ISAE 3000)).
Stakeholder Feedback
The Bank considers stakeholder feedback as a critical criterion for future
enhancement of its Sustainability Reporting initiatives. As such an
Investor/Stakeholder Feedback Form is attached to this Report and
serves as a formal feedback mechanism in addition to the continuous
stakeholder engagement process.
84 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The Approach
Hatton National Bank has consistently adopted a strategic approach to
sustainability where business and sustainability strategies are
intrinsically aligned. The Bank ensures that sustainable development is
featured at a strategic level, supported by leadership and envisioning,
whilst also integrated into all parts of its operational plan.
Hatton National Bank’s business strategy has and continues to pivot on
the end achievement of national priorities. The Bank strives to
contribute towards the national agenda and meet national objectives
through the e ective implementation of its own business strategy.
Thus, it fully appreciates that to achieve the greatest long-term bene t
the Bank must consistently devise its own unique approach and
business case for sustainability. This is fully demonstrated by how the
Bank has aligned its business goals in tandem with national goals and in
turn with sustainability development.
The Bank is committed to serve all strata of society and through careful
customer segmentation provides nancial access and services across
the continuum of socio-demographic groups. Having served the micro
and Small & Medium Entrepreneurs (SME) for over four decades, Hatton
National Bank is considered a pioneer in the introduction of nancial
services to persons considered as “non-bankable” through its Gami
Pubuduwa (Village Re-awakening) programme. The entrepreneurial
poor remains an important customer base for the Bank with nancial
inclusion for these segments an area of strategic priority from the
perspective of commercial enterprise.
Hatton National Bank recognises the criticality of SMEs to the national
economy. As engines of growth, the SMEs drive economic growth.
Aligned to the national vision to energise the SME sector, the Bank
remains committed to the sustainable development of this sector and
recognises it as a revenue optimiser from a business strategy viewpoint.
Sustainability is at the very core of the Bank’s corporate strategy. By
integrating CSR into core business processes and stakeholder
management, the Bank recognises its ability to achieve the ultimate
goal of creating both social value and corporate value. However, the
adaptation of CSR and sustainability goes beyond face value and the
Bank views sustainability as a strategic avenue for growth in the
long-term. As opposed to ad-hoc philanthropy, strategic sustainability
streams are embedded into the overall business approach and lters to
the fundamental business model. Thus, the Bank perceives sustainability
beyond the scope of stepped-up environmental performance, but as a
comprehensive way of doing business, one that delivers tremendous
economic value and opens up a vast array of new opportunities.
As Figure 2 illustrates, the Bank’s sustainability strategy aims to impact 3
core areas; economic contribution, environmental conservation and
community development. This framework has been developed on the
premise that customers, suppliers, employees, shareholders and
communities are directly entwined as contributors and bene ciaries of
the sustainability strategy.
National
Vision
Corporate
Strategy
Sustainability
Strategy
Figure 1- The Sustainability Approach
STRATEGIC SUSTAINABILITY
REVIEW
120 YEARS OF
TRUSTED
PARTNERSHIP
ECONOMIC
CONTRIBUTION
SUSTAINABLE
PERFORMANCE
GREEN
PROCUREMENT
GREENER
OFFICES
RESPONSIBLE
LENDING
HNB
SUSTAINBILITY
FOUNDATION
DEVELOPING
FUTURE
LEADERS
LEARNING &
INNOVATION
EVERY PERSON
EVERY BUSINESS
FINANCIAL
INCLUSION
(MICRO FINANCE)
ENVIRONMENT
CONSERVATION
COMMUNITY
DEVELOPMENT
Figure 2 – The Bank’s Sustainability Focus
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 85
Sustainability Stewardship & Structure
Sustainability takes a top-down approach at Hatton National Bank, with
direct leadership from the Managing Director/Chief Executive O cer to
the Sustainability Committee which in turn gives leadership and
direction to the Customer Service & Investor Group, Employee Liaison
Group, and Environment & Community Advisory Group Sub
Committees.
The Sustainability Committee comprises of key functional heads - Chief
Financial O cer, Deputy General Manager (Human Resources &
Administration), Deputy General Manager (Marketing & Retail Banking),
Deputy General Manager (Corporate Banking) and representatives of
the Risk Committee. It is endowed with the tasks of:
• Overseeing progress across our key stakeholders
• Acting as the think tank in developing the sustainability agenda
• Ensuring conformance with all sustainability guidelines
• Proactively evaluating decisions that impact on the reputation,
ethics, and values of the Bank
• Identifying and managing areas of non-compliance with the
sustainability principles
The Bank’s Risk Committee oversees the CSR activities carried out
by the Bank.
Sustainability Foundation
Founded in 2009, the Sustainability Foundation further propels the CSR
strategy and sets in place processes to carry out greater screening of
initiatives to fuse with the strategic intent of the Bank. The Foundation
independently drives the CSR strategy and acts as the base for
sustainability initiatives. The Foundation formulates policy and strategy
with implementation encompassing the Bank’s employees. The
presence of three Board Directors facilitates representation of Board
engagement.
The Foundation’s Trustees comprise of 3 members of the Board of
Directors and 7 members of the Bank’s Management team.
MD / CEO
Chief Finacial
Ocer
DGM HR & Admin
(Secretary)
DGM Marketing &
Retail Banking
Risk
Committee
DGM
Corporate Banking
Customer Service &
Investor Group
Employee Liaison
Group
Environment
& Community
Advisory Group
Sustainability Committee
Sub Committees
86 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Area of Impact Potential Impact Risks vs. Opportunities Engagement approach Process undertaken
Social • Social
development
• Risk: Under developed human
capital
• Opportunity: Empowered
human capital through skills
development
• Risk: Social alienation
• Opportunity: Social
engagement for wealth creation
• Training and development for
skill enhancement
• Social inclusiveness through the
Bank’s product and service
o ering as well as sustainability
initiatives
• Access to nance through rural
penetration with a strong
presence across the nation
• Youth empowerment and women
empowerment through vocational training
• Financial inclusion through Gami
Pubuduwa to even the lowest social tier
drawing them into self-su ciency,
converting the non-bankable to bankable.
• Micro and SME products that are
specialised for these sectors
• Focus on health and well-being through
access to clean drinking water, and
sanitation
• Imparting the precepts of savings and thrift
to school children
• Nurture creativity and skills amongst
children
• Over 205 branches and customer centres
and 350 ATMs reaching out to rural
populations
Environmental • Global
warming
• Bio-diversity
and eco-
systems
• Environmental
degradation
• Risk: Change in weather patterns,
threatens the livelihoods of Sri
Lankans and commercial activity
• Risk: Depletion in bio-diversity
and loss of eco systems pose
danger to national and global
welfare
• Opportunity: The growing need
for “green” investments
• Opportunity: Lowered carbon
footprint to become a “green
nancial institution” thus
enhancing the Bank’s corporate
citizen image
• Opportunity: Through green
practices lower long-term energy
and overhead costs
• Alternative energy usage
• Protection of bio-diversity in
partnership with wildlife and
national heritage
conservationists
• Construction of “green buildings”
to minimise impact of Bank’s
operations to environment
• Green procurement policy
• Emphasis of corporate banking
on nancing of renewable
energy and environmental
friendly investments
• Implementation of Green policy processes
across the Bank
• Implementation of 5S across the Bank to
minimise waste and for good
housekeeping
• Adoption of a policy of Recycle and Re-use
• Green buildings operational and in
construction
• Collaboration with National Wildlife
Authority and National Trust of Sri Lanka
• Suppliers educated and motivated to
adopt green practices
• Focus on lending for green investments
• Alternative energy use in preliminary
testing stage
Economic • Community
empowerment
• National
wealth creation
• More equitable
wealth creation
• Changing
behaviours
and instilling
values
• Risk: City-centric employment
• Opportunity: Integration of
rural economy through
employment
• Risk: Inward looking business
model
• Opportunity: Outward looking,
nation-aligned business model
• Opportunity: Customer
development
• Opportunity: Act as a catalyst in
changing values and behaviours
• Opportunity: Grow micro and
SME customer capacities as future
focus
• Opportunity: Mobilise the nation
into economic activity
• A policy of employment from
every point of the Bank’s
presence thus developing the
skill base for the preservation
and development of the industry
• Business strategy that has the
bandwidth to evolve with
national development
• Speci c customer development
programmes around the year,
aimed at building capacity and
market linkages
• Product development – new and
existing
• Programmes aimed at instilling
values vital for economic
momentum in the long-term
• Nation-wide recruitment
• Elementary Course in Banking & Finance
for youth from Ja na, an initiative to drive
employability of youth from the northern
province and to enrich the industry
• Products and services that meet the
national priorities
• Customer development with a “to market”
approach, thus sustaining their businesses
• SME focused product development
• Student banking units, rural empowerment
KEY IMPACTS, RISKS
AND OPPORTUNITIES
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 87
MANAGEMENT
APPROACH
Corporate Governance and Risk Management
Corporate Governance is a fundamental component of the culture and
business practices of the Bank. It is the management framework that
facilitates the conduct of the Bank’s business in a responsible and
accountable manner so as to promote its credibility and soundness,
which will in turn lead to the overall stability of the banking sector in Sri
Lanka. The Bank’s Board of Directors is responsible and accountable for
the management of the a airs of the Bank, its conduct of business, the
design and implementation of a prudent risk management framework
and its overall soundness.
The Board’s role is therefore to provide entrepreneurial leadership to the
Bank within the framework of prudent and e ective controls that
enable key risks to be managed. The Board sets the Bank’s strategic
aims, ensuring that the necessary nancial, human and physical
resources are in place for the Bank to meet its objectives. The Board sets
the Bank’s values and standards and ensures that its obligations to its
stakeholders are clearly understood and met.
Risk is an integral aspect of the banking business and Hatton National
Bank consistently aims to deliver superior shareholder value by
achieving an appropriate trade-o between risk and returns. The Bank’s
Risk Management strategy is based on a clear understanding of the
various risks, disciplined assessment, measurement and continuous
monitoring leading to the mitigation of such risks. The policies and
procedures established for this purpose are continuously reviewed in
the Bank’s quest to bene t from a blend of local and international best
practices.
Sustainability Precepts
1. Commitment to Sustainability
To fully integrate the consideration of ecological limits, social equity and
environmental justice into corporate strategies and core business areas, to
put sustainability objectives on an equal footing to shareholder
maximisation and client satisfaction, and to actively strive to nance
transactions that promote sustainability.
2. Commitment to ‘Do No Harm’
Commit to do no harm by preventing and minimising the environmentally
and/or socially detrimental impacts of the Bank’s portfolios and operations
by creating policies, procedures and standards based on the Precautionary
Principle to minimise environmental and social harm, improve social and
environmental conditions where the Bank operates, and avoid
involvement in transactions that undermine sustainability.
3. Commitment to Responsibility.
The Bank bears full responsibility for the environmental and social impacts
of its transactions including nancial risks, as well as social and
environmental costs that are borne by communities.
4. Commitment to Accountability
The Bank is accountable to its stakeholders. Accountability means that
stakeholders have an in uential voice in nancial decisions that a ect the
quality of their environments and their lives - both through ensuring that
stakeholders rights are protected by law, and through practices and
procedures adopted by the Bank itself.
5. Commitment to Transparency
The Bank is at all times transparent to its stakeholders, not only through
robust, regular and standardised disclosures, but also by being responsive
to stakeholder needs for specialised information on the Bank’s policies,
procedures and transactions.
6. Commitment to Sustainable Markets and Governance
The Bank ensures that markets are more capable of fostering
sustainability by actively supporting public policy, regulatory and/or
market mechanisms that facilitate sustainability.
88 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Information Security
Information security and Online data protection for the Bank’s
customers was a key area of focus in 2010. The Bank’s implemented a
new IT system designed to curtail fraud and manage online crime
through management of operational, and nancial risk, as well as by
meeting the compliance requirements for BASEL 2. Data security was
enhanced through vigilant monitoring and review of security measures
in use.
The security systems of the Bank’s ATM network were upgraded to meet
the latest international standards with the implementation of state of
the art monitoring and fraud preventive technology. ATM and branch
security measures are the subject of continuous review and risk
assessment. The Bank invested to protect the physical security of
branches and cash machine networks. This included the deployment of
anti-skimming devices to ATMs across the country. CCTV technologies
have been further enhanced for additional security to deter security
breaches at branches and customer centres.
Product Stewardship for Fair Banking
The business case for sustainable banking is strongest when a bank can
focus on a business line where it can take advantage of scale, become a
rst mover, or nd a niche market. Hatton National Bank has
demonstrated its ability to focus on key business lines that have been
fully explored through the infusion of innovation across time.
The Bank’s size and scale entails freedom of operations from the
smallest to the largest nancial need. As a partner in large-scale
infrastructure development, the Bank has demonstrated its ability to
service the nancial needs across the chain of sub-contractors. From a
business strategy perspective this has enabled the Bank to capture cash
ows, thus enhancing its resource-base, whilst providing services across
the product and service continuum of the Bank, thereby facilitating
small time operators to participate on an equal footing to that of large
and medium scale operators through nancial inclusion.
Similarly, the Bank’s role in serving the migrant workers of Sri Lanka has
been a mainstay of the business strategy for many decades. Through its
inward remittance services, the Bank provides a cost e ective, secure
and speedy service to Sri Lankan migrant labour placed across the
globe. Moreover, the Bank has played a vital role in minimising the
unnecessary consumption of foreign exchange by inculcating a savings
habit amongst its client base. In turn, the Bank has e ectively cross-sold
a range of nancial instruments and services such as agricultural loans
whilst retaining foreign exchange savings. Thus, capacity building
through savings and recycling and capture of capital has enabled the
Bank to e ectively sustain the livelihoods of its client base whilst also
meeting national objectives towards the augmentation of foreign
exchange reserves.
The balancing of business strategy with sustainable development of the
nation, thus, has consistently delivered win-win solutions to both the
Bank as well as to its clients and the nation at large.
Financing Green Investments
Sustainable energy nance has increased our Bank’s visibility and market
di erentiation in a highly competitive domestic market. The Bank has
actively sought to endorse sustainable energy nance in propagating
an awakening amongst Sri Lankan commercial enterprises to propel
sustainable energy projects. As a niche market player, the Bank foresees
future growth potential from a business strategy perspective, whilst
fostering a sound solution to the growing energy needs of the nation.
Through its related company Lanka Ventures (Pvt) Ltd., the Bank has
indirectly nanced a number of renewable energy projects and
continues to support those seeking sustainable energy nance. The
Bank’s corporate banking division continues to support and encourage
investments in environmental friendly projects.
MANAGEMENT
APPROACH
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 89
The Bank’s power sector exposure is quanti ed as follows:
Description Capacity
(MW)
Exposure
as at 31
December
2010
Contribution
to the
National Grid
22 mini hydro power plants in
operation with a total capacity
of
51.5 MW
Rs 605.3
Mn
160.5GWh
per annum
4 hydropower plants under
implementation with a total
capacity of
(Total commitment Rs 648. Mn)
15.6 MW
1 wind power plant with a total
capacity of
9.6 MW
Presently, the Bank is evaluating the viability of nancing into three
wind power projects and seven mini hydro projects in the upcoming
nancial year.
In addition the Bank has participated in nancing environment friendly
projects such as hazardous waste reduction, and pollution control
measures under the E-Friends Loans Scheme (exposure as at 31
December 2010 - Rs 320.7 Mn)
Policies that shape our Management Approach
1. The Bank recognises that work-life balance is imperative for the well-
being of the employees, and therefore supports and promotes a
balance between work and life for all employees. The Bank fully
endorses the maintenance of a sound balance in work and life and
acknowledges that this enhances the overall productivity of
employees, increasing sta retention, reducing absenteeism and
raising employee morale. The scope of the work-life balance policy
is organisation-wide and is applicable to all the employees. It
speci cally covers provisions for employee leave, career breaks,
nancial assistance towards achieving personal objectives,
integration of family in sports and social activities, access to health
related information and guidance, as well as employees’ access to
counseling where necessary.
2. The Bank is committed to achieving high standards of health and
safety (H&S) at the workplace and strives to achieve an incident free
occupational environment. The H&S policy is one that is holistic and
inclusive, and is a priority consideration for all business operations.
By complying to the above standards which supersede the
minimum H&S regulations laid out by the relevant authorities, the
Bank creates a secure environment for employees, customers and
other stakeholders.
3. Equity & Diversity is promoted at the Bank through policies in place
to eradicate discrimination. The Bank actively strives to ensure that
its workforce re ects diverse populations and intends to create a
place where employees hold common values about respect for
others, and respecting di erences between people. The principles
of the Equity & Diversity policy ensure that the Bank adopts a
non-discriminatory approach to employment, career development,
training, and all other recognition and reward.
4. The Bank’s grievance handling policy ensures that its employees
have the opportunity to make presentations to the Management for
redress. This is aimed at improving employee-employer relations
and thereby instituting sound industrial relations. The grievance
handling procedure is a three-step approach that allows the
grievance to be escalated to the highest level of authority within
the organisation ensuring fairness and transparency of the process.
5. The Green Pledge commits every employee to act with
environmental consciousness. Every employee at the Bank is
committed to the pledge and not only limits his or her behaviour to
the precepts of the pledge but also commits to cascade the
awareness across his family and peers.
6. Human rights are upheld at every aspect of the Bank’s operations.
The Human Rights policy re ects the Bank’s commitment to
conduct business in a manner consistent with the principles of the
policy. The Bank also strives to protect human rights within the
Bank’s areas of in uence. The Bank does not employ workers under
the legal minimum age, prohibits the use of all forms of forced
labour, respects employees rights to join, form or not join a labour
union, respects the principles of collective bargaining, provides
health & safety at work, is non-discriminatory to age, race, religion or
sex, prohibits sexual harassment, limits work to standard accepted
hours and condemns the use of corporal punishment.
7. The Bank’s Code of Conduct and Compliance and Integrity
Programme is at the heart of its management approach to
sustainable business. The Code is applicable to all employees and
calls for honest and ethical conduct, outlines con ict of interests,
misuse of corporate opportunities speci cally information security,
de nes gifts and entertainment, calls for nancial integrity in
disclosure to investors and regulators, calls for compliance with
laws, regulations and rules, and commits every employee to report
concerns where the code has been breached.
1.
Work-life
balance
policy
6.
Human
Rights
5.
Green
Pledge
4.
Grievance
Handling
policy
3.
Equity &
Diversity
7.
Code of
conduct,
Compliance &
Integrity
Programme
2.
Health &
Safety
policy
90 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Connecting with varied stakeholders is a vital aspect of the Bank’s
operations. As a responsible business, the Bank understands that its
actions will a ect others and that their actions in turn will re ect back
upon the Bank. As a part of the process of managing social and
environmental sustainability, the Bank is cognizant of the need to
increase engagement with stakeholders, making itself more open and
more accountable to a wider range of interested parties.
Thus, e ective stakeholder engagement assists the Bank to understand
the current emerging challenges faced by its stakeholders and in turn
challenges the Bank to develop mutually bene cial solutions.
This process also entails communicating results clearly, openly, and
thoroughly, a critical criteria, as the Bank’s business depends upon
credibility, and on the trust placed in the Bank by its stakeholders.
On the external front, the Bank engages with the wider community.
Communicating the Bank’s performance in sustainability initiatives and
social and environmental management to external stakeholders is a key
component in creating long-term value. Among other things, it
enhances the Bank’s reputation, builds its brand, and improves its image
in the community.
Demonstrating nancial gains from sustainable banking enhances
shareholder value. Moreover, good public reporting has improved the
Bank’s access to capital and to international markets. A major part of
improving communication is engaging in clearer, more open, and more
transparent public reporting on environmental, social, and economic
performance. Leadership in reporting has assisted the Bank to develop
and di erentiate itself in the marketplace and generated positive
relationships with external stakeholders.
Another aspect of increasing engagement with stakeholders is
promoting corporate governance. The manner in which governance is
embraced by the Bank has been described in detail in the Corporate
Governance section of this report on page 59 - 75.
STAKEHOLDER
ENGAGEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 91
Engaging stakeholders through sustainable
business practice
The Bank strives to consistently achieve a balance through the infusion
of practices towards the realisation of social and environmental
considerations in business. To this end, it is aware of the role of and the
need for stakeholder inclusiveness as a core driver of sustainable
business practice. This is aptly illustrated through the following:
A) Policies with speci c environmental and social
components applied to business lines
• Green Pledge Champion programme: training and awareness for
employees, customers and suppliers on decreasing the impact on
the environment through adoption of green practices.
• Customised training programmes for branch teams on customer
service followed by mystery shopping exercises
• Sustainable procurement policy necessitates that suppliers
comply with and adopt sustainability precepts in the functioning
of their own businesses. Education of suppliers towards the needs
of the procurement policy as well as on how to integrate green
practices to business has been an area of focus over the past two
nancial years (2009,2010).
• Green Financing has become a key area of focus for the Bank and
it has been proactively driving this area of business through
lending schemes that a ord better terms than the conventional
lending tools.
• Enhancing capacities by imparting nancial and specialist
know-how to customers (Refer Table page 92 for scope and scale
of such activities undertaken in 2010). As depicted below, the
Bank through a well-de ned stakeholder engagement process
undertakes customer education with initiatives that enhance the
bene ciary’s nancial literacy as well as general business and
sector related skills.
Engagement Processes
Stakeholder Process
Customers • Bank carries out, on an on-going basis, a series of qualitative and quantitative measures both through in-house as well as
through outsourced research houses. The results of these surveys and research processes are used continually to determine
how well and to what extent the Bank’s service portfolio as well as the service levels require to be augmented.
• Meetings, events and festivities that bring a cluster of customers face to face with the Bank’s Management also allow the Bank to
gauge the relationship with each customer and to fortify these relationship going forward.
• The Bank conducts a series of “secret shopper” styled programmes that aim to allow the Bank’s Management to “experience” the
service levels a orded to the customer base. These “experience” sessions allow the Management to determine changes to the
service levels and to the service code.
Employees • Various internal communication tools and employee feedback tools, open door policies, HatnaMag (the Bank’s internal
publication) and the Bank’s inspiring innovation programme “Spark” all contribute towards the creation of an open and
constructive dialogue.
• The “CSR Champion programme” and “The Green Pledge” undertaken by the Bank’s employees further serve as an exercise to
strengthen the engagement process across the Bank.
Financial Investors • Annual General Meeting is an e ective dialogue process on matters which are relevant and of concern to the general
membership.
• The Investor Relations team headed by the MD/CEO has regular discussions with key institutional shareholders/ Fund Managers
to share highlights of the Bank’s performance and also with the view of obtaining constructive feed-back .
• The Bank’s website also serves as a tool towards e ective engagement.
Communities • The Bank’s branches serve as the main medium for engagement with the community. With a high level of interaction taking
place between the sta of branch o ces and communities within which they operate, community focused sustainability
initiatives have largely been stimulated through stakeholder dialogue.
Suppliers • The adoption of the “Green Procurement Policy” ensures that sustainability criteria are included in speci cations to suppliers and
that sustainability criteria are met in the award of contracts by ensuring that suppliers’ environmental credentials are considered
in the supplier appraisal process.
• Bank communicates and educates suppliers on the Green policy and the need for the implementation of ethical manufacturing
processes for the long term sustainability of their own businesses.
Environment • The Bank engages with like-minded conservationists and experts in the areas of bio-diversity conservation, “green” design and
construction and forged business partnerships along the lines of green nance/renewable energy.
• The Green Pledge has been a tool to engage with those stakeholders who are external to the Bank, thereby cascading the green
message to communities in which the Bank operates.
92 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Description Locations
No of
programmes
No. of
participants
Trade nance for corporate customers Colombo 1 120
Training for SME customers & non customers Matara 1 40
General awareness programmes Boralesgamuwa, Chilaw, Gampaha, Mirigama, Nuwara Eliya,
Tangalle, Tissamaharama
7 15,615
Entrepreneur development programmes including
specialised programmes for youth
Boralesgamuwa, Galle, Giriulla, Nittambuwa, Vavuniya 5 1,025
Training for dairy farmers Homagama, Horana, Padduka, Wariyapola 5 850
Training on new technologies for o shore shing Chilaw 1 100
Awareness programmes for Farmers Kottawa, Mannar, Nawalapitiya, Nuwara Eliya,
Thambuttegama, Trincomalee
6 20,950
Climate change & water resource management Nuwara Eliya 2 200
Student Managers conferences (for school children) Colombo, Tissamaharama, Galle, Ratnapura, Kandy,
Kurunegala, Ja na
7 1,000
B) Procedures for assessing / screening environmental
and social implications of business operations with
Processes for monitoring clients’ implementation /
compliance
Performance evaluation and measurement of sustainability criteria
within the functions of the Bank are carried out through a range of
energy e ciency, waste improvement and environmental performance
criteria. The Bank meets and benchmarks against Key Performance
Indicators and undertakes initiatives to enhance the environmental
credibility of the organisation whilst minimising its carbon footprint.
Hatton National Bank adopts a systematic process to assess the
environmental and social risks and opportunities arising from its clients’
business activities, manage the bank’s exposure to them, and improve
operating e ciency and e ectiveness.
This sustainability system ensures that sustainability considerations play
a part in the Bank’s decision-making processes, including credit
assessments and portfolio analysis. It enables the Bank to consider
environmental and socio-economic issues comprehensively, and by so
doing, move beyond simply complying with regulations to taking
advantage of sustainability opportunities.
Score-cards and rating systems are implemented to assess risks
especially in lending. Covenants placed in o er letters and agreements
are followed by regular monitoring and inspections. As a policy the Bank
endeavours to balance nancial gain with sustainable practices.
C) Processes for improving sta competency to
implement the environmental and social policies and
procedures as applied to business lines
Changing behaviours is deemed critical to the long-term e ectiveness
of the Bank’s sustainability strategy. Towards this end, the Bank
continues to initiate programmes that instill the values of social
responsibility and which aim towards the achievement of social reform.
By commencing with its own employees, the Bank undertook a Green
Pledge coinciding with the World Environment Day in 2009. The Bank
STAKEHOLDER
ENGAGEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 93
drew inspiration from the United Nations theme for 2009 “Your planet
needs you. Unite to combat climate change” to compose the actions
stated in the Green Pledge. The pledge was preceded by a
comprehensive training for team leaders on waste management and
energy e ciency whilst an internal communication strategy supported
the initiative increasing awareness amongst the Banks’ employees and
customers on an individuals’ desired action towards a greener planet.
The Bank in 2010 carried out comprehensive training programmes
directed at its employees with a view to enhance their awareness on
green practices including sustainable products. Since the introduction
of the “Green Pledge”, a pervasive drive to inculcate green practices at
both the workplace and home has been deployed. Numerous internal
communication programmes have been carried out and the Bank’s
e-learning tool on the intranet carries a module on green practices with
speci c focus on the key areas highlighted under the “Green Pledge”.
Moreover, the implementation of sustainability KPI tracking systems has
enabled the Bank to persistently strive towards reaching greater
e ciencies in green practice. To inspire and motivate employees to
adopt and strive for excellence in the adoption of green practices, the
“Green branch” awards scheme was launched. Every nancial year, after
assessment of KPIs, the branch that excels on both quantitative (KPI
based criteria) and qualitative fronts (softer criteria such as taking the
green message to customers and other stakeholders) is declared the
best “green branch” for the year.
D) Interactions with clients/investors/business partners
regarding environmental and social risks and
opportunities
The Bank also considers the behaviours of all of its stakeholders in
championing change towards sustainability awareness and empathy.
From a supplier perspective, the Bank adopts a sustainability conscious
procurement strategy which gives precedence to suppliers who follow
sustainability requirements as laid out in the procurement guidelines.
Currently in the rst stages of implementation, the Bank expects the
sustainability procurement strategy to heavily impact the roles and
actions of suppliers in the years to come, necessitating change in the
way they do business in the future.
From a national and business perspective, the Bank considers
behavioural change to a more conducive social and economic focus, a
dire need for the future development of the nation. In addressing these
needs, the Bank undertook to build talent and catalyse change in the
Northern province due in large to the vast gap in resources for the
communities resident therein. After more than three decades of con ict
and with considerable brain drain due to it, the Bank recognised the
need for a large drive for advocacy in the area. In developing the
existing resources in the province, the Bank resolved to train and recruit
participants from the Northern province for the Bank’s sta
requirements for the area. With several batches of school leavers
unemployed, the Bank has undertaken to train and develop the
selected participants to better equip them to enter the nancial services
industry. Consciously training more than the Bank’s requirement, it is the
expectation of the Bank to build capacity by developing the youth of
the area from both an intellectual as well as social perspective to obtain
employment in other nancial service organisations in the area. The
programme is expected to continue over the next three years and will
be cascaded to the Eastern province in 2011.
Along the same lines, the Bank’s “Divi Saviya” Programme aims to create
nancial inclusion for rural micro-entrepreneurs. Started over two
decades ago the programme has facilitated over 100,000 youth
micro-entrepreneurs to date. Working in tandem with the Bank’s
Micro- nancing programme “Gami-Pubuduwa” or “Village Re-
awakening”, the nancial literacy e orts are compounded by giving the
youth of rural Sri Lanka the opportunity and the accessibility to nancial
services.
As a part of its innovative initiatives to develop the rural economy in Sri
Lanka and in part to further augment the “Divi Saviya” Programme the
Bank has collaborated with corporate partners to go beyond the normal
engagement of providing nancial assistance to customers. Through
tripartite agreements – with the Bank, its customers and corporate
buyers – the Bank assists customers to nd markets for their products. In
establishing “to market” linkages, the Bank has conducted trade fairs,
utilised information technology to actively promote customer products
and linked the producers to online buyers, and assisted towards quality
improvements through introduction of quality assurance experts. The
Bank’s collaborative programme aims to build and strengthen new
linkages within these communities enabling them to meet sustainability
opportunities and risks with greater con dence.
Membership Commitments
• ACCA Sri Lanka Branch
• American Chamber of Commerce (Amcham)
• Asian Bankers Association
• Association of Professional Bankers Sri Lanka
• Banking with the Poor Network, Singapore
• Employers Federation of Ceylon
• International Chamber of Commerce
Sri Lanka
• Sri Lanka Forex Association
• The Ceylon Chamber of Commerce
• The Chartered Institute of Management Accountants
- Sri Lanka Chapter
• The Institute of Bankers of Sri Lanka
• The Institute of Chartered Accountants of
Sri Lanka
• Trade Finance Association of Bankers
94 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
OTHER STAKEHOLDERS’ PERSPECTIVE
CUSTOMER RESPONSIBILITY
Hatton National Bank has been perceptive to customer needs from its
very origins over a century ago. Evolving over the years to meet the
changing needs of the customer and to match international standards
in nancial servicing, the Bank has built its core business strategy
around customers as one of its primary stakeholder groups.
The Bank recognises that a sustainable customer orientation extends
beyond merely providing services sought by its customers. It recognises
the need to continually review and redesign its service o er whilst
proactively reaching out to create a di erence in the way in which the
Bank economically empowers its customer base. Accessibility,
innovation, use of best practices in product and service o er as well as
nancial literacy education form the crux of its strategy towards
customer responsibility.
Exceeding customer expectations
During the year in review, the Bank maintained its e orts towards active
participation in determining customer expectations and satisfaction
levels by undertaking a number of qualitative and quantitative research
projects. The key outcomes of the research conducted during the year
have been fully assessed and are being taken into consideration by the
Bank’s Management in an e ort to elevate the levels of customer
service as an ongoing and proactive process.
Project Description
Period of
Implementation
Activities undertaken in 2010
Market Research
survey – Youth
Survey of youth with intention to tap insights
into their consumer behaviour towards
nancial services, map perceptions and need
patterns with the intention to launch a youth
empowerment product with two variants for
rural and urban consumers
2010 and ongoing Sample of 600 respondents aged between 18-25 years from rural and
urban geographies in Colombo, Kandy, Galle, Vavuniya, Badulla and
Ampara. The survey is being conducted in 3 phases comprising of a
familiarisation workshop with facilitators, qualitative research followed
by a quantitative research process.
Financial assistance towards the project from SEEP Foundation USA
Market Research
Survey –
Remittances
Survey of senders and receivers of remittances
to determine ways in which to improve on the
existing remittance processes with the
intention to launch a new remittance product.
Research carried out in collaboration with
International Fund for Agricultural
Development (IFAD) and Womens World Bank
(WWB)
2010 and ongoing Sample of 150 receivers of remittances from the Southern and Central
provinces and 40 senders resident in the Middle East. Focus Groups
are the main research method employed.
Continuous
product / service
Quality
improvement
schemes
A multitude of initiatives are undertaken to
ensure continuous product improvement.
These initiatives are ongoing programmes of
action that continue irrespective of timelines
with the objective of reaching excellence in
customer satisfaction
Ongoing • Internal reviews – a bottom-up approach to service enhancement
with suggestions stemming from branch level.
• Mystery shopper schemes where service quality is rated
periodically across the branch network
• Meetings, events and festivities that bring a cluster of customers
face to face with the Bank’s Management for interaction and
discussion
Corporate
Customer Audit
Quarterly audits carried out to determine
levels of satisfaction and to proactively
mitigate issues
Ongoing Audits are carried out periodically
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 95
Product and service enhancement initiatives took many forms during
the year. From a product stewardship perspective, new product
development and improvement of existing products through thorough
product assessments was a signi cant aspect of the Bank’s product
development process. Similarly, continuous focus on prompt response
to customer complaints continued to be critical to the Bank’s overall
customer centric service approach.
Project Description
Period of
Implementation
Activities undertaken in 2010
Product Development
Committee
Meets periodically to assess market needs
based on research and customer
suggestions
Ongoing Determined changes to existing products and designed new
products and services – refer list of new/ re-launched
products on page 96.
Addressing Customer
Complaints
Once a customer complaint is made, either
verbally or in a written manner, the Branch
Manager in his capacity as the Chief
Complaint O cer acts to solve or rectify the
issue at hand. Where he is unable to do so it
is escalated to Head of the Region, the Chief
Complaints O cer or the Financial
Ombudsman respectively. Circular 2003/25
outlines the process whilst a centralised
unit for resolution of complaints under the
Deputy General Manager (Marketing and
Retail Banking) liaises with the Financial
Ombudsman.
Ongoing During the year a total of 102 written complaints were
received by the Bank - of which 86 were received by the
Bank’s Management and all were resolved. The balance 16
was those received by the Financial Ombudsman and referred
to the Bank. All these were also resolved.
Customer Safety Ensure customer safety through better
security and compliance, customer privacy
and responsible lending to ensure that
customers are exposed to levels where
repayments will be an issue
Ongoing Enhanced infrastructure at branch level to o er further levels
of privacy, evaluation of customer context to determine
saturation of capital and interest repayments as per income,
continuous process to ensure strict compliance
Multi-point distribution enhances
accessibility to nancial services
The Bank employs a multi-point distribution strategy with a view to
increases the penetration of its service o er, the strategy being to reach
even the most rural of customers. As such the Bank operates fully
edged branches and customer centres, micro branches that cater to
the speci c needs of micro-enterprises and doorstep branches which
o er the most basic of banking services in deep rural pockets where
communities have little or no access to nancial services.
During the year accessibility was greatly enhanced through the opening
of several new branches and customer centres in all nine of the
country’s provinces. In total 19 branches and customer centres were
opened in 2010 of which Negombo Metro serves as a priority-banking
centre whilst Kandy City Centre branch operates 365 days of the year.
Hatton National Bank truly demonstrates its national outlook through its
distribution strategy with 205 customer centres reaching out and
serving customers across the nation, empowering them and drawing
those who have never used the services of a bank into the arena of
nancial inclusion.
The Bank’s network of customer interaction points facilitates a greater
understanding of location speci c trade requirements with greater
emphasis on areas that lack adequate nancial infrastructure. As such in
2010, the focus remained on growing the Bank’s infrastructure in the
Northern and Eastern provinces that still remain inadequately served.
The opening of the 13th customer centre in Ja na during the year
assisted in the creation of greater awareness amongst customers on the
ways and means in which the Bank can support their personal and
entrepreneurial endeavours.
In 2010 the Bank’s Automated Teller Machine network expanded to 350,
placing the Bank at the forefront of ATM penetration in the country
(refer table on page 40)
Product Development to
resonate the customer’s lifestyle
During the year under review, Hatton National Bank reviewed its
product portfolio to ensure that each of the Bank’s products and
services matched customer expectations and served to uplift their
lifestyles. As such during the year 8 products were either re-launched or
newly launched into the marketplace.
Prior to making the products or services available to the customer, each
product undergoes a rigorous assessment for compliance. Each product
is fully tested and evaluated for suitability. Most often products are put
forward for compliance testing and where applicable to third parties
(such as the Central Bank of Sri Lanka) for authorisation.
96 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Product Description
New Product
HNB Privileged Account
Current account product that targets executives within SEC A, B classi cations. Product includes a range
of diverse value additions.
Special package for Medical Practitioners Package o ered to customers in the medical profession and consists of a range of nancial services.
Special credit package for executives A personal loan scheme that o ers credit for a variety of nancing needs.
HNB Pay Link O ered to corporate clients to facilitate SLIPS transactions via the internet
Revised Product
HNB World NRFC & RFC Draw
A draw scheme that was formally known as HNB Pathum Udanaya was rebranded as HNB World to re ect
a more global appeal. Scheme encompasses NRFC, RFC and Singithi Surakum accounts.
Lifeline Account A current account product that includes free life insurance.
Senior Citizens Account A scheme that provides special privileges to senior citizens over 55 years of age.
Dream Drive Vehicle Loans Vehicle loan product
Millennium Shield Insurance cover o ered free to NRFC account holders who maintain a pre-speci ed minimum balance
CUSTOMER
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 97
Customer Engagement
Hatton National Bank actively engages in a robust and consistent
process of customer engagement. The objectives of the Bank’s
customer engagement process are two-fold. Primarily it aims to
understand issues, concerns and suggestions from customers for the
betterment of the service process such that continuous service
development can be achieved. Secondly, it engages with customers
with the intention to educate and empower customers with the Bank
acting as the catalyst for livelihood and capacity development.
The process of engagement is varied for the rst objective and
comprises of initiatives such as personal interaction at the Bank, at
events held for customer interaction, at meetings at village level and
with Gami Pubuduwa Upadeshakas (Micro banking eld o cers) as well
as through written communications with customers, suggestion box
inputs, queries on line, email newsletters and via email.
For the second objective the engagement process is unique to each
engagement project. During the year 2010, the Bank continued to
develop upon the core engagement projects that have been in place
over the past three to ve years whilst adding further projects to
enhance the overall customer education, capacity development aspect.
Project Description
Period of
Implementation
Activities undertaken in 2010
Lowa Dinana Singiththo The Programme is conducted in association
with the Ministry of Education and o ers a
unique opportunity for the young
generation to bring out their creativity skills
and inbuilt talents in di erent areas such as
Art, Signing, Speech, Drama and Writing.
The Bank is con dent that through the
development of these skills a child will
bene t and be better facilitated to meet
challenges in the future especially through
the development of character and
self-assurance and by empowering them to
reach out for bigger goals.
2008-2010 The programme had a participation of 500,000 children from
over 9,800 schools island wide participating to display their
talents and creativity in any three of their competent national
languages.
Industry speci c education for
customers
Speci c programmes for customers
engaged in agriculture, sheries, and paddy
and cash crop cultivation are held
periodically with the intention of enhancing
customer know-how and to impart best
practices. As an institution that has been
globally recognised as one that has reached
out to the rural population through
programmes aimed at nancial literacy, the
Bank understood the dire need for a
programme focused on knowledge based
capacity building.
Ongoing • Sub-programmes dedicated to agro-techniques with the
collaboration of agro-experts to showcase the latest
technological aspects of farming, quality improvement
methodologies, packaging techniques as well as how to
obtain marketing linkages.
• Sub-programme focused on the latest shing techniques,
the more optimal shing catchment areas as well the
preservation and transportation methods.
98 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Project Description
Period of
Implementation
Activities undertaken in 2010
Student Banking: Financial
Literacy for the Youth
The Student Banking Programme was
established in 1990 to involve the rural
youth, provide them access to resources
and to allow them to interact with the rest
of the nation.
Through the aegis of the Ministry of
Education, the Bank progressively
approached schools, assisted them in
infrastructure development and capacity
building. To complement the national
curriculum the Bank established Student
Banking Units within the premises of these
schools. Through this process the Bank
undertook to not only inculcate the savings
habit but also to impart nancial education,
responsibility and accountability to the
Student Bankers. In the long term, the Bank
is con dent that its interaction with the
students would enable them to procure
employability with ease. To this e ect the
Bank certi es the participation of each
Student Banker in the Financial Literacy
Programme.
1990-ongoing Over the years the Student Banker programme has
successfully trained over 30,000 students.
The objective of promoting a savings culture among students
has been signi cantly met with 158 HNB Student Banking
Centres administrated by 1,000 Student Bankers. The
Programme contributes towards personal growth, imparting
of marketing and administrative know-how to students whilst
creating a scenario of self-assurance, capability and positivism
amongst students from an early age.
On a quarterly basis, Branch level training was conducted for
the Student Bankers whilst special nancial education
programmes were conducted at the participating schools
focused on educating the majority of the student population.
“Divi Saviya”: Financial Literacy
for Rural Micro-entrepreneurs
The Bank’s nancial literacy programme
aims to create nancial inclusion for rural
micro-entrepreneurs. Started over two
decades ago the programme now
popularly known as “Divi Saviya” has
facilitated several thousands of youth
micro-entrepreneurs to date. Working in
tandem with the Banks’ Micro- nancing
programme “Gami-Pubuduwa” or “Village
Re-awakening”, the nancial literacy e orts
are compounded by giving the youth of
rural Sri Lanka the opportunity and the
accessibility to nancial services.
Refer Case in point: “Broadening the
national economy through micro-
enterprise development”.
1990-ongoing During the year under review, under the “Divi Saviya”
Programme approximately 39,000 individuals were facilitated
and encouraged into mainstream commercial
entrepreneurship, thereby enabling them to create a scenario
of livelihood sustainability as well enlarging the national
economy. Of these 20,600 entrepreneurs were from the
Northern and Eastern provinces, thus showcasing the Bank’s
focus on aligning its business and sustainability strategies
against the national strategy for economic development.
Financial Management
Education
Collaborating with International Finance
Corporation (IFC), Hatton National Bank
established a programmed aimed at
creating a greater understanding of
nancial management amongst Small and
Medium Enterprises in Matara.
2010 The Programme allowed both the customers of the Bank as
well as other SME’s to interact with experts in the area of
nancial management to better understand how practices
can be utilised in their own businesses.
Corporate Seminars Seminars on specialist areas of Banking and
nancial management are held by the Bank
to allow corporate customers to interact
with nancial service experts from across
the world.
Ongoing In 2010, an international trade seminar was held with
renowned speakers from the Investment Bank JP Morgan.
A total of 120 representatives from the corporate banking
customer base were present.
CUSTOMER
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 99
Case in point: “Broadening the national
economy through micro-enterprise development”
For over two decades Hatton National Bank has been actively broadening the national economy through its Financial Literacy
programmes now rebranded as “Divi Saviya” Programme providing Financial Literacy to Rural Micro-entrepreneurs in tandem with the
Bank’s micro-banking product “Gami Pubuduwa” or “Village Awakening”. In the late 1980s as Sri Lanka faced one of the worst social
debacles of its times – a youth insurgency – Hatton National Bank conceived the two programmes aimed at drawing the nation’s
youth into economic productivity in an e ort to stem future youth unrest. The Bank’s nest achievement lies o the beaten track in
the rural areas of Sri Lanka. Hatton National Bank’s Barefoot Banker named Gami Pubuduwa Upadeshaka (Village Awakening Advisor)
steers both the nancial literacy and the micro nancing programmes and acts as a mentor to budding rural entrepreneurs.
Sustainable development and nancial security have been the outcomes of this programme: empowered intellectually and nancially,
the rural youth associated with the Bank’s programme understand and accept that self-sustenance through agriculture and
commercial enterprise is a sound proposition for future wealth creation.
Mr W W M Wijekoonbanda’s success as an entrepreneur is a ne example of how “Gami Pubuduwa” and its nancial literacy
programme have spurred the rural economy. His story in one amongst over 100,000 youth entrepreneurs, all of whom started with
almost nothing to achieve economic stability and a hopeful future. “When I approached the Gami Pubuduwa Bankuwe Mahattaya
(Gami Pubuduwa Upadeshaka), all I had, was the will to succeed. I lived in Kantale then, in the Eastern Province of Sri Lanka, and when
I heard about the “Gami Pubuduwa” and its nancial literacy programme I knew that there is a higher power out there, listening to our
every prayer”, he recalls.
“The Bankuwe Mahattaya (gentleman from the bank) too shared our enthusiasm. I felt that he too was just like us. He understood
what I wanted and he believed in my dream and because of his ability to relate to me he helped me obtain a Rs. 15,000/- cultivation
loan. Then I was able to obtain a loan of Rs 150,000/-. For me this was an incomprehensible amount of money, and with it I purchased
a stock of paddy. We had it pounded at various mills and then distributed throughout the area of Maharagama. Seeking our fortune
in the Western Province was a big step for us. That was in 1999,“ he notes. Now Mr W W M Wijekoonbanda is an entrepreneur of rm
standing, the Bank assisted him along his journey, not only nancially but also through nancial literacy, and as he notes “it wasn’t just
about getting a series of loans, No, my relationship with the Bank was much wider, they helped me understand how to do business,
taught us the basic principles in nancial management and was always at our side to help us grow by educating us”.
“Our business has ourished, and Hatton National Bank has been there with us every step of the way as we continue to make progress
with our dream. I now have 20 employees working under me. The purchase of paddy and the milling process takes place in Kantale
under the supervision of my brother Wijekoonbanda, while sales-related transactions are handled by myself at our warehouse in
Mattegoda. The warehouse is currently on rented premises but in 2006 we bought some land close to our current warehouse
premises and we have constructed our own new warehouse there with the intention of achieving greater heights in our business.
We named it as ‘Siyasa Sahal Sala’ and it was opened in 2008”.
100 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Developing people to meet HR needs beyond
the organisational context
As Sri Lanka as a nation stands poised for development, garnering
opportunities from a post-con ict scenario, Hatton National Bank
recognises that it too needs to play a pivotal role in creating a
conducive environment that goes beyond the context of o ering
nancial services. In this respect, the Bank has been and will continue to
be responsible for HR practices and initiatives that go well beyond the
organisational context in terms of bene ts accrued.
Whilst from every angle of the sustainability strategy the Bank has
endeavoured to instill values and knowledge across its stakeholder
groups with the end objective of growing know-how and capacities
towards spurring the national economy, in employee responsibility the
Bank has focused on instilling the pursuit of excellence amongst
employees and future employees. The Bank truly demonstrates its
national stance by engaging in Human Resource practices that not
merely develop an individual in the capacity of his / her job function
but focus on developing an individual who is an inspired, motivated
professional with the depth and capacity to make a signi cant
contribution to the industry and Sri Lanka’s new economy. Therefore,
the intention is to focus beyond the organisation and build Human
Resources that will add value to the nation in terms of building national
HR capacities that match or supersede international standards.
Initiative Description
Implementation
period
Outcomes in 2010
“Upward Mobility”
System : HRIS
HR Information System enables strategic
Human Resource intelligence tools to be
utilised for planning and decision-making
and is expected to improve business
performance. The system enables the Bank
to cater to personalised HR needs of
employees. It acts as a sound base for
organisational development.
2008-ongoing Progressively implemented in 2010 and has produced
impressive results in terms of enhancements in performance
management, communication, training and development,
quick decision making and has promoted a concept of
paperless functions with respect to HR.
Online Recruitment The Bank’s recruitment process was
overhauled with the implementation of the
e-recruitment process. The system covers
the main aspects of the recruitment process
online. Hatton National Bank is the rst
organisation in Sri Lanka to introduce an
online recruitment system.
2009-ongoing During the year the Bank undertook the recruitment process
– from application assessment, screening of applications,
evaluation tests– online. The new application has decreased
the recruitment time frame to 3 weeks in comparison with the
2 months in previous years. Thus the e-recruitment process
accelerated the recruitment cycle giving the Bank the
capability to recruit with ease.
Creating a culture of Learning The Bank actively strives towards the
creation of a culture of learning, one that is
built on a rm foundation of knowledge,
skills and attitude. The Bank e ectively
utilises Training and Development as a tool
towards the creation of high levels of
functional and emotional aptitude.
Ongoing The Bank’s HR Development Plan mirrors the strategic vision,
objectives and the overall strategic intent for the Bank and in
broader perspective that of the industry and the nation.
• Overseas Training – over 10 per cent of the Bank’s
Executive Management attended reputed training
programme overseas.
OTHER STAKEHOLDERS’ PERSPECTIVE
EMPLOYEE RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 101
Initiative Description
Implementation
period
Outcomes in 2010
• Local training –551 sta members attended external
programmes
• In-house training – 4,094 employees participated in
training programmes organised by the Bank’s Training
Centre
• Management Development Programme – 36 Junior
executives attended a 3 month, 12 module programme
aimed at training Junior Executives to meet future
corporate and personal needs.
• Continuous Professional Development (CPD) – 45 per
cent of the Bank’s Branch Managers have now
participated in a CPD programme at the Post Graduate
Institute of Management over the last 3 years, an initiative
that stems from a quality enhancement approach to
business by building on managerial know-how to equip
the Managers to take up challenges and meet current
and future requirements.
• E orts were made to facilitate better communication
with classes conducted to enhance the pro ciency in all 3
national languages.
• Mentoring programme – revisited and accelerated to
ensure that the executives of the Bank receive greater
attention in terms of developing both soft and hard skills,
thus moulding them for future leadership roles.
• Coaching and Counseling programme conducted by a
UK based trainer where Regional Heads were trained to
coach and counsel, thereby extending their people skills
such that they will be better able to address people
related matters arising from their respective regions.
• E-Learning has awakened the desire for knowledge
amongst the Bank’s employees. The tool carries courses
on every aspect of banking, general management,
nance, customer service and a host of other more
specialist areas of interest, and gives the user the ability to
build competence through online competency tests.
5S Implementation The Bank has implemented 5S across its
entire Branch Network and attributes the
adoption of the housekeeping system to its
high levels of e ciency
Ongoing In 2010, 34 branches were short listed to compete at the 5S
competition organised by the Taiki Akimoto 5S - Japan Sri
Lanka Technical & Cultural Association. The Bank was
recognised for its excellence in 5S implementation when it
won 5 awards.
Recognising & Rewarding
Employee volunteerism
Employee safety is given the highest of
priority at the Bank with many measures in
place to ensure that health and safety issues
are proactively managed. Similarly, the
Bank’s focus on sustainability makes it a
priority concern. As employees are the
foundation of the organisation, the Bank
believes that employees should champion
health and social responsibility in order to
inculcate ownership to initiatives. As such
three volunteer programmes were initiated
to stimulate employee-led action with the
aim of enhancing each individual’s personal
value.
2010 The Champion scheme is a points led reward mechanism that
seeks to reward and recognise individuals who take
ownership and act as stewards of safety and sustainability.
During the year employees were nominated as Champions of
di erent causes/issues, for example Fire Safety Champions
were expected to provide leadership to re prevention
initiatives including training whilst HIV & AIDS Champions
served as the Bank’s ambassadors for HIV & AIDS. The
Champions were expected to lead initiatives relating to
creating awareness about HIV & AIDS and supporting victims.
A Green Pledge Champion scheme is also active under the
stewardship of employees.
102 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Initiative Description
Implementation
period
Outcomes in 2010
Investing in HRD for Industry
growth
The Certi cate Course in Elementary
Banking and Finance intends to educate
youth who have secondary education in
the fundamentals of Finance and Banking.
This initiative stemmed from the growth of
economic activity in the Northern province
and was launched in 2009. It serves as a
primer for those entering the Banking and
Financial Services industry from the
Northern province. The project intends to
uplift the skills of the entire industry
especially in the Northern province through
skills development.
2009-ongoing In 2010, the 3rd batch of participants commenced their
programme of study. To date the programme has trained 130
participants, some of whom have been recruited by the Bank,
whilst others have found employment within the Financial
Services Sector.
Grievance Reporting Employees have the ability to report
grievances to the top management
through the grievance reporting process.
Ongoing During the year, the Grievance Reporting process was
revamped to ensure that it is more accessible and easier for
employees to report should the need arise.
Work, Life Balance The Bank’s Work Life Balance Policy dictates
the need for a harmonious balance
between employees’ work and personal
responsibilities.
Ongoing In 2010, the Bank laid greater emphasis on achieving a middle
ground between o cial and personal accountability. As such
encouragement was given to develop employees’ aesthetic
and sporting talents. The HNB Toastmaster Club, Vesak Bakthi
Gee, Carol Services for Christmas, regional level sports days
and Inter-branch Quiz were some of the elements of the
approach towards achieving work-life balance.
Sta Welfare The Hatna Family is the crux of the Bank.
Welfare activities assist towards the creation
of content employees, and heightens the
Hatna family concept
Ongoing In 2010, as in other years a multitude of welfare initiatives
were undertaken.
Succession Planning through Human Resource
Development
In anticipation of future growth, Hatton National Bank implemented a
series of strategic HR initiatives in the year under review. The most
signi cant of these initiatives has been the steps taken towards the
forti cation of the Management team through infusion of greater
expertise. In 2010, the appointment of a Chief Operating O cer
strengthened the operational e ciency of the Bank. To complement
this strategic appointment and to enhance e ciencies further, three
core vacant positions on the organisational structure were lled at the
level of Corporate Management. These appointments are considered
critical to the strategic direction of the Bank, especially in light of the
rapid expansion of the Branch network and the service o er. The
Executive Team at the Bank was enlarged through the infusion of 150
trainees, all of whom were recruited speedily through the e-recruitment
system.
Performance Culture
The Bank pursues a management philosophy attuned towards
participatory management which creates a conducive environment for
performance management. The Bank’s orientation towards a
performance management philosophy has been a fundamental reason
for its status as a preferred employer, especially in the nancial services
industry. Where career progression is a constant where performance
management is practiced, the Bank ensures that employees meet
personal career growth expectations in tandem with commendable
performance towards achieving business objectives,
Remuneration
During the year, a remuneration survey was conducted by Hewitt
Consultants to determine Hatton National Bank’s position within the Sri
Lankan Financial Services Industry.
Formal recognition in the form of awards and career enhancements
continued to be complemented with direct nancial rewards. The Bank
also provides an array of facilities that enhances the remunerative
bene ts to employees; these include sta welfare schemes, medical
insurance for employees and immediate families, concessionary
nancial credit, housing nance, and educational nance.
Industrial Relations
The Bank adheres strictly to the International Labour Organisation (ILO)
labour practices and standards as well as local labour laws and
regulations. The Bank has and continues to establish a continuous
dialogue with the Unions, which have supported the Bank’s e orts
towards realising the business strategy and goals. In 2010, the Collective
Agreements between the Bank and the Ceylon Bank Employees Union
and the O cers Union resulted in the prevalence of a harmonious
working environment.
Ethics and Code of Conduct
The introduction of a Code of Conduct for all employees in addition to
the existing Code of Ethics in 2010 is expected to enhance the Bank’s
focus on Anti-corruption Practices, Compliance and Transparency.
EMPLOYEE
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 103
Sta distribution by Province
Province
2010 2009 2008
No % No % No %
Central 305 7.0 303 7.0 308 7.0
Eastern 171 3.9 144 3.3 135 3.1
North Central 133 3.1 88 2.0 91 2.1
North Western 217 5.0 234 5.4 211 4.8
Northern 155 3.6 139 3.2 112 2.5
Sabaragamuwa 143 3.3 140 3.3 145 3.3
Southern 233 5.4 232 5.4 237 5.4
Uva 117 2.7 117 2.7 119 2.7
Western 2863 65.8 2892 67.2 3024 68.8
Overseas 15 0.3 13 0.3 13 0.3
Total 4352 100.0 4302 100.0 4395 100.0
Curriculum of Management Development Programmes
3-month Certi cate Course in Management Development at the
Post-Graduate Institute of Management, University of Sri
Jayewardenepura.
86 managers and assistant managers have followed these programmes over a period
of 3 years since 2008 – 2010.
• the nature of and need for planning
• productivity enhancement practices
• decision-making techniques
• marketing and sales
• human resource management
• budgeting and costing
• enhancing communication skills including analytical thinking and business
writing and presentation skills
• enhancing inter personal relationship skills
• improving personal e ectiveness and accountability
MDP for Junior Executives
The experience of the MDP programmes for Managers highlighted the need for
harnessing skills at a junior level. A programme designed and formulated in-house at
the Training Centre was implemented in 2010 for 36 o cers identi ed with potential
for graduation to the Executive grade. It was conducted by both internal and external
resource persons.
The course included a mix of theoretical and practical skills development such as
• Bank management
• Managerial economics, planning and budgeting
• Marketing and selling
• Managing customer relationships
• Leadership and motivation
• Teams and team building
• Personal e ectiveness
• Communication and Presentation skills
• Business etiquette and personality development
Follow up will be based on personal action plans to be reviewed on a monthly basis.
Action taken to develop subordinates is also taken into account in this follow up
process. The programme will be continued in 2011 as well
Comparison of salaries at entry level
Industry Average
At Hatton National Bank
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20,000
LKR
104 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
EMPLOYEE
RESPONSIBILITY
17%
32%
22%
14%
8%
6%
1%
63%
17%
15%
11%
28%
17%
5%
6%
1% 0%
37%
Agewise Analysis of Employees Genderwise Analysis of Employees Servicewise Analysis of Employees
18 - 25
35 - 40
45 - 50
Over 55
25 - 35
40 - 45
50 - 55
Male
Female
Less than 02 Years 2-5 5-10
10-15 15-20 20-25
25-30 30-35 Over 35
In-house Training
Local Training
Overseas Training
SMOF
EXOF
MGMNT
Corporate Management
MGMNT
NON EXOF
SMOF
EXOF
NON EXOF
Corporate Management
MGMNT
Non EXOF
SMOF
EXOF
0
500
1,000
1,500
2,000
2,500
3,000
0
50
100
150
200
250
0
5
10
15
20
25
30
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 105
Permanent sta vs. Contract sta
Permanent 4317
Contract 35
Total 4352
Full time vs Part time sta -
All Sta inclusing contract sta work a full day
Sta Strength , Gender Analysis
As at 31st December 2010 2009 2008
Male Female Total Male Female Total Male Female Total
Corporate Management 19 7 26 17 4 21 16 4 20
Senior Management 25 5 30 30 4 34 31 4 35
Managers & Executives 459 128 587 447 123 570 431 117 548
O cers 687 324 1011 657 323 980 665 328 993
Banking Assistants 1036 690 1726 1019 581 1600 984 496 1480
Trainees 155 92 247 152 165 317 253 252 505
Secretaries,Stenographers, Typists 9 367 376 11 389 400 11 401 412
Support Sta 314 0 314 341 0 341 362 0 362
Contract Sta 30 53528113934 640
Total 2734 1618 4352 2702 1600 4302 2787 1608 4395
Percentage of sta covered by Collective Agreements
Year Total No. %
2008 4395 3105 71%
2009 4302 3152 73%
2010 4352 3267 75%
No. of employees
Year No.
2007 4334
2008 4395
2009 4302
2010 4352
Achievements of the HNB Toastmasters Club
• Achieved “President’s Distinguished Club” status for the third consecutive year
• Won the “Golden Gavel” (the highest achievement for a club) for achieving all ten
goals of the Distinguished Club Program, for the second consecutive year
• Won the “Smedley Award” for achieving new membership growth target for the
rst time
106 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Achievements in Sports 2010
Basketball
• Winner - Delmege Super League Champions - B Division (men)
• Champions Mercantile Basketball Knockout Tournament (women)
• Champions Mercantile Basketball Semi-league (women)
• Champions Super League (women)
Cricket
• Champions Mercantile G Division Cricket Tournament
Hockey
• Champions Mercantile League Hockey Tournament Singer Trophy
• Champions Mercantile Knockout Tournament Hatna Trophy
• Runner-up Mercantile Seven A Side Hockey Tournament
• Mr M M Gazzali (attached to the Central Cash department was awarded to
the most outstanding Young Player of the Year 2010 by the Mercantile
Hockey Association
• Mr Esanka Jayasuriya attached to the Navam Mawatha customer centre
was awarded a very special award of merit for continuously playing 10
years for Mercantile Hockey Association Team.
Netball
• Runner up – Nationals
• Runner up – Open Club Championship
Soccer
• Champions Football Association A Division Knockout Tournament 2010
Badminton
• Overall Champions Mercantile Badminton Overall Championship 2010
• Winner Mercantile Badminton Overall Championship 2010 - men’s singles
• Winner Mercantile Badminton Overall Championship 2010 - men’s doubles
• Winner Mercantile Badminton Overall Championship 2010 -mixed doubles
• Winner Mercantile Badminton Overall Championship 2010 -women’s
doubles
• Overall Champions Mercantile Badminton Team Championship 2010
• Winner Mercantile Badminton Team Championship 2010 - Men’s A Division
• Runner Up Mercantile Badminton Team Championship 2010 - Men’s E
Division
• Runner Up Mercantile Badminton Team Championship 2010 - Men’s H
Division
• Winner Mercantile Badminton Team Championship 2010 – Women’s A
Division
• Winner Mercantile Badminton Team Championship 2010 - Women’s D
Division
• Third Place Mercantile Badminton Team Championship 2010 - Women’s
Veterans
• Runner up Central Bank Inter Bank Badminton Tournament 2010 – Men
• Third place Central Bank Inter Bank Badminton Tournament 2010 – Women
EMPLOYEE
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 107
Case in Point: “Certi cate Course in Elementary Banking and Finance” empowers
Ja na youth and builds HR capacity for the nancial services industry
Anticipating a greater demand for trained nancial services sector professionals in the North and East, the Bank
established a three-month taught-course titled ‘’Certi cate in Elementary Banking and Finance’’, launched at the HNB
customer centre in Chunnakam in 2009.
Resource persons from the Bank and several senior lecturers from the University of Ja na form the programme’s faculty.
The course is provided free for all candidates that complete the programme of study. Consisting of four subjects -
Business of Banking, Accounting, Economics and Management and Organisation, the programme is the r st in the
peninsula to use the internet with video conferencing as a support medium in youth education. By the end of the
nancial year 2010, 2 batches of students amounting to 130 participants have been trained under the programme, some
of whom have been recruited by the Bank, whilst others have found employment within the Financial Services Sector.
Training of a third batch is in progress.
The programme has empowered intelligent and quali ed youth who hereto lacked the opportunity to grow and enter
into a career. The following quote by a parent of a participant is testimony to the impact of the programme on the lives of
these participants:
“I wish to extend my gratitude and appreciation for the School Leavers Training Programme. This has proved a boon to the
unemployed youth of Ja na, where many school leavers with fair A/L results have no opportunities to either continue
their education in a meaningful way or nd employment. HNB, in training our children and providing them with
opportunities for employment will stand out for its social responsibility”. – T. Thurairajasingham, father of Mr T.Thurenthirra
attached to the Bank’s Velanai branch.
108 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
In the year 2010, as in previous years, the focus of the Bank’s investor
relations lay in creating consistent value to shareholders. The process of
shareholder value creation is one that stems from the alignment of the
Bank’s business strategy towards maximisation of returns to
shareholders. Hatton National Bank’s consistent pursuit of business
excellence - from optimised pro tability to improved internal
e ciencies - and the general realisation of the Bank’s business
objectives in line with its business strategy, leads to satisfaction of
investor and shareholder expectations. Where enhanced pro tability
leads to enhanced wealth creation for shareholders, the Bank’s strategy
towards investor relations works hand in hand with that of the overall
business strategy. Therefore, investor relations are an on-going and
inherent process.
Shareholder Value Creation
As a responsible corporate, the Bank has consistently enhanced
shareholder value over the long-term, re ecting a cohesive and
strategic approach to shareholder value creation. This consistency in
value creation demonstrates the viability of the Bank’s business strategy.
In recognition of the Bank’s commitment to shareholder value creation,
The Asian Banker ranked Hatton National Bank as the First in Asia in
terms of Shareholder Return in the last ve years (2005-2009) under the
category of ‘Small Cap Banks’.
Binding Business Strategy to National Priorities
The year 2010 was a hallmark year for corporate Sri Lanka. The year was
re ective of the post con ict opportunities that await the nation in the
years ahead. As Sri Lanka, united as one, progressed in economic and
social indicators, Hatton National Bank continued to drive its Business
Strategy in alignment with the national strategy primarily along the key
pillars of infrastructure development, SME and micro nance as these
sectors are considered focal business drivers in the medium term.
The Bank’s post con ict development strategy has seen an increased
momentum of operations in the Northern and Eastern provinces. With
29 customer centres operational in the two provinces, Hatton National
Bank leads the revival of commercial spirit in the region through diverse
and far reaching strategies to revive the provincial economy. Persistent
strategies to ensure consistency in shareholder value creation were
deployed with a concerted growth strategy for the Northern and
Eastern provinces reinforcing the Bank’s business strategy with that of
the national development plan.
Investor Engagement in 2010
The Bank undertook a proactive approach to investor engagement in
2010. With sound economic and political scenarios at play, coupled with
the exuberance of the Colombo Stock Exchange, the ambience for
investor engagement was positive. The Bank’s focus for engagement
was primarily to be transparent in its operation and in communicating
its long term growth strategy to its investors. An aggressive
engagement strategy was followed amongst credible and
internationally recognised investor forums. The Bank also utilised
information technology to make headway in investor engagement
locally as well as internationally.
Internationally, the Bank carried out a concerted drive to enhance its
image from an investment perspective. International road shows in
Europe and the United States of America garnered exposure for Hatton
National Bank as a sound investment and as a consequence, placed Sri
Lanka in the consideration set amongst top global investors.
Participation in investor forums in Asia allowed the Bank capitalise on its
reputation as a sound performing stock and as a viable investment.
OTHER STAKEHOLDERS’ PERSPECTIVE
INVESTOR RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 109
2006
2007
2008
2009
2010
Rs.Mn
500
1,000
1,500
2,000
Gross Dividends
2006
2007
2008
2009
2010
Rs.
0
50
100
150
200
250
300
350
400
Share Price
Voting Non Voting
Road shows Europe
Singapore
Investor Forums DB Access Asia Conference organised by Deutsche
Bank , Singapore
‘Discover Sri Lanka’ investor forum organised by
India Infoline Ltd, Colombo
One to one
interactions
Large scale local and international investors and
fund managers
Email updates Quarterly emails to institutional investors with
performance updates – database of 49 recipients
Webex
Presentations
The Bank organised several Webex presentations
during the year on the Bank’s performance and the
future direction to local and foreign investors/
analysts
Website The website was re-designed in 2010 with the
intention to be more user friendly, informative and
interactive
2006
2007
2008
2009
2010
Rs.
5
10
15
20
Earnings Per Share
2006
2007
2008
2009
2010
Times
5
10
15
20
25
Price Earnings Ratio
* Earnings per share has been adjusted for weighted
Average number of shares during the current year.
ASPI equated to 100
Voting
HNB share price performance against ASPI
Non voting
0
200
400
600
800
1000
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Dec-10
2006 2007 2008 2009 2010
Earnings per Share (Adjusted) (Rs) * 9.37 12.76 13.58 18.37 18.84
Dividend Yield (%) - Voting 3.21 2.86 5.73 3.82 1.75
Dividend Yield (%) - Non Voting 7.14 6.57 12.50 6.21 3.26
Assets Growth (YOY) (%) 18.11 18.79 10.22 9.18 12.00
Holding Period Return - Voting (%) 42.89 61.80 (39.80) 153.41 139.00
Holding Period Return - Non Voting (%) 80.72 62.14 (32.39) 247.66 111.55
Operating Cost - E ciency Ratio (%) 57.80 56.21 54.22 54.34 56.51
Share Price - Voting (Rs) 155.75 122.50 69.75 170.25 399.90
Share Price - Non Voting (Rs) 70.00 53.25 32.00 104.75 214.60
Gross Dividends (Rs Mn) 588.82 824.35 942.12 1,533.06 1,647.69
* Earnings per share has been adjusted for weighted
Average number of shares during the current year.
110 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
INVESTOR
RESPONSIBILITY
Awards and Recognition
• MD / CEO Mr. Rajendra Theagarajah was awarded Qatar Financial
Centre (QFC) – Asian Banker Leadership Achievement Award for Sri
Lanka 2010.
• HNB was rated “Strongest Bank in the Country 2010” by Asian
Banker.
• HNB has been ranked First in Asia in terms of Shareholder Return in
the last ve years (2005-2009) under the category of ‘Small Cap
Banks’ according to the Investor Audit Services of The Asian Banker.
• “Best Retail Bank in Sri Lanka - 2009” presented by “The Asian Banker”
at The Asian Banker Excellence in Retail Financial Services Awards
2010.
• Recognised as the “Best Bank in Sri Lanka” by the Euromoney
Finance Magazine at the Euromoney awards for Excellence 2010.
• Gold Award Winner at the HRM 2010 Awards organised by Human
Resources Professionals and Hewitt’s Associates.
• Award for Excellence in Customer Service presented by MoneyGram
International Inc.
• Winner (Large category) - ACCA Sri Lanka Sustainability Reporting
Awards 2009
• Business Today ranked 2nd among Top 20 companies
• Top 10 Best Corporate Citizens Award 2010 organised by the Ceylon
Chamber of Commerce.
- 1st Runner up in the Overall Category
- Winner – Employee Relations Category
• Annual Report Awards of the Institute of Chartered Accountants in
Sri Lanka
- Overall Winner of the Gold Award for the Best-presented Annual
Report 2009
- The Gold Award for the Best presented Annual Report in
Banking Sector
- The Gold Award for the Best presentation in Management
Discussion and Analysis
- The Gold Award for the Best presentation in Corporate
Governance
• South Asian Federation of Accountants (SAFA) Best Presented
Accounts and Corporate Governance Awards 2009.
- First Runner up in the Banking Sector
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 111
Case in point: Shareholder value creation endorsed by The Asian Banker
In 2010, the Bank’s endeavour towards enhanced shareholder value creation was given third party endorsement by the
Asian Banker. Hatton National Bank was ranked as the rst in Asia in terms of Shareholder Return in the last ve years
(2005-2009) under the category of ‘Small Cap Banks’.
The Asian Banker Shareholder Return Ranking is an annual assessment of the relative total shareholder return (RTSR) of
listed Asian banks with market capitalisation of more than $100 million, and the top 25 largest banks (by market cap) in
other parts of the world.
The Asian Banker utilises a tried and tested methodology to determine the return ranking based on total shareholder
returns (TSR).
TSR takes into consideration the total shareholder return of a stock relative to the local market – accounting for the
impact of the local stock market - in ranking each stock.
112 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The Community has been Hatton National Bank’s raison d’etre from its
inception in the rural hillsides of Hatton. For over 12 decades it has
created opportunities for communities across Sri Lanka from the rural
hinterland to towns and cities. As the “partner in progress”, Hatton
National Bank has focused not only on creating access to nance but
also strived to achieve social inclusiveness for rural communities.
The Bank has, through a concerted strategic approach, determined a
community responsibility strategy that encapsulates programmes of
action aimed at better healthcare, education and support for
entrepreneurship.
Pillar 1: Healthcare
Improved healthcare remains a critical national priority and falls within
the United Nations Millennium Development Goals, especially Target 6
“Combat HIV/AIDS, Malaria and other diseases” and Target 7 “providing
safe drinking water and sanitation facilities”. Hatton National Bank’s focus
on healthcare as a strategic pillar, stems from the Bank’s recognition of
the criticality of healthcare for the sustenance of less-privileged
communities. In supporting the national agenda towards healthcare,
Hatton National Bank has consistently partnered national and provincial
authorities to enhance the e ectiveness of healthcare projects to ensure
that through corporate action, national agendas towards healthcare are
met, both in terms of creating awareness of issues as well as in
cascading the bene ts of state-led initiatives. Moreover, the Bank has
consciously taken upon itself numerous projects that have been solely
identi ed and initiated to assist the communities within which it
operates.
OTHER STAKEHOLDERS’ PERSPECTIVE
COMMUNITY RESPONSIBILITY
Healthcare
Community
Responsibility
Strategy
Education
Entrepreneurship
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 113
Project: Description
Period of
Implementation
Activities undertaken in 2010
Investment
in 2010 (Rs)
Investment to
date (Rs)
Cancer
Counseling Centre
The Cancer Counseling Centre is the
rst and only facility of its nature in Sri
Lanka. Established in association with
Maharagama National Cancer Hospital
with support from Arbeiter Samariter
Bund (ASB) Germany, the counseling
centre caters to both the patients as
well as their families in overcoming the
psychological trauma associated with
the diagnosis of cancer.
2007-ongoing The Bank increased its commitment to the
project by becoming more involved in the
operational aspects of the Centre with the
departure of ASB from the project in 2009.
The Bank undertook to bear all nancial
commitments arising from operational and
maintenance related activities. Four of the
Bank’s employees continue to be involved
in the counseling process.
The Bank sponsored a training programme
on counseling conducted by the
Counseling and Care Centre, Singapore.
Four of the Bank’s employees volunteered
for training and attended the training
programme, subsequently becoming
counselors at the Cancer Counseling
Centre. Refer Case in point on page 118.
5,000,000/- 8,000,000/-
Financial
Assistance to
Cancer Patients
The Bank assists patients and their
families to overcome the nancial
burden of daily expenses especially in
cases where the sole breadwinner is
a icted.
2009-ongoing The Bank extended nancial assistance to
36 families for up to six months each. Upon
the completion of the six month period,
each recipient was re-evaluated for
extension of the programme.
From the
proceeds of
Rs 15,000,000/-
Investment
Fund
National Cancer
Institute,
Maharagama
The Bank completed the renovation of
Ward 12 (the male surgical ward) of the
National Cancer Institute of Sri Lanka,
and continues to assist in its
maintenance.
2008- ongoing In 2010, the Bank continued to invest
towards maintaining Ward 12.
1,250,000/- 2,450,000/-
HIV AIDS
Awareness
The Bank is a member of the Lanka
Business Coalition on HIV/AIDS and
works to raise awareness on HIV and
AIDS in the workplace.
2009-ongoing In 2010, the Bank upheld and propagated
the principles of the Business Coalition. To
commemorate World AIDS Day, the Bank
distributed awareness ribbons throughout
the week and conducted awareness
programmes amongst employees.
100,000/- 170,000/-
114 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Project: Description
Period of
Implementation
Activities undertaken in 2010
Investment
in 2010 (Rs)
Investment to
date (Rs)
Post Flood
Drinking Water
puri cation
The Bank initiated a project to ensure
the sanitation of drinking water
especially where communities rely on
wells and ground water as primary
sources of drinking water. Wells in
identi ed localities were dredged to
ensure the communities reliant on
these water sources were safe from
water-borne diseases that were
rampant in the aftermath of oods
during the year under review.
2010-ongoing The Bank dredged 55 wells within two days
bene ting several families in the areas of
Bemmulla, Magalagoda and Daraluwa.
475,000/- 475,000/-
Safe Drinking
Water and
Sanitation Project
The lack of water and the high
incidence of bowel diseases propelled
Hatton National Bank) to undertake its
Safe Drinking Water and Sanitation
Programme as part of its community
development initiatives in 2008. To date
the project has directly impacted in
excess of 1000 families across the
nation whilst impacting an estimated
50,000 people who are categorised
pilgrims and travelers.
2008-ongoing In 2010, the Bank completed its 7th safe
drinking water project for villagers of
Karavila Ella, a small hamlet in Moneragala.
With 63 families dependant on the polluted
waters of Kumbukkan Oya, the Bank
identi ed a new water source and
constructed a well and pump room for
more convenient use of the villagers.
2,000,000/- 12,000,000/-
S-H-A-R-E
Foundation
The S-H-A-R-E (Samarasinghe
Healthcare Assistance and
Rehabilitation for the Elderly)
Foundation is a UK and Sri Lankan
registered charity and is modelled on
the District Nursing Service in the
United Kingdom. It is involved in
community health projects in under
privileged areas. The main objective of
the project is to assist in the support
and care of the patients in their homes
and promote prevention of ill health
through public health education.
2007-ongoing The Bank continued its commitment to the
Foundation by funding the work of three
nursing sisters at Kotahena (Colombo),
Payagala (Kalutara) and Alagollawa
(Anuradhapura).
300,000 900,000
COMMUNITY
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 115
Pillar 2: Education
Education remains an area of intense interest for Hatton National Bank.
Over the years the Bank has viewed the development of the quality of
education as key to the success of national progress especially in light of
Target 2 “Achieve Universal Primary Education” of the Millennium
Development Goal. In 2010, the Bank reiterated its focus on education
by continuing to accelerate progress on agship projects such as “Nana
Pubuduwa” whilst also taking on board more diverse projects with
pervasive e ects such as the National Trust of Sri Lanka. The latter is
considered by the Bank to be a fundamental step towards the creation
of a younger generation that is more empathic to the conservation of
national culture and heritage, in the years ahead.
Project: Description
Period of
Implementation
Activities undertaken in 2010
Investment
in 2010 (Rs)
Investment to
date (Rs)
National Trust of
Sri Lanka
The National Trust for Cultural and
Natural Heritage was founded in May
2005 to operate as a national body for
protecting and safe guarding the
tangible and intangible heritage of Sri
Lanka. The services rendered by the
organisation are focused towards
protecting and preserving the cultural
heritage of the country.
2010-2012 During the year, the Bank partnered with
the National Trust of Sri Lanka with a view
to grasp the opportunity to participate in a
project worthy of national importance.
1,500,000/- 1,500,000/-
Nana Pubuduwa Nana Pubuduwa project aimed at
providing a hundred libraries to schools
lacking in facilities and nancial
resources, predominantly those placed
in remote areas. The project has
progressively enhanced the literacy
skills of over 40,000 children annually
across Sri Lanka. In addition, the project
has carried out renovations to
buildings, donated books and furniture,
equipment and ttings.
The project scope has been broadened
to include computer literacy, and the
Bank has donated computers to several
schools. The project has evolved to
include the addition of computer
laboratories to selected schools.
Through needs-analysis the Bank
continues to add to the Nana
Pubuduwa project and enhance the
educational evolution of Sri Lanka’s
children.
2005-ongoing By end of 2010, the project had provided
168 libraries to less privileged schools
across Sri Lanka. During the year 13 libraries
and 11 computer centres were gifted.
Higher literacy rates, greater English literacy
and an IT enabled environment are just a
few of the long-term bene ts the Bank
foresees as a result of the Nana Pubuduwa
project.
9,025,000/- 33,725,000/-
Financial Services
Skills
Development in
the Northern and
Eastern provinces
Anticipating a greater demand for
trained nancial services sector
professionals in the North and East, the
Bank established a three-month
academic programme entitled
‘’Certi cate Course in Elementary
Banking and Finance’’. The programme
is open to youth interested in seeking
employment in the nancial services
sector. The Bank considers the
programme to be instrumental in the
human resource development of the
Northern and Eastern provinces.
2009-ongoing The project was inaugurated to bene t the
youth of Ja na Penninsula in the last
nancial year. In 2010, the second batch of
participants graduated from the
programme whilst a third batch is currently
undergoing training. The Banks intention to
uplift the resources available to the nancial
services sector in the Northern and Eastern
provinces has been partially realised with
over 130 trainees currently employed and
seeking employment. In the upcoming
nancial year, the project will be scaled out
to the Eastern province.
550,000/- 1,250,000/-
116 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
4%
29%
12%
2%
4%
3%
3%
11%
1%
7%
7%
17%
Gami Pubuduwa Review
Sectorwise Distribution of
Number of Loans
Agricultural
Animal Produce
Civil Engineering
Food Processing
Hotel & Catering
Light Engineering
Manufacturing
Medical Service
Miscellaneous
Textile
Trading
Transport
Pillar 3: Entrepreneurship
Hatton National Bank was borne from the spirit of entrepreneurship
over a century ago. Now in the present day commercial environment,
the Bank strives to instill and inculcate this same spirit and enthusiasm
for entrepreneurial dynamism. By extending its support to communities
that lack the very basic of infrastructure and are held back by the lack of
nancial inclusion, the Bank has over the years nurtured entrepreneurs
from the most rural of settings. This structured entrepreneurial
development programme has been instrumental in positioning Hatton
National Bank as an icon in imparting nancial literacy and in creating
sustainable nancial inclusiveness. Recognised for its capabilities in the
global arena, the Bank continues to forge ahead to commercially
catalyse thousands across the nation.
Project: Description
Period of
Implementation
Activities undertaken in 2010
Gami Pubuduwa The Bank introduced “Gami Pubuduwa” (village
re-awakening), a micro nance programme, to extend
nancial services to micro enterprises in the rural and
semi-rural areas, with the objective of forging closer
links with those classed as ”non-bankable” by other
nancial service providers. The scheme emphasises the
harnessing the skills of the rural community, assisting
them towards the achievement of self-reliance.
1989-on going In 2010, the Banks’ “Barefoot Banker” concept was further
developed. With over 130 Barefoot Bankers assisting the rural
community, Gami Pubuduwa is now a programme that is a
sustainability tool precipitating nancial awareness amongst
village folk. Moving away from the pure commercial aspects
of micro- nance, the programme has created a culture of
acceptance for entrepreneurship and nancial literacy
amongst the rural community.
Financial Literacy
to Indigenous
Community
Promotion of nancial literacy and the savings habit
amongst the indigenous “aadiwasii” Veddah community
has been an initiative aimed at assisting this
community to integrate with society in a more
sustainable manner.
Longstanding During the year the Bank sponsored the initial investment
required to open 60 minors’ savings accounts, as well as the
gifting of a Jumbo till, whilst a micro nance loan was
extended to the aadiwasi veddah chief Uruwarige
Wannileththo for cultivation purposes.
COMMUNITY
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 117
Short-term Projects
The Bank undertook numerous projects for the greater bene t of the
communities within which it operates during the year on a one-o
basis. These projects whilst falling within the overall strategy for
community responsibility are not projects that are long-term in nature
and are speci c to the year under review.
Strategic Pillar Project Project Description Investment
Health Cardiology Unit of the Teaching Hospital,
Anuradhapura
The Cardiology unit (Ward 29) of the Hospital sought assistance to install
curtains for cubicles.
Rs. 60,000
Health The Safe Bottle Lamps Foundation Nearly a million households in Sri Lanka do not have electricity and rely on
makeshift kerosene-oil bottle lamps to light their dwellings. These lamps are
unstable and when they topple the highly in ammable oil spills and quickly
ignites causing dis guring burns or even death to many people each year. The
Safe Bottle Lamp Foundation, inspired by Dr Wijeya Godakumbura addresses
this critical issue by substituting the home-made lamps with a safe and
inexpensive model.
2,000 safe bottle lamps were purchased and donated to 1000 households in the
villages in North Central Province.
Rs. 100,000
Education Institute of Fundamental Studies (IFS),
Kandy
The Bank assisted the publication of a trilingual science magazine “Scientia”.
Primarily aimed at school children it contains articles written by researchers,
academics and young scientists and is intended to encourage and stimulate
awareness of science amongst students. The magazine will be distributed free
of charge to schools that o er Science for Advanced Levels and other similar
institutions and 150 copies were distributed amongst the Bank’s sponsored
libraries as well.
Rs. 200,000
Health/Education St. John’s School, Ja na The school is in the process of implementing a programme to assist poor and
under privileged students of the internally displaced communities. Up to date
the school has admitted 520 such children including 222 in the hostel.
As a rst step the project will provide sanitation facilities for displaced children
who are being educated at this school.
Rs. 300,000
Health General Hospital, Vavuniya The General Hospital Vavuniya, is the only fully equipped Hospital in the area,
serving all the nearby towns and villages as well. It caters to patients from
Vavuniya, Killinochi, Chetikulam, Mannar, Mallave. The Bank donated 25 trolleys
to upgrade its equipment.
Rs. 120,000
Health Equality-Based Community Support and
Training (ECSAT)
The Equality-Based Community Support and Training (ECSAT) is a disability-
focused organisation that works towards inclusion of disabled people into
society. It focuses on involving disabled and non-disabled people together and
making disability a visible part of everyday life in communities and breaking
down the barriers of stigma and misunderstanding that exclude disabled
people from leading the lives they want.
The ECSAT organised a special event to raise funds for its projects in Galle to
make communities more accessible, by funding activities like the building of
ramps and accessible toilets in private and public settings.
The Bank as a platinum sponsor for the event invested towards the sponsorship
for building wheel chairs, ramps and accessible toilets whilst 12 employees
volunteered their time and participation.
Rs. 200,000
Health National Cancer Institute, Maharagama CCC Foundation Inc. Australia and Sri Lanka, a not-for-pro t charitable
organisation undertook to build a transit home for underprivileged outpatients
(children) and their carers, within the hospital premises.
The Bank’s employees contributed towards the project through the sale of
cards.
Rs. 120,000
Health Colours of Courage Trust in aid of the
National Cancer Institute, Maharagama
The Banks employees participated in the Colours of Courage six a side Cricket
Tournament to raise funds for the National Cancer Institute.
Rs. 120,000
118 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Employee voluntarism
The culture of community service is inbred in every one of the Bank’s
employees. The employees voluntarily participate in community
development and social activities in excess of their considerable
involvement in the CSR programmes initiated at corporate level and the
numerous customer awareness and nancial literacy programmes
carried out. With 4,352 employees, these activities are too many to
enumerate. Nearly all branches engage in the following:
• organising a variety of Almsgivings for Vesak and Poson as well as
sponsoring and taking part in Bakthi Gee programmes
• sponsoring sports days, prize giving and other events in schools in
their command area with the Branch Manager being invited as
Chief Guest at the occasion
• providing meals for the inmates of a charitable institution in the
locality to mark signi cant milestones such as the branch
anniversary
• organising or actively participating in blood donation campaigns
Case in point : Care through the Cancer Counseling Centre
Inaugurated in the year 2007, under the Banks’ community responsibility initiatives, the Cancer Counseling Centre is the
rst and only facility of its nature in Sri Lanka. Established in association with Maharagama National Cancer Hospital with
support from Arbeiter Samariter Bund (ASB) Germany, the counseling centre caters to both the patients as well as their
families in overcoming the psychological trauma associated with the diagnosis of cancer.
The availability of a professional Counseling Centre dedicated to those a icted by the disease has enhanced the mental
wellbeing of those concerned through the cumulative e ects of guidance, support and reassurance. The Bank has
incrementally increased its commitment to the project by progressively enhancing its role by becoming more involved in
the operational aspects of the Centre. The Counseling Centre came wholly under the purview of the Bank in mid 2009.
Thereafter, the Bank has undertaken to bear the maintenance and operational costs. A number of initiatives were
undertaken to renovate and upgrade the infrastructure at the counseling centre whilst the Bank also contributed
immensely to the renovation and maintenance of Ward No. 12 at the Maharagama Cancer Hospital. Notably, the Bank’s
commitment to the project is re ected in the involvement of its sta members in the counseling process. A training
programme on counseling was organized by the Cancer Counseling Centre (Patients Advise and Liaison Services Unit
(PALS) of the National Cancer Institute, Maharagama). The objective of this programme was to equip the participants with
generic and speci c components of counseling skills and greater personal self-awareness for use in the counseling
relationship when attending to the emotional and psychosocial needs of patients visiting at the National Cancer Institute
of Sri Lanka. The programme was a combination of theoretical learning and practical application and was conducted by
trainers from the Counseling and Care Centre, Singapore. The Bank sponsored 5 modules out of the 8 module programme
with four of the Bank’s employees volunteering as participants in the programme. As volunteers the Bank’s four
employees assured their services as volunteer Counselors. All 4 participants successfully completed the programme and
now dedicate an average of 6 hours per week per person for counseling. The dedication and generosity of these
individuals in volunteering to counsel demonstrates how far sustainability is ingrained in the work ethos of the Bank.
The Bank’s programme of nancial assistance to the families of cancer a icted patients has been supported by the
Cancer Counseling Centre. Through the Centre, the Bank is introduced to and identi es potential recipients. Where the
sole breadwinner of a family is the a icted party and has been ear-marked by the Cancer Counseling Centre as families in
need of nancial assistance, the Bank intervenes to provide a monthly nancial supplement enabling patients and their
families to overcome the nancial burden of daily expenses. This supplement is a orded for a period of 6 months and
renewed subject to review of the family’s life situation. To date 36 families have been recipients of the programme.
COMMUNITY
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 119
Supplier responsibility has been gaining ground as a vital cog in the
wheel of viable business practice across the world. In the nancial
services sector, supplier relations remains as critical as in any other
industry due to the need for credibility, trust and value in forging
partnerships. Suppliers play a fundamental role in how Hatton National
Bank executes its commercial activities and are a core element in the
various facets that promote sound commercial well-being. However, for
Hatton National Bank supplier relations go beyond the mere
commercial function. As an organisation that has always looked to
contribute to the broader perspect of national development, the Bank
considers supplier relations as an avenue to promote and stimulate
greater economic activity especially in the arena of micro-enterprise.
Ethical Procurement Practices
The Bank considers ethical conduct as the pivot upon which supplier
relations are built. A code of conduct governs the ethical expectations
of the Bank and its tenets are shared between employees as well as
suppliers through frequent engagement activities, a process which
strives to impart and maintain the highest standards of integrity across
every aspect of the business relationship. The Bank is of the view that
ethical behaviour must be promoted and supported by appropriate
systems and procedures. Likewise the Bank expects the highest ethical
standards from its suppliers. The following outlines the practices and
process followed by Hatton National Bank towards the upholding of
ethical practices in procurement.
Expectation Process
Transparency • Tender process ensures transparency of expectations
• More than one procurement evaluation committee
• Final approval by Board of Directors
Con dentiality • Suppliers and supplier information treated with con dentiality and fair trading
Supplier concerns/discontent • Raised through supplier engagement
• Appeal schemes allow suppliers to directly raise issue or whistle-blow to the Deputy General Manager Services and
thereafter to the Managing Director/Chief Executive O ce
Facilities to promote supplier relations • Credit accommodation
Termination of suppliers • Based a stringent review process that allows for a dialogue with the supplier and subsequent to other mechanism
such as penalties
Service quality Improvements • Operation and procedure manuals on service quality checks
OTHER STAKEHOLDERS’ PERSPECTIVE
SUPPLIER RESPONSIBILITY
120 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Sustainable Procurement Policy
Hatton National Bank recognises its responsibility to carry out its
procurement activities in an environmentally and socially responsible
manner. Thus, in accordance with the Bank’s Sustainability Strategy and
Corporate Procurement Strategy it strives to incorporate environmental
and social considerations into the procurement process. The Bank
recognises its responsibility to encourage suppliers to minimise
negative environmental and social e ects associated with the products
and services they provide. The Bank’s strategic sourcing strategy
promotes sustainable procurement by taking into consideration
environmental, ethical and social factors when making sourcing
decisions.
In the year under review, the Bank implemented a Green Procurement
Policy with a view to promote and pass preference to products and
services that can be manufactured, used, and disposed of in an
environmentally and socially responsible manner. The Green
procurement policy ensures that sustainability criteria are included in
speci cations to suppliers and that sustainability criteria are met in the
award of contracts by ensuring that suppliers’ environmental credentials
are considered in the supplier appraisal process.
The Bank continues to engage and communicate with its supplier base
in the recognition that consistent education and awareness towards
compliance will foster a relationship that not only bene ts the Bank and
its suppliers but will also cascade the positives of sustainability to a
greater audience. Hatton National Bank is con dent that engagement
and education of green policies for sustainable business will foster
greater empathy towards ethical manufacturing processes.
Case in point: sustainable procurement for equitable share of wealth
The sustainable procurement policy was progressively implemented in 2010 with criteria and processes aimed towards
the assurance of an equitable share of wealth to a larger number of suppliers. Through the enhancement of the supplier
base by a further 25 per cent in 2009, the Bank a orded a greater number of enterprises the ability to supply to the Bank.
Furthermore, the Bank extends supplier credit at zero cost on the strength of the Bank’s advance payment bond. This
initiative has enabled small-scale suppliers who lack the nancial wherewithal of large-scale enterprises to con dently
accept and provision goods and services to the Bank.
The Bank follows a concerted policy of non-discrimination against small-scale suppliers. Whilst 10 per cent of the supplier
portfolio is categorised as small-scale entrepreneurs, in fact over 60 per cent of the supplier portfolio is composed of Small
and Medium Enterprises (SMEs).
W.U. Seneviratne Company (Pvt) Ltd is a prime example of how well the Bank’s sustainable procurement strategy has
strengthened supplier relations. The Company, established in 1994 with just 3 employees initiated its journey with the
“partner in progress” in 1995 as a customer of the Pettah branch. Later as a supplier, the Company bene ted from a host of
services meted out to SME suppliers and is now a leader in courier delivery and paper related services. With a workforce of
150, W.U. Seneviratne Company credits the Bank for it success and hopes to grow its business into the areas of statement
delivery and variable data printing.
SUPPLIER
RESPONSIBILITY
Objective Process
Sustainable practice at supplier level • Pre-evaluation of suppliers’ business processes
• Inspection of suppliers premises and business practices on an ongoing basis
Selection of suppliers • Selection process goes beyond the nancial bene ts to take into account other social and environmental factors.
Creating greater awareness of the
“green” aspects of business
• Engagement with suppliers that have a turnover in excess of Rs. 1 million through a comprehensive engagement
process.
Determining one supplier over
another
• Through a rating process based on criteria laid out in the Bank’s procurement policy
Policy of non-discrimination • Encourage SME and micro enterprises to enter into partnership with the Bank. Currently 10% of the total suppler
portfolio falls into the SME category and they account for over 2% of the Banks’ procurements.
Upholding of Human Rights and
containment of social risks
• During evaluation of the supplier’s business process the Bank also considers practices such as child labour, forced
labour, Environment, Health and Safety issues.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 121
In the backdrop of policy implementation in 2009 towards the creation
of a more pervasive and structured environmental responsibility
strategy, Hatton National Bank in 2010 sharpened it focus by
introducing numerous best practices with a view to determine and
establish key performance indicators in environmental sustainability.
The thrust of the Bank’s Environmental Responsibility strategy during
the year was two pronged; rstly, the intention of the Bank was to
record and monitor its role in environmental management whilst
secondly, the Bank, as in previous years undertook initiatives aimed at
broader role in environmental stewardship.
Resource E ciency
1. Energy
At Hatton National Bank we believe that the e cient utilisation of
energy across the business provides a number of bene ts including the
protection of global energy reserves and in the reduction of the Bank’s
environmental impact. Through the e ective implementation of a range
of energy e ciency principles and processes, the Bank has successfully
achieved upto 33 percent in energy e ciencies in the year under review
in comparison with that of the previous year.
Best Practice
Description of
Measures adopted
Savings
Annual
Savings
Energy E ciency Introduction of
energy e cient lights
1471.2 kWh
per day
370,754.5 kWh
or Rs 8,156,600
Power factor
correction in 4
premises
71 kVA per
month
852 kVA
Introduction of
Electronic Ballasts to
Corporate Signage
643.85 kWh
per day
235,000 kWh
Use of Bio-gas for
branch usage
3.48 kWh in 2
branches per
day
Rs. 9,646.56
per branch
As a result of concerted e orts to utilise energy e ciently, the Bank
accrued a total of 605, 750 kWh and 71 kVA annually amounting to a
monetary saving of Rs. 13, 965,700/- per annum. The Bank reduced its
dependency on the National Grid for power demand by 334 kVA. Total
electricity consumption at the HNB customer centres is 11,939,943.76
units per year in 2010.
2. Water
As a pilot project, rain water harvesting is being carried out at Hatton
National Bank’s Buttala Branch o ce. The Branch utilises harvested
water for its operations during the rainy seasons and has initiated a
model project within its premises to create greater awareness of the
concept amongst customers. As the Branch is located in an area
where people are sensitive to the scarcity of water, and given that over
eighty ve percent of the population engages in farming activities,
the model has become a point of interest. In the year under review,
the Buttala Branch o ce saved approximately ve to ten percent of
water avoiding consumption from the national water supply. In the
upcoming nancial year, rain water harvesting will be carried out at
the Nittambuwa Green Building.
Anaerobic waste water treatment systems were installed in ve
branches at Marawila, Gampaha, Negambo, Wattala and Kahawatta
during the year with approximate 1,000,000 litres per annum of
treated waste water discharged to the environment whilst at the
Wattala branch the treated water is used for gardening purposes
(treated water capacity of Anaerobic lter system at Wattala branch –
30,000 litres per month). Anaerobic lter technology and biological
treatment of organic matter is a well accepted concept adopted
throughout the world. Anaerobic biological lters are considered the
most e cient biological lter treatment systems available especially
with respect to treatment of sewerage. In addition, the fact that the
process requires no additional infrastructure, and therefore was
OTHER STAKEHOLDERS’ PERSPECTIVE
ENVIRONMENTAL RESPONSIBILITY
122 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
suitable for implementation within the Branch premises was a further
favourable point for implementation. (Refer Case in point “ Bio-gas as
an alternative energy source” in page 124).
3. Recycle, Re-use and Reduce
The Bank adopts a 3R policy – Recycle, Reuse, Reduce - towards all
tangible resources.
Process Description of Initiatives undertaken
Recycle Paper Recycling - 151,609 Kg of waste paper was
recycled over a period of 12 months resulting in the
e ective saving of 2577 trees, 4, 818,436 litres of water,
606, 436 kWh of electricity and 266,073 litres of oil
Re-use Reconditioned printer cartridges and toners were used
at the Bank’s head o ce (number of reconditioned
toners used in 2010 – 127). Further arrangements were
made with a Supplier to collect all used toners and
cartridges from the branch network for re ll and reuse.
Recondition and re-use o ce furniture, prolonging
lifetime and thereby reducing the waste generated
through routine replacement
Reduce To overcome the detrimental e ects of paint pollution a
direct by-product of the process of paint application,
the Bank continues to use cladding as a safer alternative.
33 buildings with a total surface area of 53,925 Sqft
cladded at an expected saving of Rs. 323,550 and
600 liters of paint 3 Kg to 4.2 Kg of toxic emissions (Note
that a zero VOC paint emits approx 5-7grams of toxic
emissions)
In looking to the future, the Bank is in the initial stages of implementing
a Management Information System with the intention of creating a
paperless o ce.
The Green Pledge cascades sustainable
business practice
In the year 2009, Hatton National initiated a two-pronged
environmental responsibility ethics programme designed to educate
the employees of the Bank as well as to garner commitment towards
the sustainable business practice. All employees made a pledge, to
unite towards combating climate change through the practice of
twelve tenets outlined in the Green Pledge. In addition to an integrated
communications e ort that reached across the organisation as well to
the homes of employees, the Green Pledge was embraced by the Bank
and has successfully de ned its sustainability business practices in 2010.
Exactly one year after taking the Green Pledge and implementing
internal best practices, the Bank launched an extensive tree planting
campaign in a bid to reduce and reverse its carbon footprint. This would
ensure that the Bank in addition to reducing its consumption would
also be replanting the number of trees inevitably used in the course of
business. Under the aegis of the Pledge, 1000 Kumbuk trees were
planted on the banks of the Ma Oya in Mawanella to contain soil
erosion stemming from over mining of the river for sand. Further
planting is envisaged in the upcoming year to conserve the down-
stream sector of the river. On World Environment Day, the Bank twinned
tree-planting with awareness creation by actively involving over 100
school children from Mayurapada College, Rivisada College,
Baminiwatte College and Thammita Maha Vidyalaya of Mawanella. A
special awareness programme was conducted at Mayurapada College,
Mawanella by Dr Sudarma Yatigammana, Senior Lecturer, Zoology
Department, University of Peradeniya. In addition, a further 350 trees
such as Mango, Jak, Jambu, Amberalla and Teak were planted in
Vavuniya within the premises of children’s and elders’ homes
throughout the town.
To mark the opening of Hatton National Bank’s 200th branch, 200 trees
were planted in Yakkala and Gampaha. The Bank engaged other
stakeholders from the localities to ensure the maintenance of the young
saplings, such that the plants will continue to grow and support the
environment over a planned period of time. In addition, the Bank carried
ENVIRONMENTAL
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 123
out a project to grow mangroves in water bodies under the authority of
National Aquatic Resources, Research and Development Agency.
Carbon Neutral Publication
The Bank in its journey towards implementing better environmental
management practices and took a signi cant step by quantifying the
emissions of this Annual Report and invested in its carbon credit
equivalent. Certi cation to this e ect is given on page 125 of this report.
Business Going Green: Green Buildings
The HNB Tower sets the precedence as an energy e cient high rise
building and is one of the few buildings in Sri Lanka that utilises
revolutionary technology from variable air volume units that control
ambient temperature, a demand controlled ventilation system, an
intelligent illumination control microprocessor to energy e cient
exterior features. Whilst previously the Bank targeted 2010 as the year
for Leadership in Energy and Environment Design (LEEDS) Green
Building Certi cation it postponed the application process in a bid to
carry out rain water harvesting pilot evaluation. It is expected that
LEEDS accreditation will follow in the year 2011.
The construction of the Bank’s second green building commenced in
2009 in Nittambuwa and is currently at completion. The building is
expected to achieve e ciencies of 30 per cent reduction in energy
utilisation and 56 per cent reduction in water utilisation when
compared with an average bank branch. Meanwhile, planning is
currently underway for the construction of a third green building in
Ja na. This will be the rst of its sort in the Northern province and will
act as an icon of sustainable business practice for the area.
The green building concept encompasses the following in design and
outcome:
• an eco-friendly structure and environment
• the minimum utilisation of natural resources and preservation of
these resources for future generations
• the sustainability of having internal means to generate resources as
far as possible
• the conservation of energy by means of smart devices
• the use of recyclable materials
• a user-friendly environment, work practice and discipline
Tangible Bene ts Intangible Bene ts
Central chiller air conditioning system that is
arguably the most e cient system in Sri Lanka.
Enhanced brand
image of the Bank
Installation of water-e cient xtures to reduce
water consumption.
Enhanced
organisational
performance
Less contribution to heat island e ect (roof and
hardcape) on the environment.
Ample access to views
of outdoors to
maintain visual
connection to
surrounding
environment
Reduced light pollution of exterior lighting.
Appropriate selection of air conditioning refrigerant
- low ozone depleting potential and minimal direct
global warming potential.
Use of high-recycled content steel for pre-
engineered structure.
Discharge of CO
2
to environment expected to be
reduced by approximately 40% .
Annual energy index of 6 kWh/square feet as
opposed to an approximate 8 to 9 kWh/square feet
for a normal building.
Extensive use of day lighting resulting in e cient
lighting system.
Rain water harvesting system for the use of garden
and ushing systems.
Installation of meters and implementation of
veri cation mechanism to monitor and verify
energy and water savings.
Maximum use of locally extracted/harvested and
manufactured materials for construction.
Indoor air quality monitoring with CO
2
sensor and
automatic control of fresh air introduction with
increased ventilation.
The Bank considers the green building concept as a strategic
di erentiator and competence for the future success of its business. As
such, in 2010, the Bank’s engineering sta were exposed to specialist
training in green building technologies with the intent to enlarge the
know-how and build capacity. Training programmes included subject
matter such as solar power systems, Durra products, 3D Sim Software
Energy Modeling, 3D Energy and Building modelling, BMS systems,
automatic solar light/heat control systems and solar air conditioning
mechanisms. The Bank has a valuable team that has both technical and
practical experience to e ectively implement green building
technology. Going forward, it is the intention of the Bank to continue to
grow this knowledge base so that the team can lend its support to
green construction outside the periphery of the Bank.
124 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Case in point “Bio Gas as an alternative energy source”
The world is in need of a sustainable, e cient, carbon-neutral fuel source. Biogas, harvested from agriculture and food
industries, not only ts this criteria, it is readily available and a ordable for people around the world. Also known as biofuel,
natural methane holds promise for the future. As an industry innovator, Hatton National Bank has not only led the way in
terms of greening the value chain but has rmly established its position as an organisation constantly seeking alternatives to
the conventional energy sources. Whilst the Bank’s Green Building initiatives have led to a dramatic decline in the energy
consumption, it has concurrently sought to establish alternative energy sources. As such in 2010, the Bank introduced the
usage of biogas at two branches – Marawila and Wattala. The bio-gas is a by-product of a pilot project into anaerobic waste
water treatment. The pilot project is a bid to determine the viability of consuming this alternative energy for the Bank’s
operations in the years ahead.
Bio gas o ers a number of advantages over conventional fuel sources, including:
• Reduction in Greenhouse Gasses: methane is a signi cantly more powerful greenhouse gas than carbon dioxide, with
greater potential for increasing global warming e ects. Containing methane and converting it to CO
2
will neutralise its
e ect on global warming.
• Biogas is Carbon Neutral: Because CO
2
is returned to the atmosphere via incineration at approximately the same rate it is
taken up during photosynthesis, biogas is generally considered to be carbon neutral.
• A Renewable Resource: As biofuel is the product of recently consolidated atmospheric carbon, it is also considered to be
a highly renewable resource.
• Zero Organic Waste: Unlike traditional bio-gas production systems, the special anaerobic waste water treatment system
employed by the Bank, ensures zero organic waste as all waste is digested by the special bacteria planted inside the
system.
During the year, the Bank’s Marawila and Wattala branches produced bio-gas through the application of anaerobic lter
technology. The end-product was utilised for cooking purposes. The Bank envisages signi cant energy savings once the
project is fully implemented.
Green Procurement Policy
A green procurement policy was implemented during the year under
review. The policy aims to inculcate green business practices amongst
the supplier base. Approaches to supplier engagement prior to
selection of suppliers were many and based on the requirements of the
green procurement policy. During the year, awareness of the
procurement policy was created amongst suppliers with a turnover in
excess of Rs. 1 million through surveys, focus groups, community panels,
written communication and union structures. Currently 191 suppliers
are registered and comply with the requirements of the green
procurement policy. The procurement policy provides preference to
suppliers who manufacture or follow principles that minimise their
impact on mother earth.
Reducing impact on land- lls
Sanitact - a chemically charged bin - provides an e ective, hygienic and
discreet method to dispose of sanitary waste. The Bank introduced
Sanitact across the branch network, thus allowing for the eco-friendly
disposal of sanitary waste, reducing the impact of land- ll and
hazardous emissions due to inappropriate disposal. Sanitact utilises
modern hydro clave technology which disposes of sanitary waste by
converting it in to a powder for use at land lls reducing the e ect of
environmental pollution. The technology is approved for use by the
Central Environmental Authority.
Preservation of Natural Habitats
The Hatton National Bank continued to partner a project aimed at the
eradication of two invasive plant species – Cacti and Andara (Prosopis
Juli ora) – which cover an estimated 10,000 hectares or 60 per cent of
the total area of the Bundala National Park. Responsible corporate
citizens including the Hatton National Bank supported the project, an
initiative of renowned nature photographer Sarinda Unamboowe, the
Department of Wildlife Conservation and International Conservation
Union (IUCN).
The Bank re-invested into the conservation of the Bundala National Park
during the year in review re-a rming its commitment towards the
protection of Sri Lanka’s natural and biodiversity resources. To date the
Bank has invested into the clearing of approximately 25 hectares of the
Bundala National Park – the rst wetland in Sri Lanka to be declared as a
RAMSAR site under the Convention on Wetlands of International
Importance thus recognising the ecological importance of the Park as a
habitat for water birds. During the year, the Bank further invested into
the clearing of 5 hectares and replanting of the cleared area with trees,
re-introducing sustainable species that will allow for the natural
regeneration of plants local to the habitat.
ENVIRONMENTAL
RESPONSIBILITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 125
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126 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Section KPI
CUSTOMER RESPONSIBILITY Number of new products introduced or relaunched during the year - 8
Number of customer centres opened during the year - 19
Number of ATMs established during the year - 40
Number of written customer complaints received and resolved - 102
Sectorwise distribution of Gami Pubuduwa Loans - page 116
EMPLOYEE RESPONSIBILITY Locationwise, Categorywise, Agewise, Genderwise, Service-wise and Permanent/Contract sta analyses -pages 103-105
INVESTOR RESPONSIBILITY Economic performance indicators of the Bank - page 109
COMMUNITY RESPONSIBILITY The investment committed for community projects - pages 113-115,117
Number of Safe Drinking Water and Sanitation Projects completed during the year - 1
Number of School Libraries completed during the year – 13
Number of School computer centres completed during the year – 11
SUPPLIER RESPONSIBILITY Supplies from Micro Entrepreneurs - 10%
ENVIRONMENTAL
RESPONSIBILITY
Savings on the practices of 3R policies - page 122
Savings from Energy e cient practices - page 121
Treatment of waste water for reuse - page 121
Number of hectares reclaimed at the Bundala National Park during 2010 - 5 hectares
KEY PERFORMANCE
INDICATORS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 127
INDEPENDENT ASSURANCE
REPORT
Introduction
We were engaged by the Board of Directors
Hatton National Bank PLC (“Bank”) to provide
assurance on the following elements of the
Sustainability Report 2010 (“Report”) for the year
ended 31 December 2010:
• Reasonable assurance on the data on nancial
performance, as speci ed on page 109 of the
Report 2010;
• Limited assurance on Key Performance
Indicators (“KPIs”) speci ed on page 126 and
other information presented in the Report.
Managements’ responsibilities and the
criteria applied
Management is responsible for the preparation
ad presentation of the Report in accordance with
the GRI Sustainability Reporting Guidelines as
described in pages 82-83 of the Report and the
information and assertions contained within it:
for determining the Bank’s objectives in respect
of sustainable development performance and
reporting, including the identi cation of
stakeholder and material issues, and for
establishing and maintaining appropriate
performance management and internal control
systems from which the reported performance
information is derived.
Our responsibilities and compliance
with SLAE 3000
Our responsibility is to carry out a reasonable &
limited assurance engagement and to express a
conclusion based on the work performed. We
conducted our engagement in accordance with
the Sri Lanka Standard on Assurance
Engagements 3000 : Assurance Engagements
Other Than Audits or Reviews of Historical
Financial Information, issued by the Institute of
Chartered Accountants of Sri Lanka
This Standard requires amongst others that we
comply with applicable ethical requirements,
including independence requirements, and plan
and perform the engagement to obtain
reasonable & limited assurance about whether
the Report is free of material misstatement.
Summary of work performed
Financial data
A reasonable assurance engagement on nancial
performance reported on page 109 of the Report
involves veri cation that they were properly
derived from the audited nancial statements of
the Bank for the year ended 31 December 2010.
Key Performance Indicators and the
other information
A limited assurance engagement on Key
Performance Indicators and other information in
the Report consists of making inquiries, primarily
of persons responsible for the preparation of
information presented in the sustainability report,
and applying analytical and other evidence
gathering procedures, as appropriate. These
procedures included:
- Inquiries of management to gain an
understanding of the Bank’s processes for
determining the material issues for the Bank’s
key stakeholder groups.
- Interviews with senior management and
relevant sta at group level and selected
business unit level concerning sustainability
strategy and policies for material issues, and
the implementation of these across the
business.
- Interviews with relevant sta at corporate and
business unit level responsible for providing
the information in the Report.
- Inquiries about the design and
implementation of the systems and methods
used to collect and process the information
reported, including the aggregation of data
into information as presented in the Report.
- Comparing the information presented in the
Report to corresponding information in the
relevant underlying sources to determine
whether all the relevant information contained
in such underlying sources has been included
in the Report.
- Reading the information presented in the
Report to determine whether it is in line with
our overall knowledge of, and experience with,
the sustainability performance of the Bank
- Visits to selected project sites and branches to
review systems and data;
Our conclusion
Based on the procedures performed, as
described above, we conclude that
• The data on nancial performance, as speci ed
on page 109 of the Report 2010 are properly
derived from the nancial statements of the
Bank for the year ended 31 December 2010 for
which the independent auditors have issued
an unquali ed audit opinion dated 18
February, 2011 on page 157 of the Annual
Report;
• Nothing has come to our attention that causes
us to believe that the Key Performance
Indicators for 2010 speci ed on page 126 and
other information presented in the Report are
not fairly presented , in all material respects,
in accordance with the GRI Sustainability
Reporting Guidelines as described in
page 82-83 of the Report.
CHARTERED ACCOUNTANTS
Colombo
18 February 2011
INDEPENDENT ASSURANCE REPORT TO
HATTON NATIONAL BANK PLC
128 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Statement
GRI Application Level Check
GRI hereby states that Hatton National Bank has presented its report “Sustainability Report - Caring
Partner” to GRI’s Report Services which have concluded that the report fulfills the requirements of
Application Level B+.
GRI Application Levels communicate the extent to which the content of the G3 Guidelines has been
used in the submitted sustainability reporting
.
The Check confirms that the required set and number
of disclosures for that Application Level have been addressed in the reporting and that the GRI
Content Index demonstrates a valid representation of the required disclosures, as described in the GRI
G3 Guidelines
.
Application Levels do not provide an opinion on the sustainability performance of the reporter nor the
quality of the information in the report.
17 February 2011, Amsterdam
Nelmara Arbex
Deputy Chief Executive
Global Reporting Initiative
The “+” has been added to this Application Level because Hatton National Bank has submitted (part of)
this report for external assurance
.
GRI accepts the reporter’s own judgment for choosing its assurance
Provider and for deciding the scope of the assurance.
The Global Reporting Initiative (GRI) is a network-based organization that has pioneered the development of the world’s most widely used
sustainability reporting framework and is committed to its continuous improvement and application worldwide. The GRI Guidelines set out
the principles and indicators that organizations can use to measure and report their economic, environmental, and social performance.
www.globalreporting.org
Disclaimer:
Where the relevant sustainability reporting includes external links, including to audio visual material, this statement only
concerns material submitted to GRI at the time of the Check on 7 February 2011
.
GRI explicitly excludes the statement being applied to any
later changes to such material.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 129
STANDARD DISCLOSURES PART I: Pro le Disclosures
1. Strategy and Analysis
Pro le
Disclosure
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for omission
Explanation
1.1 Statement from the most senior decision-maker of the organization. Fully Page No. 80-81
1.2 Description of key impacts, risks, and opportunities. Fully Page No. 49-50, 86-87
2. Organizational Pro le
Pro le
Disclosure
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for omission
Explanation
2.1 Name of the organization. Fully Hatton National Bank PLC
2.2 Primary brands, products, and/or services. Fully Description of each product/service is given in detail in the
Management Discussion & Analysis section under each key
business function, from Page No. 22-34
2.3 Operational structure of the organization, including main divisions, operating
companies, subsidiaries, and joint ventures.
Fully Operational structure of the Bank - Page No. 59
Details of the group structure - Inner back cover
Operations of Group entities - Page No. 35-38
2.4 Location of organization’s headquarters. Fully Inner back cover
2.5 Number of countries where the organization operates, and names of countries with
either major operations or that are speci cally relevant to the sustainability issues
covered in the report.
Fully Page No. 39-40
2.6 Nature of ownership and legal form. Fully Inner back cover
2.7 Markets served (including geographic breakdown, sectors served, and types of
customers/bene ciaries).
Fully Page No. 39-41, 55
2.8 Scale of the reporting organization. Fully Number of employees - 4,352
Income statement - Page No.158
10 year summary - Page No. 257
20 largest shareholders Page No. 264-265
Breakdowns of operating income & expenses - Page No. 180
2.9 Signi cant changes during the reporting period regarding size, structure, or
ownership.
Not Does not exist
2.10 Awards received in the reporting period. Fully Page No. 110
3. Report Parameters
Pro le
Disclosure
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for omission
Explanation
3.1 Reporting period (e.g., scal/calendar year) for information provided. Fully 1 January 2010 to 31 December 2010
3.2 Date of most recent previous report (if any). Fully 31 December 2009.
3.3 Reporting cycle (annual, biennial, etc.) Fully Annual
3.4 Contact point for questions regarding the report or its contents. Fully Inner back cover
3.5 Process for de ning report content. Fully Page No. 82-83
3.6 Boundary of the report (e.g., countries, divisions, subsidiaries, leased facilities, joint
ventures, suppliers). See GRI Boundary Protocol for further guidance.
Fully Page No. 83
3.7 State any speci c limitations on the scope or boundary of the report (see
completeness principle for explanation of scope).
Fully Page No. 83
3.8 Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced
operations, and other entities that can signi cantly a ect comparability from period to
period and/or between organizations.
Fully Page No. 83
3.9 Data measurement techniques and the bases of calculations, including assumptions
and techniques underlying estimations applied to the compilation of the Indicators
and other information in the report. Explain any decisions not to apply, or to
substantially diverge from, the GRI Indicator Protocols.
Fully Page No. 82-83
3.10 Explanation of the e ect of any re-statements of information provided in earlier
reports, and the reasons for such re-statement (e.g.,mergers/acquisitions, change of
base years/periods, nature of business, measurement methods).
Fully None
3.11 Signi cant changes from previous reporting periods in the scope, boundary, or
measurement methods applied in the report.
Not Does not exist
3.12 Table identifying the location of the Standard Disclosures in the report. Fully This GRI Table
3.13 Policy and current practice with regard to seeking external assurance for the report. Fully Page No. 83,127
G3 INDEX
WITH FINANCIAL SERVICES SECTOR SUPPLEMENT
130 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
4. Governance, Commitments, and Engagement
Pro le
Disclosure
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for omission
Explanation
4.1 Governance structure of the organization, including committees under the highest
governance body responsible for speci c tasks, such as setting strategy or
organizational oversight.
Fully Page No. 59
4.2 Indicate whether the Chair of the highest governance body is also an executive o cer. Fully Page No. 59
4.3 State the number of members of the highest governance body that are independent
and/or non-executive members.
Fully Page No; 59, 85
4.4 Mechanisms for shareholders and employees to provide recommendations or
direction to the highest governance body.
Fully Page No. 91, Investor Feedback Form
4.5 Linkage between compensation for members of the highest governance body, senior
managers, and executives (including departure arrangements), and the organization’s
performance (including social and environmental performance).
Fully Page No. 65-66,102
4.6 Processes in place for the highest governance body to ensure con icts of interest are
avoided.
Fully Page No. 70
4.7 Process for determining the quali cations and expertise of the members of the
highest governance body for guiding the organization’s strategy on economic,
environmental, and social topics.
Fully Page No. 61
4.8 Internally developed statements of mission or values, codes of conduct, and principles
relevant to economic, environmental, and social performance and the status of their
implementation.
Fully Page No. 1, 89
4.9 Procedures of the highest governance body for overseeing the organization’s
identi cation and management of economic, environmental, and social performance,
including relevant risks and opportunities, and adherence or compliance with
internationally agreed standards, codes of conduct, and principles.
Fully Page No. 70-74, 85
4.10 Processes for evaluating the highest governance body’s own performance, particularly
with respect to economic, environmental, and social performance.
Fully Page No. 64-65
4.11 Explanation of whether and how the precautionary approach or principle is addressed
by the organization.
Fully Page No. 84-89
4.12 Externally developed economic, environmental, and social charters, principles, or other
initiatives to which the organization subscribes or endorses.
Fully Page No. 82--83
4.13 Memberships in associations (such as industry associations) and/or national/
international advocacy organizations in which the organization: * Has positions in
governance bodies; * Participates in projects or committees; * Provides substantive
funding beyond routine membership dues; or * Views membership as strategic.
Fully Page No. 93
4.14 List of stakeholder groups engaged by the organization. Fully Page No. 91
4.15 Basis for identi cation and selection of stakeholders with whom to engage. Fully Page No. 82-83
4.16 Approaches to stakeholder engagement, including frequency of engagement by type
and by stakeholder group.
Fully Page No. 90-93
4.17 Key topics and concerns that have been raised through stakeholder engagement, and
how the organization has responded to those key topics and concerns, including
through its reporting.
Fully Page No. 82-83, 90-93, 94-98, 100-102, 108, 112-124
STANDARD DISCLOSURES PART II: Disclosures on Management Approach (DMAs)
G3 DMA Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for omission
Explanation
DMA PS Disclosure on Management Approach PS Page No. 87-89
Aspects Product Portfolio
FS1 Policies with speci c environmental and social components applied to business lines. Fully Page No. 91-92
FS2 Procedures for assessing and screening environmental and social risks in business
lines.
Fully Page No. 92
FS3 Processes for monitoring clients’ implementation of and compliance with
environmental and social requirements included in agreements or transactions.
Fully Page No. 92
FS4 Process(es) for improving sta competency to implement the environmental and
social policies and procedures as applied to business lines.
Fully Page No. 92-93
FS5 Interactions with clients/investees/business partners regarding environmental and
social risks and opportunities.
Fully Page No. 93
Audits
Active Ownership
DMA EC Disclosure on Management Approach EC Page No. 87-89
Aspects Economic PerformanceCOMM
Market presence
Indirect economic impacts
DMA EN Disclosure on Management Approach EN Page No. 87-89
Aspects Materials
Energy
G3 INDEX
WITH FINANCIAL SERVICES SECTOR SUPPLEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 131
Water
Biodiversity
Emissions, e uents and waste
Products and services
Compliance
Transport
Overall
DMA LA Disclosure on Management Approach LA Page No. 87-89
Aspects Employment
Labor/management relations
Occupational health and safetyCOMM
Training and education
Diversity and equal opportunity
DMA HR Disclosure on Management Approach HR Page No. 87-89
Aspects Investment and procurement practices
Non-discrimination
Freedom of association and collective bargaining
Child labor
Forced and compulsory labor
Security practices
Indigenous rights
DMA SO Disclosure on Management Approach SO Page No. 87-89
Aspects Community
Corruption
Public policy
Anti-competitive behavior
Compliance
DMA PR Disclosure on Management Approach PR Page No. 87-89
Aspects Customer health and safety
Product and service labelling
FS15 Policies for the fair design and sale of nancial products and services. Fully Page No. 88
Marketing communications
Customer privacy
Compliance
STANDARD DISCLOSURES PART III: Performance Indicators
Product and Service Impact
Performance
Indicator
Description Reported Cross-reference/Direct answer If applicable, indicate the part
not reported
Reason for Omission
Explanation
Product portfolio
FS6 Percentage of the portfolio for business lines by speci c region, size (e.g. micro/SME/
large) and by sector.
Fully Page No. 55, 252-253
FS7 Monetary value of products and services designed to deliver a speci c social bene t
for each business line broken down by purpose.
Fully Page No. 27-28, 194, 217
FS8 Monetary value of products and services designed to deliver a speci c environmental
bene t for each business line broken down by purpose.
Fully Page No. 88-89, 194, 217
Audit
FS9 Coverage and frequency of audits to assess implementation of environmental and
social policies and risk assessment procedures.
Fully Page No. 72, 74, 85
Active ownership
FS10 Percentage and number of companies held in the institution’s portfolio with which the
reporting organization has interacted on environmental or social issues.
Fully Page No. 229-231
FS11 Percentage of assets subject to positive and negative environmental or social
screening.
Not Not available
FS12 Voting polic(ies) applied to environmental or social issues for shares over which the
reporting organization holds the right to vote shares or advises on voting.
Not Not applicable
132 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Economic
Performance
Indicator
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for Omission
Explanation
Economic performance
EC1COMM Direct economic value generated and distributed, including revenues, operating costs,
employee compensation, donations and other community investments, retained
earnings, and payments to capital providers and governments.
Fully Page No. 255
EC2 Financial implications and other risks and opportunities for the organization’s activities
due to climate change.
Not Not available
EC3 Coverage of the organization’s de ned bene t plan obligations. Fully Page No. 222-223
EC4 Signi cant nancial assistance received from government. Not Not applicable
Market presence
EC5 Range of ratios of standard entry level wage compared to local minimum wage at
signi cant locations of operation.
Fully Page No. 103 As de ned in the Collective
Agreements
EC6 Policy, practices, and proportion of spending on locally-based suppliers at signi cant
locations of operation.
Partially Page No. 119-120 Complete data not available
Signi ncant sourcing from local
suppliers
EC7 Procedures for local hiring and proportion of senior management hired from the local
community at signi cant locations of operation.
Fully 100%.
Con rmed that all hiring is done locally at signi cant
locations of operation
Indirect economic impacts
EC8 Development and impact of infrastructure investments and services provided
primarily for public bene t through commercial, in-kind, or pro bono engagement.
Fully Page No. 112-118
EC9 Understanding and describing signi cant indirect economic impacts, including the
extent of impacts.
Fully Page No. 112-118
Environmental
Performance
Indicator
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for Omission
Explanation
Materials
EN1 Materials used by weight or volume. Not Not applicable
EN2 Percentage of materials used that are recycled input materials. Fully Page No. 122
Energy
EN3 Direct energy consumption by primary energy source. Not Not applicable
EN4 Indirect energy consumption by primary source. Fully Total electricity consumption at the HNB customer centres
was 11,939,943 units per year in 2010. The source of
electricity energy used by the Bank is from the National Grid
of the Ceylon Electricity Board, the Country’s only electricity
supplier. The source producing the electricity is mostly
hydro. To ful ll any excess requirement fuel (petroleum
based) generated electricity is also supplied through the
National Grid.
EN5 Energy saved due to conservation and e ciency improvements. Fully Page No. 121
EN6 Initiatives to provide energy-e cient or renewable energy based products and
services, and reductions in energy requirements as a result of these initiatives.
Fully Page No. 88-89
EN7 Initiatives to reduce indirect energy consumption and reductions achieved. Fully Page No. 121
Water
EN8 Total water withdrawal by source. Not Not available
EN9 Water sources signi cantly a ected by withdrawal of water. Not Not applicable
EN10 Percentage and total volume of water recycled and reused. Fully Page No. 121-122
Biodiversity
EN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas
and areas of high biodiversity value outside protected areas.
Not Not applicable
EN12 Description of signi cant impacts of activities, products, and services on biodiversity in
protected areas and areas of high biodiversity value outside protected areas.
Not Not applicable
EN13 Habitats protected or restored. Fully Page No. 124
EN14 Strategies, current actions, and future plans for managing impacts on biodiversity. Fully Page No. 86, 121-124
EN15 Number of IUCN Red List species and national conservation list species with habitats
in areas a ected by operations, by level of extinction risk.
Not Not applicable
Emissions, e uents and waste
EN16COMM Total direct and indirect greenhouse gas emissions by weight. Not Not available
EN17 Other relevant indirect greenhouse gas emissions by weight. Not Not available
EN18 Initiatives to reduce greenhouse gas emissions and reductions achieved. Fully Page No. 121-124
EN19 Emissions of ozone-depleting substances by weight. Not Not applicable
G3 INDEX
WITH FINANCIAL SERVICES SECTOR SUPPLEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 133
EN20 NOx, SOx, and other signi cant air emissions by type and weight. Not Not applicable
EN21 Total water discharge by quality and destination. Not Not material
EN22COMM Total weight of waste by type and disposal method. Fully Page No. 121-124
EN23 Total number and volume of signi cant spills. Not Not applicable
EN24 Weight of transported, imported, exported, or treated waste deemed hazardous under
the terms of the Basel Convention Annex I, II, III, and VIII, and percentage of transported
waste shipped internationally.
Not Not applicable
EN25 Identity, size, protected status, and biodiversity value of water bodies and related
habitats signi cantly a ected by the reporting organization’s discharges of water and
runo .
Not Not applicable
Products and services
EN26 Initiatives to mitigate environmental impacts of products and services, and extent of
impact mitigation.
Not Not applicable
EN27 Percentage of products sold and their packaging materials that are reclaimed by
category.
Not Not applicable
Compliance
EN28 Monetary value of signi cant nes and total number of non-monetary sanctions for
non-compliance with environmental laws and regulations.
Not Not applicable
Transport
EN29 Signi cant environmental impacts of transporting products and other goods and
materials used for the organization’s operations, and transporting members of the
workforce.
Not Not material
Overall
EN30 Total environmental protection expenditures and investments by type. Fully Page No. 121-124
Social: Labor Practices and Decent Work
Performance
Indicator
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for Omission
Explanation
Employment
LA1 Total workforce by employment type, employment contract, and region. Fully Page No. 103-105
LA2 Total number and rate of employee turnover by age group, gender, and region. Not Not disclosed
LA3 Bene ts provided to full-time employees that are not provided to temporary or
part-time employees, by major operations.
Not Complete quanti cation not available. Not available
Labor/management relations
LA4 Percentage of employees covered by collective bargaining agreements. Fully Page No. 105
LA5 Minimum notice period(s) regarding signi cant operational changes, including
whether it is speci ed in collective agreements.
Fully The Bank endeavours to give a minimum of 1 month notice
regarding signi cant operationsal changes. It is not de ned
in collective agreements except for notice regarding
resignations
Occupational health and safety
LA6 Percentage of total workforce represented in formal joint management-worker health
and safety committees that help monitor and advise on occupational health and
safety programs.
Not Complete quanti cation not available. Not available
LA7 Rates of injury, occupational diseases, lost days, and absenteeism, and number of
work-related fatalities by region.
Not Not applicable
LA8 Education, training, counseling, prevention, and risk-control programs in place to assist
workforce members, their families, or community members regarding serious diseases.
Fully Page No. 101, 113
LA9 Health and safety topics covered in formal agreements with trade unions. Fully Medical leave, medical insurance, annual health check up &
reimbursement of medical expenses including
hospitalisation
Training and education
LA10 Average hours of training per year per employee by employee category. Fully Page No. 104
LA11 Programs for skills management and lifelong learning that support the continued
employability of employees and assist them in managing career endings.
Fully Page No. 100-103
LA12 Percentage of employees receiving regular performance and career development
reviews.
Fully 100%
Diversity and equal opportunity
LA13 Composition of governance bodies and breakdown of employees per category
according to gender, age group, minority group membership, and other indicators of
diversity.
Fully Page No. 103-105
LA14 Ratio of basic salary of men to women by employee category. Fully The Bank is an equal opportunity employer
134 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Social: Human Rights
Performance
Indicator
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for Omission
Explanation
Diversity and equal opportunity
HR1COMM Percentage and total number of signi cant investment agreements that include
human rights clauses or that have undergone human rights screening.
Not Complete quanti cation not available. Not available
HR2 Percentage of signi cant suppliers and contractors that have undergone screening on
human rights and actions taken.
Fully 100%
HR3 Total hours of employee training on policies and procedures concerning aspects of
human rights that are relevant to operations, including the percentage of employees
trained.
Fully 100%. At induction stage
Non-discrimination
HR4 Total number of incidents of discrimination and actions taken. Fully None reported during the year
Freedom of association and collective bargaining
HR5 Operations identi ed in which the right to exercise freedom of association and
collective bargaining may be at signi cant risk, and actions taken to support these
rights.
Fully Collective Agreements are adhered to
Child labor
HR6 Operations identi ed as having signi cant risk for incidents of child labor, and
measures taken to contribute to the elimination of child labor.
Not Not applicable
Forced and compulsory labor
HR7 Operations identi ed as having signi cant risk for incidents of forced or compulsory
labor, and measures to contribute to the elimination of forced or compulsory labor.
Not Not applicable
Security practices
HR8 Percentage of security personnel trained in the organization’s policies or procedures
concerning aspects of human rights that are relevant to operations.
Fully Security Coordinators are employed to monitor the security
functions which are outsourced.
Indigenous rights
HR9 Total number of incidents of violations involving rights of indigenous people and
actions taken.
Not Not applicable
Social: Society
Performance
Indicator
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for Omission
Explanation
Community
SO1 Nature, scope, and e ectiveness of any programs and practices that assess and
manage the impacts of operations on communities, including entering, operating,
and exiting.
Fully Page No. 86, 112-118
FS13 Access points in low-populated or economically disadvantaged areas by type. Fully Page No. 40-41
FS14 Initiatives to improve access to nancial services for disadvantaged people. Fully Page No. 94, 97-98
Corruption
SO2 Percentage and total number of business units analyzed for risks related to corruption. Fully 100%. Page No. 56
SO3 Percentage of employees trained in organization’s anti-corruption policies and
procedures.
Fully 100%. At induction stage
SO4 Actions taken in response to incidents of corruption. Fully None reported during the year
Public policy
SO5 Public policy positions and participation in public policy development and lobbying. Not Not material
SO6 Total value of nancial and in-kind contributions to political parties, politicians, and
related institutions by country.
Fully None reported during the year
Anti-competitive behavior
SO7 Total number of legal actions for anti-competitive behavior, anti-trust, and monopoly
practices and their outcomes.
Fully None reported during the year
Compliance
SO8 Monetary value of signi cant nes and total number of non-monetary sanctions for
non-compliance with laws and regulations.
Fully None reported during the year
G3 INDEX
WITH FINANCIAL SERVICES SECTOR SUPPLEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 135
Social: Product Responsibility
Performance
Indicator
Description Reported Cross-reference/Direct answer If applicable, indicate the part not
reported
Reason for omission
Explanation
Customer health and safety
PR1 Life cycle stages in which health and safety impacts of products and services are
assessed for improvement, and percentage of signi cant products and services
categories subject to such procedures.
Fully Page No. 94-98
PR2 Total number of incidents of non-compliance with regulations and voluntary codes
concerning health and safety impacts of products and services during their life cycle,
by type of outcomes.
Fully None reported during the year
Product and service labelling
PR3 Type of product and service information required by procedures, and percentage of
signi cant products and services subject to such information requirements.
Not Not available
PR4 Total number of incidents of non-compliance with regulations and voluntary codes
concerning product and service information and labeling, by type of outcomes.
Fully None reported during the year
PR5 Practices related to customer satisfaction, including results of surveys measuring
customer satisfaction.
Fully Page No. 94-98
FS16 Initiatives to enhance nancial literacy by type of bene ciary. Fully Page No. 92
Marketing communications
PR6 Programs for adherence to laws, standards, and voluntary codes related to marketing
communications, including advertising, promotion, and sponsorship.
Not Not available
PR7 Total number of incidents of non-compliance with regulations and voluntary codes
concerning marketing communications, including advertising, promotion, and
sponsorship by type of outcomes.
Fully None reported during the year
Customer privacy
PR8 Total number of substantiated complaints regarding breaches of customer privacy
and losses of customer data.
Fully None reported during the year
Compliance
PR9 Monetary value of signi cant nes for non-compliance with laws and regulations
concerning the provision and use of products and services.
Fully None reported during the year
136 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
FINANCIAL INFORMATION
SUSTAINING GROWTH
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 137
Financial Calendar 139
Annual Report of the Board of Directors
on the A airs of the Company 140
Directors’ Interest in Contracts with the Bank 146
Remuneration Committee Report 150
Nomination Committee Report 151
The Board Integrated Risk Management
Committee Report 152
Audit Committee Report 153
CEO’s and CFO’s Responsibility Statement 155
Directors’ Responsibility for
Financial Reporting 156
Independent Auditors’ Report 157
Income Statement 158
Balance Sheet 159
Statement of Changes in Equity 160
Cash Flow Statement 161
Notes to the Financial Statements 164
138 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Financial Calendar ................................................................................................................................................139
Annual Report of the Board of Directors
on the A airs of the Company .................................................................................................. 140 - 145
Directors’ Interest in Contracts with the Bank ........................................................................146 - 149
Remuneration Committee Report .............................................................................................................150
Nomination Committee Report ..................................................................................................................151
The Board Integrated Risk Management Committee Report ...................................................152
Audit Committee Report .................................................................................................................... 153 - 154
CEO’s and CFO’s Responsibility Statement ...........................................................................................155
Directors’ Responsibility for Financial Reporting ...............................................................................156
Independent Auditors’ Report ......................................................................................................................157
Income Statement ...............................................................................................................................................158
Balance Sheet .........................................................................................................................................................159
Statement of Changes in Equity .................................................................................................................160
Cash Flow Statement ............................................................................................................................161 - 163
NOTES TO THE FINANCIAL STATEMENTS
1 Reporting Entity .......................................................................................................................................164
2 Basis of Preparation ................................................................................................................................164
3 Materiality and Aggregation ............................................................................................................165
4 Signi cant Accounting Policies .........................................................................................165 - 177
5 Signi cant Accounting Policies that are speci c to the business
of the Subsidiary - HNB Assurance PLC ...................................................................177 - 178
6 Comparative Information ...................................................................................................................178
7 Directions Issued but not E ective / Applied
as at Balance Sheet Date ................................................................................................................178
8 New Accounting Standards Issued but not E ective
as at Balance Sheet Date ................................................................................................................178
9 Income ...........................................................................................................................................................179
10 Interest Income.........................................................................................................................................179
11 Interest Expenses .....................................................................................................................................179
12 Fee and Commission Income ..........................................................................................................179
13 Dividend Income .....................................................................................................................................179
14 Other Income ............................................................................................................................................180
15 Operating Expenses ...............................................................................................................................180
16 Personnel Expenses ..............................................................................................................................180
17 Provision for Employee Retirement Bene ts ..........................................................................181
18 Provision for Loan Losses ....................................................................................................................181
19 Share of Pro t / (Loss) of Associates (Net of Income Tax) ...............................................181
20 Income Tax Expense .................................................................................................................181 - 183
21 Earnings Per Share ..................................................................................................................................183
22 Cash and Cash Equivalents................................................................................................................184
23 Statutory Deposit with Central Banks .........................................................................................184
24 Dealing Securities....................................................................................................................... 184 - 187
25 Non-Current Assets Held for Sale .................................................................................................187
26 Bills of Exchange ......................................................................................................................................188
27 Lease Receivable ......................................................................................................................................189
28 Loans and Advances ................................................................................................................. 190 - 198
29 Investment Securities ..............................................................................................................199 - 203
30 Investment in Associates .......................................................................................................203 - 205
31 Investment in Joint Venture ..............................................................................................................206
32 Investments in Subsidiaries ................................................................................................206 - 207
33 Investment Properties .............................................................................................................207 - 208
34 Property, Plant and Equipment ......................................................................................... 209 - 215
35 Intangible Assets ......................................................................................................................................216
36 Other Assets ................................................................................................................................................217
37 Deposits from Customers...................................................................................................................217
38 Dividends Payable ......................................................................................................................217 - 218
39 Borrowings ..................................................................................................................................................218
40 Subordinated Debentures .................................................................................................... 218 - 219
41 Insurance Provision - Life ....................................................................................................................219
42 Insurance Provision - General ..........................................................................................................220
43 Deferred Tax Liabilities .............................................................................................................220 - 221
44 Other Liabilities .........................................................................................................................................221
45 Employee Retirement Bene ts ..........................................................................................222 - 223
46 Stated Capital ................................................................................................................................ 224 - 225
47 Commitments and Contingencies - Bank and Group .........................................226 - 227
48 Related Party Disclosures .......................................................................................................228 - 240
49 Maturity Analysis .........................................................................................................................240 - 242
50 Comparative Information ................................................................................................................... 243
51 Segment Reporting ...............................................................................................................................244
52 Events Occurring after the Balance Sheet Date ...................................................................245
53 Directors’ Responsibility Statement .............................................................................................245
Supplementary Information
Capital Adequacy .................................................................................................................................... 246 - 248
Income Statement in US Dollars .................................................................................................................249
Balance Sheet in US Dollars ...........................................................................................................................250
Analysis of Deposits ............................................................................................................................................251
Analysis of Advances ..........................................................................................................................................252
Province-wise Analysis of Deposits and Advances ........................................................................253
Sources and Utilisation of Income .............................................................................................................254
Value Added Statement ...................................................................................................................................255
Quarterly Statistics ...............................................................................................................................................256
Ten Year Statistical Summary .........................................................................................................................257
Ten Year Graphical Review ..............................................................................................................................258
Segmental Analysis .............................................................................................................................................259
Share and Debenture Information ............................................................................................... 260 - 267
Glossary ......................................................................................................................................................... 268 - 269
Notice of Meeting ................................................................................................................................................270
Form of Proxy - Voting .......................................................................................................................... 271 - 272
Form of Proxy - Non Voting ...............................................................................................................273 - 274
Investor Feedback Form ...................................................................................................................................275
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 139
Financial Calendar - 2010
Rs 5.00 per share Final Dividend for 2009 paid on 12th April 2010
Rs 1.50 per share Interim Dividend for 2010 paid on 24th November 2010
Audited Financial Statements signed on 18th February 2011
42nd Annual General Meeting to be held on 31st March 2011
Rs 5.50 per share Final Dividend for 2010 payable on * 11th April 2011
Interim Financial Statements published in terms of Rule 8.3 of the Colombo Stock
Exchange and as per the requirements of the Central Bank of Sri Lanka:
1st Quarter Interim Results released on 12th May 2010
2nd Quarter Interim Results released on 12th August 2010
3rd Quarter Interim Results released on 11th November 2010
Proposed Financial Calendar - 2011
Interim Dividend for 2011 to be payable in ** December 2011
43rd Annual General Meeting to be held in March 2012
Final Dividend for 2011 to be payable in *** April 2012
Interim Financial Statements to be published in terms of Rule 8.3 of the Colombo
Stock Exchange and as per the requirements of the Central Bank of Sri Lanka:
1st Quarter Interim Results to be released in May 2011
2nd Quarter Interim Results to be released in August 2011
3rd Quarter Interim Results to be released in November 2011
* Subject to con rmation by Shareholders
** Subject to con rmation by Directors
*** Subject to con rmation by Directors and Shareholders
FINANCIAL
CALENDAR
140 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The Board of Directors of Hatton National Bank PLC has pleasure in
pr
esenting their Annual Report to the members for the nancial year
ended 31st December 2010, together with the audited Financial
Statements of the Bank and Consolidated Financial Statements of
the Group for that year, and the Auditors’ Report on those Financial
Statements, conforming to the requirements of the Companies Act.
The Financial Statements were reviewed and approved by the Board
of Directors on 18th February 2011. The Report also includes certain
disclosures required to be made under the Banking Act direction on
Corporate Governance, Listing Rules of the Colombo Stock Exchange
and is guided by the recommended best practices on Corporate
Governance.
Hatton National Bank PLC (Bank) is a Public Limited Company
incorporated in Sri Lanka in March 1970 under the Companies
Ordinance. The Bank was re-registered as required under the provisions
of the Companies Act No 7 of 2007, on 27th September 2007.
The ordinary shares and the majority of the unsecured subordinated
redeemable debentures of the Bank are listed on the Colombo Stock
Exchange in Sri Lanka. Global Depository Receipts of the Bank are listed
on the Luxembourg Stock Exchange.
The Bank’s implied long term unsecured senior debt has been assigned
AA-(lka) by Fitch Ratings Lanka Ltd.
Principal Activities
The principal activities of the Bank and the Group during the year were
general banking, development banking, o shore banking, mortgage
nancing, lease nancing, corporate banking, dealing in government
securities and listed equities, pawn broking, credit card facilities, stock
broking, providing life and general insurance services, other nancial
services and property development. There were no signi cant changes
in the nature of the principal activities of the Bank and the Group during
the nancial year under review.
Changes to the Group Structure
In September 2010 the Bank transferred its shareholding of 49.99% in
Acuity Securities Ltd (formerly known as HNB Securities Ltd) to Acuity
Partners (Pvt) Ltd (“Acuity”) thereby completing the business model
adopted between the DFCC Bank and the Bank in 2008 to promote
interalia investment banking, corporate nance, stock broking and xed
income securities business, jointly. The shares were transferred at the
net book value. Accordingly, with e ect from 1st October 2010, Acuity
Securities Ltd was treated as a fully owned subsidiary of Acuity.
The Bank held 20.07% of the ordinary shares of Lanka Ventures PLC (LVL)
in 2009 and this investment was classi ed as an investment in Associate
in that year. Hatton National Bank sold its stake in LVL to Acuity on 18th
January 2010. Acuity has also purchased a further 58% shareholding
in LVL from DFCC Bank on the same day, thus increasing its stake in
LVL to 78%. Accordingly, HNB’s ownership in LVL has now increased
to an indirect shareholding of 39% through the joint venture Acuity,
consequent to these transactions. During the year the Bank increased its
capital contribution (direct / through conversion of loans) to Acuity by
Rs 405 Mn and retained its ownership in the joint venture.
The Bank took a strategic decision to cease commercial operations in
Canada through its investment in Commercial Interlink Services Inc (O/A
of Delma Exchange Canada), due to the erce competition in the high
volume, low margin remittance business. The commercial operations
were progressively scaled down during the latter part of the year.
This Company has been classi ed as a subsidiary of the Bank up to the
balance sheet date and the Bank has made the required provision of
Rs 28,948,000 for impairment in the Income Statement.
The Bank also invested a further sum of Rs 12.1 Mn in the equity of
Delma Exchange in Abu Dhabi, United Arab Emirates during the year
as part of a capital augmentation plan to support the expansion of
distribution network. As at balance sheet date the company had 4
branches in the UAE. The Bank continues to own 20% of this company
and classi es it as an Associate.
Review of Operations
A review of the operations of the Bank during the nancial year 2010
and results of its operations are contained in the Chairman’s Message
(pages 04 to 07), the Chief Executive O cer’s Review (pages 08 to 11)
and Management Discussion (pages 20 to 45). These reports form an
integral part of the Annual Report of the Board.
Future Developments
An overview of the future developments of the Bank is given in the
Chairman’s Message (pages 04 to 07), the Chief Executive O cer’s
Review (pages 08 to 11) and Management Discussion (pages 20 to 45).
Financial Statements
The Financial Statements of the Bank and the Group for the year ended
31st December 2010 duly signed by the Chief Financial O cer, two of the
Directors of the Bank and the Board Secretary are given on pages 158 to 245
which form an integral part of the Annual Report of the Board.
Signi cant Accounting Policies
The signi cant accounting policies adopted in the preparation of
the Financial Statements and the impact of the changes in Sri Lanka
Accounting Standards during the year are given on pages 164 to 178.
Going Concern
The Board is satis ed that the Bank has adequate resources to continue
its operations in the foreseeable future. Therefore, we continue to adopt
the going-concern basis in preparing these Financial Statements.
Auditors’ Report
Bank’s Auditors, Messrs KPMG Ford, Rhodes, Thornton & Company
carried out the audit on the Financial Statements of the Bank and the
ANNUAL REPORT OF THE BOARD OF DIRECTORS
ON THE AFFAIRS OF THE COMPANY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 141
Consolidated Financial Statements of the Group for the year ended 31st
December 2010 and their report on those Financial Statements which
forms an integral part of the Report of the Board of Directors, is given on
page 157 of this Annual Report.
Income
The Income of the Group for 2010 was Rs 38,104,665,000/= (2009 -
Rs 41,300,773,000/=) while the Bank’s income was Rs 35,581,621,000/=
(2009 - Rs 39,357,863,000/=). An analysis of the income is given in Note 9
to the Financial Statements.
Financial Results and Appropriations
The Bank has recorded a pro t before tax and pro t after tax growth of
13.8% and 2.6% respectively in 2010. The Group’s pro t before tax and
pro t after tax for the year too recorded a growth of 17.6% and 7.3%
respectively over 2009.
2010 2009
Rs ‘000 Rs ‘000
The Group pro t for the year ended
31st December 2010 after
payment of all expenses of
management and providing for
depreciation and contingencies 7,251,667 6,166,824
Less: Taxation (2,364,839) (1,613,464)
Group net pro t after taxation 4,886,828 4,553,360
Minority Interest (100,058) (70,083)
4,786,770 4,483,277
Unappropriated pro t brought
forward from previous year 3,550,268 2,616,620
Balance available before
appropriation / adjustments 8,337,038 7,099,897
Transfer to General Reserve (2,300,000) (2,210,947)
Transfer to Reserve Fund (250,000) (277,293)
Final dividend (1,179,807) (706,588)
Interim dividend (338,570) (353,415)
Dividend reversal 175,712 -
Reduction in reserves from disposal of
Associate company and long term
investment to Joint Venture (88,637) -
Acquisition of minority interest in
Subsidiary by Group (712) -
Disposal of Subsidiaries - (1,386)
Balance carried forward
as at 31st December 4,355,024 3,550,268
Reserves
The Group Reserves consist of:
2010 2009
Rs ‘000 Rs ‘000
Capital Reserve 5,791,791 5,773,882
Statutory Reserve Fund 1,510,000 1,260,000
Exchange Equalisation Reserve 2,744 5,505
Revenue Reserve 17,355,024 14,250,268
Total 24,659,559 21,289,655
The movement in these reserves is shown in the Statement of Changes
in Equity on page 160 of the Annual Report.
The Directors propose to transfer Rs 250,000,000 (2009 – Rs 277,293,000/=)
to Statutory Reserve Fund and Rs 2,300,000,000 (2009 – Rs 2,210,947,000/= )
to General Reserve Account.
Corporate Donations
During the year the Bank made donations amounting to Rs
20,303,000/= (2009 - Rs 29,184,000/=) in terms of the resolution passed
at the last Annual General Meeting. Donations made by the Group
during the year amounted to Rs 20,661,000 (2009 – Rs 29,542,000/=).
The donations made to Government approved charities from the above
sum amount to Rs 400,000/= (2009 – Rs 325,000/=).
Taxation
The income tax rate applicable on the Bank’s domestic operations and
FCBU on-shore banking operations is 35% (2009 - 35%). The o -shore
operations of the FCBU are taxed at 20% (2009 - 20%).
It is the Bank’s policy to provide for deferred taxation on all known
temporary di erences under the liability method.
The Bank is also liable for Financial VAT at 20% (2009 - 20%).
Statutory Payments
The Directors, to the best of their knowledge and belief, are satis ed that
all statutory payments in relation to the Government and the employees
have been made up to date.
Dividends
An interim dividend of Rs 1.50 per share (2009 – Rs 1.50) was paid
on 24th November 2010 to the holders of the ordinary shares (both
voting and non-voting) for the nancial year 2010. A part of the interim
dividend paid for the year represents a redistribution of the exempt
dividends received by the Bank and will therefore be free of income
tax in the hands of the shareholders. On this basis 47.0% of the interim
dividend paid for 2010 is subject to income tax.
The Directors recommend for shareholder approval at the Annual
General Meeting, a Final Dividend of Rs 5.50 per share (2009 - Rs 5.00 per
142 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
ANNUAL REPORT OF THE BOARD OF DIRECTORS
ON THE AFFAIRS OF THE COMPANY
share) for the nancial year 2010 and the dividend to be paid on 11th
April 2011 to the holders of ordinary shares (voting and non-voting)
of the Bank as at the close of business on 31st March 2011, subject to
withholding tax.
The Board of Directors was satis ed that the Bank would meet the
solvency test immediately after the interim dividend was paid in
November 2010 and the nal dividend proposed which will be paid in
April 2011 in terms of the provisions of the Companies Act No 7 of 2007.
The Board provided the Statements of Solvency to the Auditors and
obtained Certi cates of Solvency from the Auditors in respect of each
dividend payment conforming to the statutory provision.
Capital Expenditure
The total capital expenditure on acquisition of investment property,
property, plant and equipment and intangible assets of the Bank and
the Group amounted to Rs 1,052,876,000/= and Rs 1,139,281,000/=
respectively (2009 Bank - Rs 1,182,121,000/= and Group - Rs
1,290,885,000/=) details of which are given in Notes 33, 34 and 35 to the
Financial Statements. The capital expenditure approved and contracted
for, after the year end is given in Note 47 (a) to the Financial Statements.
Property, Plant and Equipment (PPE)
Details of property, plant and equipment are given in Note 34 to the
Financial Statements. There was no signi cant change in the property,
plant and equipment of the Bank.
Market Value of Freehold Properties
The net book value of freehold properties owned by the Bank and the
Group as at 31st December 2010 is included in the accounts at
Rs 5,058,275,000/= and Rs 10,207,154,000/= respectively (2009 Bank -
Rs 4,747,287,000/= and Group Rs 9,951,149,000/=).
A panel of Chartered Valuers / Licensed Surveyors carried out a
revaluation of the Bank’s freehold properties in 2007. The details of
freehold properties owned by the Bank are given in Note 34 (b) to the
Financial Statements.
Outstanding Litigation
In the opinion of the Directors and the Bank’s Lawyers, pending
litigation against the Bank disclosed in Note 47 (e) of the Financial
Statements will not have a material impact on the nancial position of
the Bank or its future operations.
Events after the Balance Sheet Date
No circumstances have arisen since the Balance Sheet date which
would require adjustments to, or disclosure in, the accounts, except
those disclosed in Note 52 to the nancial statements.
Stated Capital and Debentures
The stated capital of the Bank as at 31st December 2010 was
Rs 5,318,550,000/=, consisting of 237,969,022 ordinary shares, 191,275,606
– (voting) and 46,693,416 – (non-voting), (2009 Rs 5,084,084,000/=
consisting of 235,770,147 ordinary shares, 189,520,615 – voting and
46,249,532 – non-voting). The Bank issued 2,198,875 ordinary shares
during the year, 1,754,991 shares (voting) at a consideration of
Rs 209,650,000/= and 443,884 shares (non-voting) at a consideration
of Rs 24,816,000/= under the approved Employee Share Option Plan.
Thereby the Stated Capital of the Bank increased by Rs 234,466,000/=.
(2009 Rs 24,694,000/=)
Share Information
Information relating to earnings, dividend, net assets and market price
per share is given in the Financial Highlights on page 03 of the Annual
Report. Information on share trading is given on page 261 of the
Annual Report.
Shareholdings
As at 31st December 2010 there were 4,380 and 11,536 registered
voting and non-voting shareholders respectively. The distribution is
indicated on pages 260 and 261 of the Annual Report. The twenty
largest voting and non-voting shareholders of the Bank as at 31st
December 2010, together with an analysis are given on pages 264 and
265 of the Annual Report.
Equitable Treatment to Shareholders
The Bank has at all times ensured that all shareholders (both voting and
non-voting) are treated equitably.
The Board of Directors
The Board of Directors of the Bank consists of nine (2009 – eight)
Directors with wide nancial and commercial knowledge and
experience. The following Directors held o ce as at the Balance Sheet
date and their brief pro les appear on pages 14 and 15 of the Annual
Report.
Name of the Director Status
Mr Rienzie T. Wijetilleke (Chairman) NED
Mr Rajendra Theagarajah (MD / CEO) ED
Mr D H S Jayawardena NED
Mr M V Theagarajah IND / NED
Mr R K Obeyesekere NED
Ms Pamela C. Cooray (Senior Director) IND / NED
Mr Ranjeevan Seevaratnam IND / NED
Mr N G Wickremeratne IND / NED
Ms M A R C Cooray IND / NED
(appointed w.e.f. 15th February 2010)
(IND - Independent Director, NED - Non Executive Director and
ED - Executive Director)
Retirement and re-election / re-appointment of Directors
Mr R K Obeyesekere, Ms Pamela C. Cooray and Mr Ranjeevan Seevaratnam
retire by rotation at the AGM under the Articles of Association of the
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 143
Bank. Mr R K Obeyesekere and Ms Pamela C. Cooray o er themselves
for re-election, with the unanimous support of the Board. Mr Ranjeevan
Seevaratnam has informed the Board that he would not o er himself for
re-election.
Mr Rienzie T. Wijetilleke and Mr M V Theagarajah – Directors having
attained the age of 70 years retire at the AGM under the provision of
the Companies Act. The Directors have declared that they would not be
o ering themselves for re-appointment at the AGM.
Board Committees
The Board while assuming the overall responsibility and accountability
in the management of the Bank has also appointed Board Committees
to ensure oversight, control over certain a airs of the Bank, conforming
to corporate governance standards of the Monetary Board of the
Central Bank of Sri Lanka, and adopting the best practices. Accordingly,
the following Committees have been constituted by the Board:
Audit - Comprises - • Mr Ranjeevan Seevaratnam
Committee (Chairman)
• Mr D H S Jayawardena
• Ms Pamela C. Cooray
(Senior Director)
• Mr N G Wickremeratne
The Report of the Audit
Committee is given on page
153 which forms part of the
Annual Report of the Board.
Nomination - Comprises - • Mr Rienzie T. Wijetilleke
Committee (Chairman)
• Mr D H S Jayawardena
• Mr M V Theagarajah
• Mr R K Obeyesekere
The Report of the
Nomination Committee is
given on page 151 which
forms part of the Annual
Report of the Board.
Remuneration - Comprises - • Ms Pamela C. Cooray
Committee (Chairperson)
• Mr Rienzie T. Wijetilleke
• Mr R K Obeyesekere
• Mr N G Wickremeratne
The Report of the
Remuneration Committee
is given on page 150 which
forms part of the Annual
Report of the Board.
Integrated - Comprises - • Mr M V Theagarajah
Risk (Chairman)
Management • Mr Rienzie T. Wijetilleke
Committee • Ms M A R C Cooray
• Mr R Theagarajah (MD/CEO)
• Mr J D N Kekulawela
Senior DGM - Strategy &
Compliance
• Mr D P N Rodrigo
DGM - Risk
Mr R K Obeyesekere who was a member of the above committee
resigned from the committee on 31st March 2010. Ms M A R C Cooray
was appointed to the committee on 31st March 2010. The Report of the
Integrated Risk Management Committee is given on page 152 which
forms part of the Annual Report of the Board.
Mr R Theagarajah, Mr J D N Kekulawela and Mr D P N Rodrigo represent
the Management on the Committee.
Directors’ Meetings
The number of Directors’ meetings which comprise Board meetings,
Audit Committee meetings, Nomination Committee meetings,
Remuneration Committee meetings and Integrated Risk Management
Committee meetings and the attendance of Directors at these meetings
are given on page 74 of the Annual Report. Furthermore, the Directors
contributed towards policy advocacy and direction by participating in
the deliberations of the Board appointed sub committees on Strategic
Review, Procurement and Disposal of Assets.
Directors’ Responsibility for Financial Reporting
The Directors are responsible for the preparation of the Financial
Statements of the Bank to present a true and fair view of the state of
its a airs. The Directors are of the view that these Financial Statements
have been prepared in conformity with the requirements of the Sri
Lanka Accounting Standards, Companies Act No 7 of 2007, Sri Lanka
Accounting and Auditing Standards Act No 15 of 1995, Banking Act
No 30 of 1988 and amendments thereto and the Listing Rules of the
Colombo Stock Exchange. The Statement of Directors’ Responsibility for
Financial Reporting is given on page 156 which forms an integral part of
the Annual Report of the Board of Directors.
Directors’ Interest Register
The Bank maintains Directors’ Interest Register conforming to the
provisions of the Companies Act. The Directors of the Bank have
disclosed their interests in other companies to the Board and those
interests are recorded in the interest register conforming to the
provisions of the Companies Act. The particulars of those entries are set
out on pages 146 to 149 of the Annual Report which form an integral
part of the Annual Report of the Board.
144 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Directors’ interests in the Ordinary Shares
The Shareholdings of Directors were as follows:-
As at 31st As at 31st
December 2010 December 2009
Mr Rienzie T. Wijetilleke 7,806 7,806
Mr Rajendra Theagarajah 21,820 18,644
Mr D H S Jayawardena 10,010 10,010
Mr M V Theagarajah 294,948 289,948
Mr R K Obeyesekere 10,010 10,010
Ms Pamela C. Cooray 46,599 46,599
Mr Ranjeevan Seevaratnam 500 500
Mr N G Wickremeratne 2,000 2,000
Ms M A R C Cooray - -
There has been no change in their interests in shares between 31st
December 2010 and 18th February 2011, being the date of this Report.
Related Party Transactions
The Directors have also disclosed the transactions if any, that could be
classi ed as related party transactions in terms of Sri Lanka Accounting
Standard 30 (Revised 2005) “Related Party Disclosures” which is adopted
in the preparation of the Financial Statements. Those transactions
disclosed by the Directors are given in Note 48 to the Financial
Statements forming part of the Annual Report of the Board.
Directors’ Remuneration
Details of Directors’ emoluments paid during the year are given in Note
15 to the Financial Statements.
Human Resources
The employment strategies of the Bank are framed to employ,
train, develop and retain the best talent available. Towards this end,
employment policies are reviewed periodically to be aligned with
organisational needs.
Employee Share Ownership Plan
The Bank established an Employee Share Ownership Plan in the year
2005 for the bene t of the sta members in the grade of Executive and
above with the approval of the shareholders.
The scheme was formulated to pass certain bene ts (dividends, bonus
shares etc) on the ordinary shares (non-voting) of the Bank to the sta
without transferring the ownership. For this purpose, the Bank created
a Trust and the Trustees were entrusted to acquire ordinary shares
(non-voting) of the Bank in the secondary market or otherwise and to
allocate the shares to the sta on a basis determined by the Board. The
Trustees were granted a special loan at a commercial rate of interest to
acquire the shares. The bene ts from the shares are given to the sta
members during their employment. On cessation of employment they
are paid the market value of the shares allocated. Any part of the loan
outstanding, interest and statutory payments are recovered prior to
transferring the bene ts. From inception upto 31st December 2010, 209
sta members have received beni ts from this scheme.
The loan outstanding as at end 2010 was Rs 197,284,000/= (2009 –
Rs 136,518,000/=). The amount released to the employees who left the
services of the Bank during 2010 was Rs 105,782,437/= (2009 –
Rs 23,162,639/=).
Employee Share Option Plan
In the year 2008 with the approval of the shareholders, the Bank
formulated an Employee Share Option Plan for the sta in the
Management grades, recognising and rewarding them for their
contribution. The Scheme was aimed at further motivating the
Management sta . This gives an option to the Management sta to
acquire ownership in the ordinary shares (both voting and non-voting)
of the Bank, provided the Bank has met certain set pro t goals. It is
operative for 5 years and the Management sta has the option to
purchase ordinary shares (voting and non-voting) of the Bank each year
up to a limit of 1.25% of the shares issued up to a maximum of 5% of
the shares issued. Based on the performance achieved for the year 2007,
rst option to purchase shares, has been o ered to 175 Management
O cers. The option to purchase shares is exercisable up to 1st October
2013. As at 31st December 2010, 141 Management O cers have
exercised the option (some fully, some partly) and purchased shares.
Based on the performance achieved for the year 2009, second option
to purchase shares has been o ered to 182 Management O cers. The
option to purchase shares is exercisable up to 31st March 2015. As
at 31st December 2010, 10 Management O cers have exercised the
option and purchased shares.
The details of the options o ered to the employees as at 31st December
2010 are as follows:
2008 Allocation 2010 Allocation
Voting Non Voting Non
voting voting
No of options
brought forward 1,963,198 476,143 - -
No of options granted in 2010 - - 2,366,458 577,367
No of options exercised 1,620,059 410,960 134,932 32,924
No of options expired
during the year - - - -
No of options remaining 343,139 65,183 2,231,526 544,443
Allotment Price (Rs) 115.54 52.51 166.51 98.31
Funding granted to employees None None None None
ANNUAL REPORT OF THE BOARD OF DIRECTORS
ON THE AFFAIRS OF THE COMPANY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 145
Environmental Protection
The Bank has used its best endeavours to comply with the relevant
environmental laws and regulations. The Bank has not engaged in any
activity that is harmful or hazardous to the environment.
Statutory Payments
The Board of Directors con rms that all statutory payments to the
Government and the employees have been made up to date.
Risk and Internal Control
The Board considers that strong internal controls are integral to the
sound management of the Bank and it is committed to maintain strict
nancial, operational and risk management controls over all its activities.
The Directors are ultimately responsible for the Bank’s system of internal
control and for reviewing its e ectiveness. Such a system is designed
to manage, rather than eliminate, the risk of failure to achieve business
objectives and can provide only reasonable and not absolute assurance
against material misstatement or loss. There is an ongoing process for
identifying, recording , evaluating and managing the risks that are faced
by the Bank, and the Directors have reviewed this process, through the
Audit Committee.
The Board of Directors is satis ed with the e ectiveness of the system of
internal control for the year under review and up to the date of approval
of the Annual Report and Financial Statements.
Directors’ Statement on Internal Control
The Board has issued a report on the internal control mechanism of
the Bank as per Section 3 (8) (ii) (b) of Banking Act Direction No 11 of
2007 on Corporate Governance. The Board has con rmed that the
nancial reporting system has been designed to provide reasonable
assurance regarding the reliability of the nancial reporting, and that
the preparation of nancial statements for external purposes has been
done in accordance with relevant accounting principles and regulatory
requirements. The above report, which forms an integral part of the
Annual Report of the Board of Directors, is given on page 76 to 77.
The Board has obtained an assurance report from the External Auditors
on Directors’ Statement on Internal Control.
Corporate Governance
In the management of the Bank, the Directors have placed emphasis
in conforming to the best corporate governance practices and
procedures. Accordingly, systems and structures have been introduced
/ improved from time to time to enhance risk management measures
and to improve accountability and transparency. A separate report on
governance is given on pages 59 to 75.
Compliance with Laws and Regulations
The Bank has at all times ensured that it complied with the applicable
laws and regulations including the listing rules of the Colombo Stock
Exchange as a listed company. The Management O cers responsible
for compliance, table a report on compliance at the quarterly meetings
of the Board Audit Committee.
Auditors
The Bank’s Auditors during the period under review were Messrs KPMG
Ford, Rhodes, Thornton & Company (KPMG), Chartered Accountants.
Audit fees and reimbursement of expenses paid to KPMG during the
year under review by the Bank and the Group amounted to
Rs 8,666,000/= (2009 - Rs 7,401,000/=) and Rs 12,017,000/= (2009 –
Rs 10,108,000/=) respectively. Further Rs 3,294,000/= (2009 -
Rs 575,000/=) and Rs 3,294,000/= (2009 – Rs 575,000/=) were paid by
the Bank and the Group respectively for Audit related and non-audit
services including reimbursement of expenses.
Based on the declaration provided by Messrs KPMG Ford, Rhodes,
Thornton & Company (KPMG), and as far as the Directors are aware, the
Auditors do not have any relationship with or interest with the Bank that
in our judgment, may reasonably be thought to have a bearing on their
independence within the meaning of the Code of Professional Conduct
and Ethics issued by the Institute of Chartered Accountants of Sri Lanka,
applicable on the date of this Report.
The retiring Auditors, Messrs KPMG Ford, Rhodes, Thornton & Company,
have expressed their willingness to continue in o ce. A resolution
relating to their re-appointment and authorising the Directors to x
their remuneration, will be proposed at the forthcoming Annual General
Meeting.
Notice of Meeting
The 42nd Annual General Meeting of the Bank is convened on Thursday
the 31st day of March, 2011, at 10.00 in the forenoon, at the Auditorium
on Level 22 of “HNB Towers” (Registered O ce), No 479, T B Jayah
Mawatha, Colombo 10. The Notice of the 42nd Annual General Meeting
is on page 270 of the Annual Report.
For and on behalf of the Board of Directors.
Rajendra Theagarajah Rienzie T. Wijetilleke
Managing Director / Chairman
Chief Executive O cer
Indrani Goonesekera
Deputy General Manager (Legal) / Board Secretary
Colombo, Sri Lanka
18th February 2011
146 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
DIRECTORS’ INTEREST IN CONTRACTS
WITH THE BANK
Directors’ Interest in Contracts with the Bank
“The Bank carries out transactions in the ordinary course of business at commercial rates with entities in which a Director of the Bank is the Chairman
or a Director of such entities. The transactions with entities where a Director of the Bank either has control or exercises signi cant in uence, have been
classi ed as related party transactions and disclosed in Note 48 to the Financial Statements.
The transactions with entities where a Directors of the Bank neither have control nor exercise signi cant in uence, but only hold directorships are
disclosed below:
1. Lending Transactions with the Bank
Company Name of Director Nature of Transaction Aggregate Amount of Accommodation Security
(Relationship) as at 31st December 2010
Limit Outstanding
(Rs Mn) (Rs Mn)
Mahaweli Reach Mr Rienzie T. Wijetilleke Overdraft 15.00 12.57 Immovable property
Hotels PLC (Director) Term Loans 34.37 34.37
Term Loans 5.79 5.79
Term Loans 19.95 19.95
E Friends I Revolving 10.22 4.00
Total 85.33 76.68
Convenience Foods Subsidiary of Overdraft 20.00 4.64 Negative pledge over
(Lanka) Ltd Ceylon Biscuits Ltd Letters of Credit 80.00 81.64 the project assets
in which company Letters of Guarantee 23.00 20.00
Mr Rienzie T. Wijetilleke Short Term Loan (20.00) -
is a Director Import Loan (20.00) -
Total 123.00 106.28
Watawala Plantations PLC Subsidiary of Overdraft 85.00 30.59 Immovable property
Sunshine Holding PLC Letters of Credit 5.00 - Equipment
in which company Letters of Guarantee 15.00 5.16 Indemnity of the company
Mr Rienzie T. Wijetilleke Packing Credit *50.00 - *Could be utilised in
is the Chairman Short Term Money Market Loan (50.00) 25.00 US $ as well
Term Loan 1 1.27 1.27
Term Loan 11 35.41 35.41
Revolving Lease 15.00 0.58
Total 206.68 98.01
Swiss Biogenics Ltd Subsidiary of Overdraft (105.00) 1.61 Stocks & book debts
Sunshine Holding PLC Letters of Credit 200.00 208.03
in which company Import Loan (100.00) -
Mr Rienzie T. Wijetilleke Letters of Guarantee (10.00) -
is the Chairman Forex Forward Contracts (180.00) -
Short Term Loan 100.00 -
Block Lease 10.00 -
Total 310.00 209.64
Sunshine Travels Subsidiary of Overdraft 10.00 8.32 Corporate guarantee
& Tours Ltd Sunshine Holding PLC Letters of Guarantee 10.00 10.00
in which company Total 20.00 18.32
Mr Rienzie T. Wijetilleke
is the Chairman
Figures in brackets indicate sub limits granted to the respective entities.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 147
1. Lending Transactions with the Bank (Contd.)
Company Name of Director Nature of Transaction Aggregate Amount of Accommodation Security
(Relationship) as at 31st December 2010
Limit Outstanding
(Rs Mn) (Rs Mn)
Sunshine Teas (Pvt) Ltd Subsidiary of Overdraft 25.00 23.92 Stock in trade & book
Swiss Biogenics Ltd Letters of Credit (50.00) 18.56 debts
which is a Subsidiary of Letters of Guarantee 10.00 -
Sunshine Holding PLC Term Loan 10.54 10.54
in which company Short Term Loan 100.00 75.00
Mr Rienzie T. Wijetilleke Total 145.54 128.02
is the Chairman
Packing Credit Loan
US $ Mn 3.00 1.05
Export Bill Discounting
US$ Mn (1.50) -
Forex Forward
Contracts US $ Mn 0.60 0.20
Total US $ Mn 3.60 1.25
One o Letters of Credit (Euro) 0.59 0.59
Total Euro Mn 0.59 0.59
New Nawaloka Subsidiary of Letter of Credit 10.00 9.10 Immovable property
Hospitals (Pvt) Ltd Nawaloka Hospitals PLC Letter of Credit 130.00 94.37 Documents of title to goods
in which company Term Loan (130.00)
100.53
Cash - Rs 31.5 Mn
Mr Rienzie T. Wijetilleke Term Loan 35.00
is a Director Overdraft 55.00 55.02 Corporate guaratnee
Total 230.00 259.02
Tea Smallholder Mr Ranjeevan Seevaratnam Overdraft 50.00 - Immovable property
Factories PLC (Director) Short Term Money Market Loan (50.00) 50.00
Temp. Short Term
Money Market Loan 10.00 10.00
Total 60.00 60.00
Diesel and Motor Mr Ranjeevan Seevaratnam Letter of credit 1,750.00 1,046.00 Immovable property,
Engineering PLC (Director) Import Loans *1,000.00 809.44
Short Term Money Market Loan - 131.50 Demand promissory note
Overdraft (45.00) - *Temporary facility
Letter of Guarantee (150.00) 323.48
Forward Exchange Contracts (100.00) -
Term Loan I 17.94 17.94
Term Loan II (130.00) 130.00
Leases 1.80 -
Total 2,769.74 2,458.36
Shaw Wallace Mr Ranjeevan Seevaratnam Overdraft 15.00 12.72
Stocks and book debts
Marketing PLC (Director) Letter of Credit 270.00 177.14
Letter of Credit 40.00 - Title to goods imported,
Letter of Guarantee 5.00 0.20 Indemnity of the company
Short Term Money Market Loan 100.00 100.00 Corporate guarantee
Short Term Money Market Loan 200.00 147.50 Immovable property
Total 630.00 437.56
}
}
}
Figures in brackets indicate sub limits granted to the respective entities.
148 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
DIRECTORS’ INTEREST IN CONTRACTS
WITH THE BANK
1. Lending Transactions with the Bank (Contd.)
Company Name of Director Nature of Transaction Aggregate Amount of Accommodation Security
(Relationship) as at 31st December 2010
Limit Outstanding
(Rs Mn) (Rs Mn)
Acme Printing and Mr Ranjeevan Seevaratnam Overdraft 30.00 32.63
Packaging PLC (Director) Term Loan 4.38 4.38 Title to goods imported
Letter of Credit 270.00 30.66 Cash
Import Loan (270.00) 137.14
Short Term Loan (270.00) 100.12
Cheque Discounting 10.00 -
Total 314.38 304.93
Dipped Products PLC Mr Ranjeevan Seevaratnam Overdraft 20.00 - Demand promissory note
(Director) Overdraft (30.00) - Letter of hypothecation /
Packing Credit 100.00 - lodgement of con rmed
Short Term Money Market Loan (100.00) 100.00 export order / lodgement of
Neg. of Documentary Bills (15.00) - of exprot LC issued by other
Letters of Guarantee (5.00) - banks
Total 120.00 100.00 Money market loan agreement
Documentary bills drawn on
buyers approved by Banks
indemnity of the company
Kelani Valley Mr Ranjeevan Seevaratnam Overdraft 50.00 2.38 Demand promissory note
Plantations PLC (Director) Letter of Credit (15.00) - Title to goods imported
Total 50.00 2.38
Hayleys MGT Mr Ranjeevan Seevaratnam Overdraft 50.00 44.52 Corporate guarantee
Knitting Mills PLC (Director) Money Market Loan 100.00 100.00
Total 150.00 144.52
Multi Limit - US $ Mn 0.50 Immovable property
Import Letter of and machinery
Credit US$ Mn 0.15 LC indemnity
Import Bills US$ Mn -
Import Loans US$ Mn 0.09
EFC 0.40 0.27
Overdraft US$ Mn 0.10 -
Total US$ Mn 1.00 0.51
Classic Teas (Pvt) Ltd Mr Ranjeevan Seevaratnam Short Term Export Loan 50.00 37.83 Stock in trade,
(Director) Negotiation of Assignment of book debts
Documentary Bills (50.00) - Deposit of irrevocable LC /
Standby Short term Export Loan 50.00 - con rmed export orders
Total 100.00 37.83 Documentary bills drawn on
buyers
Letter of hypothecation
Indemnity
Figures in brackets indicate sub limits granted to the respective entities.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 149
1. Lending Transactions with the Bank (Contd.)
Company Name of Director Nature of Transaction Aggregate Amount of Accommodation Security
(Relationship) as at 31st December 2010
Limit Outstanding
(Rs Mn) (Rs Mn)
Finlays Colombo PLC Mr N G Wickremeratne Short Term Loan 75.00 - Indemnity
(Director) Export Bill Discounting (50.00) -
Total 75.00 -
Nawaloka Hospitals PLC Mr Rienzie T. Wijethileke Temporary Overdraft 31.00 16.43 -
(Director) Total 31.00 16.43
Ceylon Guardian Ms M A R C Cooray Overdraft / Revolving Short 300.00 266.31 -
Investment Trust PLC (Director) Total 300.00 266.31 -
Ceylon Investment PLC Ms M A R C Cooray Overdraft / Revolving Short (300.00) 30.11 -
(Director) Total 300.00 30.11 -
Lanka Aluminium Mr Ranjeevan Seevaratnam Overdraft 61.00 50.76 Cash
Industries Ltd (Director) Total 61.00 50.76
2 Trading Transactions with the Bank
Company Name of Director Nature of Transaction Amount
(Relationship) (Rs Mn)
Diesel and Motor
Mr Ranjeevan Seevaratnam
Repairs and maintenance of
Engineering PLC (Director) vehicles 0.41
Finlays Colombo PLC Mr N G Wickremeratne Pest control services 0.10
(Director)
Finlay Rentokil Subsidiary of Pest control services 0.14
Ceylon (Pvt) Ltd Finlays Colombo PLC
in which company
Mr N G Wickremeratne
is a Director
Acme Printing
Mr Ranjeevan Seevaratnam
Repurchase agreements 95.80
& Packaging PLC (Director) Interest paid 2.01
Nawaloka Hospitals PLC Mr Rienzie T. Wijetilleke Merchant commission 3.80
(Director)
Mahawali Reach Hotels PLC Mr Rienzie T. Wijetilleke Accomodation charges 0.40
(Director)
Figures in brackets indicate sub limits granted to the respective entities
150 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The Remuneration Committee, appointed by and responsible to the
Boar
d of Directors comprises of four Non Executive Directors, two of
whom, including the Chairperson, are also independent.
Ms Pamela C. Cooray Chairperson (IND / NED)
Mr Rienzie T. Wijetilleke (NED)
Mr R K Obeyesekere (NED)
Mr N G Wickremeratne (IND / NED)
(IND - Independent Director and NED - Non Executive Director)
Brief pro les of the members are given on pages 14 and 15 of the
Annual Report.
Policy
The Bank’s remuneration policy aims to attract, motivate and retain
management in a highly competitive environment with the appropriate
professional, managerial and operational expertise necessary to achieve
the objectives of the Bank.
It is the focus of the Committee to ensure that the total package is
su ciently competitive to attract the best available talent for the bene t
of the Bank.
The Bank’s remuneration framework for the CEO and Corporate
Management is designed to create and enhance value for all
stakeholders of the Bank and to ensure alignment between the short
and long-term interests of the Bank and its Executives.
Scope
The Committee reviews all signi cant Human Resource policies and
initiatives, salary structures and terms and conditions relating to sta
at senior executive level. In this process, necessary information and
recommendations are obtained from the CEO and DGM - Human
Resources and Administration. The Committee deliberates and
recommends to the Board of Directors the remuneration packages,
annual increments and bonuses of the MD / CEO, members of the
Corporate Management and senior executive sta .
The MD / CEO who is responsible for the overall management of the
Bank attends meetings by invitation and participates in the deliberations
except when his own interest, performance and compensation is
discussed.
Recruitment and promotions of sta at management level are also
considered and approved based on the proposals submitted by DGM
- Human Resources and Administration following a formal process of
evaluation. When necessary, interviews are held to assess the core
competencies of the proposed applicant. During the year under review,
the Committee was responsible for the recruitment of Chief Operating
O cer to assist the MD / CEO, AGM – Information Technology, AGM –
Treasury and Markets , AGM – Human Resources, AGM – Legal to assist
the MD / CEO and strengthened the Corporate Management team.
The Committee may undertake the deliberation of other matters
dealing with HR and compensation at the request of the Board.
Fees
All Non Executive Directors receive a fee for attendance at Board
meetings and serving on sub-committees, special committees and /
or subsidiary boards. They do not receive any performance or incentive
payments.
Meetings
The Committee met seven times during 2010. The reports of the
decisions approved and recommended to the Board by the Committee
are circulated and rati ed by the Board of Directors.
Attendances at the meetings are given in table on page 74 of the
Annual Report.
Professional Advice
The Committee has the authority to seek external professional advice on
matters within its purview.
Committee Evaluation
The Committee completed the evaluation process with self assessment
in 2010, which was conducted by the Chairman and Committee
Members and was deemed to be satisfactory.
Pamela C. Cooray
Chairperson
Remuneration Committee
Colombo, Sri Lanka
18th February 2011
REMUNERATION COMMITTEE
REPORT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 151
NOMINATION COMMITTEE
REPORT
Composition of the Nomination Committee
The Nomination Committee comprises four Non Executive Directors
appointed by the Board of Directors of the Bank. The following Directors
serve on the Nomination Committee:
Mr Rienzie T. Wijetilleke Chairman (NED)
Mr D H S Jayawardena (NED)
Mr M V Theagarajah (IND / NED)
Mr R K Obeyesekere (NED)
(IND - Independent Director and NED - Non Executive Director)
Brief pro les of the members of the Committee are given on pages 14
to 15 of the Annual Report.
The Primary Responsibilities of the Nomination Committee
The mandate of the Nomination Committee includes the following:
1 To establish a procedure to select / appoint new Directors.
2 To consider and recommend (or not recommend) the re-election
of current Directors, taking into account the performance and
contribution made by the Director concerned.
3 To assess at the time of appointment and annually thereafter
whether a Director is t and proper to hold o ce.
4 To recommend from time to time, the requirements of additional
/ new expertise and the succession arrangements for retiring
Directors.
5 To look into and make recommendations to any other matters
referred to it by the Board of Directors.
Nomination Committee Meeting
The Nomination Committee met once during the year under review
to consider and recommend the appointment of an additional
Independent / Non Executive Director to the Board and to assess the
tness and propriety of each of the Directors holding o ce in terms of
the provisions of the Banking Act and the Directions of the Monetary
Board relating to Corporate Governance. Attendance by the Committee
members at the meeting is given in the table on page 74 of the Annual
Report. The Chief Executive O cer also attended the meeting by
invitation.
Re-election / Re-appointment of Directors at the 42nd
Annual General Meeting
Since three Directors out of the four Nomination Committee members
should be re-elected / re-appointed at the 42nd Annual General
Meeting to be held on 31st March 2011, the Committee decided to
recommend that this matter be discussed at and decided by the full
Board.
Committee Evaluation
The Committee commenced the evaluation process with self
assessment in 2010, which was conducted by the Chairman and
Committee Members and was deemed to be satisfactory.
Rienzie T. Wijetilleke
Chairman
Nomination Committee
Colombo, Sri Lanka
18th February 2011
152 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The Board Integrated Risk Management Committee (BIRMC) comprises
six members of which thr
ee members are Non-Executive Directors.
Mr M V Theagarajah Chairman (IND / NED)
Mr Rienzie T. Wijetilleke (NED)
Mr R K Obeyesekere (NED)
resigned from committee w.e.f. 31st March 2010
Ms M A R C Cooray (IND / NED)
appointed w.e.f. 31st March 2010
Mr Rajendra Theagarajah CEO / MD
Mr J D N Kekulawela Senior DGM - Strategy
Mr D P N Rodrigo DGM - Risk
(IND - Independent Director and NED - Non Executive Director)
Brief pro les of the Directors representing the Committee are given on
pages 14 to 15 of the Annual Report.
Terms of Reference
The Terms of Reference set out by the Board of Directors, includes the
following:
1 To ensure that the Bank has a comprehensive risk management
framework, appropriate compliance policies and systems in place.
2 To assess all risk types, including but not limited to: credit, market,
liquidity, operational and strategic risks to the Bank through
appropriate risk indicators and management information.
3 To ensure risk decisions are taken in accordance with established
delegated authorities and corrective actions are taken to mitigate
risks taken beyond the risk tolerance set by the Committee,
on the basis of Bank’s policies and regulatory and supervisory
requirements.
4 To monitor and assess the e ectiveness of the Bank’s Risk
Management System and the robustness of the risk management
function.
5 Periodically assess performance against internally de ned risk
appetite.
6 To establish a compliance function to assess the Bank’s compliance
with applicable laws, regulations, regulatory guidelines, internal
controls and approved policies relating to all areas of business
operations.
7 To review progress on Basel II Roadmap implementation.
Meetings
For the year a meeting was held for each quarter.
Attendances at the meetings are given in table on page 74 of the
Annual Report.
The discussions and conclusions reached at the meeting are recorded
in minutes and circulated to the Board of Directors for information and
advice.
Committee Evaluation
The Committee completed the evaluation process with self assessment
in 2010, which was conducted by the Chairman and Committee
Members and was deemed to be satisfactory.
M V Theagarajah
Chairman
Integrated Risk Management Committee
Colombo, Sri Lanka
18th February 2011
THE BOARD INTEGRATED
RISK MANAGMENT COMMITTEE REPORT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 153
Committee Composition
The A
udit Committee comprises of four Non Executive Directors,
a majority of whom are independent including the Chairman. The
Committee is chaired by Mr Ranjeevan Seevaratnam, who is a Fellow
member of the Institute of Chartered Accountants of Sri Lanka and the
Institute of Chartered Accountants in England and Wales.
The members of the Board appointed Audit Committee are:
Mr Ranjeevan Seevaratnam Chairman (IND / NED)
Mr D H S Jayawardena (NED)
Ms Pamela C. Cooray Senior Director (IND / NED)
Mr N G Wickremeratne (IND / NED)
(IND - Independent Director and NED - Non Executive Director)
Brief pro les of the members are given on pages 14 and 15 of the
Annual Report.
The Board Secretary functions as the Secretary to the Audit Committee.
Meetings
The Audit Committee met ve times during the year. Attendance by the
Committee members at each of these meetings is given in the table on
page 74 of the Annual Report. The Managing Director / Chief Executive
O cer, Chief Operating O cer, Senior DGM Strategy, DGM Risk, Chief
Financial O cer, Head of Internal Audit and External Auditor also
attended these meetings by invitation.
Financial Reporting
The Committee, as part of its responsibility to oversee the Bank’s
nancial reporting process on behalf of the Board of Directors, has
reviewed and discussed with the Management, the annual and the
quarterly Financial Statements prior to their release, including the extent
of compliance with the Sri Lanka Accounting Standards, the Companies
Act No 7 of 2007, the Banking Act No 30 of 1988. Matters of special
interest in the current environment and the processes that support
certi cations of the Financial Statements by the Bank’s Chief Executive
O cer and Chief Financial O cer were also brought up for discussion.
The Committee also con rmed with the Chief Financial O cer that
nancial reporting requirements relating to the GDR listing have been
complied with.
Risks and Controls
During the year, the Committee reviewed the e ectiveness of the
Bank’s internal control system and has reviewed quarterly reports
on losses resulting from frauds or operational failures. Additionally
the Committee also assessed the e ectiveness of the Bank’s internal
control over nancial reporting as of 31st December 2010, as required
by the Banking Act Direction No 11 of 2007, Corporate Governance for
Licensed Commercial Banks in Sri Lanka, Subsection 3(8)(ii) (b), based
on the “Guidance for Directors of Banks on the Directors’ Statement on
Internal Control” issued by the Institute of Chartered Accountants of
Sri Lanka. The result of the assessment is given on page 76 to 77
(Directors’ Statement on Internal Control) in the Annual Report.
The external auditors have issued an Assurance Report on Directors’
Statement on Internal Controls.
The Committee has reviewed the processes for identi cation, recording,
evaluation and management of all signi cant risks throughout the Bank
and other Group entities. The Committee received and reviewed reports
on all signi cant matters discussed by the Risk Committee.
External Audit
The Audit Committee undertook the annual evaluation of the
independence and objectivity of the External Auditor and the
e ectiveness of the audit process.
The Committee met with the External Auditor during the year to discuss
their audit approach and procedures, including matters relating to
the scope of the audit and Auditor’s independence. The Lead Audit
Partner is required to be rotated every ve years, in order to ensure the
independence of the Auditor.
The Committee reviewed the audited nancial statement with the
External Auditors who are responsible for expressing an opinion on its
conformity with the Sri Lanka Accounting Standards.
The Committee reviewed the Management Letter issued by the External
Auditor together with the management responses thereto.
The Committee met the External Auditors twice during the year without
the presence of the executive management to ensure that there was no
limitation of scope or any incidents which could have had a negative
impact on the e ectiveness of the external audit, and concluded that
there were no such causes for concern.
The Audit Committee reviewed the Non-Audit Services provided by the
External Auditor and was of the view that such services were not within
the category of services identi ed as restricted under;
1 The guidelines issued by the Central Bank of Sri Lanka, for External
Auditors, relating to their statutory duties in terms of section 39 of
Banking Act No 30 of 1988 and as amended by Banking Act No 33
of 1995.
2 The Guidelines for Listed Companies on Audit and Audit
Committees issued by the Securities and Exchange Commission of
Sri Lanka.
AUDIT COMMITTEE
REPORT
154 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The Letter of Representation and Independence con rmation issued to
the Ex
ternal Auditor was tabled at the Audit Committee Meeting.
The Audit Committee has recommended to the Board of Directors
that Messrs KPMG Ford, Rhodes, Thornton & Company, Chartered
Accountant, be re-appointed for the nancial year ending 31st
December 2011subject to the approval of shareholders at the next
Annual General Meeting.
Internal Audit
During the year, the Audit Committee reviewed the performance of the
internal audit function, the ndings of the internal audits completed
and their evaluation of the Bank’s internal control including internal
control systems. The Audit Committee also reviewed the adequacy
of coverage of the internal audit plan and approved the same. It also
assessed the Department’s resource requirements including succession
planning.
Regulatory Compliance
The Committee reviewed the procedures established by Management
for compliance with the requirements of regulatory authorities.
Senior Deputy General Manager – Strategy who has oversight of
the Compliance function, submitted quarterly reports to the Audit
Committee on the extent to which the Bank was in compliance with the
regulatory requirements.
Committee Evaluation
The annual evaluation of the Committee was conducted by the Non
Executive Chairman, the Managing Director, the Chief Financial O cer,
the Head of Internal Audit and the External Auditor in accordance with
International best practices and was deemed to be satisfactory.
On behalf of the Audit Committee;
Ranjeevan Seevaratnam
Chairman
Colombo, Sri Lanka
18th February 2011
AUDIT COMMITTEE
REPORT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 155
The Financial Statements of Hatton National Bank PLC (Bank) and the
C
onsolidated Financial Statements of the Bank and its Subsidiaries as
at 31st December 2010 are prepared in compliance with the Sri Lanka
Accounting Standards issued by the Institute of Chartered Accountants
of Sri Lanka, Companies Act No 7 of 2007, Sri Lanka Accounting and
Auditing Standards Act No 15 of 1995, the Banking Act No 30 of 1988
and amendments thereto, and the Listing Rules of the Colombo Stock
Exchange. The Accounting Policies used in the preparation of the
Financial Statements are appropriate and are consistently applied by
the Group. There are no departures from the prescribed Accounting
Standards in their adoption. Comparative information has been
reclassi ed wherever necessary to comply with the current presentation.
The signi cant accounting policies and estimates that involved a high
degree of judgment and complexity were discussed with the Audit
Committee and our External Auditors .
The Board of Directors and the Management of the Bank accept
responsibility for the integrity and objectivity of these Financial
Statements. The estimates and judgments relating to the Financial
Statements were made on a prudent and reasonable basis, in order
that the Financial Statements re ect in a true and fair manner, the
form and substance of transactions and that the Bank’s state of a airs
is reasonably presented. To ensure this, the Bank has taken proper and
su cient care in installing a system of internal control and accounting
records, for safeguarding assets and for preventing and detecting frauds
as well as other irregularities, which is reviewed, evaluated and updated
on an ongoing basis. Our internal auditors have conducted periodic
audits to provide reasonable assurance that the established policies
and procedures of the Bank were consistently followed. However, there
are inherent limitations that should be recognised in weighing the
assurances provided by any system of internal controls and accounting.
Further your Board assessed the e ectiveness of the Bank’s internal
control over nancial reporting during the year ended 31st December
2010, as required by the Banking Act Direction No 11 of 2007, result of
which is given on page 76 to 77 in the Annual Report.
The Financial Statements of the Group were audited by Messrs KPMG
Ford, Rhodes, Thornton & Company (“KPMG”), Chartered Accountants,
the independent external auditors. Their report is given on page 157 of
the Annual Report.
The Audit Committee of the Bank meets periodically with the internal
audit team and the independent external auditors to review their
audit plans, assess the manner in which these auditors are performing
their responsibilities and to discuss their reports on, internal controls
and nancial reporting issues. To ensure complete independence, the
external auditors and the internal auditors have full and free access
to the members of the Audit Committee to discuss any matter of
substance.
The Audit Committee pre-approves the audit and non audit services
provided by our external auditors, KPMG, in order to ensure that the
provision of such services does not impair KPMG’s independence.
We con rm that
- the Bank and its Subsidiaries have complied with all applicable
laws, regulations and prudential requirements;
- there are no material non compliances ; and
- there are no material litigations that are pending against the
Group other than those disclosed in the Notes 47 to the Financial
Statements in this Annual Report.
Rajendra Theagarajah
Managing Director / Chief Executive O cer
Ajantha de Vas Gunasekara
Chief Financial O cer
Colombo, Sri Lanka
18th February 2011
CHIEF EXECUTIVE OFFICER’S AND CHIEF FINANCIAL OFFICER’S
RESPONSIBILITY STATEMENT
156 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
The responsibility of the Directors in relation to the Financial Statements
of the Bank and its Subsidiar
ies prepared in accordance with the
provisions of the Companies Act No 7 of 2007 is set out in the following
statement. The responsibilities of the External Auditors in relation to the
Financial Statements are set out in the Report of the Auditors given on
page 157 of the Annual Report.
As per the provisions of the Companies Act No 7 of 2007 the Directors
are required to prepare Financial Statements for each nancial year
and place them before a general meeting. The Financial Statements
comprise the Balance Sheet as at 31st December 2010, and the Income
Statement, Statement of Changes in Equity and Cash Flow for the year
then ended and notes thereto.
The Financial Statements of the Bank and its Subsidiaries give a true and
fair view of:
1 the state of a airs of the Bank and its Subsidiaries as at 31
December 2010; and
2 the pro t or loss of the Bank and its Subsidiaries for the nancial
year then ended.
In preparing these Financial Statements, the Directors are required to
ensure that:
1 the appropriate accounting policies have been selected and
applied in a consistent manner and material departures, if any, have
been disclosed and explained;
2 judgments and estimates have been made which are reasonable
and prudent; and
3 all applicable Accounting Standards, as relevant, have been
complied with.
The Directors are also required to ensure that the Bank and its
Subsidiaries have adequate resources to continue in operation to
justify applying the going concern basis in preparing these Financial
Statements.
Further, the Directors have a responsibility to ensure that the companies
within the Group maintain su cient accounting records to disclose,
with reasonable accuracy the nancial position of the Bank and its
Subsidiaries.
Financial Statements prepared and presented in this Report are
consistent with the underlying books of account and are in conformity
with the requirements of Sri Lanka Accounting Standards, Companies
Act No 7 of 2007, Sri Lanka Accounting and Auditing Standard Act No
15 of 1995, Banking Act No 30 of 1988 and amendments thereto. The
Directors have also instituted e ective and comprehensive systems of
Internal Control for identifying, recording, evaluating and managing
the signi cant risks faced by the Bank throughout the year and it is
being under regular review of the Board of Directors. This comprises
Internal reviews, Internal Audit and the whole system of nancial and
other controls required to carry on the business of banking in an orderly
manner, safeguard its assets, prevent and detect frauds and other
irregularities and secure as far as practicable the accuracy and reliability
of the records. The results of such reviews carried out during the year
ended 31st December 2010 is given on page 76 to 77 of the Annual
Report, “Directors Statement on Internal Control”.
Directors are required to prepare the Financial Statements and to
provide the Bank’s External Auditors, Messrs KPMG Ford, Rhodes,
Thornton & Company, with every opportunity to carry out whatever
reviews and sample checks on the system of internal control they may
consider appropriate and necessary for expressing their independent
audit opinion on the Financial Statements.
Further, as required by Section 56 (2) of the Companies Act No 7 of 2007,
the Directors have con rmed that the Bank, based on the information
available, satis es the solvency test immediately after the distribution of
dividends, in accordance with Section 57 of the Companies Act No 7 of
2007, and has obtained a certi cate from the Auditors, prior to declaring
a nal dividend of Rs 5.50 per share for this year, to be paid on 11th April
2011.
The Directors to the best of their knowledge and belief, are satis ed that
all statutory payments in relation to all relevant regulatory and statutory
authorities which were due and payable by the Bank and its Subsidiaries
as at the Balance Sheet date have been paid or where relevant provided
for.
The Directors are of the view that they have discharged their
responsibilities as set out in this statement.
By Order of the Board
Indrani Goonesekera
Deputy General Manager (Legal) / Board Secretary
Colombo, Sri Lanka
18th February 2011
DIRECTORS’ RESPONSIBILITY FOR
FINANCIAL REPORTING
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 157
INDEPENDENT
AUDITORS’ REPORT
TO THE SHAREHOLDERS OF HATTON NATIONAL BANK PLC
Report on the Financial Statements
We have audited the accompanying nancial statements of Hatton
National Bank PLC (“Company”), and the consolidated nancial
statements of the Company and its subsidiaries as at 31st December
2010, which comprise the balance sheet as at that date, and the income
statement, statement of changes in equity and cash ow statement for
the year then ended, and a summary of signi cant accounting policies
and other explanatory notes as set out on pages 158 to 245 of this
Annual Report.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation
of these nancial statements in accordance with Sri Lanka Accounting
Standards. This responsibility includes: designing, implementing
and maintaining internal control relevant to the preparation and
fair presentation of nancial statements that are free from material
misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that
are reasonable in the circumstances.
Scope of Audit and Basis of Opinion
Our responsibility is to express an opinion on these nancial statements
based on our audit. We conducted our audit in accordance with Sri
Lanka Auditing Standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the nancial
statements are free from material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the nancial statements. An audit
also includes assessing the accounting policies used and signi cant
estimates made by management, as well as evaluating the overall
nancial statement presentation.
We have obtained all the information and explanations which to the
best of our knowledge and belief were necessary for the purposes of
our audit. We therefore believe that our audit provides a reasonable
basis for our opinion.
Opinion
In our opinion, so far as appears from our examination, the Company
maintained proper accounting records for the year ended 31st
December 2010 and the nancial statements give a true and fair view
of the Company’s state of a airs as at 31st December 2010 and its pro t
and cash ows for the year then ended in accordance with Sri Lanka
Accounting Standards.
In our opinion, the consolidated nancial statements give a true and
fair view of the state of a airs as at 31st December 2010 and the pro t
and cash ows for the year then ended, in accordance with Sri Lanka
Accounting Standards, of the Company and its subsidiaries dealt with
thereby, so far as concerns the members of the Company.
Report on Other Legal and Regulatory Requirements
1. These nancial statements also comply with the requirements of
Section 153(2) to 153(7) of the Companies Act No. 07 of 2007.
2. These nancial statements present the information required by the
Banking Act, No 30 of 1988.
CHARTERED ACCOUNTANTS
18th February 2011
Colombo, Sri Lanka.
158 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
BANK GROUP
For the year ended 31st December 2010 2009 2010 2009
Note Rs 000 Rs 000 Rs 000 Rs 000
INCOME 9 35,581,621 39,357,863 38,104,665 41,300,773
Interest income 10 30,249,230 34,620,276 30,563,795 34,836,422
Less: Interest expenses 11 14,703,256 20,039,646 14,777,155 20,280,948
Net interest income 15,545,974 14,580,630 15,786,640 14,555,474
Foreign exchange pro t 1,015,987 903,210 1,014,208 903,381
Fee and commission income 12 2,809,330 2,331,278 3,115,443 2,377,510
Dividend income 13 209,762 217,353 199,012 195,879
Other income 14 1,297,312 1,285,746 3,212,207 2,987,581
Operating Income 20,878,365 19,318,217 23,327,510 21,019,825
Less:
OPERATING EXPENSES 15
Personnel expenses 16 4,624,286 4,093,737 5,090,220 4,446,059
Premises, equipment and establishment expenses 2,978,363 2,840,613 2,821,552 2,641,070
Fee and commission expenses 134,572 137,736 135,314 346,960
Provision for employee retirement bene ts 17 882,815 815,682 893,742 823,365
Provision for loan losses 18 481,309 708,227 481,309 708,227
Diminution / (appreciation) in value of investments 8,025 2,038 1,088 2,038
Impairment of goodwill - - - 5,199
Loans written o 274 285 274 285
Other expenses 5,037,270 4,802,380 6,649,915 5,887,478
14,146,914 13,400,698
16,073,414
14,860,681
PROFIT FROM OPERATIONS 6,731,451 5,917,519 7,254,096 6,159,144
Share of pro t / (loss) of associates (net of income tax) 19 - - (2,429) 7,680
PROFIT BEFORE INCOME TAX 6,731,451 5,917,519 7,251,667 6,166,824
Less: Income tax expense 20 2,267,484 1,565,867 2,364,839 1,613,464
PROFIT FOR THE YEAR 4,463,967 4,351,652 4,886,828 4,553,360
Attributable to:
Equity holders of the Bank 4,463,967 4,351,652 4,786,770 4,483,277
Minority interest - - 100,058 70,083
PROFIT FOR THE YEAR 4,463,967 4,351,652 4,886,828 4,553,360
BASIC EARNINGS PER SHARE (Rs) 21 18.84 18.47 20.20 19.03
DILUTED EARNINGS PER SHARE (Rs) 21 18.71 18.46 20.07 19.02
DIVIDEND PER SHARE (Rs) *7.00 6.50 *7.00 6.50
The Notes to the Financial Statements from pages 164 to 245 form an integral part of these Financial Statements.
*Calculated on interim dividend paid and nal dividend proposed, which is to be approved at the Annual General Meeting.
INCOME
STATEMENT
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 159
BANK GROUP
As at 31st December 2010 2009 2010 2009
Note Rs 000 Rs 000 Rs 000 Rs 000
ASSETS
Cash and cash equivalents 22 18,005,640 27,152,248 18,506,511 27,598,197
Statutory deposit with Central Banks 23 12,491,644 11,063,948 12,506,052 11,078,805
Government treasury bills - - 976,447 305,810
Dealing securities 24 1,457,502 39,485 2,504,283 687,731
Securities purchased under re-sale agreements 1,185,831 500,000 2,713,591 950,703
Non-current assets held for sale 25 - - 2,875 2,875
Bills of exchange 26 1,401,130 1,447,490 1,401,130 1,447,490
Commercial papers 158,963 209,099 212,045 282,936
Lease receivable within one year 27 4,630,492 3,931,110 4,630,492 3,931,110
Lease receivable after one year 27 8,816,761 5,013,132 8,816,761 5,013,132
Loans and advances 28 188,033,851 159,247,361 185,982,734 156,560,522
Investment securities 29 58,704,102 53,959,680 60,250,684 55,847,724
Investments in Associates 30 83,651 203,806 196,009 226,129
Investment in Joint Venture 31 655,000 250,000 - -
Investments in Subsidiaries 32 2,179,086 2,179,326 - -
Investment properties 33 353,563 350,760 173,595 172,555
Property, plant and equipment 34 7,473,947 7,179,502 14,535,778 14,332,929
Intangible assets 35 577,015 675,272 702,930 710,009
Other assets 36 7,705,316 6,886,678 9,146,091 8,059,113
Total Assets
313,913,494 280,288,897 323,258,008 287,207,770
LIABILITIES
Deposits from customers 37 234,071,085 210,506,805 233,880,554 210,363,145
Dividends payable 38 49,558 215,607 51,121 215,607
Securities sold under re-purchase agreements 11,951,727 8,685,000 13,523,113 9,413,416
Borrowings 39 10,810,554 8,310,128 10,803,498 8,313,440
Current tax liabilities 3,127,622 2,921,234 3,258,984 2,977,237
Bills payable 1,305,161 1,161,151 1,305,161 1,161,151
Subordinated debentures 40 2,724,293 2,673,192 2,697,543 2,653,192
Insurance provision - Life 41 - - 2,385,246 1,853,513
Insurance provision - General 42 - - 730,658 599,364
Deferred tax liabilities 43 735,884 939,253 734,376 938,366
Other liabilities 44 21,863,843 20,976,437 23,321,053 21,945,731
Total Liabilities 286,639,727 256,388,807 292,691,307 260,434,162
EQUITY
Stated capital 46 5,318,550 5,084,084 5,318,550 5,084,084
Statutory reserve fund 1,510,000 1,260,000 1,510,000 1,260,000
Retained earnings 4,420,248 3,848,946 4,355,024 3,550,268
Other reserves 16,024,969 13,707,060 18,794,535 16,479,387
Total equity attributable to equity holders of the Bank 27,273,767 23,900,090 29,978,109 26,373,739
Minority interest - - 588,592 399,869
T
otal Equity 27,273,767 23,900,090 30,566,701 26,773,608
Total Liabilities and Equity 313,913,494 280,288,897 323,258,008 287,207,770
Commitments and contingencies 47 124,170,550 63,027,220 124,170,550 63,039,700
The Notes to the Financial Statements from pages
164 to 245 form an integral part of these Financial Statements.
I certify that these Financial Statements are in compliance with the requirements of Companies Act No 7 of 2007 and give a true and fair view of the state of
a airs of Hatton National Bank PLC and the Group as at 31st December 2010 and the pro ts for the year then ended.
Ajantha de Vas Gunasekara
Chief Financial O cer
For and on behalf of the Board
Rajendra Theagarajah Rienzie T. Wijetilleke Indrani Goonesekera
Managing Director / Chairman Deputy General Manager (Legal) /
Chief Executive O cer Board Secretary
Colombo, Sri Lanka
18th February 2011
BALANCE
SHEET
160 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
For the year ended 31st December 2010
BANK Attributable to Equity Holders of the Bank Minority Total
Interest
Statutory Retained
Stated Capital Reserve Other Reserves Earnings
Fund
Voting Non-Voting Capital General Repairs and Exchange
Shares Shares Reserve Reserve Renovation Equalisation
Reserve Reserve
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Balance as at 31st December 2008 2,881,387 2,178,003 982,707 3,004,250 8,482,353 6,700 - 3,045,537 - 20,580,937
Final dividend for 2008 - - - - - - - (706,588) - (706,588)
Deferred tax liability for
revaluation reserve [Note 43 (a)] - - - 2,810 - - - - - 2,810
Net pro t for the year 2009 - - - - - - - 4,351,652 - 4,351,652
Interim dividend for 2009 - - - - - - - (353,415) - (353,415)
Shares issued under ESOP 22,093 2,601 - - - - - - - 24,694
Transfers during the year 2009 - - 277,293 - 2,217,647 (6,700) - (2,488,240) - -
Balance as at 31st December 2009 2,903,480 2,180,604 1,260,000 3,007,060 10,700,000 - - 3,848,946 - 23,900,090
Final dividend for 2009 - - - - - - - (1,179,807) - (1,179,807)
Deferred tax liability for
revaluation reserve [Note 43 (a)] - - - 2,248 - - - - - 2,248
Impact on rate change [Note 43 (a)] - - - 15,661 - - - - - 15,661
Net pro t for the year 2010 - - - - - - - 4,463,967 - 4,463,967
Interim dividend for 2010 - - - - - - - (338,570) - (338,570)
Shares issued under ESOP 209,650 24,816 - - - - - - - 234,466
Dividend reversal [Note 38 (c)] - - - - - - - 175,712 - 175,712
Transfers during the year 2010 - - 250,000 - 2,300,000 - - (2,550,000) - -
Balance as at 31st December 2010 3,113,130 2,205,420 1,510,000 3,024,969 13,000,000 - - 4,420,248 - 27,273,767
GROUP Attributable to Equity Holders of the Bank Minority Total
Interest
Statutory Retained
Stated Capital Reserve Other Reserves Earnings
Fund
Voting Non-Voting Capital General Repairs and Exchange
Shares Shares Reserve Reserve Renovation Equalisation
Reserve Reserve
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Balance as at 31st December 2008 2,881,387 2,178,003 982,707 5,771,072 8,482,353 6,700 2,459 2,616,620 347,816 23,269,117
Final dividend for 2008 - - - - - - - (706,588) (18,750) (725,338)
Deferred tax liability for
revaluation reserve [Note 43 (a)] - - - 2,810 - - - - - 2,810
Disposal of Subsidiaries - - - - - - - (1,386) - (1,386)
Exchange gain / (loss) on translation of
Financial Statements of foreign operations - - - - - - 3,046 - 981 4,027
Net pro t for the year 2009 - - - - - - - 4,483,277 70,083 4,553,360
Interim dividend for 2009 - - - - - - - (353,415) - (353,415)
Shares issued under ESOP 22,093 2,601 - - - - - - - 24,694
Transfers during the year 2009 - - 277,293 - 2,217,647 (6,700) - (2,488,240) - -
Minority interest’s portion of
pre acquisition reserve - - - - - - - - (261) (261)
Balance as at 31st December 2009 2,903,480 2,180,604 1,260,000 5,773,882 10,700,000 - 5,505 3,550,268 399,869 26,773,608
Final dividend for 2009 - - - - - - - (1,179,807) (30,158) (1,209,965)
Deferred tax liability for - - - - - - - - - -
revaluation reserve [Note 43 (a)] - - - 2,248 - - - - - 2,248
Impact on rate change [Note 43 (a)] - - - 15,661 - - - - - 15,661
Exchange gain / (loss) on translation of
Financial Statements of foreign operations - - - - - - (2,761) - (1,905) (4,666)
Minority interest on additional investment
in Subsidiaries through Joint Venture - - - - - - - - 22,974 22,974
Reduction in reserves from disposal of
Associate company and long term
investment to Joint Venture - - - - - - - (88,637) - (88,637)
Acquisition of minority interest in
Subsidiary by Bank - - - - - - - (712) 712 -
Minority Interest as at the date of acquisition
of Subsidiary through Joint Venture - - - - - - - - 97,042 97,042
Net pro t for the year 2010 - - - - - - - 4,786,770 100,058 4,886,828
Interim dividend for 2010 - - - - - - - (338,570) - (338,570)
Shares issued under ESOP 209,650 24,816 - - - - - - - 234,466
Dividend reversal [Note 38 (c)] - - - - - - - 175,712 - 175,712
Transfers during the year 2010 - - 250,000 - 2,300,000 - - (2,550,000) - -
Balance as at 31st December 2010 3,113,130 2,205,420 1,510,000 5,791,791 13,000,000 - 2,744 4,355,024 588,592 30,566,701
The Notes to the Financial Statements from page 164 to 245 form an integral part of these Financial Statements.
In accordance with Section 58 of Companies Act No 7 of 2007, share capital and share premium have been classi ed as stated capital.
Statutory reserve fund represents the statutory requirement in terms of Section 20 (1) and (2) of the Banking Act No 30 of 1988.
Capital reserve relates to revaluation of freehold land and buildings carried out in 1989, 1993 and 2007 and includes the surplus on revaluation of those assets.
General reserve comprises the amounts appropriated by the Board of Directors as a general banking reserve.
Exchange equalisation reserve consists of foreign exchange di erences resulting from translation of foreign Subsidiary and Associate nancial statements to functional currency of the Group (Sri Lankan Rupees)
Voting and non voting shares included under stated capital include share premium on shares issued of Rs 988 Mn and Rs 1,716 Mn respectively.
STATEMENT OF
CHANGES IN EQUITY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 161
BANK GROUP
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Cash Flows from Operating Activities
Interest and commission receipts 29,351,427 31,735,949 29,813,744 31,770,910
Interest payments (15,894,274) (16,131,045) (15,967,635) (16,372,345)
Receipts from other operating activities 1,080,673 1,003,539 3,000,373 2,607,287
Cash payments to employees (5,524,247) (5,257,678) (5,979,839) (5,609,996)
Cash payments to suppliers (2,155,209) (2,089,604) (1,840,568) (1,738,014)
Recoveries from loans written o in previous years 6,549 7,283 6,549 7,283
Cash payments to other operating activities (3,902,232) (2,686,220) (4,842,127) (3,350,666)
Operating Pro t before Changes in
Operating Assets and Liabilities [Note (a)] 2,962,687 6,582,224 4,190,497 7,314,459
(Increase) / Decrease in Operating Assets
Commercial papers and reverse repos (635,695) 916,809 (1,354,410) 1,599,037
Deposits held for regulatory or monetary control purpose (1,427,696) 783,375 (1,427,247) 783,193
Loans and advances (33,303,017) 5,192,190 (33,936,494) 6,038,957
Other short term assets (1,177,048) 4,092,063 (1,316,993) 3,644,154
(36,543,456) 10,984,437 (38,035,144) 12,065,341
Increase / (Decrease) in Operating Liabilities
Deposits from customers 23,427,782 22,567,119 23,380,911 22,578,778
Negotiable certi cates of deposits 136,498 1,169,824 136,498 1,169,824
Other liabilities 1,235,060 (2,620,327) 1,602,831 (2,128,230)
24,799,340 21,116,616 25,120,240 21,620,372
Net Cash Generated from / (Used in)
Operating Activities before Income Tax (8,781,429) 38,683,277
(8,724,407) 41,000,172
Income taxes paid (1,807,700) (623,535) (1,814,307) (613,246)
Net Cash Generated from / (Used in) Operating Activities (10,589,129) 38,059,742 (10,538,714) 40,386,926
Cash Flows from Investing Activities
Dividend receipts 216,557 202,365 205,806 180,891
Net proceeds from sale of dealing securities (640,338) 275,701 (216,052) 24,882
Net purchase of investment securities (1,352,171) (25,230,973) (1,431,652) (25,902,385)
Purchase of property, plant and equipment (977,446) (1,071,026) (1,033,680) (1,163,844)
Purchase of intangible assets (68,183) (110,432) (100,105) (126,378)
Improvements to investment properties (7,247) (663) (5,496) (663)
Investment in Associate company - (12,860) (48,500) (12,860)
Net proceeds from sale of Associate company 179,907 - 89,954 -
Investment in Joint Venture company (405,000) - - -
Net cash e ect on investment / increase percentage
held in Subsidiary company by Joint Venture [Note (b) i and (b) ii] - - (416,086) -
Net cash e ect on investment in Subsidiary company [Note (c)] - (240) - 471
Net cash e ect on disposal of DNH Financial (Pvt) Ltd
(former HNB Stockbrokers (Pvt) Ltd) [Note (d)] - - - 43,474
Proceeds from sale of property, plant and equipment 6,077 19,663 7,835 24,724
Net Cash Used in Investing Activities (3,047,844) (25,928,465) (2,947,976) (26,931,688)
Cash Flows from Financing Activities
Decrease in debentures - (127,627) - (1,127,627)
Increase / (decrease) of other borrowings 5,767,154 (7,206,116) 5,677,415 (7,323,573)
Dividends paid (1,508,713) (971,699) (1,537,309) (990,451)
P
roceeds from issue of shares under ESOP 234,466 24,694 234,466 24,694
Share issue expenses (2,542) (233) (2,542) (233)
Proceeds from Issue of shares to minority share holders - - 22,974 -
Net Cash Generated from / (Used in) Financing Activities 4,490,365 (8,280,981) 4,395,004 (9,417,190)
Net increase / (decrease) in cash and cash equivalents (9,146,608) 3,850,296 (9,091,686) 4,038,048
Cash and cash equivalents at the beginning of the year 27,152,248 23,301,952 27,598,197 23,560,149
Cash and Cash Equivalents at the end of the Year 18,005,640 27,152,248 18,506,511 27,598,197
CASH FLOW
STATEMENT
162 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
CASH FLOW
STATEMENT
BANK GROUP
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Note (a) Reconciliation of Operating Pro t
Pro t before taxation 6,731,451 5,917,519 7,251,667 6,166,824
Dividend received (216,557) (202,365) (205,806) (180,891)
Pro t on sale of property, plant and equipment (4,674) (11,917) (5,691) (13,157)
Bad debts recovered (421,433) (736,571) (421,433) (736,571)
Depreciation of property, plant and equipment 657,360 579,993 806,143 722,872
Amortisation of intangible assets 168,761 166,636 179,997 175,765
Depreciation of investment properties 4,444 4,380 4,456 4,421
Bad debts written o 274 285 274 285
Provision for loan losses 481,309 708,227 481,309 708,227
Gain on marked to market valuation of dealing securities (90,053) (17,451) (90,053) (25,696)
Diminution / (appreciation) in value of investments 8,025 2,038 1,088 2,038
Capital gain from sale of investment securities (101,710) - (63,186) -
Capital gain from sale of dealing securities (18,462) (9,197) (56,847) (9,197)
Capital gain from sale of government securities (6,089) (2,590) (37,754) (15,460)
Capital gain from sale of Associate company (47,581) - (23,791) -
Capital gain from sale of investment securities transferred to dealing securities (497,114) - (497,114) -
(Pro t)/ Loss on FCBU revaluation (29,902) 16,572 (29,902) 16,572
Property, plant and equipment written o 20,717 - 20,717 -
Capital gain from sale of Subsidiaries - -
- (67,659)
Recov
ery of unclaimed VAT written o - (200,309) - (200,309)
Recovery of Aquila investment - (216,674) - (216,674)
Share issue expenses 2,542 233 2,542 233
Discount accrual on government securities (3,454,466) (2,812,437) (3,540,277) (3,001,193)
Share of Associate (pro t) / loss - - 2,429 (7,680)
Non life insurance reserve fund - - 663,027 622,166
Notional tax and withholding tax credit (438,856) (332,070) (476,242) (370,730)
Accrual for interest receivable 201,261 (2,071,098) 164,847 (2,071,098)
Accrual for other receivable (12,593) (14,986) 6,003 (14,986)
Accrual for interest payable (1,191,018) 3,908,601 (1,190,479) 3,908,601
Accrual for other payable 1,217,051 1,905,405 1,251,853 1,912,557
Goodwill written o / (negative goodwill recognised)
on investment in Subsidiaries - - (7,280) 5,199
Operating Pro t before Changes in
Operating Assets and Liabilities 2,962,687 6,582,224 4,190,497 7,314,459
2010
Rs 000
Note (b) Net Cash E ect on Investment in Subsidiaries by Joint Venture Company
Note (b) i Investment in Lanka Ventuers PLC
Property plant and equipment 247
Reverse re-purchase agreements 5,043
Investment securities 139,890
Investment in Associates 47,645
Cash and cash equivalents 31,504
Commercial papers 10,961
Government securities 61,716
Other receivable 13,363
Other liabilities (2,260)
Retirment bene t obligations (571)
Minority Interest (18,128)
Net identi able assets and liabilities 289,410
Goodwill on acquisition
70,187
Consideration paid in cash (359,597)
Cash acquired 31,504
Net cash out ow (328,093)
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 163
2010
Rs 000
Note (b) ii Increase in Percentage held in Acuity Securities Limited
Property plant and equipment 1,124
Intangible assets 266
Reverse re-purchase agreements 288,748
Cash and cash equivalents 355
Government securities 739,981
Loans and advances 2,246
Other receivable 14,842
Re-purchase agreements (922,344)
Current tax liability (21,308)
De erred tax liability (71)
Other liabilities (8,211)
Net identi able assets and liabilities 95,628
Negative goodwill on acquisition (7,280)
Consideration paid in cash (88,348)
Cash acquired 355
Net cash out ow (87,993)
2009
Rs 000
Note (c) Net Cash E ect on Investment in Subsidiary Company -
Commercial Interlink Services Inc (o/a Delma Exchange Canada)
Cash and cash equivalents 711
Trade and other receivables 249
Property, plant and equipment 3,855
Trade and other payables (9,774)
Net identi able assets and liabilities (4,959)
Goodwill on acquisition 5,199
Consideration paid in cash (240)
Cash acquired 711
Net cash in ow 471
Note (d) Net Cash E ect on Disposal of DNH Financial (Pvt) Ltd
[former HNB Stockbrokers (Pvt) Ltd]
Property, plant and equipment 461
Reverse re-purchase agreements 1,137
Trade and other receivables 37,360
Deferred tax asset 1,214
Cash and cash equivalents 34,534
Retirement bene t obligation (59)
Current taxation (95)
Trade and other payables (23,165)
Net identi able assets and liabilities 51,387
Consideration received in cash 78,008
Cash disposed o (34,534)
Net cash in ow 43,474
Comparative information in the Cash Flow Statement has been amended based on the reclassi ed gures.
The Notes to the Financial Statements from pages 164 to 245 form an integral part of these Financial Statements.
164 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
1. REPORTING ENTITY
Hatton National Bank PLC (“Bank”) is a public quoted
company incorporated on 5th March 1970 with limited
liability and domiciled in Sri Lanka. It is a Licensed Commercial
Bank regulated under the Banking Act No. 30 of 1988 and
amendments thereto. The Company was re-registered under
the Companies Act No. 07 of 2007. The registered o ce of the
Bank is situated at No 479, T B Jayah Mawatha, Colombo 10. The
shares of the Bank have a primary listing on the Colombo Stock
Exchange, while the Global Depository Receipts (GDRs) issued
by the Bank have a primary listing on the Luxemburg Stock
Exchange.
The sta strength of the Bank as at 31st December 2010 is 4,352
(2009 - 4,302).
The Consolidated Financial Statements of the Bank for the year
ended 31st December 2010 include the Bank and its Subsidiaries
(together referred to as the “Group” and individually as “Group
entities”) and the Group’s interest in its Associate and Joint
Venture. The Financial Statements of all companies in the Group
have a common nancial year which ends on December 31.
The Bank does not have an identi able parent of its own.
There were no signi cant changes in the nature of the principal
activities of the Bank and the Group during the nancial year
under review.
1.1 Principal Activities
1.1.1 Bank
The principal activities of the Bank continued to be banking
and related activities such as accepting deposits, corporate and
retail banking, personal nancial services, o shore banking,
foreign currency operations, trade services, investment
banking, development banking, rural nance, project nance,
dealing in government securities etc.
1.1.2 Subsidiaries
Name of Subsidiary Principle Activities
HNB Assurance PLC Insurance services
Sithma Development Property development
(Pvt) Ltd
Majan Exchange LLC Provision of remittances
and foreign currency
related services
The commercial activities of Commercial Interlink Services Inc
were ceased on 1st October 2010.
1.1.3 Associate
The Associate of the Bank, Delma Exchange’s principal activities
are provision of remittances and foreign currency related
services
Bank disposed its investment in Lanka Ventures PLC on 18th
January 2010.
1.1.4 Joint Venture
The Joint Venture of the Bank, Acuity Partners (Pvt) Ltd’s
principal activities are operating as an investment company
and providing nancial services.
2. BASIS OF PREPARATION
2.1 Statement of Compliance
The Balance Sheet, Income Statement, Statement of Changes
in Equity and Cash Flow Statement have been prepared in
accordance with the Sri Lanka Accounting Standards laid down
by the Institute of Chartered Accountants of Sri Lanka, and
comply with the requirements of Companies Act No 7 of 2007
and Banking Act No 30 of 1988 and amendments thereto.
2.2 Approval of Financial Statements by Directors
The Financial Statements were authorised for issue by the
Board of Directors in accordance with the resolution of the
directors on 18th February 2011.
2.3 Basis of Measurement
The Financial Statements have been prepared on the historical
cost basis and applied consistently with no adjustments being
made for in ationary factors a ecting the Financial Statements,
except for the following;
• Land and buildings are measured at cost at the time of
acquisition and subsequently at revalued amounts, which
are the fair values at the date of revaluation less accumulated
depreciation and impairment losses, if any.
• Dealing securities are measured at market value.
• Non-current assets held for sale are measured at lower of its
carrying amount and fair value less costs to sell.
2.4 Functional and Presentation Currency
The Financial Statements are presented in Sri Lankan Rupees,
which is the Bank’s functional currency. Financial information
presented in Sri Lankan Rupees has been rounded to the
nearest thousand unless indicated otherwise.
2.5 Use of Estimates and Judgements
The preparation of Financial Statements in conformity with
Sri Lanka Accounting Standards requires management to
make judgements, estimates and assumptions that a ect the
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 165
application of accounting policies and the reported amounts of
assets
, liabilities, income and expenses. Actual results may di er
from these estimates.
Estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised and in
any future periods a ected. Information about signi cant areas
of estimation and uncertainty that have the most signi cant
e ect on the amounts recognised in the Financial Statements
are described in Notes 2.5.1 to 2.5.5.
2.5.1 Provision for Loan Losses
In addition to the speci c provisions for possible loan losses
made on the basis of continuous review of all loans and
advances to customers in accordance with the Sri Lanka
Accounting Standard 23 “Revenue Recognition and Disclosures
in the Financial Statements of Banks” and the directions issued
by the Central Bank of Sri Lanka, the Bank evaluates the need
for additional provisions for loans and advances based upon
management’s best estimate of recoverability. In estimating the
recoverability the management makes judgments about the
borrower’s nancial situation, the workout strategy and the net
realisable value of any underlying collateral.
The general provisions cover loan losses inherent in portfolios
with similar credit risk characteristics (portfolios of pawning,
lease receivables and Shanthi Housing loans) when there is
objective evidence to suggest that they contain impaired loans,
but the individual impaired loans cannot yet to be identi ed.
In assessing the need for general provision for loan losses,
management considers factors such as credit quality, portfolio
size, concentrations, and economic factors. In order to estimate
the required provisions, assumptions are made to de ne
the way inherent losses are determined based on historical
experience.
2.5.2 Classi cation of Dealing (Trading) and Investment
Securities
In classifying securities as “Dealing” (Trading), the Bank has
determined that it meets the description set out in Note 4.6.1.
In classifying securities as “Investment”, the Bank has
determined that it has both the positive intention and ability to
hold the securities until their maturity date as required by Note
4.6.2.
2.5.3 Assessment of Impairment
The Bank assesses at each Balance Sheet date whether there
is objective evidence that an asset or portfolio of assets
is impaired. The recoverable amount of an asset or Cash
Generating Unit (CGU) is the greater of its value in use and its
fair value less costs to sell.
In assessing value in use, the estimated future cash ows are
discounted to present value using appropriate discount rates
that re ects the current market assessments of the time value
of money and risks speci c to the asset.
The carrying value of goodwill is reviewed at each Balance
Sheet date and is written down to the extent that it is no longer
supported by probable future bene ts. Goodwill is allocated to
CGU for the purpose of impairment testing.
2.5.4 Employee Retirement Bene ts
The liability in respect of employee retirement bene ts of the
Bank’s Pension Fund which is a separate entity, as at Balance
Sheet date was actuarially valued based on the assumptions set
out in Note 45 (a) v. Bank makes contributions to the Pension
Fund based on the actuarial valuation and the unfunded
pension fund liability as at the Balance Sheet date is set out in
Note 45 (a) i.
2.5.5 Classi cation of Investment Property
Classi cation of Investment Property is based on the
description set out in Note 4.11.
3. MATERIALITY AND AGGREGATION
Each material class of similar items is presented separately in
the Financial Statements. Items of dissimilar nature or function
are presented separately unless they are immaterial.
4. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied
consistently to all periods presented in these Financial
Statements. The accounting policies of the Bank have been
consistently applied by Group entities where applicable and
deviations if any, have been disclosed accordingly.
4.1 Basis of Consolidation
4.1.1 Subsidiaries
Subsidiaries are entities that are controlled by the Bank. Control
exists when the Bank has the power, directly or indirectly, to
govern the nancial and operating policies of an entity so as to
obtain bene ts from its activities. In assessing control, potential
voting rights that presently are exercisable are taken into
account. The Financial Statements of Subsidiaries are included
in the Consolidated Financial Statements from the date that
control e ectively commences until the date that control
e ectively ceases.
The Minority Interest is presented in the Consolidated Balance
Sheet within equity, separately from the equity attributable to
the Equity Holders of the Bank. Minority Interest in the pro t
or loss of the Group is disclosed separately in the Consolidated
Income Statement.
166 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
NOTES TO THE
FINANCIAL STATMENTS
The Consolidated Financial Statements are prepared to
common nancial year end of 31st December. The accounting
policies of Subsidiaries have been changed where ever
necessary to align them with the policies adopted by the Bank.
Where Subsidiaries have been sold or acquired during the
year, their operating results have been included to the date of
disposal or from the date of acquisition.
The carrying amount of the investment at the date that such
entity ceases to be a Subsidiary would be regarded as the cost
on initial measurement of a nancial asset in accordance with
Sri Lanka Accounting Standard 22 “Accounting for Investments”.
A list of Subsidiaries within the Group is provided in Note 32.
4.1.2 Associate
Associate is an entity in which the Bank has signi cant
in uence, but no control over the nancial and operating
policies. Signi cant in uence is presumed to exist when the
Bank holds between 20 and 50 percent of the voting power
of another entity. The Associate is accounted for using the
Equity method and is recognised initially at cost. The Bank’s
investments include goodwill identi ed on acquisition, net
of any accumulated impairment losses. The Consolidated
Financial Statements include the Bank’s share of the income
and expenses and equity movements of the Associate, after
adjustments being made to align the accounting policies with
those of the Group from the date that signi cant in uence
e ectively commences until the date that signi cant in uence
e ectively ceases.
When the Bank’s share of losses exceeds its interest in the
Associate, the carrying amount of that interest is reduced to nil
and the recognition of further losses is discontinued except to
the extent that Bank has an obligation or made payments on
behalf of the Associate. If the Associate subsequently reports
pro ts, the Bank resumes recognising its share of those pro ts
only after its share of the pro ts equals the share of losses not
recognised.
The Bank discontinues the use of the Equity method from
the date that it ceases to have signi cant in uence over an
Associate and re-classi es the investment as “Investment
Securities” in accordance with Sri Lanka Accounting
Standard 22 “Accounting for Investments”.
Details of the Associate within the Group is provided in
Note 30.
4.1.3 Joint Venture
Joint Venture is an entity over whose activities the Bank
has joint control, established by contractual arrangement
and requiring unanimous consent for strategic, nancial
and operating decisions. The Bank recognises its interest in
the Joint Venture using the line by line reporting format for
Proportionate Consolidation method and is recognised initially
at cost.
The Bank combines its share of each of the assets, liabilities,
income and expenses of the Joint Venture with similar items,
line by line in the Consolidated Financial Statements from the
date that joint control commences, until the date joint control
ceases.
Details of the Joint Venture are provided in Note 31.
4.1.4 Transactions Eliminated on Consolidation
Intra-group balances and transactions, income, expenses and
any unrealised gains arising from intra-group transactions and
transactions with Joint Venture are eliminated in preparing the
Consolidated Financial Statements. Unrealised gains arising
from transactions with Associates are eliminated to the extent
of the Group’s interest in the Associates against the investment
in the Associate. Unrealised losses are eliminated in the same
way as unrealised gains except that they are only eliminated to
the extent that there is no evidence of impairment.
4.2 Foreign Currency Translation
4.2.1 Foreign Currency Transactions
Transactions in foreign currencies are translated to Sri Lankan
Rupees at the middle rate of exchange ruling at the dates of
the transactions.
Monetary assets and liabilities denominated in foreign
currencies at the Balance Sheet date are translated to Sri
Lankan Rupees at the middle rate of exchange ruling at that
date. Foreign exchange di erences arising on the settlement
or resulting due to unrealised gains or losses from revaluation
of the Bank’s monetary items at rates di erent from those at
which they were initially recognised in the nancial statements,
are recognised in the Income Statement in the period in which
they arise.
Non-monetary assets and liabilities denominated in foreign
currency that are stated at historical cost at the Balance
Sheet date are translated to Sri Lankan Rupees at the foreign
exchange rates ruling at the date of the initial transaction.
4.2.2 Foreign Operations
The Financial Statements of foreign entities within the Group
whose functional currency is di erent to presentation currency,
(Sri Lankan Rupees) are translated to Sri Lankan Rupees as
follows:
• Assets and liabilities are translated at the middle rate of
exchange at the date of Balance Sheet.
• Income and expenses are translated at the average
exchange rate ruling during the period under consideration.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 167
• All resulting foreign exchange di
erences are recognised
directly in equity.
When a foreign operation is disposed of, the cumulative
relevent exchange di erences recognised in equity is
transferred to Income Statement as part of the gain or loss on
disposal.
4.2.3 Foreign Currency Banking Unit
The Income Statement and the Balance Sheet of the Foreign
Currency Banking Unit is translated to Sri Lankan Rupees at the
middle rate of exchange ruling at the Balance Sheet date.
4.2.4 Forward Exchange Contracts
Forward exchange contracts are valued at the forward market
rates ruling on the date of the Balance Sheet. Resulting net
unrealised gains and losses are dealt with through the Income
Statement.
ASSETS AND BASES OF THEIR VALUATION
4.3 Cash and Cash Equivalents
Cash and cash equivalents include cash in hand, balances with
banks, placements with banks, money at call and short notice.
They are brought to account at the face value or the gross
value where appropriate
4.4 Statutory Deposit with Central Banks
The Monetary Law Act requires that all Commercial Banks
operating in Sri Lanka maintain reserves against all deposit
liabilities denominated in Sri Lankan Rupees. The licensing
regulations for Exchange Houses issued by the Central Bank of
Oman require that all Exchange Houses maintain a deposit with
the Central Bank of Oman.
The details of reserve requirements are given in Note 23.
4.5 Government of Sri Lanka Treasury Bills and Bonds
4.5.1 Investment in Treasury Bills and Treasury Bonds Held
for Dealing
Investments in treasury bills and treasury bonds in dealing
portfolio are those investments that the Group acquires
or incurs principally for the purpose of selling, or holds as
part of a portfolio that is managed for short term pro t.
These investments are initially recognised and subsequently
measured at market value in the Balance Sheet. Gains and
losses on marked to market valuation are dealt with through
the Income Statement.
4.5.2 Securities Purchased under Re-sale Agreements
Securities purchased under re-sale agreements are recorded
separately in the Financial Statements at cost. The di erence
between the purchase and re-sale price represents interest
income and is recognised in the Income Statement over the
period of the resale agreement.
4.6 Investments
An investment is an asset held by the Bank / Group for the
accretion of wealth through distribution [such as interest,
royalties, dividends and rentals (other than leases)] for capital
appreciation or for other bene ts to the Bank / Group such as
those obtained through trading relationships.
4.6.1 Dealing (Trading) Securities
Dealing (trading) securities are those investments that are
acquired or incurred principally for the purpose of selling or
holding as part of a portfolio that is managed for short term
pro t. These investments are initially recognised at cost and
subsequently measured at market value. Gains and losses on
marked to market valuations are dealt with through the Income
Statement.
The Bank’s Subsidiary HNB Assurance PLC measures dealing
securities at cost / market value whichever is lower.
4.6.2 Investment Securities
These are securities which are acquired and held for yield or
capital growth in the medium / long term with the positive
intent and ability to hold until maturity. Such securities are
recorded at cost. Interest and dividend income are accrued.
Changes in market values of these securities are not taken into
account, unless there is considered to be a diminution in value
which is other than temporary.
Investments in treasury bills / bonds in the investment portfolio
are initially measured at market value of bills / bonds at the
date of purchase and the discount / premium accrued thereon.
On disposal of an investment the di erence between net
disposal proceeds and the carrying amount is recognised as
income or expense.
Sale of more than insigni cant amount of would result in
reclassi cation of all such securities as ‘Trading securities”.
However, sales and reclassi cation in any of the following
circumstances would not trigger a reclassi cation:
- Sale or reclassi cation that are so close to maturity that
changes in the marker rate of interest would not have a
signi cant e ect on the securities’ market value
- Sale or reclassi cation after the Bank has collected
substantially all of the securities’ original principal
- Sale or reclassi cation attributable to non-recurring isolated
events beyond the Bank’s control that could not have been
reasonably anticipated.
168 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
4.6.3 Investments in Subsidiaries
Investments in Subsidiaries are stated at cost in the Bank’s
Financial Statements.
4.6.4 Investment in Associate
Investment in Associate is accounted for at cost in the Bank’s
Financial Statements and under the Equity method in the
Consolidated Financial Statements.
Under the Equity method, the investment in Associate is initially
accounted for at cost and the carrying amount is adjusted for
post acquisition changes in the Bank’s share of net assets of the
Associate, less any impairment in the Bank’s net investment in
Associate.
4.6.5 Investment in Joint Venture
Investment in Joint Venture is accounted for at cost in the
Bank’s Financial Statements and under the Proportionate
Consolidation method in the Consolidated Financial
Statements.
4.7 Non-current Assets Held for Sale
Non-current assets that are expected to be recovered primarily
through sale rather than through continuing use are classi ed
as “Held for Sale” once identi ed that the carrying amount will
be recovered principally through a sale transaction rather than
through continuing use. These are assets which are available for
immediate sale in their present condition, subject to only the
terms that are usual and customary for sale of such assets and
their sale is highly probable.
“Non-Current Assets Held for Sale” are presented separately
on the face of the Balance Sheet at the lower of its carrying
amount and fair value less costs to sell.
Assets classi ed as “Non-Current Assets Held for Sale” are
neither amortised nor depreciated.
Impairment losses on initial classi cation as held for sale and
subsequent gains and losses on remeasurement are recognised
in the Income Statement.
4.8 Loans and Advances to Customers
Loans and advances to customers are stated in the Balance
Sheet at the recoverable amount represented by the gross
value of the outstanding balance adjusted for provision of loan
losses and interest in suspense (interest which is not accrued to
revenue).
4.8.1 Non Performing Loans and Advances
The loans and advances are classi ed as Non Performing
Advances (NPA) based on the criteria set out in Direction
No 3 of 2008 dated 8th May 2008, issued by the Central Bank
of Sri Lanka on “Classi cation of Loans and Advances, Income
Recognition and Provisioning”. Details of the criteria referred to
above are given in Note 28 (c).
Provision for possible loan losses are made on the basis of a
continuous review of all loans and advances to customers
in accordance with the Sri Lanka Accounting Standard 23,
“Revenue Recognition and Disclosures in the Financial
Statements of the Banks” and the Directions issued by the
Central Bank of Sri Lanka and disclosed in the Financial
Statements of the Bank.
4.8.2 Foreclosed Properties
Foreclosed properties represent properties acquired in full
or partial settlement of loans and advances up to 2001 and
are yet to be disposed. From 2001 onwards this practice was
discontinued whereby loans and advances in satisfaction of
which properties are acquired, continue to be classi ed as
non-performing loans and advances. These are accounted for at
the lower of cost or forced sale value on an individual property
basis. The shortfall between the prevailing forced sale value of
the property and the related loan outstanding is recognised
as a provision for loan losses in the Income Statement during
the year of acquiring the said property in satisfaction of the
loan. Any shortfall between the carrying amount of these
properties and their respective forced sale values identi ed
subsequently is charged as a provision for loan losses in the
Income Statement. Subsequent recoveries on the disposal
of the said properties are treated as provisions written back
and any shortfall between capital outstanding and amount
recovered if not provided is charged to the Income Statement.
These properties are recorded under loans and advances until
those are disposed o . Any subsequent expenditure on these
properties are capitalised and provisions are made for such
subsequent additions.
4.8.3 Provision for Loan Losses
4.8.3 (a) Speci c Provisions for Loan Losses are Made as
Follows:
In accordance with the Direction No 3 of 2008 dated 8th May
2008, issued by the Central Bank of Sri Lanka on “Classi cation
of Loans and Advances, Income Recognition and Provisioning”
speci c provisions on NPA are made as follows.
Category of Minimum Speci c
NPA Credit Quality Provision Requirement
Substandard
Credit cards 25%
Other advances 20%
Doubtful 50%
Loss 100%
The provision made relates to all categories of loans and
advances including pawning and leasing identi ed as
substandard, doubtful and loss.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 169
Where necessary, speci c provisions have been made over and
abov
e the minimum percentages stipulated above, on a case
by case basis.
4.8.3 (b) General Provision
The amount of potential losses not speci cally identi ed but
which experience indicates are present in the portfolio of
pawning, lease receivables and Shanthi housing loans are
recognised as a general provision in the Income Statement.
Accordingly, a general provision of 0.1% of the total portfolio
of pawning facilities, 2% of the lease receivables (net of speci c
provision) and 0.2% of the total portfolio of Shanthi housing
loans is made in the Income Statement.
The Direction issued by the Monetary Board of the Central Bank
of Sri Lanka on 5th December 2006, in terms of Section 46 of
the Banking Act No 30 of 1988, as amended, in “Requirements
to Maintain a General Provision for Advances” requires all
Licensed Commercial Banks to maintain a general provision
of 1% of the total on balance sheet performing loans and
advances and on balance sheet overdue loans and advances,
net of interest in suspense and credit facilities secured by
cash deposits, gold or government securities with the same
Bank. This policy was reiterated by the Direction issued on 8th
May 2008 on “ Classi cation of Loans and Advances, Income
Recognition and Provisioning”. The general provision was
commenced with a minimum of 0.1% provision as at 31st
December 2006 and thereafter incremental provisions were
being made on the same basis till 31st March 2009, with the
view of meeting the total provision requirement of 1% not later
than 31st March 2009.
Thereafter the said 1% provision was maintained on such loans
and advances.
This requirement was amended by the Direction issued by
the Monetary Board of the Central Bank of Sri Lanka on 27th
September 2010 in terms of Section 46(1) and 46A of the
Banking Act No 30 of 1988, as amended, by “Amendments to
Directions on Classi cation of Loans and Advances, Income
Recognition and Provisioning for Licensed Commercial
Banks in Sri Lanka”. The above Direction requires all Licensed
Commercial Banks to maintain general provision at 0.5% of the
total outstanding of on balance sheet performing loans and
advances and on balance sheet overdue loans and advances
net of interest in suspense and credit facilities secured by cash
deposits, gold or government securities with the same bank
commencing from 1st January 2012. For this purpose banks
shall reduce the exiting general provision requirement of 1%
to 0.5% at a rate of 0.1% per quarter during the ve quarters
commencing 1st October 2010.
Accordingly, general provision was maintained at 0.9% (after
reducing 0.1% during the quarter ended 31st December 2010)
as at 31st December 2010.
4.8.4 Revenue Recognition on Non-Performing Loans
When an advance is classi ed as non performing, based on
criteria set out in Direction No 3 of 2008 dated 8th May 2008
issued by the Central Bank of Sri Lanka on “Classi cation of
Loans and Advances, Income Recognition and Provisioning” as
explained in Note 28 (c), interest ceases to be accrued and is
taken to income thereafter on cash basis.
4.8.5 Write-O Policy
The Bank writes o a loan (net of any related loan loss
provisions), when it determines that the loan is uncollectible.
This determination is reached after considering information
such as the occurrence of signi cant changes in the borrower’s
nancial position such that the borrower can no longer pay the
obligation, or that proceeds from collateral will not be su cient
to pay back the entire exposure.
4.9 Finance Leases
Assets leased to customers which transfer substantially all the
risks and rewards associated with ownership other than legal
title, are classi ed as nance leases. Amounts receivable under
nance leases are included under “Lease Receivable”. Leasing
balances are stated in the Balance Sheet after deduction
of initial rentals received, unearned lease income and the
provisions for rentals doubtful of recovery.
4.9.1 Provision for Lease Receivables
Speci c provision has been made in relation to identi ed non
performing leases as stated above in Note 4.8.3 (a). In addition,
a general provision has been made as stated above in Note
4.8.3 (b).
4.10 Intangible Assets
An intangible asset is an identi able non monetary asset
without physical substance held for use in the production
or supply of goods or services, for rental to others or for
administrative purposes.
4.10.1 Basis of Recognition
An intangible asset is recognised if it is probable that the future
economic bene ts that are attributable to the asset will ow to
the entity and the cost of the assets can be measured reliably.
An intangible asset is initially measured at cost.
4.10.1 (a) Goodwill
Goodwill arising on the acquisition represents the excess of the
cost of acquisition over the Group’s interest in the net fair value
of the acquiree’s identi able assets, liabilities and contingent
liabilities at the date of acquisition. Upon transition to revised
Sri Lanka Accounting Standard 25 “Business Combinations”,
goodwill is no longer amortised. Instead, goodwill is tested
for impairment annually and assessed for any indication of
impairment at each reporting date to ensure that its carrying
amount does not exceed its recoverable amount.
170 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
If an impairment loss is identi ed, it will be recognised
immediat
ely in the Income Statement.
The negative goodwill is recognised immediately in the Income
Statement.
4.10.1 (b) Software
All computer software costs incurred, licensed for use by the
Group, which are not integrally related to associated hardware,
which can be clearly identi ed, reliably measured and it’s
probable that they will lead to future economic bene ts, are
included in the Balance Sheet under the category intangible
assets and carried at cost less accumulated amortisation and
any accumulated impairment losses.
4.10.2 Subsequent Expenditure
Expenditure incurred on software is capitalised only when
it is probable that this expenditure will enable the asset to
generate future economic bene ts in excess of its originally
assessed standard of performance and this expenditure can
be measured and attributed to the asset reliably. All other
expenditure is expensed as incurred.
4.10.3 Amortisation
Intangible assets, except for goodwill, are amortised on a
straight line basis in the Income Statement from the date when
the asset is available for use, over the best estimate of its useful
economic life based on a pattern in which the asset’s economic
bene ts are consumed by the Bank. The estimated useful life
of software is six years. Expenditure on an intangible item that
was initially recognised as an expense by the Bank in previous
Annual Financial Statements or Interim Financial Reports are
not recognised as part of the cost of an intangible asset at a
later date.
4.10.4 Retirement and Disposal
An intangible asset is derecognised on disposal or when
no future economic bene ts are expected from its use and
subsequent disposal.
4.11 Investment Properties
Investment properties are properties held either to earn rental
income or for capital appreciation or both but not for sale in
the ordinary course of business, used in the production or
supply of goods or services or for administrative purposes.
4.11.1 Basis of Recognition
Investment property is recognised if it is probable that future
economic bene ts that are associated with the investment
property will ow to the Group and cost of the investment
property can be reliably measured.
4.11.2 Measurement
An investment property is measured initially at its cost. The cost
of a purchased investment property comprises of its purchase
price and any directly attributable expenditure. The cost of
a self constructed investment property is its cost at the date
when the construction or development is complete.
The Group applies the cost model for investment properties
in accordance with Sri Lanka Accounting Standard 40 (Revised
2005) “Investment Property” . Accordingly, land classi ed as
investment properties are stated at cost less any accumulated
impairment losses and buildings classi ed as investment
properties are stated at cost less any accumulated depreciation
and any accumulated impairment losses.
4.11.3 Depreciation
Depreciation is provided on a straight line basis over the
estimated life of the class of asset from the date of purchase up
to the date of disposal.
Hatton National Bank PLC
Freehold buildings 2.5% per annum
[Refer Note 33 (a)]
Sithma Development (Pvt) Ltd*
Freehold buildings (Smart building)
[Refer Note 33 (b)] 2.5% per annum
Plant, machinery and equipment integral to freehold buildings
referred to above 20% per annum
* Sithma Development (Pvt) Ltd
The HNB towers which is owned by Sithma Development
(Pvt) Ltd (“Sithma”), is leased to occupants including the
Bank. However, the ancillary services provided by Sithma
Development (Pvt) Ltd to the occupants of HNB towers, is
a signi cant component of the arrangement as a whole.
Therefore, HNB towers is not classi ed as investment property
in the nancial statements of Sithma, but has been classi ed
under property, plant and equipment in accordance with
Sri Lanka Accounting Standard 40 (Revised 2005) “Investment
Property”.
4.11.4 Derecognition
Investment properties are derecognised when disposed of, or
permanently withdrawn from use because no future economic
bene ts are expected. Transfers are made to and from
investment properties only when there is a change in use.
4.12 Property, Plant and Equipment
Property, plant and equipment are tangible items that are held
for servicing, or for administrative purposes and are expected
to be used during more than one period.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 171
4.12.1 Basis of Recognition
Property, plant and equipment are recognised if it is probable
that future economic bene ts associated with the assets
will ow to the Group and cost of the asset can be reliably
measured.
4.12.2 Measurement
An item of property, plant and equipment that quali es
for recognition as an asset is initially measured at its cost.
Cost includes expenditure that is directly attributable to the
acquisition of the asset and cost incurred subsequently to add
to, replace part of, or service it. The cost of self constructed
assets includes the cost of materials and direct labour, any other
costs directly attributable to bringing the asset to a working
condition for its intended use and the costs of dismantling and
removing the items and restoring the site on which they are
located. Purchased software that is integral to the functionality
of the related equipment is capitalised as part of computer
equipment.
4.12.3 Cost Model
The Group applies cost model to property, plant and
equipment except for freehold land and buildings and records
at cost of purchase or construction together with any incidental
expenses thereon less accumulated depreciation and any
accumulated impairment losses.
4.12.4 Revaluation Model
The Group applies the revaluation model to the entire class
of freehold land and buildings. Such properties are carried
at a revalued amount, being their fair value at the date of
revaluation less any subsequent accumulated depreciation
and subsequent accumulated impairment losses. Freehold
land and buildings of the Group are revalued every seven years
on a roll over basis to ensure that the carrying amounts do
not di er materially from the fair values at the Balance Sheet
date. On revaluation of an asset, any increase in the carrying
amount is credited directly to equity, under capital reserve or
used to reverse a previous revaluation decrease relating to the
same asset, which was charged to the Income Statement. In
this circumstance, the increase is recognised as income to the
extent of the previous write down. Any decrease in the carrying
amount is recognised as an expense in the Income Statement
or debited directly to equity under revaluation reserve to the
extent of any credit balance existing in the capital reserve in
respect of that asset.
4.12.5 Subsequent Costs
The cost of replacing part of an item of property, plant and
equipment is recognised in the carrying amount of the item
if it is probable that the future economic bene ts embodied
within that part will ow to the Group and its cost can be
reliably measured. The costs of day to day servicing of property,
plant and equipment are charged to the Income Statement as
incurred. Costs incurred in using or redeploying an item are not
included under carrying amount of an item.
4.12.6 Derecognition
The carrying amount of an item of property, plant and
equipment is derecognised on disposal or when no future
economic bene ts are expected from its use or disposal.
The gain or loss arising from the derecognition of an item
of property, plant and equipment is included in Income
Statement when the item is derecognised.
When replacement costs are recognised in the carrying amount
of an item of property, plant and equipment, the remaining
carrying amount of the replaced part is derecognised. Major
inspection costs are capitalised. At each such capitalisation, the
remaining carrying amount of the previous cost of inspections
is derecognised.
4.12.7 Depreciation
The Group provides depreciation from the date the assets are
available for use up to the date of disposal, at the following
rates on a straight line basis over the periods appropriate to
the estimated useful lives based on the pattern in which the
asset’s future economic bene ts are expected to be consumed
by the Bank of the di erent types of assets, except for which are
disclosed separately. Depreciation does not cease when the
assets become idle or is retired from active use unless the asset
is fully depreciated.
Hatton National Bank PLC and its Subsidiary Companies
(except for Sithma Development (Pvt) Ltd)
% per annum
Freehold buildings 2.5
Motor vehicles 25
Computer equipment 16.7
O ce equipment 20
Furniture and ttings 10
Fixtures 10
Civil works (Majan Exchange LLC) 10
Improvements to
leasehold buildings over the
lease period
Depreciation is not provided for freehold land.
Sithma Development (Pvt) Ltd
% per annum
Freehold buildings - Sithma building 1
Generators, generator panels
and associated power cables 2
Chillers, cooling towers and
associated equipment 4
Lifts and escalator 4
Building management systems 4
Plant and machinery 20
Equipment 20
Furniture and ttings 10
172 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
4.12.8 Capital Work-in-Progress
Capital work-in-progress is stated at cost. These are expenses
of a capital nature directly incurred in the construction
of buildings, major plant and machinery and system
development, awaiting capitalisation. Capital work-in-progress
would be transferred to the relevant asset when it is available
for use i.e. when it is in the location and condition necessary
for it to be capable of operating in the manner intended by
management. Capital work-in-progress is stated at cost less any
accumulated impairment losses.
4.12.9 Borrowing Costs
Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset have been
capitalised as part of the cost of the asset in accordance with Sri
Lanka Accounting Standard 20 “Borrowing Costs”. Capitalisation
of borrowing costs ceases when substantially all the activities
necessary to prepare the qualifying asset for its intended use
are completed.
4.13 Work-in-Progress - Residential Apartment Complex
Sithma Development (Pvt) Ltd commenced a project to
develop a residential apartment complex. The expenses
relating to this project are accounted for as work-in-progress
until the completion of the project.
On completion, the value of apartments is transferred to
inventories - residential apartment complex. Inventories are
shown under other assets in the Balance Sheet.
4.14 Impairment
4.14.1 Financial Assets
The Group assesses at each Balance Sheet date whether there is
objective evidence that a nancial asset is impaired. A nancial
asset is impaired and impairment losses are incurred if and only
if, there is objective evidence of impairment as a result of one
or more loss events that occurred after the initial recognition
of the asset and prior to the Balance Sheet date (“a loss event”),
and that loss event or events have had an impact on the
estimated realisable value of the asset.
The Group rst assesses whether objective evidence of
impairment exists for nancial assets that are signi cant (except
for loans and advance explained below).
For loans and advances, impairment loss is measured
individually and collectively as explained in Note 4.8.3. When
a loan is uncollectible, it is written o against the related
provision. Such loans are written o after all the necessary
procedures have been completed and the amount of the loss
has been determined. Subsequent recoveries of the amounts
previously written o are included under “Other Income” in the
Income Statement.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an
event occurring after the impairment was recognised, the
previously recognised impairment loss is reversed by adjusting
the impairment provision account. The amount of the reversal
is recognised in the Income Statement.
4.14.2 Non Financial Assets
Tangible and intangible assets (excluding deferred tax assets
which are explained in Note 4.27.2) are written down to
recoverable amount where their carrying value exceeds
recoverable amounts.
The carrying values of property, plant and equipment are
reviewed for impairment annually or when events or changes
in circumstances indicate that the carrying value may not be
recoverable. If such indications exist and where the carrying
values exceed the estimated recoverable amount, the assets are
written down to their recoverable amount. Impairment losses
are recognised in the Income Statement unless it reverses a
previous revaluation surplus for the same asset.
Assets with an inde nite useful life, including goodwill, are
not subject to amortisation and are tested on an annual basis
for impairment and additionally whenever an indication of
impairment exists. Assets that are subject to amortisation
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
The recoverable amount of an asset is the higher of its fair value
less costs to sell or its value in use. Any decrease in the carrying
value is recognised as an expense in the Income Statement in
the reporting period in which the impairment loss occurs.
For assets that do not generate largely independent cash
in ows, the recoverable amount is determined for the cash
generating unit to which that asset belongs. Management
judgement is applied to establish cash generating units. Each
of these cash generating units is represented by an individual
primary reporting segment, or a subdivision of a primary
segment.
An impairment loss in respect of goodwill is not reversed.
In respect of other assets impairment losses recognised in
prior periods, are assessed at each balance sheet date for any
indications that the loss has decreased or no longer exists.
An impairment loss is reversed if there has been a change
in estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation or
amortisation, if no impairment loss had been recognised.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 173
LIABILITIES AND PROVISIONS
4.15 Deposits from Customers
Deposits include non interest bearing deposits, savings
deposits, term deposits, deposits redeemable at call and
certi cates of deposit. They are brought to account at the gross
value of the outstanding balance. Interest paid is charged to
the Income Statement.
4.16 Deposit Insurance Scheme
In terms of the Banking Act Direction No 5 of 2010 “Insurance
of Deposit Liabilities” issued on 27th September 2010 all
Licensed Commercial Banks are required to insure their deposit
liabilities in the Deposit Insurance Scheme operated by the
Monetary Board in terms of Sri Lanka Deposit Insurance
Scheme Regulations No 1 of 2010 issued under Sections 32A
to 32E of the Monetary Law Act with e ect from 1st October
2010. Deposits to be insured include demand, time and savings
deposit liabilities and exclude the following.
- deposit liabilities to member institutions
- deposit liabilities to Government of Sri Lanka
- deposit liabilities to shareholders, directors, key
management personnel and other related parties as de ned
in Banking Act Direction No 11 of 2007 on Corporate
Governance of Licensed Commercial Banks
- deposit liabilities held as collateral against any
accommodation granted
- deposit liabilities falling within the meaning of abandoned
property in terms of the Banking Act and dormant deposits
in terms of the Finance Companies Act funds of which have
been transferred to Central Bank of Sri Lanka
Banks are required to pay a premium of 0.10% on eligible
deposit liabilities if the bank maintains a capital adequacy ratio
of 14% or above as at the end of the immediately preceding
nancial year and a premium of 0.125% on eligible deposit
liabilities for all other Licensed Commercial Banks calculated
on the total amount of eligible deposits as at the end of the
quarter to be payable within a period of 15 days from the end
of the quarter.
4.17 Dividends Payable
Provision for dividends is recognised at the time the dividend
recommended and declared by the Board of Directors is
approved by the Shareholders.
4.18 Borrowings
Borrowings include re nance borrowings, call and time
deposits, vostro balances and borrowings from nancial
institutions. They are brought to account at the gross value of
the outstanding balance.
4.19 Securities Sold under Re-purchase Agreement
Securities sold under agreements to re-purchase are recorded
separately in the Financial Statements. The di erence between
the sale and the re-purchase price represents interest expense,
which is recognised in the Income Statement over the period
of the re-purchase agreement.
4.20 Bills Payable and Other Liabilities
Bills payable and other liabilities include all nancial liabilities,
interest, fees, expenses payable and securities purchased but
not delivered. These liabilities are recorded at the cash value to
be realised when settled.
4.21 Employee Retirement Bene ts
4.21.1 De ned Bene t Plan
A de ned bene t plan is a post employment bene t plan other
than a de ned contribution plan.
4.21.1 (a) Pension Fund
The Bank operates an approved Pension Fund to facilitate the
following payments for permanent sta of the Bank:
a) Pensions to retiring sta
b) Bene ts to sta who opted for the optional scheme for
pension introduced in 2005
c) Gratuity
The gratuity would include both gratuity payments to
pensionable sta who have not opted for optional scheme
for pension introduced in 2005 in the event such sta
member leaving before the age of 55 and satisfy the
criteria as per Gratuity Act and gratuity payments for non
pensionable sta who have satis ed the criteria as per
Gratuity Act.
The Bank’s obligation in respect of de ned bene t pension plan
is calculated by estimating the amount of future bene t that
employees have earned in return for their service in the current
and prior periods and discounting that bene t to determine
its present value, then deducting the fair value of any plan
assets. The discount rate is the yield at the reporting date on
government bonds that have maturity dates approximating
to the terms of the Bank’s obligations. The calculation is
performed by a quali ed actuary using the Projected Unit
Credit method which is the method recommended by Sri
Lanka Accounting Standard 16 (Revised 2006) “Employee
Bene ts” (SLAS 16).
When the bene ts of a plan are improved, the portion of the
increased bene t relating to past service by employees is
recognised in the Income Statement on a straight line basis
over the average period until the bene ts become vested. To
the extent that the bene ts vest immediately, the expense is
recognised immediately in Income Statement.
174 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
In respect of actuarial gains and losses that arise in calculating
the Bank
’s obligation in respect of a plan, to the extent that
any cumulative unrecognised actuarial gain or loss exceeds
10% of the greater of the present value of the de ned bene t
obligation and the fair value of plan assets, that portion is
recognised in Income Statement over the expected average
remaining working lives of the employees participating in the
plan. Otherwise, the actuarial gain or loss is not recognised.
Monthly provision is made by the Bank to the Pension Fund,
based on a percentage of the gross salary of employees. The
percentage of contributions are determined by the same
actuary and retirement bene ts are provided to all permanent
sta . The Bank carries out an actuarial valuation of the Pension
Fund in December each year to ascertain the full liability of
the fund. The valuation method used by the actuary to value
the fund is the Projected Unit Credit method, the method
recommended by SLAS 16.
The demographic assumptions underlying the valuation
are retirement age (55 yrs), early withdrawals from service
and retirement on medical grounds, death before and after
retirement etc.
The Subsidiaries do not operate pension funds.
Transitional provisions applied on rst time adopting of Sri
Lanka Accounting Standard 16 - (Revised 2006) “Employee
Bene ts” on 1st January 2008
On rst adopting the standard, the Bank determined its
transitional liability for de ned bene t plans as at 1st January
2008. As the transitional liability was more than the liability
that would have been recognised on 1st January 2008 under
the entity’s previous accounting policy, the Bank made an
irrevocable choice to recognise that increase in its de ned
bene t liability, as an expense on a straight line basis over a
period of ve years from 1st January 2008.
4.21.1 (b) Widows’, Widowers’ and Orphans’ Pension Fund
The Bank operates a separate Widows’, Widowers’ and Orphans’
Pension Scheme (WW & OP) which was established with
e ect from 1st September 1995. The contributions are from
employees only.
The actuarial valuation of the Widows’, Widowers’ and Orphans’
Pension Scheme is carried out by the same actuary who carried
out the actuarial valuation of the Pension Fund using the same
method and same assumptions detailed in Note 4.21.1 (a)
above.
4.21.1 (c) Majan Exchange LLC
The Company’s obligation in respect of non-Omani terminal
bene ts which is an unfunded de ned bene t retirement
plan, is made in accordance with Omani Labour Laws and is
calculated by estimating the amount of future bene t that
such employees have earned in return for their service in the
current and prior periods. The obligation is calculated using the
Projected Unit Credit method and is discounted to its present
value.
4.21.2 De ned Contribution Plans
A de ned contribution plan is a post employment plan under
which an entity pays xed contributions into a separate
entity and will have no legal or constructive obligation to pay
a further amount. Obligations for contributions to de ned
contribution plans are recognised as expense in the Income
Statement as and when they are due.
4.21.2 (a) Employees’ Provident Fund
The Bank and employees contribute 12% and 8% respectively
on the salary of each employee to the approved private
Provident Fund while the Group entities and their employees
contribute the same percentages to Employees’ Provident
Fund.
4.21.2 (b) Employees’ Trust Fund
The Bank / Group contributes 3% of the salary of each
employee to the Employees’ Trust Fund.
4.21.2 (c) Majan Exchange LLC
In respect of Majan Exchange LLC, contributions to a de ned
contribution retirement plan for Omani employees in
accordance with the Omani Social Insurance Scheme are
recognised as expense in the Income Statement as and when
they are due.
4.21.3 Gratuities
No provision has been made in the Financial Statements of the
Bank for gratuities to employees who have completed ve or
more years of service, payable under the Payment of Gratuity
Act No 12 of 1983, as the Bank contributes for gratuity of all
permanent employees through its own non-contributory
pension scheme which is in force.
Based on the Sri Lanka Accounting Standard 16 (Revised 2006)
– “Employee Bene ts” which became e ective from nancial
years commencing after 1st July 2007, the Subsidiaries other
than HNB Assurance PLC have adopted the Gratuity Formula
method while HNB Assurance PLC continues to apply Actuarial
Valuation method. Accordingly provisions have been made
based on the above methods.
The gratuity liabilities are not externally funded.
4.21.4 Employee Share Ownership Plan
The Employee Share Ownership Plan introduced in 2005
o ered shares to executive and high rank o cers of the Bank.
The shares allotted to the respective employee under the plan
would remain within the plan while the bene cial interest will
be with the employee. At the time the employee leaves the
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 175
Bank the di
erence between the issue price and the market
price is paid to the employee. Therefore the said Employee
Share Ownership Plan has no potential dilutive e ect on the
earnings per share of the Bank.
4.21.5 Employee Share Option Plan
At the Annual General Meeting held on 28th March 2008 a
resolution was passed to formulate an Employee Share Option
Plan (ESOP) apart from the Employee Share Ownership Plan
enabling the sta in the management rank and above of the
Bank to take part in the voting and non voting ordinary shares
of the Bank. The total number of share options available to
the eligible employees per year will be 1.25% of shares issued
by the Bank up to a maximum limit of 5% of the shares issued
(both voting and non voting) by the Bank in 4 years. The
bene ts under ESOP will accrue to eligible employees of the
Bank in any particular year only if the conditions set out in the
ESOP are met.
An eligible employee will qualify to receive share options in
a particular year by achieving a positive performance rating
in the annual performance assessment. The amount of share
options to be granted to each quali ed eligible employee will
depend on his / her seniority in the Bank. This employee share
option plan has potential dilutive e ect on the earnings per
share of the Bank.
Details of share options are given in Note 46 (a) and (b).
4.22 Provisions
A provision is recognised if, as a result of a past event, the
Group has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an out ow of
economic bene ts will be required to settle the obligation.
A provision for onerous contracts is recognised when the
expected bene ts to be derived by the Group from a contract
are lower than the unavoidable cost of meeting its obligations
under the contract. The provision is measured at the present
value of the lower of the expected cost of terminating the
contract and the expected net cost of continuing with the
contract. Before a provision is established, the Group recognises
any impairment loss on the assets associated with that
contract.
Provisions for non performing loans and advances are made as
set out in Note 4.8.3.
4.23 Operational Risk Events
Provisions for operational risk events are recognised for losses
incurred by the Bank which do not relate directly to amounts of
principal outstanding for loans and advances.
The amount recognised as a provision is the best estimate of
the expenditure required to settle the present obligation as
at the Balance Sheet date, taking into account the risks and
uncertainties that surround the events and circumstances that
a ect the provision.
4.24 Commitments and Contingencies
All discernible risks are accounted for in determining the
amount of all known liabilities. The Bank’s share of any
contingencies and capital commitments of a Subsidiary,
Associate or Joint Venture for which the Bank is also liable
severally or otherwise are also included with appropriate
disclosures.
Contingent liabilities are possible obligations whose existence
will be con rmed only by uncertain future events or present
obligations where the transfer of economic bene t is not
probable or cannot be reliably measured. Contingent liabilities
are not recognised in the Balance Sheet but are disclosed
unless they are remote.
4.25 Income Recognition
4.25.1 Interest
Interest receivable is recognised on an accrual basis. Interest
from loans and advances ceases to be accrued when they are
classi ed as non performing as explained in Note 4.8.4. Interest
on non performing loans and advances is accounted for on a
cash basis. Interest on non performing loans and advances is
credited to the “Interest in Suspense Account” which is netted
in the Balance Sheet against the relevant loans and advances.
Interest income from investments is recognised on an accrual
basis.
4.25.2 Dividend Income
Dividend income is recognised in the Income Statement on an
accrual basis when the Bank’s right to receive the dividend is
established.
4.25.3 Lease Income
The excess of aggregate lease rentals receivable over the cost of
the leased assets constitutes the total unearned lease income
at the commencement of a lease. The unearned lease income is
taken into income over the term of the lease commencing with
the month in which the lease is executed in proportion to the
declining receivable balance.
Gross earnings under nance leases in respect of lease rentals
due, cease to be taken to revenue when they are in arrears for
ninety days. Thereafter, such income is recognised on a cash
basis.
176 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
4.25.4 Discount on Bills of Exchange
Income on discounting bills of exchange is recognised
proportionately over the period of the instrument.
4.25.5 Trading Income
Gains or losses arising from the sale of investment securities,
dealing securities, shares and units are accounted for on the
date of transaction in the Income Statement.
4.25.6 Fee and Commission Income
Fees and commission income, including account servicing fees,
investment management fees, sales commission, placement
fees and syndication fees are recognised as the related services
are performed.
4.25.7 Pro t / Loss from Sale of Property, Plant and
Equipment
Pro t / loss from sale of property, plant and equipment is
recognised in the period in which the sale occurs and is
classi ed as other income.
4.25.8 Pro t / Loss from Sale of Investment Properties
Any gains or losses on retirement or disposal of investment
properties are recognised in the month of retirement or
disposal.
4.25.9 Rental Income
Rental income is recognised on an accrual basis.
4.26 Expenses
4.26.1 Interest Expenses and Other Expenses
Interest payable and other expenses are recognised on an
accrual basis.
4.26.2 Lease Payments
Payments made under operating leases are recognised in the
Income Statement on a straight line basis over the term of the
lease.
The future monthly commitments on operating leases are
shown in Note 47 (b).
Minimum lease payments made under nance leases are
apportioned between the nance expense and the reduction
of the outstanding liability. The nance expense is allocated
to each period during the lease term so as to produce a
constant periodic rate of interest on the remaining balance of
the liability. Contingent lease payments are accounted for by
revising the minimum lease payments over the remaining term
of the lease when the lease adjustment is con rmed.
4.26.3 Fee and Commission Expenses
Fee and commission expenses are recognised on an accrual
basis.
4.27 Income Tax Expense
Income tax expense comprises of current and deferred tax.
Income tax expense is recognised in the Income Statement
except to the extent that it relates to items recognised directly
in equity, in which case it is recognised in equity.
4.27.1 Current Tax
Current tax is the expected tax payable on the taxable income
for the year, using tax rates enacted or substantively enacted on
the Balance Sheet date, and any adjustment to tax payable in
respect of previous years.
Provision for taxation is based on the pro t for the year adjusted
for taxation purposes in accordance with the provisions of
the Inland Revenue Act No 10 of 2006 and the amendments
thereto at the rates speci ed in Note 20.
4.27.2 Deferred Tax
Deferred taxation is provided using the liability method,
providing for temporary di erences between the carrying
amounts of assets and liabilities for nancial reporting purposes
and the tax base of assets and liabilities, which is the amount
attributed to those assets and liabilities for tax purposes. The
amount of deferred tax provided is based on the expected
manner of realisation or settlement of the carrying amount of
assets and liabilities, using tax rates enacted or substantively
enacted by the reporting date.
Deferred tax liabilities are not recognised for the following
temporary di erences: the initial recognition of goodwill, the
initial recognition of assets and liabilities in a transaction that is
not a business combination and that a ects neither accounting
nor taxable pro t and di erences relating to investments in
Subsidiaries to the extent that they probably will not reverse in
the foreseeable future.
Deferred tax assets, including those related to temporary tax
e ects of income tax losses and credits available to be carried
forward, are recognised only to the extent that it is probable
that future taxable pro ts will be available against which the
asset can be utilised. Deferred tax assets are reviewed at each
reporting date and are reduced to the extent that it is no longer
probable that the related tax bene t will be realised.
4.27.3 O setting
Current and deferred tax assets and liabilities are o set only to
the extent that they relates to income taxes imposed by the
same taxation authority, there is a legal right and intentions to
settle on a net basis and it is allowed under the tax law of the
relevant jurisdiction.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 177
4.27.4 Withholding Tax on Dividends
Dividend distributed out of taxable pro t of the local
Subsidiaries attracts a 10% deduction at source and is not
available for set o against the tax liability of the Bank. Thus,
the withholding tax deducted at source is added to the tax
expense of the Subsidiaries in the Consolidated Financial
Statements as a consolidation adjustment.
Withholding tax that arise from the distribution of dividends by
the Bank are recognised at the same time as the liability to pay
the related dividend is recognised.
4.27.5 Value Added Tax on Financial Services
The base for the computation of Value Added Tax on Financial
Services is the accounting pro t before income tax adjusted
for the economic depreciation and emoluments of employees
computed on prescribed rate.
4.28 Earnings per Share
The Group presents Basic and Diluted Earnings per Share (EPS)
data for its ordinary shares. Basic EPS is calculated by dividing
the pro t or loss attributable to ordinary shareholders of the
Bank by the weighted average number of ordinary shares
outstanding during the period. Diluted EPS is determined
by adjusting the pro t or loss attributable to the ordinary
shareholders and the weighted average number of ordinary
shares outstanding for the e ects of all dilutive potential
ordinary shares, which comprise share options granted to
employees.
4.29 Segment Reporting
A segment is a distinguishable component of the Group that
is engaged either in providing related products or services
(business segment), or in providing products and services
within a particular economic environment (geographical
segment), which is subject to risks and returns di erent from
those of other business segments. For the purposes of segment
reporting disclosures, the information is presented in respect of
the Group’s business segments, which is based on the Group’s
management and internal reporting structure. The Group
comprises the following major business segments; banking,
leasing, dealing, property and insurance.
Inter-segment pricing is determined on an arms length basis.
Measurement of segment assets, liabilities, segment revenue
and results is based on the accounting policies set out above.
Segment revenue results, assets and liabilities include items
directly attributable to segments as well as those that can be
allocated on a reasonable basis.
4.30 Cash Flow Statement
The Cash Flow Statement has been prepared using the “Direct
Method” of preparing Cash Flows in accordance with the Sri
Lanka Accounting Standard 9 “Cash Flow Statements”. Cash and
cash equivalents comprise short term, highly liquid investments
that are readily convertible to known amounts of cash and are
subject to an insigni cant risk of changes in value. The cash
and cash equivalent include cash in hand, balances with banks,
placements with banks, money at call and short notice.
PRESENTATION
4.31 O setting Income and Expenses
Income and expenses are not o set unless required or
permitted by accounting standards.
4.32 O setting Assets and Liabilities
Assets and liabilities are o set and the net amount reported in
the Balance Sheet only where there is :
• a current enforceable legal right to o set the asset and
liability; and
• an intention to settle on a net basis, or to realise the asset
and settle the liability simultaneously.
5. SIGNIFICANT ACCOUNTING POLICIES THAT ARE
SPECIFIC TO THE BUSINESS OF THE SUBSIDIARY –
HNB ASSURANCE PLC
5.1 General Insurance Business
5.1.1 Gross Written Premium
Gross written premium is generally recognised as written
upon inception of the policy. Upon inception of the contract,
premiums are recorded as written and are earned primarily on
a pro-rata basis over the term of the related policy coverage.
However, for those contracts for which the period of risk di ers
signi cantly from the contract period, premiums are earned
over the period of risk in proportion to the amount of insurance
protection provided.
5.1.2 Reinsurance Premium
Premiums ceded to reinsurers are recognised as an expense in
accordance with the pattern of reinsurance services received.
Reinsurance premiums are decided based on rates agreed with
reinsurers.
5.1.3 Unearned Premium
The unearned premium reserve represents the portion of the
premiums net of outward reinsurance premiums written in the
current year in respect of risks related to subsequent periods.
Unearned premiums are calculated on the 1/24th basis in
accordance with the Regulation of Insurance Industry Act No
43 of 2000.
5.1.4 Unexpired Risk
Provision is made where appropriate for the estimated amount
required over and above unearned premiums to meet future
claims and related expenses on the business in force as at end
of the year.
178 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
5.1.5 Title Insurance Reserve
Title insurance reserve is maintained by the Company to pay
potential claims arising from the title insurance policies. Title
insurance policies are normally issued for a long period such as
5 years or more. Thus, no pro t is recognized in rst three years
of the policy given the high probability for claims according to
the nature of the business. From the 4th year onwards, pro t
recognition is started by amortising the premium received
and will be distributed throughout the balance loan period
using the straight line method. Pro t up to the 3rd year will be
recognized in the 4th year.
5.1.6 Net Deferred Acquisition Expenses
Acquisition expenses, representing commissions, which vary
with and directly related to the production of business, are
deferred and amortised over the period in which the related
written premiums are earned. Reinsurance commission is also
treated in the same manner within deferred acquisition costs.
5.1.7 Claims
Claims include provisions for the estimated cost of claims and
related handling expenses in respect of Incidents up to the
year end, including those which have not been noti ed, net of
salvage, anticipated reinsurance and other recoveries. Claims
outstanding are assessed by review of individual claim les and
estimating changes in the ultimate cost of settling claims.
The provision in respect of Claims Incurred But Not Reported
(IBNR) and Claims Incurred But Not Enough Reported (IBNER)
is actuarially valued to ensure a more realistic estimation of
the future liability based on the past experience and trends.
Actuarial valuations are performed on a semi-annual basis.
Whilst the directors consider that the provision for claims are
fairly stated on the basis of information currently available,
the ultimate liability will vary as a result of subsequent
information and events. This may result in adjustments to
the amounts provided. Such amounts are re ected in the
Financial Statements for that period. The methods used and the
estimates made are reviewed regularly.
5.2 Life Insurance Business
5.2.1 Gross Written Premium
Premium from traditional life insurance contracts, including
participating contracts and annuity policies with life
contingencies, are recognised as revenue when cash is received
from the policyholder. Bene ts and expenses are provided
against such revenue to recognise pro ts over the estimated
life of the policies.
5.2.2 Reinsurance Premium
Outward reinsurance premiums are recognised when payable.
Reinsurance recoveries are credited to match the relevant gross
claims.
5.2.3 Bene ts, Losses and Expenses
Expenses on the life insurance revenue account relate to the
acquisition and maintenance of life insurance business and
include investment expenses not treated as a part of the capital
cost of investment. Claims by death and maturity are charged
against revenue on noti cation of death or on expiry of the
term. The interim payments and surrenders are accounted for
only at the time of settlement.
5.2.4 Actuarial Valuation for Long Term Insurance
Provision
The directors agree to the long term insurance provision for
the company at the year end on the recommendations of
the independent consultant actuary following his annual
investigation of the life insurance business. The actuarial
valuation takes into account all liabilities and is based on
assumptions recommended by the independent consultant
actuary.
6. COMPARATIVE INFORMATION
The comparative information is re-classi ed wherever
necessary to conform with the current year’s presentation in
order to provide a better presentation. The details of such re-
classi cations have been provided in Note 50.
7 DIRECTIONS ISSUED BUT NOT EFFECTIVE / APPLIED
AS AT BALANCE SHEET DATE
The Central Bank of Sri Lanka issued Banking Act Direction
No 9 of 2008 on 30th December 2008 on “Amendments to
Directions on Classi cation of Loans Income Recognition and
Provisioning”. The following section of the direction has not
become e ective as at balance sheet date, hence not applied
by the Bank in preparing these Financial Statements.
7.1 Classi cation of NPA Based on Aggregated Exposure
According to Section 1 of the above Direction, with e ect from
1st January 2011 all credit facilities extended to a borrower
should be classi ed as NPA when one or more of the credit
facilities has / have been classi ed as NPA and if the aggregate
amount of the outstanding of such NPA (excluding interest in
suspense) exceeds 30% of the total credit facilities extended to
such borrower (excluding interest in suspense).
8 NEW ACCOUNTING STANDARDS ISSUED BUT NOT
EFFECTIVE AS AT BALANCE SHEET DATE
The Institute of Chartered Accountants of Sri Lanka has issued
a new volume of Sri Lanka Accounting Standards which will
become applicable for nancial periods begining on or after
1st January 2012. Accordingly, these Standards have not been
applied in preparing these nancial statements as they were
not e ective for the year ended 31st December 2010.
These Sri Lanka Accounting Standards comprise Accounting
Standards pre xed both SLFRS (corresponding to IFRS)
and LKAS (corresponding to IAS). Application of Sri Lanka
Accounting Standards pre xed SLFRS and LKAS for the rst
time shall be deemed to be an adoption of SLFRSs.
The Bank is currently in the process of evaluating the potential
e ects of these Standards on its nancial statements and the
impact on the adoption of these Standards have not been
quanti ed as at Balance Sheet date.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 179
Bank Group
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
9 INCOME
Interest income (Note 10) 30,249,230 34,620,276 30,563,795 34,836,422
Foreign exchange pro t 1,015,987 903,210 1,014,208 903,381
Fee and commission income (Note 12) 2,809,330 2,331,278 3,115,443 2,377,510
Dividend income (Note 13) 209,762 217,353 199,012 195,879
Other income (Note 14) 1,297,312 1,285,746 3,212,207 2,987,581
35,581,621 39,357,863 38,104,665 41,300,773
10 INTEREST INCOME
Loans and advances to customers 23,535,452 28,348,045 23,267,708 28,010,206
Government securities 5,605,876 4,982,682 6,062,711 5,447,232
Placements with banks 607,443 865,307 664,115 914,401
Other interest income 500,459 424,242 569,261 464,583
30,249,230 34,620,276 30,563,795 34,836,422
Notional Credit for Withholding Tax on Government Securities on Secondary Market Transactions
Section 137 of the Inland Revenue Act No 10 of 2006 provides that a company which derives interest income from the secondary market
transactions in Government securities be entitled to a notional tax credit (being one ninth of the net interest income) provided such interest
income forms part of the statutory income of the company for that year of assessment.
Accordingly, net income earned from secondary market transactions in Government securities for the year by the Bank / Group has been
grossed up in the Financial Statements and the resulting notional tax credit amounted to Rs 434.17 Mn (2009 - Rs 332.07 Mn) for Bank
and Rs 471.56 Mn (2009 - Rs 370.73 Mn) for Group.
Bank Group
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
11 INTEREST EXPENSES
Deposits from customers 12,780,463 17,499,991 12,773,745 17,492,541
Short term borrowings 878,574 1,304,101 962,370 1,384,230
Re nance borrowings 457,899 544,189 457,899 544,188
Subordinated debentures 361,959 387,455 358,815 555,069
Other interest expenses 224,361 303,910 224,326 304,920
14,703,256 20,039,646 14,777,155 20,280,948
12 FEE AND COMMISSION INCOME
Fee income 5,907 7,367 14,998 22,938
Commission income 2,803,423 2,323,911 3,100,445 2,354,572
2,809,330 2,331,278 3,115,443 2,377,510
13 DIVIDEND INCOME
Dealing securities 1,208 - 3,600 323
Investment securities - quoted 145,634 117,991 140,595 92,644
Investment securities - unquoted 62,920 99,362 54,817 102,912
209,762 217,353 199,012 195,879
180 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Bank Group
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
14 OTHER INCOME
Capital gain from sale of dealing securities 18,462 9,197 56,847 9,197
Capital gain from sale of investment securities
(disposal through dealing securities) [Note 29 (b)] 497,114 - 497,114 -
Capital gain from sale of Government securities 6,089 2,590 37,754 15,460
Capital gain from sale of Subsidiaries - - - 67,659
Capital gain from sale of Associate company [Note 30 (a) i] 47,581 - 23,791 -
Capital gain from sale of investment securities [Note 29 (d)] 101,710 - 63,186 -
Gain on marked to market valuation of dealing securities 90,053 17,451 90,053 25,696
Rent received 8,439 5,026 91,237 89,336
Rent received from investment properties 41,951 39,412 40,079 37,881
Auditorium hire income 3,420 2,133 3,420 2,133
Pro t from sale of property, plant and equipment 4,674 11,917 5,691 13,157
Pro t from sale of gold 24,351 26,503 24,351 26,503
Recovery of bad debts [Note 26 (a), 27 (c) and 28 (a)] * 421,433 736,571 421,433 736,571
Recovery of loans written o in prior years 6,549 7,283 6,549 7,283
Recovery of investment in Aquila fund provided for in prior years - 216,674 - 216,674
Recovery of VAT written o in prior year - 200,309 - 200,309
Recovery of operational losses provided for in prior year 7,024 - 7,024 -
Insurance premium income - - 1,813,089 1,524,635
Miscellaneous 18,462 10,680 30,589 15,087
1,297,312 1,285,746 3,212,207 2,987,581
* Bad debts recovered in 2009 includes the write back of provision made against Kabool Lanka (Pvt) Ltd’s loan exposure as explained in Note
28 (j).
15 OPERATING EXPENSES
Operating expenses, among others, include the following:
Legal expenses and professional fees 81,061 77,585 86,884 85,050
Depreciation of investment property (Note 33) 4,444 4,380 4,456 4,421
Depreciation of property, plant and equipment (Note 34) 657,360 579,993 806,143 722,872
Amortisation of intangible assets (Note 35) 168,761 166,636 179,997 175,765
Provision for operational risk event losses 43,169 60,083 43,189 60,083
Provision for receivable from Commercial Interlink Services Inc (Note 36) 18,885 - - -
Property, plant and equipment written o (Note 34) 20,717 - 21,702 -
Directors’ emoluments 81,979 55,993 98,087 67,657
Auditors’ remuneration [Note 15 (a)] 11,960 7,976 15,775 10,893
Advertising and related expenses 256,904 210,900 308,287 213,710
Donations 20,303 29,184 20,661 29,542
Direct operating expenses on investment property 4,363 2,361 1,556 696
Share issue expenses 2,542 233 2,542 233
Impairment loss on inventory - residential apartment complex (Note 36) - - 8,367 6,813
15 (a) Auditors’ Remuneration
Audit fees and expenses 6,605 5,817 9,308 8,253
Audit related fee and expenses 2,061 1,584 2,709 1,855
Non-audit services 3,294 575 3,294 575
Audit fee and expenses - Other auditors - - 464 210
11,960 7,976 15,775 10,893
16 PERSONNEL EXPENSES
In addition to salaries, personnel expenses include the following :
Contribution to Employees’ Provident Fund 339,475 299,570 365,227 319,533
Contribution to Employees’ Trust Fund 84,869 74,885 91,249 79,767
Provision for employee retirement bene ts is shown separately in Note 17.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 181
Bank Group
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
17 PROVISION FOR EMPLOYEE RETIREMENT BENEFITS
Current service cost 392,326 315,365 392,326 315,365
Interest on obligation 727,413 747,129 727,413 747,129
Expected return on plan assets (520,399) (567,601) (520,399) (567,601)
Amortisation of actuarial losses and transitional liability 283,475 320,789 283,475 320,789
Provision made for gratuities - - 10,927 7,683
882,815 815,682 893,742 823,365
On rst time adoption of Sri Lanka Accounting Standard 16 (Revised 2006) “Employee Bene ts” (SLAS 16), the transitional liability of the Bank as
at 1st January 2008 was Rs 1,417.37 Mn. According to the transitional provisions provided in SLAS 16, the said de cit is being amortised on a
straight line basis over a period of 5 years, beginning from 2008. The annual charge is Rs 283.47 Mn.
The Subsidiaries did not have transitional liabilities as at 1st January 2008.
Bank Group
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
18 PROVISION FOR LOAN LOSSES
Speci c provision for loans and advances* 296,308 665,845 296,308 665,845
General provision for pawning advances 6,050 785 6,050 785
General provision for housing advances 1,146 (891) 1,146 (891)
Additional general provision for performing and
overdue / special mention loans and advances to ful ll statutory requirement 41,313 37,798 41,313 37,798
Total provision for loans and advances [Note 28 (a)] 344,817 703,537 344,817 703,537
Speci c provision for bills of exchange [Note 26 (a)] - 4,270 - 4,270
General provision reversal for bills of exchange [Note 26 (a)] (1,784) (7,136) (1,784) (7,136)
Speci c provision for leases [Note 27 (c)] 46,376 59,702 46,376 59,702
General provision charge / (reversal) for leases [Note 27 (c)] 91,900 (52,146) 91,900 (52,146)
Total provision made during the year 481,309 708,227 481,309 708,227
*Speci c provisions against pawning and housing advances are included in speci c provision for loans and advances.
19 SHARE OF PROFIT/(LOSS) OF ASSOCIATES (NET OF INCOME TAX)
Share of pro t of Associates before income tax 1,959 11,392
Income tax expense on share of pro t of Associates (4,388) (3,712)
Share of pro t / (loss) of Associates after income tax (2,429) 7,680
20 INCOME TAX EXPENSE
Recognised in the Income Statement
20 (a) Current Tax Expense
Current tax on pro ts for the year [Note 20 (e)] 2,555,321 1,791,919 2,660,366 1,838,850
Over provision in the prior years reversed (102,377) (295,713) (109,388) (295,713)
Under provision in the prior years charged - - - 3,029
2,452,944 1,496,206 2,550,978 1,546,166
20 (b) Deferred Tax Expense
Adjustment to opening balance [Note 43 (b)] - - 156 -
Adjustment to opening deferred tax asset / liability resulting from
change in tax rate [Note 43 (a), (b) and (c)] (172,191) - (172,045) -
Deferred tax asset recognised / (reversed) during the year [Note 43 (b)] (132,037) 3,189 (132,908) 1,414
Charge to deferred tax liability [Note 43 (a)] 118,768 66,472 118,658 65,884
(185,460) 69,661 (186,139) 67,298
Total income tax expense 2,267,484 1,565,867 2,364,839 1,613,464
182 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
20 INCOME TAX EXPENSE (Contd.)
Group
For the year ended 31st December 2010 2009
Rs 000 Rs 000
20 (c) Current Tax on Pro ts of Subsidiaries
HNB Assurance PLC 28,208 29,473
20 (d) Current Tax on Pro ts of Joint Venture
Acuity Partners (Pvt) Ltd and Subsidiaries 76,837 17,458
Total 105,045 46,931
Bank Group
For the year ended 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
20 (e) Reconciliation of Accounting Pro t and Taxable Income
Pro t before taxation 6,731,451 5,917,519 7,251,667 6,166,824
Disallowable expenses 10,912,338 9,539,995 11,121,842 9,678,027
Allowable expenses (5,927,023) (5,079,875) (5,971,227) (5,120,266)
Tax exempt income (4,304,389) (3,658,607) (4,620,965) (3,807,637)
Tax losses utilised [Note 20 (f)] - (1,459,754) (43,638) (1,505,102)
Tax loss incurred during the year - - (19,920) (21,305)
Taxable income 7,412,377 5,259,278 7,717,759 5,390,541
Of which,
Taxable income at 35% 6,887,878 4,757,227 7,170,775 4,888,490
Taxable income at 20% 524,499 502,051 546,984 502,051
7,412,377 5,259,278 7,717,759 5,390,541
Income tax provision for the year is made up of the following:
Income tax at 35% 2,410,757 1,665,027 2,509,771 1,710,972
Income tax at 20% 104,900 100,410 109,397 100,410
2,515,657 1,765,437 2,619,168 1,811,382
Social Responsibility Levy at 1.5% on current year’s income tax liability 37,735 26,482 39,269 27,468
Social Responsibility Levy on dividend paid during the year 1,929 - 1,929 -
Current tax on pro ts for the year 2,555,321 1,791,919 2,660,366 1,838,850
E ective tax rate 37.96% 30.28% 36.69% 29.82%
E ective tax rate of current tax expense [Note 20 (a)] 36.44% 25.28% 35.18% 25.07%
E ective tax rate of total income tax expense 33.68% 26.46% 32.61% 26.16%
20 (f) Tax Losses Brought Forward and Utilised during the Year
Tax losses brought forward - - 292,923 311,973
Adjustments for brought forward tax losses - 1,459,754 4,654 1,464,747
Loss incurred during the year - - 19,920 21,305
Tax losses utilised during the year [Note 20 (e)] - (1,459,754) (43,638) (1,505,102)
Tax losses not utilised and carried forward - - 273,859 292,923
20 (g) Hatton National Bank PLC
The Bank’s Domestic Banking Unit (DBU) is liable for taxation on its income from banking operations at the rate of 35% for the year
(2009 - 35%). The taxable income of on shore operations of the Foreign Currency Banking Unit (FCBU) is liable for taxation at the rate of 35% for
the year (2009 - 35%). The taxable income from o shore operations of FCBU is liable for taxation at the rate of 20% for the year (2009 - 20%).
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 183
20 INCOME TAX EXPENSE (Contd.)
20 (h) HNB Assurance PLC
HNB Assurance PLC is liable for income tax at the rate of 35% (2009 - 35%) on its taxable income. Provision has been made in the Financial
Statements accordingly.
20 (i) Sithma Development (Pvt) Ltd
In accordance with the BOI agreement dated 28th December 1994, the pro ts and income of Sithma Development (Pvt) Ltd are exempt from
taxation until Year of Assessment 2014 / 15. After the expiration of the said tax exempt period, the following options are available for the
company for another 15 years;
(a) Income tax payable for the Year of Assessment shall be computed at 2% of the turnover of the Company, or
(b) The provisions of the Inland Revenue laws for the time being in force shall apply to the Company.
In the event the company elects option (a), no deferred tax liability will arise even after the expiration of the tax exempt period. The company
needs to make the election only 90 days prior to the expiration of the said tax exemption period, after evaluating all tax implications prevailing
at that time. Therefore, no provision has been made in the Financial Statements by the company for deferred tax liability which could arise
after the tax exempt period in the event the company elects option (b).
20 (j) Acuity Partners (Pvt) Ltd
Acuity Partners (Pvt) Ltd is liable for income tax at the rate of 35% (2009 - 35%) on its taxable income. Provision has been made in the Financial
Statements accordingly. Subsidiaries of Acuity Partners (Pvt) Ltd other than Lanka Ventures PLC (20%) are liable for income tax at the rate of 35%.
21 EARNINGS PER SHARE
21 (a) Basic Earnings per Share
Basic Earnings per Share has been calculated by dividing the pro t for the year attributable to equity holders of the Bank by the weighted
average number of ordinary shares on issue (both voting and non-voting) during the year, as per the requirements of the Sri Lanka Accounting
Standard 34 - “Earnings per Share”.
21 (b) Diluted Earnings per Share
The calculation of Diluted Earnings per Share as at Balance Sheet date was based on the pro t attributable to equity holders of the Bank by
the weighted average number of ordinary shares outstanding during the year, after adjusting for the e ects of all potentially dilutive weighted
average number of ordinary shares that would be issued on the conversion of all the dilutive ESOPs into ordinary shares.
The details of the options execersied and expired under Employee Share Option Plan during the year are given in Note 46 (b).
Bank Group
For the year ended 31st December 2010 2009 2010 2009
Pro t attributable to equity holders of the Bank (Rs 000) 4,463,967 4,351,652 4,786,770 4,483,277
Weighted average number of ordinary shares during the year
used as the denominator (‘000) for Basic EPS 236,952 235,560 236,952 235,560
Basic Earnings per Share (Rs) 18.84 18.47 20.20 19.03
Pro t attributable to equity holders of the Bank (Rs 000) 4,463,967 4,351,652 4,786,770 4,483,277
Weighted average number of ordinary shares during the year
used as the denominator (‘000) for Basic EPS 236,952 235,560 236,952 235,560
Weighted average number of shares under option (‘000) 3,309 2,695 3,309 2,695
Weighted average number of ordinary shares that would have been
issued at average market price (‘000) (1,727) (2,538) (1,727) (2,538)
Weighted average number of ordinary shares during the year
used as the denominator (‘000) for Diluted EPS 238,534 235,717 238,534 235,717
Diluted Earnings per Share (Rs) 18.71 18.46 20.07 19.02
184 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
22 CASH AND CASH EQUIVALENTS
Local currency in hand 5,541,469 4,791,813 5,567,435 4,807,027
Foreign currency in hand 299,083 388,270 299,083 388,270
Balances with local banks 80,295 43,367 81,407 91,664
Fixed deposits with other banks in local currency 2,000,000 - 2,382,943 276,000
Balances / placements with banks in foreign currency 7,571,480 9,703,739 7,662,330 9,810,177
Money at call and short notice 2,000,000 7,175,000 2,000,000 7,175,000
Placements with banks by FCBU 513,313 5,050,059 513,313 5,050,059
18,005,640 27,152,248 18,506,511 27,598,197
All cash and cash equivalent balances held by the Group entities were available for use by the Group.
23 STATUTORY DEPOSIT WITH CENTRAL BANKS
Statutory deposit with Central Bank of Sri Lanka 12,491,644 11,063,948 12,491,644 11,063,948
Statutory deposit with Central Bank of Oman - - 14,408 14,857
12,491,644 11,063,948 12,506,052 11,078,805
As required by the provisions of Section 93 of the Monetary Law Act, a cash balance is maintained with the Central Bank of Sri Lanka as
explained in Note 4.4. The minimum cash reserve requirement on Rupee deposit liabilities was 7% as at 31st December 2010 (2009 - 7%).
There are no reserve requirement for deposit liabilities of the Foreign Currency Banking Unit and foreign currency deposits liabilities in the
Domestic Banking Unit.
Majan Exchange LLC is required to maintain a deposit of Omani Riyal 50,000 with the Central Bank of Oman (CB Oman) in accordance with its
licensing regulations for exchange houses issued by the CB Oman. Interest is earned at the rate of 2% per annum.
24 DEALING SECURITIES
24 (a) Dealing Securities - Summary
As at 31st December 2010 2009
Cost / Market Cost / Market
Value Value
Rs 000 Rs 000
Quoted shares - Bank [Note 24 (b)] 576,280 39,485
Government of Sri Lanka treasury bills - Bank [Note 24 (c)] 877,998 -
Government of Sri Lanka treasury bonds - Bank [Note 24 (d)] 3,224 -
Dealing Securities - Bank 1,457,502 39,485
Quoted shares - Subsidiaries [Note 24 (e)]* 174,136 40,821
Government of Sri Lanka treasury bills - Joint Venture [Note 24 (f)] 567,210 492,338
Government of Sri Lanka treasury bonds - Joint Venture [ [Note 24 (g)] 305,435 115,087
Dealing securities - Bank 1,457,502 39,485
Dealing Securities - Group 2,504,283 687,731
*HNB Assurance PLC (HNBA) carries it’s dealing securities at cost or market value which ever is lower as explained in Note 4.6.1.
These investments are held by the life fund, therefore any gains relating to these investments can not be taken to the Income Statement.
Accordingly, a gain of Rs 34 Mn arising from adjustment required to the accounting policy of HNBA to be consistant with that of the Bank, had
not been accounted for in the Consolidated Financial Statements.
Dealing securities through the Joint Venture reported above represent only 50% of the total dealing securities of the Joint Venture, being the
shareholding of the Bank on the same.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 185
24 DEALING SECURITIES (Contd.)
24 (b) Quoted Shares Held by the Bank
As at 31st December 2010 2009
No of Cost of % of Market No of Cost of Market
Ordinary Investment Total Value Ordinary Investment Value
Shares Rs 000 Cost Rs 000 Shares Rs 000 Rs 000
Banks, Finance and Insurance
Ceylinco Insurance PLC (Non Voting) 4,000 700 0.14 1,080 - - -
Lanka Orix Leasing Company PLC 225,000 29,322 5.84 28,755 - - -
National Development Bank PLC 100,000 36,253 7.21 34,950 - - -
Sampath Bank PLC 201,738 40,053 7.97 54,853 - - -
Seylan Bank PLC 533,400 40,230 8.01 52,167 - - -
Beverage, Food and Tobacco
Lion Brewery Ceylon PLC 450,000 74,215 14.77 83,295 - - -
Diversi ed Holdings
Aitken Spence PLC 450,000 75,766 15.08 76,455 - - -
John Keells Holdings PLC 282,900 77,644 15.45 84,417 - - -
Health Care
Lanka Hospitals PLC 298,742 7,513 1.50 9,471 2,078,142 52,265 39,485
Nawaloka Hospitals PLC 7,673,300 29,792 5.93 28,391 - - -
Manufacturing
Ceylon Grain Elevators PLC 352,800 18,062 3.59 26,354 - - -
Tokyo Cement PLC 377,500 20,014 3.98 20,763 - - -
Telecommunications
Dialog Axiata PLC - - - - 50 1 -
Trading
Browns & Co PLC 305,100 52,778 10.50 75,329 - - -
Odd lots and delisted shares 135 0.03 - 135 -
Total 502,477 100.00 576,280 - 52,401 39,485
Gain / (loss) from marked to market valuation 73,803 - (12,916) -
Total Quoted Shares - Bank 576,280 576,280 39,485 39,485
24 (c) Government of Sri Lanka Treasury Bills Held by the Bank
As at 31st December 2010 2009
Cost of Market Cost of Market
Investment Value Investment Value
Rs 000 Rs 000 Rs 000 Rs 000
Face Value Year of Discounted
Maturity Value (Rs 000)
Rs 900 Mn 2011 874,589 874,589 877,998 - -
Gain from marked to market valuation 3,409 - - -
Total Government of Sri Lanka Treasury Bills - Bank 877,998 877,998 - -
186 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
24 DEALING SECURITIES (Contd.)
24 (d) Government of Sri Lanka Treasury Bonds Held by the Bank
As at 31st December 2010 2009
Cost of Market Cost of Market
Investment Value Investment Value
Rs 000 Rs 000 Rs 000 Rs 000
Face Value Year of Discounted
Maturity Value (Rs 000)
Rs 3 Mn 2015 3,298 3,298 3,224 - -
Loss from marked to market valuation (74) - - -
Total Government of Sri Lanka Treasury Bonds - Bank 3,224 3,224 - -
24 (e) Quoted Shares Held by the Subsidiaries
As at 31st December 2010 2009
No of Cost of % of Market No of Cost of Market
Ordinary Investment Total Value Ordinary Investment Value
Shares Rs 000 Cost Rs 000 Shares Rs 000 Rs 000
Commercial Bank of Ceylon PLC 67,050 17,046 9.79 17,426 19,500 2,535 3,695
Hemas Holdings PLC 321,000 14,106 8.10 14,285 4,200 447 516
John Keells Holdings PLC 81,193 20,472 11.76 24,228 40,393 5,310 6,927
Dialog Axiata PLC 217,500 5,243 3.01 2,567 217,500 5,243 1,577
Asian Hotels & Properties PLC 5,000 167 0.10 970 35,500 1,426 3,355
National Development Bank PLC 17,100 2,646 1.52 5,976 36,100 4,489 7,437
Royal Ceramics Lanka PLC 12,000 633 0.36 3,659 46,000 2,000 3,059
Sta ord Hotels PLC - - - - 123,500 3,181 3,396
Chemical Industries (Colombo) PLC 116,500 10,905 6.26 16,392 63,600 3,882 4,007
ACL Cables PLC 25,000 1,414 0.81 2,128 36,700 2,055 2,817
Dipped Products PLC 19,500 1,829 1.05 2,334 19,500 1,829 1,677
Colombo Dockyard PLC - - - - 6,000 974 1,469
Hemas Power PLC - - - - 65,000 1,300 1,268
Cargills Ceylon PLC - - - - 12,000 712 783
Renuka Agri Foods PLC 309,100 815 0.47 2,071 318,300 716 716
Aitken Spence Hotels Holdings PLC 23,375 820 0.47 2,471 4,500 1,073 1,212
DFCC Bank 43,000 5,390 3.10 8,609 24,700 3,649 4,125
Riverina Hotels PLC 52,000 5,060 2.91 5,476 - - -
The Lighthouse Hotel PLC 21,400 1,433 0.82 1,348 - - -
Sampath Bank PLC 92,724 19,945 11.44 25,212 - - -
Nations Trust Bank PLC 180,000 11,767 6.75 15,012 - - -
Singer Finance (Lanka) PLC 4,400 66 0.04 66 - - -
Richard Pieris and Company PLC 325,000 2,449 1.41 3,413 - - -
Hayleys PLC 22,000 7,258 4.17 7,590 - - -
Haycarb PLC 20,500 3,547 2.04 3,454 - - -
Chevron Lubricants Lanka PLC 24,000 3,619 2.08 3,828 - - -
Tokyo Cement Company (Lanka) PLC 304,512 12,764 7.33 16,748 - - -
Kelani Cables PLC 44,300 5,035 2.89 4,652 - - -
ACL Plastics PLC 3,600 372 0.21 586 - - -
Laugfs Gas PLC - (Voting Shares) 26,700 614 0.35 692 - - -
Laugfs Gas PLC - (Non Voting Shares) 19,200 288 0.17 355 - - -
PC House PLC 178,800 1,967 1.13 2,020 - - -
Renuka Holdings PLC 70,000
2,970 1.71 4,333 - - -
Asiri Hospital Holdings PLC 928,200 7,990 4.59 8,168 - - -
Dolphin Hotels PLC 149,900 5,506 3.16 9,174 - - -
Total Quoted Shares - Subsidiaries 174,136 100.00 215,243 40,821 48,036
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 187
24 DEALING SECURITIES (Contd.)
24 (f) Government of Sri Lanka Treasury Bills held through Joint Venture
As at 31st December 2010 2009
Cost of Market Cost of Market
Investment Value Investment Value
Rs 000 Rs 000 Rs 000 Rs 000
Face Value Year of Discounted
Maturity Value (Rs 000)
Rs 587 Mn 2011 567,210
Total Government of Sri Lanka Treasury Bills - Joint Venture 567,210 567,834 492,338 492,338
24 (g) Government of Sri Lanka Treasury Bonds held through Joint Venture
As at 31st December 2010 2009
Cost of Market Cost of Market
Investment Value Investment Value
Rs 000 Rs 000 Rs 000 Rs 000
Face Value Year of Discounted
Maturity Value (Rs 000)
Rs 144 Mn 2011 145,248
Rs 17 Mn 2012 16,798
Rs 1 Mn 2013 958
Rs 50 Mn 2014 47,566
Rs 100 Mn 2015 94,865
Total Government of Sri Lanka Treasury Bonds - Joint Venture 305,435 305,435 115,087 115,122
25 NON CURRENT ASSETS HELD FOR SALE
Bank Group
As at 31st December 2010 2009 2010 2009
Carrying Carrying Carrying Carrying
amount amount amount amount
Rs 000 Rs 000 Rs 000 Rs 000
Balance as at 1st January - 1,455 2,875 1,455
Transferred to property, plant and equipment - (1,455) - (1,455)
Add : Additions - - - 2,875
Balance as at 31st December - - 2,875 2,875
25 (a) Freehold Land*
2010 2009
Extent Cost of land Extent Cost of land
(perches) Rs 000 (perches) Rs 000
Lot - X, Survey plan - 6448, o Edirisinghe Rd, Mirihana* 10 2,875 10 2,875
Total - Group 2,875 2,875
* Value of the above land (10 perches) amounted to Rs 5.75 Mn as at 31st January 2011 based on the valuation carried out by
Messrs K C B Condegama AIV (Sri Lanka). As this land is held by Acuity Partners (Pvt) Ltd, the Joint Venture, only 50% of the value is taken to the
Consolidated Financial Statements.
188 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
26 BILLS OF EXCHANGE
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Inland bills 508,138 500,790 508,138 500,790
Import bills 240,343 358,903 240,343 358,903
Export bills 584,411 633,750 584,411 633,750
1,332,892 1,493,443 1,332,892 1,493,443
Foreign Currency Banking Unit bills 164,427 287,850 164,427 287,850
Gross bills of exchange 1,497,319 1,781,293 1,497,319 1,781,293
Provision for bills of exchange
Speci c provision [Note 26 (a)] (74,458) (305,249) (74,458) (305,249)
General provision [Note 26 (a)] (12,571) (14,355) (12,571) (14,355)
Total provision for bills of exchange (87,029) (319,604) (87,029) (319,604)
Bills of exchange after provision 1,410,290 1,461,689 1,410,290 1,461,689
Less : Interest in suspense [Note 26 (b)] 9,160 14,199 9,160 14,199
Net bills of exchange 1,401,130 1,447,490 1,401,130 1,447,490
26 (a) Movement in Provision for Bills of Exchange - Bank / Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Speci c Speci c General General
Balance as at 1st January 305,249 297,546 14,355 21,491
Exchange rate variance on foreign currency provision (2,042) 783 - -
Additional provision made / (reversed) during the year (Note 18) - 4,270 (1,784) (7,136)
Recoveries made during the year (385) - - -
Transfer from loan loss provision [Note 28 (a)]* - 2,650 - -
Bills written o against provision (228,364) - - -
Balance as at 31st December 74,458 305,249 12,571 14,355
*Speci c provisions in respect of bills which were in loan loss provision were transferred to provision for bills of exchange in 2009.
26 (b) Movement in Interest in Suspense for Bills of Exchange - Bank / Group
As at 31st December 2010 2009
Rs 000 Rs 000
Balance as at 1st January 14,199 5,902
Interest suspended during the year 2,356 8,937
Interest recovered (4,773) (640)
Interest written o (2,622) -
Balance as at 31st December [Note 28 (g)] 9,160 14,199
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 189
27 LEASE RECEIVABLES
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Gross lease rentals receivable 33,736,872 28,192,889 33,736,872 28,192,889
Initial rentals received (85,923) (92,363) (85,923) (92,363)
Lease rentals received (16,357,491) (16,469,523) (16,357,491) (16,469,523)
Total lease rentals receivable 17,293,458 11,631,003 17,293,458 11,631,003
Unearned lease income (3,374,141) (2,232,361) (3,374,141) (2,232,361)
Gross lease receivable 13,919,317 9,398,642 13,919,317 9,398,642
Provisions for lease receivable
Speci c [Note 27 (c)] (197,631) (271,867) (197,631) (271,867)
General [Note 27 (c)] (274,433) (182,533) (274,433) (182,533)
Net lease receivable 13,447,253 8,944,242 13,447,253 8,944,242
Lease receivable within one year [Note 27 (a)] 4,630,492 3,931,110 4,630,492 3,931,110
Lease receivable after one year [Note 27 (b)] 8,816,761 5,013,132 8,816,761 5,013,132
13,447,253 8,944,242 13,447,253 8,944,242
27 (a) Lease Receivable within One Year
Total lease rentals receivable within one year from
Balance Sheet date 6,637,506 5,597,641 6,637,506 5,597,641
Unearned lease income (1,714,883) (1,314,440) (1,714,883) (1,314,440)
Provision for lease receivable
Speci c [Note 27 (c)] (197,631) (271,867) (197,631) (271,867)
General (94,500) (80,224) (94,500) (80,224)
Balance as at 31st December 4,630,492 3,931,110 4,630,492 3,931,110
27 (b) Lease Receivable after One Year
Total lease rentals receivable after one year from
Balance Sheet date 10,655,952 6,033,362 10,655,952 6,033,362
Unearned lease income (1,659,258) (917,921) (1,659,258) (917,921)
Provision for lease receivable - General (179,933) (102,309) (179,933) (102,309)
Balance as at 31st December 8,816,761 5,013,132 8,816,761 5,013,132
There were no lease receivables beyond ve years.
27 (c) Movement in Provision for Lease Receivable - Bank / Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Speci c Speci c General General
Balance as at 1st January 271,867 256,965 182,533 234,679
Exchange rate variance on foreign currency provision (7) - - -
Additional provision made / (reversed) during the year (Note 18) 46,376 59,702 91,900 (52,146)
Recoveries made during the year (69,265) (43,873) - -
Fully provided leases written o (51,340) (927) - -
Balance as at 31st December 197,631 271,867 274,433 182,533
190 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
28 LOANS AND ADVANCES
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Sri Lanka Rupee loans and advances
Overdrafts 40,673,843 32,264,297 40,264,282 31,467,898
Short term loans 11,223,962 9,704,995 11,223,961 9,704,995
Trust receipts 7,461,863 6,347,877 7,461,863 6,347,877
Packing credit loans 211,285 252,283 211,285 252,283
Sta loans 8,594,691 7,556,419 8,728,096 7,665,980
Term loans 54,108,307 46,850,546 52,333,347 44,850,546
Housing loans 17,987,441 17,551,280 17,987,441 17,551,280
Pawning advances 27,965,219 21,914,906 27,965,219 21,914,906
Foreclosed properties [Note 28 (h)] 25,378 26,099 25,378 26,099
168,251,989 142,468,702 166,200,872 139,781,864
Foreign currency loans and advances
Overdrafts 2,273,268 1,458,805 2,273,268 1,458,805
Short term loans 571,715 592,436 571,715 592,436
Trust receipts 920,755 2,478,197 920,755 2,478,197
Packing credit loans 5,755,495 5,053,984 5,755,495 5,053,984
Term loans 15,584,006 12,725,573 15,584,006 12,725,573
Housing loans 697,183 611,822 697,183 611,822
Foreclosed properties [Note 28 (h)] 437,905 450,627 437,905 450,627
26,240,327 23,371,444 26,240,327 23,371,444
Sri Lanka Rupee and foreign currency loans and advances
194,492,316 165,840,146
192,441,199 163,153,308
Less:
Speci c provision for loans and advances [Note 28 (b) i] 3,157,152 3,348,876 3,157,152 3,348,876
Speci c provision for foreclosed properties [Note 28 (b) i] 448,778 461,768 448,778 461,768
General provision for pawning advances 27,965 21,915 27,965 21,915
General provision for housing loans 36,984 35,838 36,984 35,838
Additional general provision for performing
and overdue / special mention
loans and advances to ful ll statutory requirement [Note 28 (b) ii] 1,099,004 1,062,463 1,099,004 1,062,463
Total provision for loan losses [Note 28 (a)] 4,769,883 4,930,860 4,769,883 4,930,860
Loans and advances after provision 189,722,433 160,909,287 187,671,316 158,222,448
Less: Interest in suspense [Note 28 (f)] 1,688,582 1,661,926 1,688,582 1,661,926
Net loans and advances 188,033,851 159,247,361 185,982,734 156,560,522
28 (a) Movement in Provision for Loan Losses
Balance as at 1st January 4,930,860 7,329,827 4,930,860 7,329,827
Exchange rate variance on foreign currency provision (47,215) 87,577 (47,215) 87,577
Provision made during the year (Note 18) 344,817 703,537 344,817 703,537
Fully provided loans written o (106,796) (2,494,733) (106,796) (2,494,733)
Recoveries made during the year (351,783) (692,698) (351,783) (692,698)
Transfer to bills of exchange provision [Note 26 (a)] - (2,650) - (2,650)
Balance as at 31st December 4,769,883 4,930,860 4,769,883 4,930,860
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 191
28 LOANS AND ADVANCES (Contd.)
As at 31st December 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
28 (b) Total Provision for Loan Losses - Bank / Group
28 (b) i Speci c Provision
Bills of exchange [Note 26 (a)] 74,458 305,249
Loans and advances (Note 28) 3,157,152 3,348,876
Foreclosed properties 448,778 461,768
Lease receivable within one year [Note 27 (c)] 197,631 3,878,019 271,867 4,387,760
28 (b) ii General Provision
Bills of Exchange [Note 26(a)] 12,571 14,355
Loans and advances (pawning and housing loans) 64,949 57,753
Lease receivable within one year [Note 27 (a)] 94,500 80,224
Lease receivable after one year [Note 27 (b)] 179,933 102,309
Additional general provision for performing and
overdue / special mention loans and advances to
ful ll statutory requirement 1,099,004 1,450,957 1,062,463 1,317,104
Total provision [Note 26 (a), 27 (c) and 28 (a)] 5,328,976 5,704,864
As explained in Note 4.8.3 (b), the Bank makes general provision for potential losses not speci cally identi ed but which experience indicates
are present in the portfolio of pawning, lease receivable and Shanthi Housing Loans. A further provision of Rs 35.01 Mn (2009 - Rs 30.7 Mn) was
made during the year along with the above provisions to meet the regulatory requirement. The total general provision of Rs 1,450.9 Mn
(2009 - Rs 1,317.1 Mn) was 0.9% (2009 - 1%) of the total performing and overdue loans and advances, net of interest in suspense as at the
Balance Sheet date and was equal to the regulatory requirement (0.9%) as at 31st December 2010 (2009 - 1%).
28 (c) Non-performing Lending Portfolio
Loans, advances, bills of exchange and nance leases are classi ed as non-performing as explained in Note 4.8.1. The criteria used for the
classi cation of lending portfolio of the Bank as non performing is set out below. This is in accordance with the direction issued by the Central
Bank of Sri Lanka on 8th May 2008 on “Classi cation of Loans and Advances, Income Recognition and Provisioning”.
In accordance with Section 4(7)(I) of Banking Act Direction No. 3 of 2008, Banks shall reclassify Non Performing Loans and Advances (NPL) as
Performing Loans and Advances (PLA) if interest and principal in arrears are paid in full by the borrower. However, this direction was replaced
by Section 2 of Banking Act Direction No 9 of 2008 which relaxed the basis for reclassi cation of NPL to PLA even when a part of arrears
is repaid. This direction which became e ective from 31st December 2008 till 31st December 2009, was subsequently extended to 31st
December 2010 by the Direction No 6 of 2009. However, the Bank continued to apply the stringent policy of reclassi cation of NPA to PLA,
only upon repayment of all arrears.
28 (c) i CBSL Classi cation of Advances into Non-performing Lending Portfolio
Type of facility Point of classi cation
Overdrafts Outstanding balance in excess of sanctioned limit continuously for a period of
90 days or more
Credit facilities repayable in monthly installments Three consecutive installments, principal and / or interest have not been paid
Credit facilities payable in quarterly / half yearly installments An installment is not paid within 90 days from the due date
Credit facilities repayable in one installment Payment is not made within 90 days from the end of the agreed period or the
(bullet payments) due date.
Credit cards Minimum payment is in arrears for 90 days from the due date
192 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
28 LOANS AND ADVANCES (Contd.)
28 (c) Non-performing Lending Portfolio
(Contd.)
28 (c) ii Categorisation of Advances within Non-performing Lending Portfolio
Categorisation of NPA
Type of facility Determinant Overdue / Substandard Doubtful Loss
special mention
Overdrafts Period that the Equal to or more than Equal to 180 days Equal to or more than Equal to 540 days
outstanding 90 days but less than or more but less than 360 days but less or more
is in excess of the 180 days 360 days than 540 days
sanctioned limit
continuously
Credit facilities No of installments, 3 installments or more 6 installments or more 12 installments or more Equal to
repayable in monthly principal and / or interest but less than but less than but less than 18 installments
installments due and unpaid 6 installments 12 installments 18 installments or more
Credit cards No of days minimum 90 days or more 120 days or more 180 days or more Equal to 240 days
payment is in arrears but less than 120 days but less than 180 days but less than 240 days or more
for from due date
Other credit facilities No of days payments 90 days or more 180 days or more 360 days or more Equal to 540 days
are in arrears from the but less than 180 days but less than 360 days but less than 540 days or more
due date
Provision for possible loan losses are made on the basis of a continuous review of all advances to customers, in accordance with the Sri Lanka
Accounting Standard 23, “Revenue Recognition and Disclosures in Financial Statements of Banks” and the directions issued by the Central Bank
of Sri Lanka and disclosed in the Financial Statements of the Bank, after considering the values of the collateral obtained against the respective
non performing loans and advances.
Valuation of collateral is performed based on the direction issued by the Central Bank of Sri Lanka as explained in Note 28 (c) iii.
28 (c) iii Valuation of Securities for Provisioning Purposes
As per Direction No 3 of 2008 dated 8th May 2008 issued by the Central Bank of Sri Lanka on Classi cation of Loans and Advances, Income
recognition and provisioning, the initial and progressive discounts that need to be applied to the Forced Sale Value (FSV) of immovable
property held as collateral are as follows:
Category % of FSV of immovable property that can be considered
as the value of security
Freehold Property Leasehold Property
At the rst time of provisioning 75 60
Period in the loss section
Less than 12 months 75 60
More than 12 but less than 24 months 60 50
More than 24 but less than 36 months 50 40
More than 36 but less than 48 months 40 30
More than 48 months Property should be reviewed
on a regular basis and
discounted further at the
discretion of the bank’s
management Nil
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 193
28 LOANS AND ADVANCES (Contd.)
28 (d) Asset Quality - Non Performing Lending Portfolio - Bank / Group
As at 31st December 2010 2009
Rs 000 Rs 000
Bills of exchange 100,559 381,105
Loans and advances 9,927,769 11,092,486
Foreclosed properties 463,283 476,726
Lease receivable 595,641 523,916
Gross non-performing lending portfolio 11,087,252 12,474,233
Less: Speci c provisions
Bills of exchange 74,458 305,249
Loans and advances 3,157,152 3,348,876
Foreclosed properties 448,778 461,768
Lease receivable 197,631 3,878,019 271,867 4,387,760
7,209,233 8,086,473
Less: Interest in suspense [Note 28 (f)] 1,697,742 1,676,125
Net non-performing lending portfolio 5,511,491 6,410,348
NPA ratio 4.51% 6.15%
NPA ratio (revised) 4.09% 5.43%
Net non-performing lending portfolio of Rs 5,511.5 Mn (2009 - Rs 6,410.3 Mn) is secured by immovable assets, movable assets and other
registered securities, approved by the Central Bank of Sri Lanka for provisioning purposes. The values of the immovable properties are
discounted for provisioning purposes as explained in Note 28 (c) iii.
NPA ratio (revised) refers to the NPA ratio of the Bank in the event the Bank had applied Section 2 of the Direction referred to in Note 28 (c).
28 (e) Credit Risk
28 (e) i Collateral Wise Analysis of Gross Non-performing Lending Portfolio
The Bank holds collateral against its lending portfolio in the form of mortgage interest over property, other registered securities and assets.
Estimation of fair values / realisable values are based on the value of collateral assessed at the time of lending and generally are not updated
except when a loan is individually assessed as non-performing.
As at 31st December 2010 2009
Rs 000 % Rs 000 %
Secured by immovable assets 7,111,325 64 8,905,849 71
Secured by movable assets 697,181 6 623,947 5
Secured by cash / shares 110,691 1 338,216 3
Other securities 1,729,624 16 1,707,107 13
Clean 1,413,599 13 812,967 7
Pawning 24,832 - 86,147 1
11,087,252 100 12,474,233 100
194 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
28 LOANS AND ADVANCES (Contd.)
28 (e) Credit Risk (Contd.)
28 (e) ii Sector / Product Wise Analysis of Gross Lending Portfolio - Bank 2010
The Bank monitors concentration of credit risk by sectors. An analysis of concentration of credit risk as at the Balance Sheet date is shown
below:
Sector / Overdrafts Short Term Medium Term Long Term Pawning Leasing Total
Type of Loan Loans Loans Loans
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 %
Agriculture and shing 4,341,287 7,469,118 6,117,361 571,954 - 780,835 19,280,555 9.25
Manufacturing 5,399,197 9,668,639 8,143,561 1,079,785 - - 24,291,182 11.66
Tourism 720,931 852,611 6,189,300 4,426,970 - - 12,189,812 5.85
Transport 656,604 639,381 2,769,542 346,124 - 7,580,480 11,992,131 5.75
Construction 2,565,157 2,198,428 5,921,233 20,238,811 - 2,856,613 33,780,242 16.21
Traders 12,391,709 9,684,827 8,385,630 2,243,420 - 163,070 32,868,656 15.76
New economy 451,803 261,615 961,572 141,912 - 807,093 2,623,995 1.26
Financial and
business services 3,754,775 2,727,599 8,046,167 1,053,103 - - 15,581,644 7.48
Infrastructure 1,447,533 518,119 1,094,962 2,539,863 - - 5,600,477 2.69
Other services 8,545,519 1,982,822 1,209,366 529,386 - 1,508,725 13,775,818 6.61
Other customers 2,672,596 2,260,439 1,135,541 2,170,825 27,965,219 222,501 36,427,121 17.48
Total 42,947,111 38,263,598 49,974,235 35,342,153 27,965,219 13,919,317 208,411,633 100.00
Gross loans and advances (Note 28) 194,492,316 93.32
Gross lease receivable (Note 27) 13,919,317 6.68
208,411,633 100.00
The “other customers” category comprises the following advances:
Credit card - 1,877,220 - - - - 1,877,220 5.15
Pawning* - - - - 27,965,219 - 27,965,219 76.77
Others 2,672,596 383,219 1,135,541 2,170,825 - 222,501 6,584,682 18.08
Total 2,672,596 2,260,439 1,135,541 2,170,825 27,965,219 222,501 36,427,121 100.00
* Pawning includes facilities extended to agriculture and shing sectors amounting to Rs 6.057 Mn.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 195
28 LOANS AND ADVANCES (Contd.)
28 (e) Credit risk (Contd.)
28 (e) iii Sector / Product Wise Analysis of Gross Lending Portfolio - Bank 2009
Sector / Overdrafts Short Term Medium Term Long Term Pawning Leasing Total
Type of Loan Loans Loans Loans
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 %
Agriculture and shing 3,732,097 3,423,359 3,948,907 5,627,242 - 1,044,203 17,775,808 10.14
Manufacturing 4,910,797 11,742,404 6,397,205 1,646,247 - 186,437 24,883,090 14.20
Tourism 2,547,010 1,233,348 3,564,879 3,962,657 - 310,300 11,618,194 6.63
Transport 411,868 594,295 885,143 829,108 - 2,844,678 5,565,092 3.18
Construction 5,017,161 3,377,520 8,022,185 14,681,988 - 295,461 31,394,315 17.92
Traders 9,043,564 6,081,538 2,514,654 2,809,181 - 849,160 21,298,097 12.14
New economy 322,333 304,632 2,358,963 239,930 - 511,206 3,737,064 2.13
Financial and
business services 1,197,718 2,596,828 3,830,985 1,963,048 - 249,890 9,838,469 5.62
Infrastructure 1,408,241 639,812 274,010 1,373,305 - 123,345 3,818,713 2.18
Other services 4,200,351 4,591,650 2,163,813 5,909,034 - 2,863,655 19,728,503 11.26
Other customers 931,962 2,327,408 233,464 53,396 21,914,906 120,307 25,581,443 14.60
Total 33,723,102 36,912,794 34,194,208 39,095,136 21,914,906 9,398,642 175,238,788 100.00
Gross loans and advances (Note 28) 165,840,146 94.64
Gross lease receivable (Note 27) 9,398,642 5.36
175,238,788 100.00
The “other customers” category comprises the following advances:
Credit card - 1,942,243 - - - - 1,942,243 7.59
Pawning - - - - 21,914,906 - 21,914,906 85.67
Others 931,962 385,165 233,464 53,396 - 120,307 1,724,294 6.74
Total 931,962 2,327,408 233,464 53,396 21,914,906 120,307 25,581,443 100.00
196 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
28 LOANS AND ADVANCES (Contd.)
28 (e) Credit Risk (Contd.)
28 (e) iv Sector / Product Wise Analysis of Gross Lending Portfolio - Group 2010
Sector / Overdrafts Short Term Medium Term Long Term Pawning Leasing Total
Type of Loan Loans Loans Loans
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 %
Agriculture and Fishing 4,341,287 7,469,118 6,117,361 571,954 - 780,835 19,280,555 9.34
Manufacturing 5,399,197 9,668,639 8,143,561 1,079,785 - - 24,291,182 11.77
Tourism 720,931 852,611 6,189,300 4,426,970 - - 12,189,812 5.91
Transport 656,604 639,381 2,769,542 346,124 - 7,580,480 11,992,131 5.81
Construction 2,155,596 2,198,428 5,921,233 18,463,851 - 2,856,613 31,595,721 15.31
Traders 12,391,709 9,684,827 8,385,630 2,243,420 - 163,070 32,868,656 15.93
New Economy 451,803 261,615 961,572 141,912 - 807,093 2,623,995 1.27
Financial and Business Services 3,754,775 2,727,599 8,046,167 1,053,103 - - 15,581,644 7.55
Infrastructure 1,447,533 518,119 1,094,962 2,539,863 - - 5,600,477 2.71
Other Services 8,545,519 1,982,822 1,209,366 529,386 - 1,508,725 13,775,818 6.68
Other Customers 2,672,596 2,260,439 1,268,945 2,170,825 27,965,219 222,501 36,560,525 17.72
Total 42,537,550 38,263,598 50,107,639 33,567,193 27,965,219 13,919,317 206,360,516 100.00
Gross loans and advances (Note 28) 192,441,199 93.25
Gross lease receivable (Note 27) 13,919,317 6.75
206,360,516 100.00
Credit card - 1,877,220 - - - - 1,877,220 5.13
Pawning - - - - 27,965,219 - 27,965,219 76.49
Other 2,672,596 383,219 1,268,945 2,170,825 - 222,501 6,718,086 18.38
Total 2,672,596 2,260,439 1,268,945 2,170,825 27,965,219 222,501 36,560,525 100.00
* Pawning includes facilities extended to agriculture and shing sectors amounting to Rs 6.057 Mn.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 197
28 LOANS AND ADVANCES (Contd.)
28 (e) Credit Risk (Contd.)
28 (e) v Sector / Product Wise Analysis of Gross Lending Portfolio - Group 2009
Sector / Overdrafts Short Term Medium Term Long Term Pawning Leasing Total
Type of Loan Loans Loans Loans
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 %
Agriculture and shing 3,732,097 3,423,359 3,948,907 5,627,242 - 1,044,203 17,775,808 10.28
Manufacturing 4,910,797 11,742,404 6,397,205 1,646,247 - 186,437 24,883,090 14.38
Tourism 2,547,010 1,233,348 3,564,879 3,962,657 - 310,300 11,618,194 6.71
Transport 411,868 594,295 885,143 829,108 - 2,844,678 5,565,092 3.42
Construction 4,240,921 3,377,520 8,022,185 12,681,988 - 295,461 28,618,075 16.60
Traders 9,043,564 6,081,538 2,514,654 2,809,181 - 849,160 21,298,097 12.31
New economy 322,333 304,632 2,358,963 239,930 - 511,206 3,737,064 2.16
Financial and
business services 1,177,559 2,596,828 3,830,985 1,963,048 - 249,890 9,818,310 5.67
Infrastructure 1,408,241 639,812 274,010 1,373,305 - 123,345 3,818,713 2.21
Other services 4,200,351 4,591,650 2,163,813 5,909,034 - 2,863,655 19,728,503 11.40
Other customers 931,962 2,327,408 343,025 53,396 21,914,906 120,307 25,691,004 14.85
Total 32,926,703 36,912,794 34,303,769 37,095,136 21,914,906 9,398,642 172,551,950 100.00
Gross loans and advances (Note 28) 163,153,308 94.55
Gross lease receivable (Note 27) 9,398,642 5.45
172,551,950 100.00
The “other customers” category comprises the following advances:
Credit card - 1,942,243 - - - - 1,942,243 7.56
Pawning - - - - 21,914,906 - 21,914,906 85.30
Others 931,962 385,165 343,025 53,396 - 120,307 1,833,855 7.14
Total 931,962 2,327,408 343,025 53,396 21,914,906 120,307 25,691,004 100.00
198 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
28 LOANS AND ADVANCES (Contd.)
As at 31st December 2010 2009
Rs 000 Rs 000
28 (f) Movement in Interest in Suspense for Loans - Bank / Group
Balance as at 1st January 1,661,926 1,244,823
Interest suspended 1,962,086 2,150,512
Interest recovered (1,924,285) (1,699,867)
Interest written o (11,145) (33,542)
Balance as at 31st December [Note 28 (g)] 1,688,582 1,661,926
28 (g) Total Interest in Suspense - Bank / Group
Bills of exchange [Note 26 (b)] 9,160 14,199
Loans and advances [Note 28 (f)] 1,688,582 1,661,926
Total interest in suspense 1,697,742 1,676,125
As a policy, the Bank seals o interest on non-performing loans and advances after one year of classi cation into the loss category. However, at
the time of recovery, further interest on such advances is calculated from the date on which interest was sealed o .
28 (h) Movement in Foreclosed Properties - Bank / Group
As at 31st December 2010 2009
Rs 000 Rs 000
Balance as at 1st January 14,958 15,142
Disposals during the year (721) (2,977)
Exchange translation 436 183
Provision during the year (889) -
Provision reversed during the year 721 2,610
Balance as at 31st December 14,505 14,958
The total of foreclosed properties and related provisions
have been classi ed under loans and advances
Sri Lanka Rupee loans and advances 25,378 26,099
Foreign currency loans and advances 437,905 450,627
Speci c provision for foreclosed properties [Note 28 (i)] (448,778) (461,768)
14,505 14,958
28 (i) Movement in Provision for Foreclosed Properties - Bank / Group
Balance as at 1st January 461,768 459,046
Exchange rate variance in foreign currency provision (13,158) 5,332
Provision during the year 889 -
Recoveries made during the year (721) (2,610)
Balance as at 31st December 448,778 461,768
28 (j) Loans and Advances to Kabool Lanka (Pvt) Ltd
The Bank had an exposure of Rs 3.0 Bn to Kabool Lanka (Pvt) Ltd as at 29th December 2009, against which a provision of Rs 2.8 Bn had
been made by the Bank as at that date. The assets jointly owned by the Bank and Bank of Ceylon and acquired through legal process were
subsequently acquired by the Government under the provisions of Land Acquisition Act. The banks had lodged their claim for compensation.
On 29th December 2009, the Bank received treasury bonds redeemable in 18 months amounting to Rs 570.6 Mn (presented under Note 29 (f)
- Investment Securities - Government of Sri Lanka Treasury Bonds held by the Bank) as the full and nal settlement from the Government.
Accordingly, after setting o the net exposure against the provision made in the Financial Statements, in 2009 Rs 368 Mn was written back to
Income Statement (presented under Note 14 - Other Income).
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 199
29 INVESTMENT SECURITIES
29 (a) Investment Securities Summary
As at 31st December 2010 2009
Cost of Cost of
Investment Investment
Rs 000 Rs 000
Quoted shares - Bank [Note 29 (b)] 911,399 1,025,082
Quoted units in unit trusts - Bank [Note 29 (c)] 150,000 150,000
Unquoted shares - Bank [Note 29 (d)] 387,956 642,941
Sri Lanka Development bonds and Sovereign bonds - Bank [Note 29 (e)] 10,183,798 9,343,780
Government of Sri Lanka treasury bonds - Bank [Note 29 (f )] 8,297,895 7,798,138
Government of Sri Lanka treasury bills and CBSL securities - Bank [Note 29 (g)] 37,508,009 34,498,745
Foreign government bonds - Bank [Note 29 (h)] 140,645 -
Other long term investments - Bank [Note 29 (i)] 1,124,400 500,994
Investment Securities - Bank 58,704,102 53,959,680
Quoted shares - Joint Venture [Note 29 (j)] 580 580
Unquoted shares - Joint Venture [Note 29 (k)] 46,303 -
Net asset value adjustment on Acuity Securities* - 74,985
Quoted units in unit trusts - Subsidiaries and Joint Venture [Note 29 (l)] 32,203 -
Unquoted units in unit trusts - Subsidiaries [Note 29 (m)] 56,500 50,000
Quoted debentures - Subsidiaries and Joint Venture [Note 29 (n)] 257,420 106,000
Unquoted debentures - Subsidiaries and Joint Venture [Note 29 (o)] 150,500 60,000
Government of Sri Lanka treasury bonds - Subsidiaries and Joint Venture [Note 29 (p)] 1,003,076 1,596,479
Investment securities - Bank 58,704,102 53,959,680
Investment Securities - Group 60,250,684 55,847,724
* Bank’s share holding of 49.99% in Acuity Securities Ltd (after the 50.01% share transfer to Acuity Partners (Pvt) Ltd, in 2008), was accounted for
at cost in Bank’s books while accounted for at net assets value at the date of share transfer in the Consolidated Financial Statements.
The remaining 49.99% was disposed to Acuity Partners (Pvt) Ltd during 2010.
Based on the internal assessment carried out by the Board of Directors as at 31st December 2010, there was no indication of impairment other
than those disclosed in Note 29 (d) which required provision for permanent diminution in value of investment securities of the Bank.
Investment securities through the Joint Venture reported above represent only 50% of the total investment securities of the Joint Venture,
being the shareholding of the Bank on the same.
29 (b) Quoted Shares Held by the Bank
As at 31st December 2010 2009
No of Cost of Market No of Cost of Market
Ordinary Investment Value Ordinary Investment Value
Shares Rs 000 Rs 000 Shares Rs 000 Rs 000
Ceylinco Insurance PLC - - - 50,000 8,750 6,712
Commercial Bank of Ceylon PLC - - - 1,430,574 95,813 271,809
DFCC Bank 32,109,140 911,399 6,428,250 16,054,570 911,399 2,681,113
Distilleries Company of Sri Lanka PLC - - - 1,481,500 11,158 155,928
911,399 6,428,250 1,027,120 3,115,562
Provision for diminution in value - - (2,038) -
Total Quoted Shares - Bank 911,399 6,428,250 1,025,082 3,115,562
During the year the Bank’s investments in Ceylinco Insurance PLC, Commercial Bank of Ceylon PLC and Distilleries Company of Sri Lanka PLC
were transferred to dealing securities and subsequently disposed except for 4,000 shares in Ceylinco Insurance PLC. The resultant gain of
Rs 497.114 Mn is reported under “Capital gain from sale of investment securities (disposed through dealing securities)” in Note 14 - Other
Income. The provision of Rs 2.038 Mn made in respect of Ceylinco Insurance PLC’s shares in 2009 has been reversed during the year.
200 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
29 INVESTMENT SECURITIES (Contd.)
29 (c) Quoted Units in Unit Trusts held by the Bank
As at 31st December 2010 2009
Cost of Market Cost of Market
No of Investment Value No of Investment Value
Units Rs 000 Rs 000 Units Rs 000 Rs 000
Namal Acuity Value Fund 3,000,000 150,000 270,000 3,000,000 150,000 149,250
Total Quoted Units in Unit Trusts - Bank 150,000 270,000 150,000 149,250
29 (d) Unquoted Shares Held by the Bank
As at 31st December 2010 2009
No of Cost of Directors’ No of Cost of Directors’
Ordinary Investment Valuation Ordinary Investment Valuation
Shares Rs 000 Rs 000 Shares Rs 000 Rs 000
Browns’ Group Motels Ltd 50,000 500 500 50,000 500 500
Credit Information Bureau of Sri Lanka 5,300 530 530 5,300 530 530
Fitch Rating Lanka Ltd 62,500 625 625 62,500 625 625
Lanka Clear (Pvt) Ltd 2,200,000 22,000 22,000 2,200,000 22,000 22,000
Lanka Financial Services Bureau 225,000 2,250 2,250 225,000 2,250 2,250
S.W.I.F.T. 21 2,051 2,051 21 2,051 2,051
Dialog Axiata PLC
Rated cumulative redeemable
preference shares 360,000,000 360,000 360,000 540,000,000 540,000 540,000
Acuity Securities Ltd * - - - 7,498,500 74,985 74,985
Magpek Exports Ltd 359,000 14,360 - 359,000 14,360 -
Metal Recyclers Colombo Ltd 69 3 - 69 3 -
Provision for diminution in market value ** (14,363) (14,363)
Total Unquoted Shares - Bank 387,956 387,956 642,941 642,941
* Bank’s investment of 49.99% in Acuity Securities Limited of Rs 74.985 Mn was disposed to Acuity Partners (Pvt) Ltd a Joint Venture between
the Bank and DFCC Bank on 30th Sepetember 2010. The resulting gain of Rs 101.71 Mn from this transaction is reported under “Capital gain
from sale of investment securities” included in Note 14 - Other Income.
** As shares of Magpek Exports Ltd and Metal Recyclers Colombo Ltd have been de-listed, the market values are shown as nil. Provision of
Rs 14.363 Mn for diminution in market value has been made in the Financial Statements.
29 (e) Sri Lanka Development Bonds and Sovereign Bonds Held by the Bank
As at 31st December 2010 2009
Cost of Cost of
Investment Investment
Rs 000 Rs 000
Face Value Year of Discounted
Maturity Value (Rs 000)
Rs 2,885 Mn 2011 2,884,570
Rs 7,299 Mn 2012 7,299,228
Total Sri Lanka Development Bonds and Sovereign Bonds - Bank 10,183,798 9,343,780
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 201
29 INVESTMENT SECURITIES (Contd.)
29 (f) Government of Sri Lanka Treasury Bonds Held by the Bank
As at 31st December 2010 2009
Face Value Year of Discounted Cost of Market Cost of Market
Maturity Value Investment Value Investment Value
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Rs 3,951 Mn 2011 3,955,278
Rs 450 Mn 2012 451,923
Rs 1,701 Mn 2013 1,750,994
Rs 2,100 Mn 2014 2,139,700
Total Government of Sri Lanka Treasury Bonds - Bank 8,297,895 8,314,671 7,798,138 8,098,828
29 (g) Government of Sri Lanka Treasury Bills and
CBSL Securities Held by the Bank
Face Value Year of Discounted
Maturity Value
Rs 000
Rs 38,187 Mn 2011 37,508,009
Total Government of Sri Lanka Treasury Bills and CBSL Securities - Bank 37,508,009 37,547,622 34,498,745 34,663,641
29 (h) Foreign Government Bonds Held by the Bank
Face Value Year of Discounted
Maturity Value
Rs 000
Rs 148 Mn 2012 140,645
Total Foreign Government Bonds - Bank 140,645 135,930 - -
29 (i) Other Long Term Investments Held by the Bank
As at 31st December 2010 2009
Cost Directors’ Cost Directors’
Valuation Valuation
Rs 000 Rs 000 Rs 000 Rs 000
Long term non-negotiable bonds
maturing on 14.11.2016 489,000 489,000 489,000 489,000
People’s Leasing Co. Ltd. - securitised notes trust 29 - - 11,994 11,994
People’s Leasing Co. Ltd. - securitised notes trust 65 365,400 365,400 - -
Singer Sri Lanka PLC Debentures 270,000 270,000 - -
Total Other Long Term Investments - Bank 1,124,400 1,124,400 500,994 500,994
29 (j) Quoted Shares Held through Joint Venture
As at 31st December 2010 2009
No of Cost of Market No of Cost of Market
Ordinary Investment Value Ordinary Investment Value
Shares Rs 000 Rs 000 Shares Rs 000 Rs 000
John Keells Holdings PLC 4,680 22 1,395 4,680 22 803
Hayleys PLC 7,491 558 2,585 7,491 558 1,281
Central Finance PLC 3 - 2 - - -
Total Quoted Shares - Joint Venture 580 3,982 580 2,084
202 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
29 INVESTMENT SECURITIES (Contd.)
29 (k) Unquoted Shares Held through Joint Venture
As at 31st December 2010 2009
No of Cost of No of Cost of
Ordinary Investment Ordinary Investment
Shares Rs 000 Shares Rs 000
Durdans Heart Surgical Centre (Private) Ltd 750,000 7,313 - -
Durdans Medical & Surgical Centre (Private) Ltd 1,000,000 12,500 - -
E Services Lanka Limited 1,250,000 12,500 - -
Tudawe Brothers Limited 100,000 10,000 - -
Nividhu (Private) Limited 1,640,000 16,490 - -
58,803 - -
Provision for diminution in value (12,500) -
Total Unquoted Shares - Joint Venture 46,303 -
29 (l) Quoted Units in Unit Trusts Held by Subsidiaries and through Joint Venture
As at 31st December 2010 2009
No of Cost of Market No of Cost of Market
Units Investment Value Units Investment Value
Rs 000 Rs 000 Rs 000 Rs 000
Namal Acuity Fund 114,400 7,203 10,296 - - -
Namal Income Fund 2,436,870 25,000 27,050 - - -
Total Quoted Units - Subsidiaries and Joint Venture 32,203 37,346 - -
29 (m) Unquoted Units in Unit Trusts Held by Subsidiaries
As at 31st December 2010 2009
Cost of Cost of
No of Investment No of Investment
Units Rs 000 Units Rs 000
Namal Giltedge Funds 1,000,000 10,000 - -
Namal Optima - - 1,000,000 10,000
Cey Bank 4,000,000 40,000 4,000,000 40,000
Ceylon Asset Management 664,622 6,500 - -
Total Unquoted Units in Unit Trusts - Subsidiaries 56,500 50,000
As at 31st December 2010 2009
No of Cost of Market No of Cost of Market
Debentures Investment Value Debentures Investment Value
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
29 (n) Quoted Debentures Held by
Subsidiaries and through Joint Venture
DFCC Bank (Rs 1000/- each) 10,000 10,000 10,000 10,000 10,000 10,000
Seylan Bank PLC (Rs 100/- each) 100,000 10,000 10,000 100,000 10,000 10,000
Sampath Bank PLC (Rs 100/- each) 240,000 24,000 24,000 240,000 24,000 24,000
Singer (Sri Lanka) PLC (Rs 100/- each) 250,000 25,000 25,000 250,000 25,000 25,000
Bank of Ceylon (Rs 100/- each) 590,000 59,000 59,000 200,000 20,000 20,000
Nations Trust Bank PLC (Rs 1000/- each) 17,000 17,000 17,000 17,000 17,000 17,000
Urban Development Authority (Rs 100/- each) 1,124,200 112,420 112,420 - - -
Total Quoted Debentures -
Subsidiaries and Joint Venture 257,420 257,420 106,000 106,000
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 203
29 INVESTMENT SECURITIES (Contd.)
29 (o) Unquoted Debentures Held by Subsidiaries
and through Joint Venture
As at 31st December 2010 2009
Cost of Cost of
No of Investment No of Investment
Debentures Rs 000 Debentures Rs 000
Singer (Sri Lanka) PLC (Rs 100/- each) - - 50,000 5,000
Seylan Bank PLC (Rs 100/- each) 150,000 15,000 150,000 15,000
Senkadagala Finance Co Ltd (Rs 1000/-each) 40,000 40,000 40,000 40,000
DSI Holdings Ltd (Rs 1000/-each) 30,000 25,500 - -
Ceylon Hospital PLC (Rs 10/- each) 5,000,000 50,000 - -
Neluwa Cascade Hydro Power (Private) Limited 2,000,000 20,000 - -
Total Unquoted Debentures - Subsidiaries and Joint Venture 150,500 60,000
As at 31st December 2010 2009
Cost of Market Cost of Market
Investment Value Investment Value
Rs 000 Rs 000 Rs 000 Rs 000
29 (p) Government of Sri Lanka Treasury Bonds
Held by Subsidiaries and through Joint Venture
Face Value Year of Discounted
Maturity Value (Rs 000)
Rs 110 Mn 2011 110,040
Rs 313 Mn 2012 295,561
Rs 689 Mn 2013 588,725
Rs 10 Mn 2015 8,750
Total Government of Sri Lanka Treasury Bonds - Subsidiaries and Joint Venture 1,003,076 1,182,725 1,596,479 1,724,195
29 (q) Assets Pledged as Security
Out of the treasury bills and bonds classi ed as dealing and investment securities, the following amount is pledged as security for re-purchase
agreements entered into by the Bank / Group.
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Treasury bills 10,926,033 6,223,728 11,989,447 6,487,507
Treasury bonds 1,025,694 2,461,272 1,631,688 2,971,980
11,951,727 8,685,000 13,621,135 9,459,487
30 INVESTMENTS IN ASSOCIATES
As at 31st December 2010 2009
Cost of Market Cost of Market
Principal % Investment Value % Investment Value
Activity Holding Rs 000 Rs 000 Holding Rs 000 Rs 000
30 (a) Bank
30 (a) i Quoted
Lanka Ventures PLC Venture Capital - - - 20.07% 132,326 180,653
(10,036,250 ordinary shares)
- - - 132,326 180,653
204 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
30 INVESTMENTS IN ASSOCIATES (Contd.)
30 (a) Bank (Contd.)
As at 31st December 2010 2009
Cost of Directors’ Cost of Directors’
Principal % Investment Valuation % Investment Valuation
Activity Holding Rs 000 Rs 000 Holding Rs 000 Rs 000
30 (a) ii Unquoted
Browns Engineering (Pvt) Ltd Engineering 32.63% 20,560 - 32.63% 20,560 -
(2,056,000 ordinary shares)
Delma Exchange Dealing in
(simple limited partnership) foreign exchange 20.00% 83,651 83,651 20.00% 71,480 71,480
Provision for diminution in value (20,560) (20,560)
83,651 83,651 71,480 71,480
Total for the Bank [30 (a) i and 30 (a) ii] 83,651 203,806
Lanka Ventures PLC
Bank’s investment in Lanka Ventures PLC was sold to Acuity Partners (Pvt) Ltd, a Joint Venture investment banking company of DFCC Bank and
HNB on 18th January 2010 for Rs 18 per share. The gain from sale of this investment of Rs 47.581 Mn is disclosed in Note 14 - Other Income.
Browns Engineering (Pvt) Ltd
Browns Engineering (Pvt) Ltd is under liquidation and the Bank’s investment in this company has been fully provided for.
Delma Exchange
Delma Exchange is a limited liability partnership incorporated in Abu Dhabi and the Bank holds 20% of this partnership. During the year
receivable from Delma Exchange amounting to Rs 12.171 Mn was transferred to investment. Bank’s holding in Delma Exchange of 20%
remained the same after this transaction.
Quoted Unquoted Total
Investments Investments
As at 31st December 2010 2009 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
30 (b) Group
Investment in Associate companies (at cost) 132,326 132,326 71,730 71,730 204,056 204,056
Investment in Associate company
through Joint Venture - - 59,870 - 59,870 -
Additional investment in Associate company - - 60,671 - 60,671 -
Negative goodwill on acquisition recognised
in Income Statement 5,830 5,830 3,416 3,416 9,246 9,246
Group share of Associate company
retained pro ts balance as at 1st January 14,206 922 (4,648) 956 9,558 1,878
Current year’s share of pro ts after tax (6,384) 13,284 3,955 (5,605) (2,429) 7,679
Exchange e ect on revaluation of investment - - 1,015 3,270 1,015 3,270
Disposal of Associate company (145,978) - - - (145,978) -
Group Investment in Associate
companies (equity basis) - 152,362 196,009 73,767 196,009 226,129
Splendor Media (Pvt) Ltd (Splendor Media)
The Bank’s fully owned subsidiary Sithma Development (Pvt) Ltd (Sithma) holds 25% in Splendor Media. Accordingly Splendor Media has been
accounted for as an Associate of Sithma.
The Board of Directors carried out an internal assessment of impairment as at 31st December 2010 and concluded that there was no
indication of impairment of this investment.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 205
30 INVESTMENTS IN ASSOCIATES (Contd.)
30 (c) Summarised Financial Information of Associates
30 (c) i Associates Held by the Bank
Lanka Delma Exchange
Ventures PLC (Pvt) Ltd
As at 31st December 2009 2010 2009
Rs 000 Rs 000 Rs 000
Revenue 117,874 17,670 7,925
Expenses (53,816) (97,057) (55,351)
Pro t / (loss) before tax 64,058 (79,387) (47,426)
Current assets 302,989 257,616 312,295
Non current assets 461,321 45,568 18,358
Total assets 764,310 303,184 330,653
Current liabilities 3,721 5,676 3,447
Non current liabilities 1,435 - 882
Total liabilities 5,156 5,676 4,329
Lanka Ventures PLC which was an Associate of the Bank in 2009 became a subsidiary of Acuity Partners (Pvt) Ltd, the Joint Venture between
DFCC Bank and HNB during the year.
30 (c) ii Associate Held by Subsidiary
Splendor Media
(Pvt) Ltd
As at 31st December 2010 2009
Rs 000 Rs 000
Revenue 86,290 61,199
Expenses (73,531) (36,933)
Pro t before tax 12,759 24,266
Current assets 115,195 88,280
Non current assets 1,728 646
Total assets 116,923 88,926
Current liabilities 75,851 54,596
Non current liabilities 483 320
Total liabilities 76,334 54,916
30 (c) iii Associates Held through Joint Venture
Unit Energy Hayles Hydro Neluwa
Lanka Energy Cascade
(Pvt) Ltd (Pvt) Ltd Hydropower
As at 31st December 2010 2010 2010
Rs 000 Rs 000 Rs 000
Revenue 160,867 - 72,542
Expenses (96,636) (93) (60,595)
Pro t / (loss) before tax 64,231 (93) 11,947
Current assets 76,336 26 18,567
Non current assets 487,697 119,100 349,553
Total assets 564,033 119,126 368,120
Current liabilities 32,886 844 87,625
Non current liabilities 284,553 - 185,085
Total liabilities 317,439 844 272,710
The above companies are Associates of Lanka Ventures PLC which is a Subsidiary of Acuity Partners (Pvt) Ltd.
206 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
31 INVESTMENT IN JOINT VENTURE
Bank
As at 31st December 2010 2009
Cost of Directors’ Cost of Directors’
Principal % Investment Valuation % Investment Valuation
Activity Holding Rs 000 Rs 000 Holding Rs 000 Rs 000
Unquoted
Acuity Partners (Pvt) Ltd Investment banking 50% 655,000 655,000 50% 250,000 250,000
Total for the Bank 655,000 655,000 250,000 250,000
During the year the Bank increased its capital contribution (direct / through conversion of loans) to Acuity Partners (Pvt) Ltd the Joint Venture
between DFCC Bank and HNB by Rs 405 Mn. Bank’s shareholding in Acuity Partners (Pvt) Ltd remained at 50% after this transaction.
Bank’s interest in Acuity Partners (Pvt) Ltd include:
2010 2009
Rs 000 Rs 000
Assets 2,985,433 1,199,570
Liabilities 2,051,891 915,811
Income 484,785 151,750
Expenses 225,641 100,960
Tax 69,569 18,124
32 INVESTMENTS IN SUBSIDIARIES
32 (a) Quoted
As at 31st December 2010 2009
Cost of Market Cost of Market
Principal % Investment Value % Investment Value
Activity Holding Rs 000 Rs 000 Holding Rs 000 Rs 000
HNB Assurance PLC
(22,494,750 shares) Insurance 60% 149,965 1,754,591 60% 149,965 1,113,490
Total Quoted 149,965 149,965
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 207
32 INVESTMENTS IN SUBSIDIARIES (Contd.)
32 (b) Unquoted
As at 31st December 2010 2009
Cost of Directors’ Cost of Directors’
Principal % Investment Valuation % Investment Valuation
Activity Holding Rs 000 Rs 000 Holding Rs 000 Rs 000
Sithma Development (Pvt) Ltd Property
(206,000,000 ordinary shares) development 100% 1,973,000 1,973,000 100% 1,973,000 1,973,000
Majan Exchange LLC Dealing in
(200,000 shares) foreign exchange 40% 56,121 56,121 40% 56,121 56,121
Commercial Interlink
Services Inc
(o/a Delma Exchange Canada) Dealing in
(100,001 shares) foreign exchange 100% 10,063 - 95% 240 240
Provision for dimunition in value (10,063) -
Total Unquoted 2,029,121 2,029,361
Total for the Bank [32 (a) and 32 (b)] 2,179,086 2,179,326
Bank together with 40% shareholding in Majan Exchange LLC and management control over the activities of the company can govern the
nancial and operating policies of the company. Accordingly the investment in Majan Exchange LLC has been classi ed as investment in
Subsidiary.
Rs 9.82 Mn which was receivable to Bank from Commercial interlink Services Inc (o/a of Delma Exchange Canada) was converted to shares
during the year. This resulted in the increase of Bank’s holding in the company from 95% to 100%.
As directed by the Director Bank Supervision of the Central Bank of Sri Lanka, the Bank has taken steps to liquidate Commercial Interlink
Services Inc (o/a of Delma Exchange Canada) and the commercial operation of the same has been ceased since 1st October 2010. The said
entity has been treated as a subsidiary up to the Balance Sheet date and the results of the same have been consolidated. The Bank has made
full provision of Rs 10.063 Mn against the investment and Rs 18.885 Mn (Note 36) against the receivable from the said subsidiary.
33 INVESTMENT PROPERTIES
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Cost
Balance as at 1st January 369,503 195,505 243,250 242,587
Transferred from property, plant and equipment - 173,335 - -
Improvements 7,247 663 5,496 663
Balance as at 31st December 376,750 369,503 248,746 243,250
Accumulated depreciation
Balance as at 1st January 18,743 8,038 70,695 66,274
Transferred from property, plant and equipment - 6,325 - -
Charge for the year 4,444 4,380 4,456 4,421
Balance as at 31st December 23,187 18,743 75,151 70,695
Net book value as at 31st December 353,563 350,760 173,595 172,555
208 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
33 (a) Valuation of Investment Properties - Bank
Cost / Carrying Amount Fair Value
Building Extent Land Building Total Land Building Total
(Cost) (Net Book
Value)
As at 31st December 2010 sq.ft Perches Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
23 & 23 1/1,
Independence Avenue,
Colombo 7 10,800 105.00 37,081 43,440 80,521 393,750 45,900 439,650
479 T B Jayah Mawatha,
Colombo 10 * Land 112.96 75,781 - 75,781 519,616 - 519,616
21, 21A, 23 & 25,
Janadhipathi Mawatha,
Colombo 1 * Land 26.62 34,889 - 34,889 39,930 - 39,930
10, Sri Uttarananda Mawatha,
Colombo 03 ** 49,500 40.00 72,000 90,372 162,372 240,000 100,237 340,237
219,751 133,812 353,563 1,193,296 146,137 1,339,433
33 (b) Valuation of Investment Properties - Group
Cost / Carrying Amount Fair Value
Building Extent Land Building Total Land Building Total
(Cost) (Net Book
Value)
As at 31st December 2010 sq.ft Perches Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
23 & 23 1/1,
Independence Avenue,
Colombo 7 10,800 105.00 37,081 43,440 80,521 393,750 45,900 439,650
Smart building,
21, 21A, 23 & 25,
Janadhipathi Mawatha,
Colombo 1 41,688 - - 93,074 93,074 - 145,908 145,908
37,081 136,514 173,595 393,750 191,808 585,558
The fair value of the investment properties are based on market valuations carried out as at 31st December 2009 by Messrs J M J Fernando, FIV,
DIV (Sri Lanka), K C B Condegama, AIV (Sri Lanka), members of the Institute of Valuers of Sri Lanka, who are independent valuers not connected
with the Bank. The Bank carries investment properties at cost.
The Directors have carried out an internal valuation as at 31st December 2010 based on the market conditions of similar properties situated
within close proximity. Since the fair values of the investment properties were above the carrying value, the Board of Directors concluded
there was no impairment in investment properties.
* Land situated at No 479, T B Jayah Mw, Colombo 10 on which HNB Towers is built, and No 21, 21A, 23 and 25 Janadhipathi Mawatha,
Colombo 01 are leased to Sithma Development (Pvt) Ltd by the Bank and the Bank receives ground rent. Accordingly, these lands have been
classi ed as investment property in the Balance Sheet of the Bank. However, according to Sri Lanka Accounting Standard 40 “Investment
Property” (SLAS 40), the said lands are treated as property, plant and equipment in the Consolidated Balance Sheet, since these are leased
to a Group entity. Accordingly, the revaluation impact of such property has not been adjusted in the Group since the classi cation is a
consolidation adjustment.
** Building situated at No 10, Sri Uttarananda Mw, Colombo 03 is leased out to HNB Assurance PLC and Royal Ceramics Lanka PLC. Accordingly
this building is classi ed as investment property in the Balance Sheet of the Bank. However, according to SLAS 40, the said building is treated
as property, plant and equipment in the Group Balance Sheet, since Group uses a signi cant portion of the building for use in the production
or supply of goods and services.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 209
34 PROPERTY, PLANT AND EQUIPMENT
Bank Leasehold Freehold Computer Equipment Motor Capital 2010 2009
Buildings Land and Equipment Furniture Vehicles Work-in Total Total
Buildings and Progress
Note 34 (c) Note 34 (b) Note 34 (a) Fixtures
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Cost / valuation
as at 1st January 1,055,642 4,847,904 2,153,426 2,599,211 221,656 219,927 11,097,766 10,327,944
Transferred to investment property* - - - - - - - (173,335)
Additions and improvements 97,800 150,389 135,825 280,109 7,512 305,811 977,446 1,071,026
Disposals during the year (1,315) - (50,987) (53,377) - - (105,679) (125,446)
Sub category transfers
during the year (43,194) 43,000 - 194 - - - -
Transferred from non current assets
held for sale (Note 25) - - - - - - - 1,455
Transferred from capital
work-in-progress 85,949 176,430 - 79,626 - (342,005) - -
Written o during the year** - - - - - (20,717) (20,717) -
Transferred to debtors - - - - - (1,200) (1,200) -
Transferred to intangible assets - - - - - (2,321) (2,321) (3,878)
Cost / valuation
as at 31st December 1,194,882 5,217,723 2,238,264 2,905,763 229,168 159,495 11,945,295 11,097,766
Accumulated depreciation
as at 1st January 597,702 100,617 1,252,169 1,844,279 123,497 - 3,918,264 3,462,296
Transferred to investment property* - - - - - - - (6,325)
Charge for the year 122,353 46,877 230,118 212,755 45,257 - 657,360 579,993
Sub category transfers
during the Year (12,041) 11,954 - 87 - - - -
Disposals during the year (1,315) - (50,758) (52,203) - - (104,276) (117,700)
Accumulated depreciation
as at 31st December 706,699 159,448 1,431,529 2,004,918 168,754 - 4,471,348 3,918,264
Net book value
as at 31st December 2010 488,183 5,058,275 806,735 900,845 60,414 159,495 7,473,947 -
Net book value
as at 31st December 2009 457,940 4,747,287 901,257 754,932 98,159 219,927 - 7,179,502
210 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
34 PROPERTY, PLANT AND EQUIPMENT (Contd.)
Group Leasehold Freehold Computer Equipment Civil Motor Capital 2010 2009
Buildings Land and Equipment Furniture Works Vehicles Work-in Total Total
Buildings and Progress
Note 34 (c) Note 34 (b) Fixtures
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Cost / valuation as at 1st January
without exchange e ect 1,075,981 10,259,006 2,261,973 4,789,250 3,527 236,765 220,184 18,846,686 17,822,696
E ect of movements in exchange rates 95 - 186 162 20 - 65 528 -
Cost / Valuation
as at 1st January 1,076,076 10,259,006 2,262,159 4,789,412 3,547 236,765 220,249 18,847,214 17,822,696
Acquisitions of Subsidiaries - - 2,863 2,928 - 1,563 - 7,354 2,312
Additions and improvements 98,230 152,140 160,468 306,182 - 10,849 305,811 1,033,680 1,163,844
Disposals during the year (1,315) - (51,058) (55,848) - (1,188) - (109,409) (148,778)
Written o during the year - - (692) (293) - - (20,717) (21,702) -
Transferred from non current
assets held for sale - - - - - - - - 1,455
Transferred to Acuity Partners (Pvt) Ltd and
Acuity Stockbrokers (Pvt) Ltd from
DNH Financial (Pvt) Ltd
[former HNB Stockbrokers (Pvt) Ltd] - - - - - - - - 10,988
Disposal of DNH Financial (Pvt) Ltd
[former HNB Stockbrokers (Pvt) Ltd] - - - - - - - - (1,953)
Sub category transfers during the year (43,194) 43,000 - 194 - - - - -
Transfers from capital
work-in-progress 85,949 176,430 - 79,626 - - (342,005) - -
Transferred to debtors - - - - - - (1,200) (1,200) -
Transfer to intangible assets - - - - - - (2,321) (2,321) (3,878)
E ect of movements in exchange rates 16 - (216) (66) (107) - - (373) 528
Cost / Valuation
as at 31st December 1,215,762 10,630,576 2,373,524 5,122,135 3,440 247,989 159,817 19,753,243 18,847,214
Accumulated depreciation as at 1st January
without exchange e ect 600,600 307,857 1,301,729 2,174,313 355 129,379 - 4,514,233 3,921,679
E ect of movements in exchange rates 11 29 14 (2) - - 52 -
Accumulated depreciation
as at 1st January 600,611 307,857 1,301,758 2,174,327 353 129,379 - 4,514,285 3,921,679
Adjustment to opening balance - - (489) (146) - 15 - (620) -
Acquisitions of subsidiaries - - 1,809 2,550 - 1,563 - 5,922 292
Transferred to Acuity Partners (Pvt) Ltd and
Acuity Stockbrokers (Pvt) Ltd from
DNH Financial (Pvt) Ltd
[former HNB Stockbrokers (Pvt) Ltd] - - - - - - - - 8,094
Disposal of DNH Financial (Pvt) Ltd
[former HNB Stockbrokers (Pvt) Ltd] - - - - - - - - (1,493)
Charge for the year 126,972 103,611 247,138 278,258 369 49,795 - 806,143 722,872
Disposals during the year (1,315) - (50,781) (54,026) - (1,143) - (107,265) (137,211)
Write o s during the year - - (661) (266) - - - (927) -
Sub category transfers during the year (12,041) 11,954 - 87 - - - - -
E ect of movements in exchange rates 5 - (44) (17) (17) - - (73) 52
Accumulated Depreciation
as at 31st December 714,232 423,422 1,498,730 2,400,767 705 179,609 - 5,217,465 4,514,285
Net book value
as at 31st December 2010 501,530 10,207,154 874,794 2,721,368 2,735 68,380 159,817 14,535,778 -
Net book value
as at 31st December 2009 475,465 9,951,149 960,401 2,615,085 3,194 107,386 220,249 - 14,332,929
* Building situated at No 10, Sri Uttarananda Mw, Colombo 3 was transferred to investment property during the year ended 31st December
2009 by the Bank as it is now held primarily for generation of rent.
As set out in Note 4.12.4, the Bank / Group had revalued its freehold land and buildings as at 1st January 2007, by professionally quali ed
independent valuers. The revaluation was carried out by taking into account the observable prices in active market or recent market
transactions on arm’s length term. The revaluation surplus, amounting to Rs 2,778.7 Mn / Rs 5,545.5 Mn had been credited to the revaluation
reserve account in respect of Bank / Group respectively in 2007. An impairment loss of Rs 87.76 Mn was recognised in that year in respect of
freehold land and buildings based on revaluation of such properties.
** Based on the internal assesment, Capital Work-in-progress (WIP) relating to system development of Rs 20.7 Mn was written o to the
Income Statement during the year as it was concluded that the said WIP will not generate any future economic bene ts to the Bank.
Based on the assessment of potential impairment carried out internally by the Board of Directors as at 31st December 2010, no provision was
required to be made in the Financial Statements as at Balance Sheet date other than those disclosed above.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 211
34 PROPERTY, PLANT AND EQUIPMENT (Contd.)
34 (a) Computer Equipment - Bank
Additions Additions 2010 2009
Prior to After Total Total
1st July 2000 1st July 2000
Rs 000 Rs 000 Rs 000 Rs 000
Rate of depreciation 25.00% 16.67%
Cost as at 1st January 576,821 1,576,605 2,153,426 1,889,893
Additions and improvements - 135,825 135,825 320,347
Transferred from capital work-in-progress - - - 645
Disposals during the year - (50,987) (50,987) (57,459)
Cost as at 31st December 576,821 1,661,443 2,238,264 2,153,426
34 (b) Freehold Land and Buildings - Bank
Cost / Cost /
Buildings Extent Valuation of Valuation of Total Accumulated Net Book Net Book
Sq.ft. (perches) Land Buildings Value Depreciation Value Value
2010 2009
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Within Colombo City Limits
Bambalapitiya Branch 14,801 20.00 80,000 107,451 187,451 12,663 174,788 177,960
285, Galle Road, Colombo 4.
Borella Branch 9,750 28.00 98,493 52,230 150,723 5,471 145,252 146,019
53/1, D S Senanayake Mawatha,
Borella.
Centralised Operations Building 10,250 249.00 996,000 36,088 1,032,088 3,642 1,028,446 1,029,359
90, Vinayalankara Mawatha,
Colombo 10.
City O ce 49,911 84.00 252,000 73,562 325,562 8,802 316,760 316,756
16, Janadhipathi Mawatha,
Colombo 1.
Grandpass Branch 9,440 24.00 36,000 23,712 59,712 2,536 57,176 57,816
182, St Joseph Street,
Colombo 14.
Gunasinghepura Pay O ce 6,990 37.53 112,600 17,764 130,364 1,996 128,368 128,911
and Stores
11, Mohandiram’s Road,
Colombo 12.
Panchikawatta Branch 8,000 23.67 101,538 29,145 130,683 1,192 129,491 123,426
168, Panchikawatta Road,
Colombo 10.
Pettah Branch 13,535 13.03 85,000 46,280 131,280 5,750 125,530 126,967
149-151, Main Street,
Colombo 11.
Pettah Extension O ce 6,848 6.29 47,100 18,211 65,311 1,800 63,511 63,972
88, Main Street,
Colombo 11.
Sea Street Branch 9,000 6.93 48,500 24,920 73,420 2,813 70,607 71,262
60, Sea Street,
Colombo 11.
Wellawatte Branch 17,560 36.05 140,000 52,112 192,112 5,490 186,622 185,992
102, Galle Road,
Wellawatte.
Total freehold land and buildings
within Colombo City Limits 1,997,231 481,475 2,478,706 52,155 2,426,551 2,428,440
212 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
34 PROPERTY, PLANT AND EQUIPMENT (Contd.)
34 (b) Freehold Land and Buildings - Bank (Contd)
Cost / Cost /
Buildings Extent Valuation of Valuation of Total Accumulated Net Book Net Book
As at 31st December 2010 Sq.ft. (perches) Land Buildings Value Depreciation Value Value
2010 2009
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Outside Colombo City Limits
Akkaraipattu Branch 8,805 17.00 20,400 17,129 37,529 1,613 35,916 35,493
1, Main Street,
Akkaraipattu.
Ambalangoda Branch 5,282 32.56 31,000 12,742 43,742 1,353 42,389 42,333
94/1, New Galle Road, Ambalangoda.
Anuradhapura Branch 9,980 25.59 48,083 14,706 62,789 1,678 61,111 61,007
30, Maithripala Senanayake
Mawatha, Anuradhapura.
Badulla Branch 5,550 27.75 26,200 13,522 39,722 1,365 38,357 38,228
15, 15 1/1, Udayaraja Mawatha,
Badulla.
Boralesgamuwa Branch 5,500 30.34 33,375 15,721 49,096 1,635 47,461 47,837
24, Maharagama Road,
Boralesgamuwa.
Dambulla Branch 6,862 94.50 42,525 16,479 59,004 1,606 57,398 57,826
622, Anuradhapura Road,
Dambulla.
Galle Branch 7,271 13.80 41,000 22,691 63,691 2,624 61,067 61,762
3, Wakwella Road,
Galle.
Gampaha Branch 16,685 25.00 24,959 115,281 140,240 3,021 137,219 130,170
150, Colombo Road,
Gampaha.
Gampola Branch 5,604 11.88 14,920 11,737 26,657 1,459 25,198 25,564
12, Kandy Road,
Gampola.
Gampola Bare Land Bare land 17.05 28,028 - 28,028 - 28,028 28,027
142,144,146, Kandy Road,
Gampola.
Hatton Branch 10,141 69.48 35,179 14,518 49,697 1,621 48,076 48,514
78, Dambulla Road,
Hatton.
Mount Bungalow 5,088 160.00 16,000 8,044 24,044 812 23,232 22,918
7, Mount Road,
Hatton.
Ja-Ela Branch 4,918 19.00 11,400 13,097 24,497 1,507 22,990 23,379
73, Old Negombo Road,
Ja-Ela.
Ja na Branch Bare land 62.36 48,839 34 48,873 10 48,863 2,018
181/5C, Ponnambalam Road,
Ja na.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 213
34 PROPERTY, PLANT AND EQUIPMENT (Contd.)
34 (b) Freehold Land and Buildings - Bank (Contd)
Cost / Cost /
Buildings Extent Valuation of Valuation of Total Accumulated Net Book Net Book
As at 31st December 2010 Sq.ft. (perches) Land Buildings Value Depreciation Value Value
2010 2009
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Kandy Branch 29,196 57.65 432,375 238,595 670,970 15,466 655,504 660,450
1, Dalada Veediya,
Kandy.
Kalmunai Branch Bare Land 136.50 19,779 - 19,779 - 19,779 -
30A, Batticaloa Road
Kalmunai
Kahawatte Branch 8,331 16.14 12,100 42,765 54,865 3,146 51,719 43,536
77 2A, Main Street,
Kahawatte.
Kegalle Branch Bare Land 48.70 15,600 - 15,600 - 15,600 15,600
Main Street,
Kegalle.
Kuliyapitiya Branch 4,506 31.80 15,150 19,975 35,125 1,657 33,468 31,400
225, Main Street,
Kuliyapitiya.
Kurunegala Branch 9,600 36.25 32,375 82,758 115,133 5,915 109,218 111,261
6, St. Anne’s Street,
Kurunegala.
Mannar Branch 5,466 23.00 619 17,214 17,833 1,858 15,975 13,766
68, Main Street,
Mannar.
Marawila Branch 7,352 43.80 19,545 17,370 36,915 1,848 35,067 34,744
534, Chilaw Road,
Marawila.
Maskeliya Branch 4,757 20.32 4,100 32,183 36,283 1,864 34,419 35,077
9, New Town,
Maskeliya.
Matale Branch 8,493 22.80 13,700 28,125 41,825 2,724 39,101 39,819
660, Trincomalee Road,
Matale.
Matara Branch 9,580 26.00 22,000 34,786 56,786 3,479 53,307 53,587
29, Anagarika Dharmapala Mawatha,
Matara.
Mount Lavinia Branch 12,674 22.66 34,000 34,432 68,432 4,104 64,328 65,094
100, Galle Road,
Mount Lavinia.
Minuwangoda Branch 3,538 20.51 20,044 6,754 26,798 298 26,500 25,561
115A, Minuwangoda Road,
Ekala.
Monaragala Bare Land 20.00 1,455 - 1,455 - 1,455 1,455
No 67/11, Kumaradola Road,
Monaragala.
214 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
34 PROPERTY, PLANT AND EQUIPMENT (Contd.)
34 (b) Freehold Land and Buildings - Bank (Contd)
Cost / Cost /
Buildings Extent Valuation of Valuation of Total Accumulated Net Book Net Book
As at 31st December 2010 Sq.ft. (perches) Land Buildings Value Depreciation Value Value
2010 2009
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Nawalapitiya Branch 3,900 7.00 6,400 6,959 13,359 858 12,501 12,717
92, Gampola Road,
Nawalapitiya.
Negombo Branch 5,440 8.88 11,100 19,938 31,038 2,154 28,884 53,421
18, Rajapakse Broadway,
Negombo.
Negombo Metro Building 24,416 51.98 25,479 178,865 204,344 2,241 202,103 -
190, Colombo Road
Negombo
Nittambuwa Branch 5,840 12.30 49,624 9,990 59,614 1,143 58,471 57,896
22, Kandy Road,
Nittambuwa.
Nochchiyagama Branch 9,890 40.00 10,000 16,298 26,298 1,856 24,442 24,951
10, Puttalam Road,
Nochchiyagama.
Nugegoda Branch 11,560 15.71 58,500 71,752 130,252 9,028 121,224 123,470
181, High Level Road,
Nugegoda.
Nuwara Eliya Branch / Bungalow 13,507 149.03 41,700 28,871 70,571 2,839 67,732 64,084
42, Queen Elizabeth Drive,
Nuwara Eliya.
Polonnaruwa Branch 7,296 18.43 - 38,036 38,036 5,219 32,817 -
467, Main Street, Kaduruwela
Polonnaruwa.
Pussellawa Branch 6,163 15.90 10,599 19,561 30,160 790 29,370 28,979
409/9A, Pussellawa Road,
Pussellawa.
Ratnapura Branch 3,805 27.70 24,879 13,116 37,995 901 37,094 35,089
21 & 23, Senanayake Mawatha,
Ratnapura.
Trincomalee Branch 6,802 33.91 24,137 24,975 49,112 5,313 43,799 41,351
59, Ahambraram Road,
Trincomalee.
Welimada Branch 4,415 14.37 20,747 11,863 32,610 3,973 28,637 28,402
35, Nuwara Eliya Road,
Welimada.
Wellawaya Branch 6,916 30.00 2,837 21,159 23,996 4,413 19,583 -
70, Kumaradasa Mawatha
Wellawaya.
Wattala Branch 8,090 53.00 60,605 35,619 96,224 3,902 92,322 92,061
270, 270/1, Negombo Road,
Wattala.
Total freehold land and buildings 1,411,357 1,327,660 2,739,017 107,293 2,631,724 2,318,847
outside Colombo City Limits
Total freehold land and buildings 3,408,588 1,809,135 5,217,723 159,448 5,058,275 4,747,287
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 215
34 PROPERTY, PLANT AND EQUIPMENT (Contd.)
34 (c) Leasehold Buildings
Bank Group Bank Group
As at 31st December 2010 2010 2009 2009
Cost of Accumulated Net Book Cost of Accumulated Net Book Net Book Net Book
Buildings Depreciation Value Buildings Depreciation Value Value Value
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Up to 1 year - - - - - - 87 87
01 - 05 years 291,807 193,832 97,975 312,685 201,363 111,322 64,123 81,648
05 - 10 years 829,756 469,223 360,533 829,758 469,225 360,533 340,129 340,129
10 - 15 years 61,059 37,616 23,443 61,059 37,616 23,443 46,847 46,847
15 - 20 years 12,260 6,028 6,232 12,260 6,028 6,232 6,754 6,754
1,194,882 706,699 488,183 1,215,762 714,232 501,530 457,940 475,465
34 (d) Fully Depreciated Property, Plant and Equipment
The initial cost of fully depreciated property, plant and equipment as at 31st December 2010, which are still in use as at Balance Sheet date is
as follows.
As at 31st December 2010 2009
Rs 000 Rs 000
Motor vehicles 70,697 37,523
Leasehold building 192,658 209,795
Computer equipment 682,961 1,285,773
Equipment, furniture and xtures 1,165,032 670,153
Intangible assets 419,647 -
34 (e) Temporarily Idle Property, Plant and Equipment
Two lands worth of Rs 17.055 Mn were idle as at 31st December 2010 (2009 - Nil) as these lands were not identi ed as available for immediate use.
34 (f) Property, Plant and Equipment Retired from Active Use
The carrying amount of property, plant and equipment which are retired from active use and not classi ed as held for sale as at
31st December 2010 is Rs 0.276 Mn (2009 - Rs 0.312 Mn).
As at 31st December 2010 2009
Rs 000 Rs 000
Computer equipment - 116
Equipment, furniture and xtures 276 196
276 312
34 (g) Title Restriction on Property, Plant and Equipment
There were no restrictions on the title of property, plant and equipments as at 31st December 2010.
34 (h) Property, Plant and Equipment Pledged as Security for Liabilities
There were no items of property, plant and equipments pledged as securities for liabilities.
34 (i) Compensation from Third Parties for Items of Property, Plant and Equipment
Rs 5.3 Mn was received as compensation from third parties for items of property, plant and equipment that were impaired, lost or given up.
216 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
35 INTANGIBLE ASSETS
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Cost
Balance as at 1st January without exchange e ect 1,399,071 1,284,761 1,470,140 1,337,891
E ect of movements in exchange rates - - 301 -
Balance as at 1st January 1,399,071 1,284,761 1,470,441 1,337,891
Additions and improvements during the year 68,183 110,432 100,105 126,378
Acquisitions of Subsidiaries by Joint Venture - - 2,475 2,399
Good will on acquisition through Joint Venture [Note 35 (b)] - - 70,188 -
Transferred from capital work-in-progress 2,321 3,878 2,321 3,878
Disposal of Subsidiaries - - - (2,708)
Transferred to Acuity Partners (Pvt) Ltd and
Acuity Stockbrokers (Pvt) Ltd from DNH Financial (Pvt) Ltd
[former HNB Stockbrokers (Pvt) Ltd] - - - 2,307
E ect of movement in exchange rates - - 54 296
Balance as at 31st December 1,469,575 1,399,071 1,645,584 1,470,441
Accumulated amortisation
Balance as at 1st January without exchange e ect 723,799 557,163 760,385 584,503
E ect of movements in exchange rates - - 47 -
Balance as at 1st January 723,799 557,163 760,432 584,503
Amortisation for the year 168,761 166,636 179,997 175,765
Acquisition of Subsidiaries by Joint Venture - - 2,209 360
Disposal of Subsidiaries - - - (1,247)
Transferred to Acuity Partners (Pvt) Ltd and
Acuity Stockbrokers (Pvt) Ltd from DNH Financial (Pvt) Ltd
(former HNB Stockbrokers (Pvt) Ltd) - - - 1,004
E ect of movement in exchange rates - - 16 47
Balance as at 31st December 892,560 723,799 942,654 760,432
Net book value as at 31st December
577,015 675,272
702,930 710,009
35 (a) Analysis of Intangible Assets
Software 577,015 675,272 632,742 710,009
Goodwill [Note 35 (b)] - - 70,188 -
577,015 675,272 702,930 710,009
As stated in Note 4.10.1 (b), all computer software costs incurred by the Bank / Group which are not integrally related to associated hardware
have been classi ed as intangible assets.
There were no restrictions on the title of the intangible assets as at the Balance Sheet date. Further there were no items pledged as securities
for liabilities.
35 (b) Goodwill
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Balance as at 1st January - - - -
Goodwill recognised during the year - - 70,188 -
Balance as at 31st December - - 70,188 -
Goodwill recognised during the year is in respect of aquisition of Lanka Ventures PLC by the Joint Venture Acuity Partners (Pvt) Ltd. 50% of the
goodwill created through this transaction has been recognised in Consolidated Financial Statements being the shareholding of the Bank in
the Joint Venture.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 217
36 OTHER ASSETS
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Deposits, prepayments and interest receivable 3,533,647 3,899,260 3,291,211 3,472,973
Items in transit 2,540,450 1,910,397 2,540,450 1,910,397
Claims receivable - - 71,759 24,698
VAT recoverable 1,109,223 566,427 1,114,337 569,987
Related party receivable - exchange houses * 11,937 39,977 - 3,720
Items held for use 141,023 158,937 142,090 160,679
Inventory - residential apartment complex ** - - 941,055 938,591
Other debtors 369,036 311,680 1,045,189 978,069
7,705,316 6,886,678 9,146,091 8,059,113
* Rs 18.885 Mn included under related party receivable from Commercial Interlink Services Inc (o/a Delma Exchange Canada) has been fully
provided for during the year.
** Rs 8.367 Mn has been charged as provision in the Consolidated Financial Statements for impairment of inventory - residential apartment
complex held by the Subsidiary, Sithma Development (Pvt) Ltd.
37 DEPOSITS FROM CUSTOMERS
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Local Currency Deposits
Current account deposits 24,214,105 15,090,759 24,134,386 15,038,532
Savings deposits 83,981,743 66,080,330 83,980,788 66,080,282
Time deposits 78,198,953 80,572,001 78,171,703 80,544,751
Certi cates of deposit 5,576,315 5,439,817 5,576,315 5,439,817
191,971,116 167,182,907 191,863,192 167,103,382
Foreign Currency Deposits
Current account deposits 794,003 1,191,309 794,003 1,191,309
Savings deposits 15,033,471 14,715,443 15,019,677 14,710,532
Time deposits 26,272,495 27,417,146 26,203,682 27,357,922
42,099,969 43,323,898 42,017,362 43,259,763
Total Deposits 234,071,085 210,506,805 233,880,554 210,363,145
Deposits from non-bank customers 234,026,250 210,469,638 233,835,719 210,325,978
Deposits from banks 29,238 24,533 29,238 24,533
Deposits from nance companies 15,597 12,634 15,597 12,634
234,071,085 210,506,805 233,880,554 210,363,145
38 DIVIDENDS PAYABLE
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Balance as at 1st January 215,607 127,303 215,607 127,303
Final dividends declared in the prior year 1,179,807 706,588 1,179,807 706,588
Interim dividends declared during the year 338,570 353,415 338,570 353,415
Reversal of dividend declared in prior years [Note 38 (c)] (175,712) - (175,712) -
Dividends paid (1,508,713) (971,699) (1,508,713) (971,699)
Unclaimed balance of Subsidiary aquired by Joint Venture - - 1,562 -
Balance as at 31st December 49,558 215,607 51,121 215,607
38 (a) Proposed Final Dividend
Board of Directors has recommended the payment of nal dividend of Rs 5.50 per share for the year ended 31st December 2010 (2009 nal
- Rs 5.00 per share), which is to be approved at the Annual General Meeting to be held on 31st March 2011. In accordance with Sri Lanka
Accounting Standard No 12 (Revised 2005), “Events after the Balance Sheet Date”, this proposed nal dividend has not been recognised as a
liability as at 31st December 2010. Under the Inland Revenue Act No 10 of 2006, a withholding tax of 10% has been imposed on dividends
declared. An interim dividend of Rs 1.50 per share (2009 - Rs 1.50) was paid for the shareholders on 24th November 2010. Final dividends
proposed for the year 2010 amounts to Rs 1,309.122 Mn (2009 - Rs 1,179.807 Mn).
218 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
38 DIVIDENDS PAYABLE (Contd.)
38 (b) Compliance with Section 56 and 57 of Companies Act No 7 of 2007
As required by Section 56 of the Companies Act No 07 of 2007, the Board of Directors of the Bank satis ed the solvency test in accordance
with the section 57, prior to recommending the nal dividend. A statement of solvency completed and duly signed by the directors on 18th
February 2011 has been audited by Messrs KPMG Ford, Rhodes, Thornton & Co.
38 (c) Reversal of Dividend Declared in Previous Years
The persons who invested in the ordinary shares (voting) of the Bank’s capital, but not recognised and registered as shareholders of the Bank
in the share register are not entitled to such shares. Title to any share/s will vest on a person only when such person’s name is entered in the
register as a holder of shares in the Bank. Thus no dividends were paid to unregistered share holders as such shareholders had no right to
receive any dividends. In the event such investors are recognised as shareholders at any stage, then their shareholdings will be dated back
to the date of the rst investment and they will become entitled to all past dividends. However, the investors who disposed their shares
while they were not registered as shareholders are therefore no longer entitled to any past dividends on such shares. Accordingly dividends
accrued against such shareholders of Rs 175.712 Mn has been credited to retained earnings during the year and presented in the Statement of
Changes in Equity.
39 BORROWINGS
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Re nance borrowings 6,314,639 6,169,445 6,314,639 6,169,445
Borrowings from foreign banks 4,494,901 2,133,264 4,474,029 2,132,453
Other borrowings 1,014 7,419 14,830 11,542
10,810,554 8,310,128 10,803,498 8,313,440
40 SUBORDINATED DEBENTURES
Balance as at 1st January 2,673,192 2,754,851 2,653,192 3,734,851
Interest capitalised * 51,101 45,968 51,101 45,968
Debentures redeemed ** - (127,627) - (1,127,627)
Debentures of the Bank held by Subsidiary acquired through Joint Venture*** - - (6,750) -
Balance as at 31st December 2,724,293 2,673,192 2,697,543 2,653,192
* Interest payable on zero coupon debentures have been added to the debenture value.
** On 10th September 2009 Rs 127.6 Mn worth of debentures were redeemed by the Bank, while on 15th December 2009 Rs 1 Bn worth of
debentures were redeemed by Sithma Development (Pvt) Ltd.
*** Lanka Ventures PLC, a Subsidiary of Acuity Partners (Pvt) Ltd the Joint Venture holds Rs 13.5 Mn debentures of the Bank. 50% of this is
recognised being the shareholding of the Bank in the Joint Venture.
HNB Assurance PLC, a Subsidiary of the Bank holds 200,000 debentures amounting to Rs 20 Mn.
40 (a) Terms and Conditions of Unsecured, Subordinated, Redeemable Debentures issued are as follows
40 (a) i Year of Issuance
2002
Number of debentures of Rs 100 each 1,132,240
Six types of debentures were included in the above issue, with xed or oating interest rate options as follows.
Redemption period 10 Years
Fixed p.a. 14.20%
E ective annual yield p.a. 14.70%
Floating p.a. 6 months net TB+1.25%
Redeemable on 10th September 2012
Amount (Rs 000) 113,224
The oating rate is based on the six month treasury bill net rate with a cap of 17% p.a. and a oor of 12% p.a. These debentures are listed on
the Colombo Stock Exchange.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 219
40 SUBORDINATED DEBENTURES (Contd.)
40 (a) ii Year of Issuance 2006
Number of debentures of Rs 100 each 11,200,000
Five types of debentures were included in the above issue, with xed or oating interest rate options as follows.
Redemption Period 6 Year 7 Year 8 Year 15 Year 18 Year
Fixed p.a. 11.00% 11.25%
E ective annual yield p.a. 11.00% 11.00%
Floating p.a. 6 months
net
TB + 2.25% 6 months
net
TB + 2.25% 6 months
net
TB + 2.25%
Redeemable on 31st March 2012 31st March 2013 31st March 2014 31st March 2021 31st March 2024
Amount (Rs 000) 262,500 250,000 300,000 176,657 332,209
The above oating rate is based on the six month treasury bill net rate with a cap of 16% p.a. and a oor of 8% p.a. These debentures are listed
on the Colombo Stock Exchange.
40 (a) iii Year of Issuance 2007
Number of debentures of Rs 100 each 12,000,000
Two types of debentures were included in the above issue with xed rates.
Redemption Period 10 years 15 years
Fixed p.a. 16.00% 16.75%
E ective annual yield p.a. 16.00% 16.75%
Redeemable on 31st July 2017 31st July 2022
Amount (Rs 000) 500,000 700,000
These debentures are listed on the Colombo Stock Exchange.
40 (a) iv Year of Issuance 2008
Number of debentures of Rs 100 each 897,045
Five types of debentures were included in the above issue with xed or oating interest rate options. However only the 5 year debentures
were issued with the following characteristics.
Redemption period 5 year
Fixed p.a.
E ective annual yield p.a.
Floating p.a. 1 year net TB + 1.00%
Redeemable on 4th June 2013
Amount (Rs 000) 89,705
These debentures are pending listing on the Colombo Stock Exchange.
40 (a) v The above debentures will, in the event of the winding of the Bank, be subordinated to the claims of depositors and
all other creditors of the Bank.
The Bank has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during 2010 and 2009.
41 INSURANCE PROVISION-LIFE
The insurance provision - life balance represents the life fund of the Subsidiary HNB Assurance PLC, which is carrying out life and general
insurance business. This balance represents the amounts attributable to life policy holders included in the Group’s net assets. The valuation
of the insurance provision - life as at 31st December 2010 was made by Mr M Poopalanathan, AIA, of Messrs Actuarial and Management
Consultants (Pvt) Ltd for and on behalf of HNB Assurance PLC. The life fund stands at Rs 2,385.2 Mn as at 31st December 2010 (2009 -
Rs 1,853.5 Mn) and in the opinion of the Actuary this amount is adequate to cover the liabilities pertaining to the long term insurance
business of HNB Assurance PLC, as per the actuary’s report dated 31st January 2011.
220 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
42 INSURANCE PROVISION - GENERAL
Insurance provision general represents the following which are included in the nancial statements of HNB Assurance PLC, Subsidiary of the
Bank, as required by the Statement of Recommended Practice of the Institute of Chartered Accountants of Sri Lanka (ICASL) and in accordance
with the regulation of Insurance Industry Act No 43 of 2000.
Group Group
As at 31st December 2010 2010 2009 2009
Rs 000 Rs 000 Rs 000 Rs 000
Unearned premium
Gross 748,856 626,056
Reinsurance (196,675) (202,352)
Net 552,181 423,704
Deferred acquisition expenses (12,392) (4,644)
Unexpired risk reserve 12,641 9,244
552,430 428,304
Claims outstanding - Gross 154,176 151,825
Claims incurred but not reported - Gross 24,052 178,228 19,235 171,060
Total 730,658 599,364
43 DEFERRED TAX LIABILITIES
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Deferred tax liabilities [Note 43 (a)] 890,602 967,604 891,530 968,494
Deferred tax assets [Note 43 (b)] (154,718) (28,351) (157,154) (30,128)
735,884 939,253 734,376 938,366
43 (a) Deferred Tax Liabilities
Bank Group
2010 2009 2010 2009
Temporary Tax Temporary Tax Temporary Tax Temporary Tax
Di erence E ect Di erence E ect Di erence E ect Di erence E ect
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Balance as at 1st January 2,764,583 967,604 2,582,693 903,942 2,768,345 968,494 2,588,134 905,420
Impact on rate change reversed to
Income Statement [Note 43 (c)] - (177,861) - - - (177,898) - -
Impact on rate change to equity - (15,661) - - - (15,661) - -
Deferred tax liabilities attributable
to revaluation surplus
charged to equity (8,029) (2,248) (8,029) (2,810) (8,029) (2,248) (8,029) (2,810)
Adjustment to deferred tax on
additional investment in
Subsidiary through the Joint Venture - - - - 657 185 - -
Originating during the year 424,173 118,768 189,919 66,472 423,779 118,658 188,240 65,884
3,180,727 890,602 2,764,583 967,604 3,184,752 891,530 2,768,345 968,494
Deferred Tax Liability Charged Directly to Equity
According to Sri Lanka Accounting Standard No 14 (Revised 2005) “Income Taxes”, deferred tax shall be charged or credited directly to equity if
the tax relates to items that are credited or charged, in the same or in a di erent period, directly to equity.
Accordingly, the deferred tax liability arising on revaluation of property, plant and equipment of Rs 17,547 Mn was charged directly to
revaluation reserve in the Statement of Changes in Equity in 2007. Reversals of Rs 2.248 Mn per annum (2009 - Rs 2.810 Mn) have been made
to the revaluation reserve in the Statement of Changes in Equity from deferred tax liability. The reversal of deferred tax liability to revaluation
reserve results from the excess depreciation resulting from the revaluation of property, plant and equipment that took place in 2007.
No deferred tax liability has been recognised for Sithma Development (Pvt) Ltd, in view of the tax holiday enjoyed by the company. The details
have been given in Note 20 (i).
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 221
43 DEFERRED TAX LIABILITIES (Contd.)
43 (b) Deferred Tax Asset
Bank Group
2010 2009 2010 2009
Temporary Tax Temporary Tax Temporary Tax Temporary Tax
Di erence E ect Di erence E ect Di erence E ect Di erence E ect
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Balance as at 1st January 81,003 28,351 90,114 31,540 86,078 30,128 93,587 32,756
Opening balance adjustment - - - - (446) (156) - -
Impact on rate change reversed to
Income Statement [Note 43 (c)] - (5,670) - - - (5,853) - -
Deferred tax asset recognised / (reversed)
on general provisions [Note 43 (d) ] 471,560 132,037 (9,111) (3,189) 471,560 132,037 (9,111) (3,189)
Adjustment to deferred tax on
additional investment in Subsidiary
through the Joint Venture - - - - 454 127 - -
Deferred tax asset recognised / (reversed)
on deductible temporary di erences
other than general provision - - - - 3,110 871 5,071 1,775
Deferred tax on disposal of
DNH Financial (Pvt) Ltd
(former HNB Stockbrokers (Pvt) Ltd) - - - - - - (3,469) (1,214)
552,563 154,718 81,003 28,351 560,756 157,154 86,078 30,128
43 (c) Impact Due to Corporate Income Tax Rate Change
The corporate income tax rate would be reduced to 28% commencing from year of assessment 2011/12 as per the budget proposals for 2011
announced by the Finance Minister, which is considered to be substantially enacted pending legislation in 2011. Accordingly, deferred tax
asset and liability have been computed based on 28% and Rs 172.191 Mn in the Bank and Rs 172.045 Mn in the Group have been reversed to
Income Statement as disclosed in Note 20 (b) - Deferred Tax Expense.
43 (d) Deductible Temporary Di erence - General Provision - Bank
During the year the Central Bank of Sri Lanka issued amended guidelines on general provision requirement for performing and
overdue / special mention loans and advances as explained in Note 4.8.3 (b) which require the banks to maintain general provision at 0.5%
commencing from 1st January 2012. The banks shall reduce the general provision requirement of 1% to 0.5% at a rate of 0.1% per quarter
commencing from 1st October 2010.
The general provision requirement as at 31st December 2010 was 0.9%. Accordingly, 0.4% of the general provision will reverse during 2011.
The Bank has recognised a deferred tax asset amounting to Rs 146.444 Mn arising due to the said reversal.
In management’s view the Bank’s NPA ratio as at Balance Sheet date is an indicator of deferred tax asset which could be recovered in the future
periods in respect of the deductible temporary di erence arising from this balance general provision of 0.5%. Recognition of deferred tax asset
relating to temporary di erences arising from balance general provision of 0.5% as at Balance Sheet date was limited to Bank’s NPA ratio of
4.51% (2009 - 6.15%). Deferred tax asset recognised during the year of Rs 132.037 Mn is the deferred tax asset recognised during the year net
of reversal of deferred tax asset.
44 OTHER LIABILITIES
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Cheques sent on clearing 2,191,687 1,709,760 2,191,687 1,709,760
Accrued expenditure and interest 14,474,729 14,652,430 14,594,661 14,746,243
Items in transit 5,782 7,871 5,782 7,871
Margins 1,162,309 905,455 1,162,309 905,455
Refundable deposits and advances* - - 489,442 191,323
Balance held o/a of Pension Fund 2,207,605 2,053,398 2,207,605 2,053,398
Balance held o/a of Widows’ / Widowers’ and Orphans’ Pension Fund (WW&OP) 41,047 467,970 41,047 467,970
Balance held o/a of Employees’ Provident Fund (EPF) 110,365 24,813 110,365 24,813
Provision for retiring bene ts - - 33,776 22,878
Payable to vendors for lease equipments 640,469 181,703 640,469 181,703
Other creditors 1,029,850 973,037 1,843,910 1,634,317
21,863,843 20,976,437 23,321,053 21,945,731
*Refundable deposits and advances include the advances taken from customers on account of the apartments in the Residential Apartments
Complex which is developed by Sithma Development (Pvt) Ltd.
222 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
45 EMPLOYEE RETIREMENT BENEFITS
45 (a) Pension Fund
An actuarial valuation of the Pension Fund was carried out as at 31st December 2010 by Mr M Poopalanathan, AIA, Messrs Actuarial and
Management Consultants (Pvt) Ltd, a rm of professional actuaries. The valuation method used by the actuaries to value the Fund is the
“Projected Unit Credit Method”, the method recommended by the Sri Lanka Accounting Standard No 16 (Revised 2006) “Employee Bene t s ”.
Accordingly, the Bank contributes on the following basis for the employees to the Pension Fund:
Pensionable Employees - 24.34%
Employees who opted for the Optional Scheme - 23%
The assets of the Fund, which are independently administered by the Trustees as per the provision of the Trust Deed are held separately from
those of the Bank.
No additional provision has been made in the Financial Statements of the Bank for gratuities to employees who have completed ve or more
years of service payable under the payment of Gratuity Act No 12 of 1983 as the Bank contributes for all permanent employees to its own non-
contributory pension scheme, which is in force.
45 (a) i Amounts Recognised in the Balance Sheet are as follows
As at 31st December 2010 2009
Rs 000 Rs 000
Present value of unfunded obligation - -
Present value of funded obligation 8,415,678 6,927,747
Total present value of obligations 8,415,678 6,927,747
Fair value of plan assets (7,358,111) (5,977,832)
Present value of net obligations 1,057,567 949,915
Less: Unrecognised net obligations (1,057,567) (949,915)
Recognised liability for de ned bene t obligations - -
The transitional liability to be recognised amounts to Rs 566.96 Mn.
45 (a) ii Plan Assets Consist of the Following
As at 31st December 2010 2009
Rs 000 Rs 000
Equity securities and debentures 402,302 347,001
Government bond 4,347,510 3,327,393
Balance with Hatton National Bank PLC 2,207,605 2,053,398
Fixed deposits 255,936 250,040
Interest receivable 148,770 -
Tax payable (4,012) -
7,358,111 5,977,832
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 223
45 (a) iii Movement in the Present Value of De ned Bene t Obligations
2010 2009
Rs 000 Rs 000
Liability for de ned bene t obligations as at 1st January 6,927,747 6,496,902
Actuarial (gains) / losses 741,662 (371,379)
Bene ts paid by the plan (373,470) (260,270)
Current service cost and interest cost 1,119,739 1,062,494
Liability for de ned bene t obligations as at 31st December 8,415,678 6,927,747
45 (a) iv Movement in Plan Assets
Fair value of plan assets brought forward 5,977,832 4,338,509
Contributions paid into plan 825,160 1,106,182
Bene ts paid by the plan (373,470) (260,270)
Actuarial gains 408,190 225,810
Expected return on plan assets 520,399 567,601
Fair value of plan assets as at 31st December 7,358,111 5,977,832
45 (a) v Actuarial Assumptions
2010 2009
Discount rate as at 31st December 9.75% 10.50%
Expected return on plan assets as at 1st January 8.38% 11.50%
Future salary increases 9.77% 10.01%
Future pension increases Nil Nil
Increase in cost of living allowance 10% Nil
Assumptions regarding future mortality are based on 1967 - 70 mortality table and a (90) annuitants table (males and females) issued by the
Institute of Actuaries.
The overall expected long term rate of return on assets is 8.38%.
The demographic assumptions underlying the valuation are retirement age (55 years), early withdrawals from service and retirement on medi-
cal grounds, death before and after retirement, etc.
45 (a) vi Historical Information
As at 31st December 2009 2008 2007
Rs 000 Rs 000 Rs 000
Present value of the de ned bene t obligation 6,927,747 6,496,902 5,275,079
Fair value of plan assets (5,977,832) (4,338,509) (3,857,705)
De cit in the plan 949,915 2,158,393 1,417,374
45 (b) Widows’, Widowers’ and Orphans’ Pension Fund
The results of the actuarial valuation of the Widows’, Widowers’ and Orphans’ Pension Scheme indicates that the actuarial present value of the
promised bene t is Rs 261.4 Mn and that the fair value of the fund assets is Rs 555.5 Mn resulting in a past service surplus of Rs 294.1 Mn (2009
- Rs 289.9 Mn) in the Widows’, Widowers’ and Orphans’ Pension Scheme as at 31st December 2010.
No contribution is made by the Bank and the members contribution during the period amounted to Rs 53 Mn.
224 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
46 STATED CAPITAL
In accordance with Section 58 of Companies Act No 7 of 2007, which became e ective from 3rd May 2007, share capital and share premium
have been classi ed as stated capital.
As at 31st December 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Voting ordinary shares
As at 1st January
189,520,615 (2009 - 189.3 Mn) voting ordinary shares 2,903,480 2,881,387
Issue of shares under ESOP
1,754,991 (2009 - 0.191 Mn) voting ordinary shares 209,650 22,093
As at 31st December
191,275,606 (2009 - 189.5 Mn) voting ordinary shares 3,113,130 2,903,480
Non-voting ordinary shares
As at 1st January
46,249,532 (2009 - 46.2 Mn) non-voting ordinary shares 2,180,604 2,178,003
Issue of shares under ESOP
443,884 (2009 - 0.049 Mn) non-voting ordinary shares 24,816 2,601
As at 31st December
46,693,416 (2009 - 46.2 Mn) non-voting ordinary shares 2,205,420 2,180,604
Stated Capital as at 31st December 5,318,550 5,084,084
The non-voting shares rank pari passu in respect of all rights with the ordinary shares of the Bank except voting rights on resolutions passed
at general meetings. If the Bank fails to pay dividends for three consecutive years, these shares will automatically be converted into voting
ordinary shares.
Voting and non-voting shares included under stated capital consist of share premium on shares issued of Rs 988 Mn and Rs 1,716 Mn
respectively.
Expenses relating to the above share issue amounting to Rs 2.542 Mn has been charged to Income Statement as disclosed in
Note 15 - Operating Expenses.
46 (a) Employee Share Ownership Plan
Employee Share Ownership Plan was introduced in 2005 where shares were o ered to the executive employees of the Bank.
No shares were allotted under the Employee Share Ownership Plan in 2009 and the loan outstanding as at 31st December 2010 amounts to
Rs 197.284 Mn. The amount released to the employees who left the service in 2010 is Rs 105.78 Mn.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 225
46 (b) Employee Share Option Plan
46 (b) i Allocation - 2008
Type of share Number of Number of Number of Number of Allotment Weighted
options options options options price average
brought forward expired exercised remaining share price
Rs Rs
Voting* 1,963,198 Nil 1,620,059 343,139 115.54 290.85
Non voting* 476,143 Nil 410,960 65,183 52.51 181.61
* These options were allocated on 28th March 2008 and the retention period ended on 27th March 2009.
The remaining contractual life of the above share options is 2 years and 2 months.
46 (b) ii Allocation - 2010
Type of share Number of Number of Number of Number of Allotment Weighted
options options options options price average
allocated expired exercised remaining share price
Rs Rs
Voting* 2,366,458 Nil 134,932 2,231,526 166.51 290.85
Non voting* 577,367 Nil 32,924 544,443 98.31 181.61
* These options were allocated on 20th April 2010 and the retention period will end on 19th April 2011.
The remaining contractual life of the above share options is 4 years and 3 months.
No nancial assistance is granted to the employees in order to purchase shares.
The share options received at a particular grant can be exercised only after one year from the grant date. However if an employee retires
during the year in which he or she has been granted the options, may excercise the options prior to retirement.
The outstanding options can be exercised within four years from the end of retention period or at retirement, resignation or death whichever
occurs rst.
226 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
47 COMMITMENTS AND CONTINGENCIES - BANK AND GROUP
In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities with legal recourse to its
customers and would be party to litigation due to its operations. No material losses are anticipated as a result of these transactions.
47 (a) Capital Commitments
Capital expenditure approved by the Board of Directors for which provision has not been made in the accounts amounts to approximately
Rs 347 Mn.
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
Approved and contracted for 297,780 250,958 495,780 250,958
Approved and not contracted for 49,163 - 49,163 -
346,943 250,958 544,943 250,958
Share of capital commitments of Joint Venture amounted to Rs 198 Mn as at 31st December 2010.
47 (b) Future Monthly Commitments on Operating Leases - Bank
Bank Group
As at 31st December 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000
0 - 1 year - - 17,721 15,994
1 - 5 years 10,391 6,960 20,742 14,572
6 - 10 years 7,233 17,591 7,233 17,591
11 - 15 years 304 798 304 798
16 - 20 years 15 278 15 278
17,943 25,627 46,015 49,233
47 (c) Irrevocable Commitments - Bank
Commitments as at Balance Sheet date that cannot be revoked at the discretion of the Bank without the risk of incurring signi cant penalty or
expense amounted to Rs 42.511 Mn (2009 - Rs 29.750 Mn).
47 (d) Contingent Liabilities
As at 31st December 2010 2009
Rs 000 Rs 000
Acceptances 6,487,793 4,040,195
Documentary credits 14,290,864 9,505,450
Guarantees 28,220,189 20,244,879
Bills for collection 5,842,576 6,062,584
Interest rate swap 394 2,940
54,841,816 39,856,048
Forward exchange contracts 69,328,734 23,171,172
Total - Bank 124,170,550 63,027,220
Contingent liabilities Subsidiaries - 12,480
Total Contingencies - Group 124,170,550 63,039,700
Unrecognised pension fund de cit amounted to Rs 1,057 Mn as at 31st December 2010.
Contingent liabilities of Joint Venture as at 31st December 2010 was nil.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 227
47 COMMITMENTS AND CONTINGENCIES - BANK AND GROUP (Contd.)
47 (e) Litigation against the Bank
i HC (Civil) case No. 277/2007 MR a claim for damages for dishonour of Bank draft due to a technical issue and for closure of current account.
Based on the above information available on the current status of the above case, the Bank is not in a position to quantify the potential
nancial impact if any, as at the Balance Sheet date. Further, the Bank con rms that there is no case (including the LT cases) which is not
disclosed above which would have a material impact on the nancial position of the Bank.
47 (f) Tax assessments against the Bank
The following tax assessments are outstanding, against which the Bank has duly appealed.
i VAT on nancial services for 2003 and 2004, taxes amounting to Rs 207 Mn, on Assessment Nos. VATFS/06/0312/06, VATFS/U6/0401/01,
VATFS/J6/0402/02, VATFS/U6/0403/03, VATFS/U6/0404/04 and VATFS/U6/0405/05. (Pursuant to the determination made by the Board of
Review on the appeal made for VAT on nancial services, the Bank led a case in the court of appeal - CA No. 01/2010 - BRA/VAT - 06).
ii PAYE taxes amounting to Rs 407 Mn. on Assessments Nos.8018210, 8202714, & 8364152 for the years 2003, 2004 & 2005 respectively.
iii VAT on nancial services for 2006 taxes amounting to Rs 437.7Mn, on Assessments Nos. VATFS/BFSU/2009/110 to VATFS/BFSU/2009/113.
iv VAT on nancial services for 2007 taxes amounting to Rs 1,330.6 Mn,on Assessments Nos. VATFS/BFSU/2009/131 to VATFS/BFSU/2009/142.
v VAT on nancial services for 2008 taxes amounting to Rs 1,825.3 Mn,on Assessments Nos. VATFS/BFSU/2009/251 to VATFS/BFSU/2009/262.
vi VAT for the year 2005 taxes amounting to Rs 10.5 Mn, on Assessments Nos. 8865223 and 8865224.
vii VAT for the year 2009 taxes amounting to Rs 11.8 Mn, on Assessment No.8882823.
The Bank is of the view that the above assessments will not have any material impact on the Financial Statements.
228 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
48 RELATED PARTY DISCLOSURES
The Bank carries out transactions in the ordinary course of its business with parties who are de ned as related parties in Sri Lanka Accounting
Standard 30 (Revised 2005) “Related Party Disclosures ”, the details of which are reported below. The pricing applicable to such transactions is
based on the assessment of risk and pricing model of the Bank and is comparable with what is applied to transactions between the Bank and
its unrelated customers.
48 (a) Parent and Ultimate Controlling Party
The Bank does not have an identi able parent of its own.
48 (b) Transactions with Key Management Personnel (KMP)
According to Sri Lanka Accounting Standard 30 (Revised 2005) “Related Party Disclosures”, Key Management Personnel are those having
authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Directors of the Bank (including
executive and non-executive Directors) and their immediate family members have been classi ed as KMP of the Bank.
Immediate family member is de ned as spouse or dependent. Dependent is de ned as anyone who depends on the respective Director for
more than 50% of his / her nancial needs.
As the Bank is the ultimate parent of its Subsidiaries listed out in Note 32, and the Board of Directors of the Bank have the authority and
responsibility for planning, directing and controlling the activities of the Group, the Directors of the Bank and their immediate family members
have been identi ed as the KMP of the Group.
Therefore, o cers who are only directors of the Subsidiaries and not of the Bank have been classi ed as KMP of that respective Subsidiary only.
48 (b) i Compensation to KMP
Bank Group
Short term employment bene ts (Rs 000) 74,544 74,774
Post employment bene ts (Rs 000) 7,435 7,435
81,979 82,209
Bene ts under Employee Share Option Plan
Voting (No of shares) - Exercised 38,083 38,083
- Remaining* 36,329 36,329
Non-voting (No of shares) - Exercised 9,293 9,293
- Remaining* 8,865 8,865
Bene ts under Employee Share Ownership Plan
Non-voting (No of shares) 53,179 53,179
* Shares alloted in 2010 based on the results achieved for the year 2009.
In addition to their salaries, Bank also provides non cash bene ts to KMP and contributes to a post employment de ned bene t plan on behalf
of the Executive Director.
48 (b) ii Credit Card Facilities to KMP
As at 31st December 2010
Limit Outstanding
Balance
Rs 000 Rs 000
Mr Rienzie T. Wijetilleke (Chairman) 500 152
Mr Rajendra Theagarajah (Managing Director / CEO) 500 308
Mr D H S Jayawardena * 10,500 189
Mr M V Theagarajah 500 12
Mr R K Obeyesekere 500 29
Ms Pamela C. Cooray 500 1
Mr Ranjeevan Seevaratnam 350 -
Mr N G Wickremeratne** 900 269
Ms M A R C Cooray 500 -
* Rs 500,000/= clean and the balance is secured by cash deposits.
** Cash cover available for the total limit.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 229
48 RELATED PARTY DISCLOSURES (Contd.)
48 (b) Transactions with Key Management Personnel (KMP) (Contd.)
48 (b) iii Facilities Granted to KMP
As at 31st December 2010
Name of Director Aggregate Amount of Accommodation
Limit Outstanding Security
Rs 000 Rs 000
Mr Rienzie T. Wijetilleke (Chairman) 2,380 2,038 Cash deposit
Mr M V Theagarajah 4,600 - Cash deposit
Mr Ranjeevan Seevaratnam 1,500 - -
Mr N G Wickremeratne 180 - Shares and Cash Deposit
Ms Pamela C. Cooray 6,000 - -
No losses have been recorded against loan balances outstanding during the period with KMP and no speci c provisions have been made for
loan losses on balances with KMP and their immediate family members as at the Balance Sheet date.
48 (b) iv Deposits held by KMP with the Bank
As at Balance Sheet date the aggregate deposits (including Treasury Bills and Repos) held by the KMP with the Bank are as follows:
SLRs ‘000 173,028
USD ‘000 203
GBP ‘000 18
Euro ‘000 1
AUD ‘000 28
CAD ‘000 13
48 (c) Transactions with / between Subsidiaries
Details of the Subsidiaries are given in Note 32.
48 (c) i HNB Assurance PLC
HNB Assurance PLC (“Assurance”), is a Subsidiary of the Bank.
The details of the transactions with the Bank are as follows:
(a) Assurance held deposits and current accounts with the Bank amounting to Rs 155.16 Mn as at 31st December 2010 (2009 - Rs 122.35
Mn). The Company also held debentures of the Bank amounting to Rs 20.0 Mn as at 31st December 2010 (2009 - Rs 20.0 Mn).
(b) A summary of transactions of Assurance with the Group are given below:
Transaction Type HNB SITHMA
Rs 000 Rs 000
Premium received 23,462 5,853
Claims incurred 7,099 4,464
Interest received 9,244 -
O ce rent and electricity paid 16,756 -
Other administrative expenses paid 69,074 -
Dividend paid 33,742 -
230 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
48 RELATED PARTY DISCLOSURES (Contd.)
48 (c) Transactions with / between Subsidiaries (Contd.)
48 (c) ii Sithma Development (Pvt) Ltd
Sithma Development (Pvt) Ltd (“Sithma”) is a wholly owned Subsidiary of the Bank.
(a) The details of its borrowing transactions with the Bank are as follows:
Type of Facility Rate of Interest As at 31st December 2010 Security
Limit Outstanding
Rs 000 Rs 000
Overdraft 2% above the one year *WATB. 900,000 409,562 Registered primary oating mortgage for Rs 3,000 Mn
to be reviewed every 6 months. over land and building at
No 479, T B Jayah Mw, Colombo 10.
Term Loan 1.5% above the 6 month treasury 2,000,000 1,774,960 A primary mortgage bond for Rs 3,000 Mn
bill rate (gross). To be reviewed over immovable property at
every 6 months (24 months No 479, T B Jayah Mw, Colombo 10.
grace period) (Standing concurrent to existing
primary concurrent mortgage bond)
Interest payable 10,687
*WATB - Weighted Average Treasury Bill rate
(b) A summary of other transactions of Sithma with the Group are given below:
Transaction Type HNB HNB
ASSURANCE
Rs 000 Rs 000
Leasse rental received 617,917 -
Refundable deposit received 500,000 -
Insurance premium paid - 5,853
Claims received - 4,464
Overdraft interest paid 62,592 -
Term loan interest paid 218,308 -
Ground rent paid 3,811 -
48 (c) iii Majan Exchange LLC
Majan Exchange LLC (Majan) is a 40% owned Subsidiary of the Bank.
Majan maintains a current account with the Bank and the balance as at 31st December 2010 amounted to Rs 20.8 Mn (2009 - Rs 389,000).
Value of the outstanding guarantees issued by the Bank to Majan Exchange LLC as at 31st December 2010 amounted to Rs 2.2 Mn.
The Bank has paid an advance payment to Majan to the value of Rs 11.9 Mn during the year (2009 - 12.3 Mn).
48 (c) iv Commercial Interlink Services Inc (o/a of Delma Exchange Canada)
Commercial Interlink Services Inc (o/a of Delma Exchange Canada) is a wholly owned Subsidiary of the Bank.
The Company maintains a current account with the Bank and the balance as at 31st December 2010 amounted to Rs 36,709/- (2009 -
Rs 421,000). The total amount due from Commercial Interlink Services Inc as at 31st December 2010 is Rs 18.9 Mn for which 100% provision has
been made by the Bank.
The company has ceased operations in 1st October 2010 and the Bank has made a full provision of Rs 10.063 Mn against it’s investments in the
company.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 231
48 RELATED PARTY DISCLOSURES (Contd.)
48 (d) Transactions with Associates
48 (d) i Lanka Ventures PLC
The Bank sold it’s equity stake of 20.07% in Lanka Ventures PLC to Acuity Partners (Pvt) Ltd, Joint Venture of HNB and DFCC Bank on 18th
January 2010 [Note 48 (e)]. Accordingly as explained in Note 30, Lanka Ventures PLC ceased to be an Associate of the Bank.
48 (d) ii Delma Exchange
Delma Exchange is a 20% owned Associate of the Bank.
Delma Exchange maintains current accounts with the Bank and the balance as at 31st December 2010 amounted to Rs 35.4 Mn
(2009 - Rs 9.8 Mn). Value of the outstanding guarantees issued by the Bank to Delma Exchange as at 31st December 2010 amounted
to Rs 78.54 Mn. During the year receivable from Delma Exchange amounting to Rs 12.171 Mn was transferred to investment. There was no
change in the Bank’s interest in the Associate subsequent to this investment.
48 (d) iii Splendor Media (Pvt) Ltd
Splendor Media (Pvt) Ltd is a 25% owned Associate of Sithma, a fully owned Subsidiary of the Bank.
The Bank and Sithma have paid Rs 41 Mn (2009 - Rs 24.78 Mn) and Rs 1.01 Mn (2009 - 0.44Mn) respectively to Splendor Media (Pvt) Ltd as
commission against advertising channeled through that company.
48 (e) Transactions with Joint Venture - Acuity Partners (Pvt) Ltd
During the year Bank increased its capital contribution (direct / through conversion of loans) to Acuity Partners (Pvt) Ltd the Joint Venture
between DFCC Bank and HNB by Rs 405 Mn. Bank’s shareholding in Acuity Partners (Pvt) Ltd remained at 50% subsequent to this investment.
Acuity Partners (Pvt) Ltd has a current account with the Bank with a balance of Rs 14.3 Mn (2009 - Rs 192,455) as at 31st December 2010 and
has paid bank charges of Rs 497,136. (2009 - Rs 130,000). Further the Company had paid to the Bank Rs 21.5 Mn as loan interest during the year
ended 31st December 2010.
Bank sold its equity stakes in Lanka Ventures PLC (20.07%) and Acuity Securities Limited (49.99%) to Acuity Partners (Pvt) Ltd on 18th January
2010 and 30th September 2010 respectively. Both Lanka Ventures PLC (79.58%) and Acuity Securities Limited (100%) were Subsidiaries of
Acuity Partners (Pvt) Ltd as at 31st December 2010.
Total pro t earned by the Bank from these transactions amounted to Rs 149.29 Mn which is disclosed in Note 14 - Other Income under “Capital
gain from sale of Associate company” and “Capital gain form sale of investment securities”.
48 (f) Transactions with Other Related Entities
Other Related Entities are those which are controlled or signi cantly in uenced, directly or indirectly by KMP of the Bank. Signi cant in uence
is presumed to be established if a KMP of the Bank has more than 20% shareholding in an entity, unless otherwise rebutted by the respective
KMP. Further, signi cant in uence is also established if in the view of a KMP, he / she has the ability to in uence the operating and nancial
policies of an entity even in the absence of 20% shareholding.
The transactions of the Bank with other related entities are disclosed in Note 48 (f) i, ii and iii.
232 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
48 Related Party Transactions (Contd.)
48 (f) i Lending Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Aggregate Amount of Accommodation
as at 31st December 2010
Security
Limit
(Rs Mn)
Outstanding
(Rs Mn)
Stassen Exports (Pvt) Ltd Mr D H S Jayawardena
(Chairman / Shareholder)
Mr R K Obeyesekere
(Director / Shareholder)
Overdraft I
Overdraft II
Letters of Credit
Letters of Guarantee
Forex Forward Contracts
Negotiation of
Documentary Bills
Total
2,948.50
300.00
265.00
100.00
172.50
500.00
4,286.00
158.41
241.23
35.19
47.95
33.30
25.01
541.09
Quoted company shares
Stassen International
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Overdraft
Letters of Credit
Letters of Guarantee
Negotiation of
Documentary Bills
Total
100.00
150.00
125.00
500.00
875.00
-
63.38
61.11
76.78
201.27
Quoted company shares
Milford Exports (Ceylon)
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director /
Shareholder)
Mr R K Obeyesekere
(Director / Shareholder)
Overdraft
Letters of Credit
Letters of Guarantee
Negotiation of Doc Bills
Total
10.00
50.00
40.00
200.00
300.00
-
-
10.00
-
10.00
Quoted company shares
Madulsima Plantations PLC Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Overdraft I
Overdraft II
Standby Overdraft
Letters of Guarantee
Term Loan I
Term Loan II
Letters of Guarantee
Total
50.00
70.00
33.00
1.25
11.66
4.34
1.00
171.25
37.30
1.25
11.66
4.34
-
54.55
Immovable property
(leasehold),
Quoted company
shares,
Stock in trade
Cash deposit
Ceylon Garden Coir (Pvt) Ltd Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Letters of Credit
Total
10.00
10.00
-
-
Quoted company shares
Stassen Natural Foods
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Letters of Credit
Letter of Guarantee
Negotiation of
Documentary Bills
Overdraft
Total
50.00
15.00
200.00
10.00
275.00
0.65
15.00
10.18
-
25.83
Quoted company shares
Browns Beach Hotels PLC Mr D H S Jayawardena
(Chairman)
M
r M V Theagarajah
(Director / Shareholder)
Letters of Guarantee
Total
0.25
0.25
0.25
0.25
Cash deposits
Lanka Milk Foods
(CWE) PLC
Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Overdraft
Letters of Credit
Letters of Guarantee I
Letter of Guarantee II
Total
900.00
(900.00)
(70)
30.00
930.00
133.52
-
96.65
230.17
Quoted company
shares, immovable
property (leasehold),
and plant & machinery
Lanka Dairies (Pvt) Ltd Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Overdraft
Letter of Credit
Total
200.00
100.00
300.00
152.77
17.02
169.79
Quoted company shares
}
}
Figures in brackets indicate sub limits granted to the respective entities.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 233
48 Related Party Transactions (Contd.)
48 (f) i Lending Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Aggregate Amount of Accommodation
as at 31st December 2010
Security
Limit
(Rs Mn)
Outstanding
(Rs Mn)
Ambewela Products
(Pvt) Ltd
Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Overdraft
Letters of Credit
Total
10.00
50.00
60.00
9.87
13.03
22.90
Quoted company shares
Ambewela Livestock
Company Ltd
Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Overdraft
Letters of Credit
Total
50.00
10.00
60.00
4.91
-
4.91
Quoted company shares
Pattipola Livestock
Company Ltd
Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Overdraft
Letters of Credit
Total
50.00
10.00
60.00
8.22
-
8.22
Quoted company shares
Distilleries Company
of Sri Lanka PLC
Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Standby Overdraft
Letters of Credit
Letters of Guarantee
Total
1,220.00
400.00
3.12
1,623.12
1,202.64
233.07
3.12
1,438.83
Quoted company shares
cash margins
Periceyl (Pvt) Ltd Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Letters of Credit
Standby Overdraft
Letters of Guarantee
Total
25.00
(25.00)
1.80
26.80
-
11.91
1.80
13.71
Quoted company shares
cash margins
Balangoda Plantations PLC Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Overdraft
Total
45.00
45.00
-
-
Immovable property
(leasehold)
Texpro Industries Ltd Mr D H S Jayawardena
(Chairman)
Overdraft
Bank Guarantee
Total
Overdraft US$ Mn
Letter of Credit US$ Mn
Export Loans US$ Mn
Bill Purchase US$ Mn
Term Loans US$ Mn
Total US$ Mn
21.53
0.22
21.75
0.15
1.60
(1.60)
(0.30)
0.03
1.78
20.92
0.22
21.14
0.13
0.83
0.54
0.22
0.03
1.75
Cash deposit
I
mmovable property
Indo Lanka Exports (Pvt) Ltd Mr. D H S Jayawardena
(Chairman)
Letters of Credit
Overdraft
Letters of Guarantee
Total
* 100.00
* 40.00
* 30.00
170.00
-
-
-
-
Quoted company shares
*(limits not established
yet)
Aitken Spence PLC Mr. D H S Jayawardena
(Chairman)
Term Loan
Total
100.00
100.00
100.00
100.00
Negative pledge
Figures in brackets indicate sub limits granted to the respective entities.
(Contd.)
234 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
48 Related Party Transactions (Contd.)
48 (f) i Lending Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Aggregate Amount of Accommodation
as at 31st December 2010
Security
Limit
(Rs Mn)
Outstanding
(Rs Mn)
Elpitiya Plantations PLC Subsidiary of Aitken
Spence Plantation
Management Ltd
Overdraft / Short term
loan
Commercial Paper
Money Mkt Loan /
overdraft
Standby overdraft
Revolving Loan /
overdraft
Term Loan
Term Loan
Term Loan
Term Loan
Bank Guarantee
E-friends Loan
Overdraft
Overdraft
Lease
Total
50.00
75.00
(75.00)
10.00
1.50
0.68
25.00
1.66
5.50
4.53
30.00
9.00
6.97
219.84
32.52
75.00
-
-
1.50
0.68
25.00
1.66
-
4.53
-
-
6.97
147.86
Immovable property
(leased hold)
Stock in trade
Cash margins
Corporate guarantee
A E N Palm Oil
Processing (Pvt) Ltd
Associate of Aitken Spence
Plantation Management
Ltd
Term Loan
Short Term Export Loan
Negotiation of
Documentary Bills
Total
21.55
33.00
(33.00)
54.55
21.55
-
-
21.55
Corporate guarantee
Stocks & assignment
of book debts, Deposit
of irrevocable export
letters of credit,
Documentry bills drawn
on buyers
Letter of hypothecation
over bills / indemnity
Aitken Spence Hotel
Holdings PLC
Mr D H S Jayawardena
(Chairman)
Term Loan
Overdraft
Total
460.44
20.00
480.44
460.44
-
460.44
Corporate guarantee
Aitken Spence Resources
(Pvt) Ltd
Subsidiary of Aitken
Spence PLC in
which
Mr D H S Jayawardena
is the Chairman
Letters of Guarantee
Total
0.75
0.75
0.75
0.75
Corporate guarantee
Aitken Spence Hotel
Management (Pvt) Ltd
Subsidiary of Aitken
Spence Hotel Holdings
PLC in which
Mr D H S Jayawardena
is the Chairman
Overdraft
Total
10.00
10.00
-
-
Corporate guarantee
Neptune Ayurvedic
Village (Pvt) Ltd
Subsidiary of Aitken
Spence Hotel Holdings
PLC in which
Mr D H S Jayawardena
is the Chairman
Overdraft
Total
10.00
10.00
-
-
Corporate guarantee
Hethersett Hotels Ltd Subsidiary of Aitken
Spence Hotel Holdings
PLC in which
Mr D H S Jayawardena
is the Chairman
Overdraft
Total
15.00
15.00
-
-
Corporate guarantee
Figures in brackets indicate sub limits granted to the respective entities.
(Contd.)
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 235
48 Related Party Transactions (Contd.)
48 (f) i Lending Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Aggregate Amount of Accommodation
as at 31st December 2010
Security
Limit
(Rs Mn)
Outstanding
(Rs Mn)
Ace Containers (Pvt) Ltd
Ace Distriparks (Pvt) Ltd
Ace Container Repair
(Pvt) Ltd
Ace Freight Management
(Pvt) Ltd
Ace Haulage (Pvt) Ltd
Ace Container Terminal
(Pvt) Ltd
Subsidiaries of Aitken
Spence PLC in which
Mr D H S Jayawardena
is the Chairman
Overdraft* / money
market loan
Letters of Guarantee*
Total
100.00
(100.00)
100.00
63.25
19.36
82.61
Corporate guarantee
Corporate guarantee
* Interchangeable Limit
within 6 companies
Aitken Spence
Garments Ltd
Subsidiary of Aitken
Spence PLC in which
Mr D H S Jayawardena
is the Chairman
Letters of Credit US$ Mn
Short Term
Export Loan US $ Mn
Overdrafts US$ Mn
Overdrafts US$ Mn
Total US$ Mn
Overdraft
Letters of Guarantee
Total
1.50
(1.50)
0.15
0.10
1.75
(25.00)
2.00
2.00
0.29
0.46
0.02
0.77
-
0.70
0.70
Documents to title
to goods, stock and
book debts / corporate
guarantee, mortgage
over immovable
property / movable
machinery
Indemnity
Cowrie Investments
(Pvt) Ltd
Subsidiary of Aitken
Spence Hotel Holdings
PLC
which
Mr D H S Jayawardena
is the Chairman
Term Loan US$ Mn
Overdraft US$ Mn
Term Loan US$ Mn
Total US$ Mn
0.47
2.00
4.00
6.47
0.47
0.14
4.00
4.61
Leashold rights to the
Island of Meedhapparu
Ace Power Embilipitiya
(Pvt) Ltd
Subsidiary of Aitken
Spence PLC in
which
Mr D H S Jayawardena
is the Chairman
Overdraft
Syndicated Overdraft
Total
Overdraft US$ Mn
Overdraft US$ Mn
Letter of Credit US $
Term Loan US$ Mn
Term Loan US$ Mn
Term Loan US$ Mn
Term Loan US$ Mn
Total US$ Mn
200.00
(350.00)
200.00
0.62
2.63
0.5
0.11
0.46
0.57
2.43
7.32
0.05
-
0.05
3.75
-
0.11
0.46
0.57
2.43
7.32
-
Leasehold land, building
& xtures
Bookdebts & stock /
shares over Company /
Assignment of project
document / xtures
Documents of title
Duly accpeted drafts
Elpitiya Lifestyle
Solutions (Pvt) Ltd
Subsidiary of
Elpitiya Plantation PLC
Overdraft
Total
4.00
4.00
3.88
3.88
Demand promisary note
/ leasehold land
Factory, building &
machiner
y
ADS Resorts (Pvt) Ltd Subsidiary of Aitken
Spence Hotel
International Ltd
Term Loan US$ Mn
Total US$ Mn
1.94
1.94
1.94
1.94
Project assets at
Lohifushi in Maldives
Unique Resorts (Pvt) Ltd Subsidiary of Aitken
Spence Hotel
International Ltd
Term Loan US$ Mn
Term Loan US$ Mn
Total US$ Mn
12.76
4.00
16.76
12.76
4.00
16.76
Project assets at
Vaadhoo Island Resort in
Maldives
Kandalama Hotels Ltd Subsidiary of Aitken
Spence Hotel Holdings
PLC which
Mr D H S Jayawardena
is the Chairman
Overdraft
Total
20.00
20.00
-
-
Corporate guarantee
}
}
Figures in brackets indicate sub limits granted to the respective entities.
(Contd.)
236 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
48 (f) ii Other Business Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Amount
(Rs Mn)
Madulsima Plantation PLC Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Lease of holiday bungalow at Bogawantalawa 2.28
Lanka Bell (Pvt) Ltd Mr D H S Jayawardena
(Chairman)
Telecommunication charges
Merchant commission
25.26
0.08
Lanka Financial Services
Bureau Ltd
Mr Rajendra Theagarajah
(Chairman)
Subscription paid 3.98
Aitken Spence PLC Mr D H S Jayawardena
(Chairman)
Interest on repurchase agreements
Air tickets
0.01
0.01
Aitken Spence Hotel
Management (Pvt) Ltd
Subsidiary of
Aitken Spence Hotel Holdings PLC
in which company
Mr D H S Jayawardena
is the Chairman
Merchant commission 0.02
Balangoda Plantations PLC Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Repurchase agreements
Interest on repurchase agreements
194.40
6.34
48 Related Party Transactions (Contd.)
48 (f) i Lending Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Aggregate Amount of Accommodation
as at 31st December 2010
Security
Limit
(Rs Mn)
Outstanding
(Rs Mn)
Golden Sun Resorts (Pvt) Ltd
(Ramada Resort)
Subsidiary of Aitken
Spence Hotel Holdings Plc
which
Mr D H S Jayawardena
is the Chairman
Overdraft
Term Loan
Term Loan
Total
10.00
10.00
8.31
28.31
-
10.00
8.31
18.31
Corporate guarantee
Immovable property
Acuity Stockbrokers
(Pvt) Ltd
Subsidiary of the Joint
Venture “Acuity”
Overdraft
Total
130.00
130.00
-
-
-
Acuity Securities Limited
Subsidiary of the Joint
Venture “Acuity”
Overdraft
Total
100.00
100.00
-
-
-
Falcon Commodities
(Pvt) Ltd
On the date the
accommodation
was granted, Mr D H
S Jayawardena had
signi cant in uence
[through the shareholding
of Stassen Exports
(Pvt) Ltd] in Falcon
Commodities (Pvt) Ltd,
which was since disposed
Overdraft / Import Bills
Overdraft
(Habib Bank AG Zurich
Ltd)
--*Total outstanding as
at 31st December 2009
was Rs 326.4 Mn and
the Bank had made a
provision Rs 248.12 Mn
for the unsecured net
exposure as at that date.
The loan outstanding
was written o against
the above provision
of Rs 248.1 Mn, after
recovering Rs 78.3 Mn
from the cash deposits
held by the Bank.
(Contd.)
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 237
48 (f) ii Other Business Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Amount
(Rs Mn)
Bell Vantage (Pvt) Ltd Mr D H S Jayawardena
(Chairman)
Payment for telephone systems 0.01
Browns Beach Hotels PLC Mr D H S Jayawardena
(Chairman)
Mr M V Theagarajah
(Director / Shareholder)
Repurchase agreements
Interest on repurchase agreements
Merchant commission
68.00
2.96
0.85
Stassen Exports (Pvt) Ltd Mr D H S Jayawardena
(Chairman / Shareholder)
Mr R K Obeyesekere
(Director)
Forward contract
Interest on repurchase agreements
336.80
0.49
Stassen International (Pvt) Ltd Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Interest on repurchase agreements 0.98
Sri Lanka Insurance
Corporation Ltd
Signi cant shareholder
of the Bank (according to CBSL
direction)
Repayment of excess insurance claims received
Insurance premium paid
Claims lodged
Merchent commission earned
3.19
4.83
0.52
1.30
Hatton National Bank
Retirement Pension Fund
Mr Rajendra Theagarajah
(Trustee)
Investment in term deposits
Investment in HNB debentures
Interest received on HNB debentures
Balance held by the Bank
on behalf of the fund
Interest paid
Contributions made in 2010
255.94
53.65
4.04
2,207.61
164.24
882.82
Hatton National Bank
Employee Provident Fund
Mr Rajendra Theagarajah
(Trustee)
Investment in term deposits
Investment in Repos
Balance held by the Bank on behalf of the fund
Investment in HNB shares
- Voting
- Non-voting
Contribution made in 2010
Interest paid
Dividends paid
1,811.44
2,177.59
110.37
2.08
8.73
339.48
3.78
2.45
Widows’, Widowers’ and
Orphans’ Pension Fund
Mr Rajendra Theagarajah
(Trustee)
Balance held by the Bank on behalf of the fund
Interest paid
41.05
7.21
Acuity Securities Limited
Subsidiary of the
Joint Venture “Acuity”
Interest received
Commission received
Current account balance as at year end
0.10
0.60
12.29
Acuity Stockbrokers
(Pvt) Ltd
Subsidiary of the
Joint Venture “Acuity”
Bank charges received
Interest received
Commission paid
Current account balance as at year end
0.07
3.35
26.80
39.94
Lanka Ventures PLC Subsidiary of Acuity Partners
(Pvt) Ltd in which
Mr Rajendra Theagarajah is a
Director
Interest paid
Bank charges received
Current account balance as at year end
Debentures
1.24
0.05
4.21
13.50
48 Related Party Transactions (Contd.)
(Contd.)
238 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
48 (f) ii Other Business Transactions with Other Related Entities by the Bank
Company Name of Director
(Relationship)
Nature of Transaction Amount
(Rs Mn)
Namal Acuity Value Fund A fund managed by National Asset
Management Ltd (NAMAL), a
Subsidiary of Milford Holdings (Pvt)
Ltd in which Mr D H S Jayawardena
is the Managing Director / Mr R K
Obeyesekere is a Director.
Investment in units 150.00
48 (f) iii Business Transactions with Other Related Entities by the Group
Company
Name of Director
(Relationship)
Nature of Transaction Amount
(Rs Mn)
Sithma Development (Pvt) Ltd
Acuity Securities Ltd Mr Rajendra Theagarajah
(Chairman)
Lease rentals received 0.34
Lanka Bell (Pvt) Ltd Mr D H S Jayawardena
(Chairman)
Telecommunication charges 0.06
HNB Assurance PLC
Acuity Stockbrokers (Pvt) Ltd Mr Rajendra Theagarajah
(Chairman)
Insurance premium received
Claims paid
1.31
0.27
Acuity Securities Limited Mr Rajendra Theagarajah
(Chairman)
Insurance premium received
Claims paid
Interest received
Investments (Repo)
0.35
0.36
13.54
145.38
Acuity Partners (Pvt) Ltd Mr Rajendra Theagarajah
(Director)
Insurance premium received 0.98
Sri Lanka Insurance
Corporation Ltd
Signi cant shareholder
of the Bank (according to CBSL
direction)
Co insurance premium
Co insurance claims
0.69
-
Colours of Courage Trust
Guarantee Ltd
Mr Rajendra Theagarajah
(Director)
Sponsorship provided 0.11
Stassen Exports (Pvt) Ltd Mr D H S Jayawardena
(Chairman / Shareholder)
Mr R K Obeyesekere
(Director)
Insurance premium received
Claims paid
11.92
9.77
Stassen International
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Insurance premium received 1.32
Stassen Natural Foods
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Insurance premium received 0.21
Ceylon Garden Coir
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Insurance premium received 0.07
48 Related Party Transactions (Contd.)
(Contd.)
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 239
48 (f) iii Business Transactions with Other Related Entities by the Group
Company
Name of Director
(Relationship)
Nature of Transaction Amount
(Rs Mn)
Milford Exports (Ceylon)
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director / Shareholder)
Mr R K Obeyesekere
(Director / Shareholder)
Insurance premium received 0.04
Milford Developers
(Pvt) Ltd
Mr D H S Jayawardena
(Managing Director)
Mr R K Obeyesekere
(Director)
Insurance premium received 0.46
Aitken Spence Garments Ltd Subsidiary of Aitken Spence PLC
in which company
Mr D H S Jayawardena
is the Chairman
Insurance premium received 0.36
Aitken Spence Cargo (Pvt)Ltd Subsidiary of
Aitken Spence PLC
in which company
Mr D H S Jayawardena
is the Chairman
Insurance premium received 0.22
Elpitiya Plantations PLC Subsidiary of Aitken
Spence Plantation
Management Ltd
Insurance premium received
Claims paid
0.20
0.01
Ambewela Products
(Pvt) Ltd
Mr D H S Jayawardena
(Chairman)
Claims paid 0.01
Beruwela Distillery (Pvt) Ltd Mr D H S Jayawardena
(Director)
Mr R K Obeyesekere
(Director)
Claims paid 0.39
Distilleries Company
of Sri Lanka PLC
Mr D H S Jayawardena
(Chairman)
Mr R K Obeyesekere
(Director)
Insurance premium received
Claims paid
0.21
2.76
Lanka Bell (Pvt) Ltd Mr D H S Jayawardena
(Chairman)
Insurance premium received
Claims paid
Telecommunication charges paid
0.04
1.27
0.06
Periceyl (Pvt) Ltd Mr D H S Jayawardena
(Chairman)
Mr. R K Obeyesekere
(Director)
Insurance premium received
Claims paid
0.33
1.52
Texpro Industries Ltd Mr D H S Jayawardena
(Chairman)
Insurance premium received 0.61
Lanka Milk Foods (CWE) PLC Mr D H S Jayawardena
(Chairman)
Mr. R K Obeyesekere
(Director)
Insurance premium received
Claims paid
0.38
1.15
Lanka Diaries (Pvt) Ltd Mr D H S Jayawardena
(Chairman)
Mr. R K Obeyesekere
(Director)
Insurance premium received 0.01
(Contd.)
48 Related Party Transactions (Contd.)
240 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
48 (f) iii Business Transactions with Other Related Entities by the Group
Company
Name of Director
(Relationship)
Nature of Transaction Amount
(Rs Mn)
Hethersett Hotels Ltd Subsidiary of Aitken Spence
Hotel Holdings PLC in which
Mr D H S Jayawardena is the
Chairman
Insurance premium received 0.06
Ace Distriparks (Pvt) Ltd Subsidiary of Aitken Spence PLC
in which
Mr D H S Jayawardena is the
Chairman
Insurance premium received 0.05
Ace Containers (Pvt) Ltd Subsidiary of Aitken Spence PLC
in which
Mr D H S Jayawardena is the
Chairman
Insurance premium received 0.02
49 MATURITY ANALYSIS
49 (a) Bank
An analysis of the total assets and liabilities of the Bank as at 31st December, based on the remaining period at the Balance Sheet date to the
respective contractual maturity dates, is given below:
Up to 3 to 12 1 to 3 3 to 5 More Than Total
3 Months Months Years Years 5 Years 2010
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Interest earning assets
Cash and short term funds 12,084,793 - - - - 12,084,793
Securities purchased under resale
agreements 1,185,831 - - - - 1,185,831
Commercial papers 158,963 - - - - 158,963
Investment securities-Bonds &
Debentures 26,470,539 18,875,315 9,792,790 2,508,325 489,000 58,135,969
Bills of exchange 1,401,130 - - - - 1,401,130
Loans and advances 76,798,052 32,264,499 19,303,741 28,721,567 30,945,992 188,033,851
Lease receivable 1,239,343 3,391,149 6,322,272 2,494,489 - 13,447,253
119,338,651 54,530,963 35,418,803 33,724,381 31,434,992 274,447,790
Non interest earning assets
Cash and short term funds 5,920,847 - - - - 5,920,847
Statutory deposit with CBSL 12,491,644 - - - - 12,491,644
Dealing securities - Shares 576,280 - - - - 576,280
Investments - Quoted - - - - 1,061,399 1,061,399
Investments - Unquoted - 180,000 180,000 - 27,956 387,956
Investment in Associate companies - - - - 83,651 83,651
Investments in Joint Venture companies - - - - 655,000 655,000
Investment in Subsidiary companies - - - - 2,179,086 2,179,086
Intangible assets - - - - 577,015 577,015
Investment properties - - - - 353,563 353,563
Property, plant and equipment - - - - 7,473,947 7,473,947
Other assets 6,918,774 254,140 32,402 - 500,000 7,705,316
25,907,545 434,140 212,402 - 12,911,617 39,465,704
Total assets 145,246,196 54,965,103 35,631,205 33,724,381 44,346,609 313,913,494
Precentage 31st December 2010 46.27 17.51 11.35 10.74 14.13 100
Precentage 31st December 2009 48.37 16.94 16.44 5.24 13.00 100
(Contd.)
48 Related Party Transactions (Contd.)
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 241
49 MATURITY ANALYSIS (Contd.)
49 (a) Bank (Contd.)
Up to 3 to 12 1 to 3 3 to 5 More Than Total
3 Months Months Years Years 5 Years 2010
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Interest bearing liabilities
Deposits from customers 151,385,917 42,476,244 10,244,033 3,723,232 1,233,551 209,062,977
Borrowings - Re nance 607,147 705,898 2,287,915 1,164,811 1,548,868 6,314,639
Borrowings - Foreign Banks 4,494,901 - - - - 4,494,901
Other borrowings 507 507 1,014
Repo agreements 4,895,086 7,056,641 - - - 11,951,727
Subordinated debentures - - 715,429 300,000 1,708,864 2,724,293
161,383,558 50,239,290 13,247,377 5,188,043 4,491,283 234,549,551
Non interest bearing liabilities
Deposits from customers 25,008,108 - - - - 25,008,108
Dividend payable 49,558 - - - - 49,558
Bills payable 1,305,161 - - - - 1,305,161
Current tax liability - 3,127,622 - - - 3,127,622
Deferred tax liability - - - - 735,884 735,884
Other liabilities 14,275,307 - - 7,588,536 - 21,863,843
Shareholders’ funds - - - - 27,273,767 27,273,767
40,638,134 3,127,622 - 7,588,536 28,009,651 79,363,943
Total Liabilities and shareholders’ funds 202,021,692 53,366,912 13,247,377 12,776,579 32,500,934 313,913,494
Precentage 31st December 2010
64.36 17.00 4.22 4.07 10.35 100
Precentage 31st December 2009
61.11 18.51 3.80 4.02 12.56 100
* Upto 3 months deposits include the Bank’s Savings Deposit Base of Rs 99.0 billion (2009 - Rs 80.8 billion).
49 (b) Group
Up to 3 to 12 1 to 3 3 to 5 More Than Total
3 Months Months Years Years 5 Years 2010
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Interest earning assets
Cash and short term funds 12,259,065 183,928 122,000 75,000 - 12,639,993
Statutory deposit with Central Bank of Oman 14,408 - - - - 14,408
Securities purchased under resale agreements 2,653,447 60,144 - - - 2,713,591
Government of Sri Lanka treasury bills 223,193 753,254 - - - 976,447
Commercial papers 158,962 53,083 - - - 212,045
Investment securities - Bonds and debentures 26,814,762 19,373,590 10,849,582 2,905,176 501,500 60,444,610
Bills of exchange 1,401,130 - - - - 1,401,130
Loans and advances 76,792,272 31,784,596 18,848,557 28,225,964 30,331,345 185,982,734
Lease receivable 1,239,343 3,391,149 6,322,272 2,494,489 - 13,447,253
121,556,582 55,599,744 36,142,411 33,700,629 30,832,845 277,832,211
Non interest earning assets
Cash and short term funds 5,866,518 - - - - 5,866,518
Statutory deposit with CBSL 12,491,644 - - - - 12,491,644
Dealing securities 750,416 - - - - 750,416
Investments - Quoted 7,203 - - - 1,061,979 1,069,182
Investments - Unquoted - 180,000 234,813 - 75,946 490,759
242 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
49 MATURITY ANALYSIS (Contd.)
49 (b) Group (Contd.)
Up to 3 to 12 1 to 3 3 to 5 More Than Total
3 Months Months Years Years 5 Years 2010
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Investment in Associate companies - - - - 196,009 196,009
Intangible assets - 1,974 - - 700,956 702,930
Investment properties - - - - 173,595 173,595
Property, plant and equipment - 4,491 - - 14,531,287 14,535,778
Non current assets held for sale - 2,875 - - - 2,875
Other assets 7,770,091 1,210,334 32,402 - 133,264 9,146,091
26,885,872 1,399,674 267,215 - 16,873,036 45,425,797
Total assets 148,442,454 56,999,418 36,409,626 33,700,629 47,705,885 323,258,008
Precentage - 31/12/2010 45.92 17.63 11.26 10.43 14.76 100
Precentage - 31/12/2009 47.43 17.23 16.32 5.37 13.65 100
Interest bearing liabilities
Deposits from customers 151,371,168 42,380,181 10,244,033 3,723,232 1,233,551 208,952,165
Borrowings - money at call - - - - - -
Borrowings - re nance 607,147 705,898 2,287,915 1,164,811 1,548,868 6,314,639
Borrowings - local banks 13,816 - - - - 13,816
Borrowings - foreign banks 4,475,043 - - - - 4,475,043
Repo agreements 6,462,829 7,060,284 - - - 13,523,113
Subordinated debentures - - 696,179 300,000 1,701,364 2,697,543
162,930,003 50,146,363 13,228,127 5,188,043 4,483,783 235,976,319
Non interest bearing liabilities
Deposits from customers 24,928,389 - - - - 24,928,389
Dividend payable 51,121 - - - - 51,121
Bills payable 1,305,161 - - - - 1,305,161
Insurance provision - Life - - - - 2,385,246 2,385,246
Insurance provision - General - 730,658 - - - 730,658
Current tax liability - 3,258,984 - - - 3,258,984
Deferred tax liability - - - - 734,376 734,376
Other liabilities 14,952,664 741,000 - 7,588,536 38,853 23,321,053
Shareholders’ funds - - - - 30,566,701 30,566,701
41,237,335 4,730,642 - 7,588,536 33,725,176 87,281,689
Total liabilities and shareholders’ funds 204,167,338 54,877,005 13,228,127 12,776,579 38,208,959 323,258,008
Precentage - 31/12/2010 63.16 16.98 4.09 3.95 11.82 100
Precentage - 31/12/2009 59.94 18.14 3.96 3.88 14.08 100
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 243
50 COMPARATIVE INFORMATION
The following comparative gures have been reclassi ed in the 2010 Financial Statements to maintain comparability of nancial statements in
order to provide a better presentation.
50 (a)
Bank Group
As disclosed Reclassi ed Adjustment As disclosed Reclassi ed Adjustment
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Income 39,374,436 39,357,864 16,572 41,317,345 41,300,773 16,572
Foreign exchange pro t 919,782 903,210 16,572 919,953 903,381 16,572
Premises, equipment and establishment expenses 2,848,503 2,840,613 7,890 2,648,960 2,641,070 7,890
Fee and commission expenses 107,796 137,734 (29,938) 317,022 346,960 (29,938)
Other expenses 4,841,000 4,802,380 38,620 5,926,098 5,887,478 38,620
50 (a) i Loss on FCBU revaluation of Rs 16.57 Mn and fee and commission expenses of Rs 29.94 Mn included under other expenses have been
reclassi ed.
50 (a) ii Other expenses of Rs 7.89 Mn included under premises, equipment and establishment expenses have been reclassi ed.
50 (b)
Bank Group
As disclosed Reclassi ed Adjustment As disclosed Reclassi ed Adjustment
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Fee and commission income 2,309,235 2,331,278 (22,043) 2,355,467 2,377,510 (22,043)
Other income 1,307,789 1,285,746 22,043 3,009,624 2,987,581 22,043
Fee and commission income of Rs 22.04 Mn included under other income have been reclassi ed.
50 (c)
Bank Group
As disclosed Reclassi ed Adjustment As disclosed Reclassi ed Adjustment
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Cash and cash equivalents 27,042,858 27,152,248 (109,390) 27,488,807 27,598,197 (109,390)
Bills of exchange 1,476,044 1,447,490 28,554 1,476,044 1,447,490 28,554
Loans and advances 159,184,398 159,247,361 (62,963) 156,391,674 156,560,522 (168,848)
Other assets 7,333,833 6,886,678 447,155 8,612,153 8,059,113 553,040
Other liabilities 21,008,833 20,976,437 32,396 21,978,127 21,945,731 32,396
Borrowings 8,581,089 8,310,128 270,961 8,584,401 8,313,440 270,961
50 (c) i Cash and cash equivalents of Rs 109.39 Mn and loans and advances of Rs 34.40 Mn included under other assets have been reclassi ed.
50 (c) ii General provision of Rs 14.355 Mn and interest in suspense of Rs 14.199 Mn for bills of exchange included under loans and advances have
been reclassi ed.
50 (c) iii Other liabilities of Rs 32.39 Mn included under other assets have been reclassi ed.
50 (c) iv Capital repayments of Rs 270.961 Mn made on the Balance Sheet date against borrowings classi ed under other assets have been reclassi ed.
50 (c) v Sta loan advances of Subsidiaries of Rs 105.889 Mn included under other assets have been reclassi ed.
Comparative information in the Cash Flow Statement has been amended based on the reclassi ed gures as disclosed above.
244 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
51 SEGMENT REPORTING
Segment information is presented in respect of the Group’s business segments. The Group’s primary format for segment reporting is based on
business segments.
The business segments are determined based on the Group’s management and internal reporting structure.
Business segments - Group
Banking Leasing **Dealing Property Insurance Eliminations Consolidated
/Unallocated
2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Revenue from external customers :
Interest 28,091,408 32,413,563 - - 147,290 116,047 - - 435,045 441,507 1,890,052 1,865,305 30,563,795 34,836,422
Exchange / premium 1,015,987 903,210 - - 3,711 265 - - 1,868,746 1,537,309 - - 2,888,444 2,440,784
Lease / brokerage - - 1,890,052 1,961,078 304,404 81,790 - 12,000 - - (1,890,052) (1,961,078) 304,404 93,790
Commissions / rent 2,787,882 2,272,323 7,751 3,966 15,407 7,136 97,495 100,112 - - - 294 2,908,535 2,383,831
Other 1,486,507 1,485,765 - - 124,468 42,003 - - 8,689 3,873 (180,177) 14,305 1,439,487 1,545,946
Total revenue from
external customers 33,381,784 37,074,861 1,897,803 1,965,044 595,280 247,241 97,495 112,112 2,312,480 1,982,689 (180,177) (81,174) 38,104,665 41,300,773
Inter-segment revenue 302,034 317,958 - - 11,585 1,538 618,037 615,609 44,968 55,364 - - 976,624 990,469
Total revenue 33,683,818 37,392,819 1,897,803 1,965,044 606,865 248,779 715,532 727,721 2,357,448 2,038,053 (180,177) (81,174) 39,081,289 42,291,242
Segment result 6,273,812 5,187,103 1,288,204
1,481,425 246,544 38,511
281,242 178,527 309,864 266,293 (154,974) (89,657) 8,244,692 7,062,202
Unallocated expenses (990,596) (903,058)
Pro t from operations 7,254,096 6,159,144
Income from Associates (2,429) 7,680
Income tax expense (2,364,839) (1,613,464)
Pro t for the period 4,886,828 4,553,360
Minority interests (100,058) (70,083)
Pro t attributable to equity
holders of the Bank 4,786,770 4,483,277
Segment assets 281,438,663 253,619,311 13,447,253 8,944,242 3,134,815 1,345,982 8,209,036 8,347,215 4,548,029 3,671,702 (2,663,818) (2,917,800) 308,113,978 273,010,652
Investment in Associates 196,009 226,129
Unallocated assets 14,948,021 13,970,989
Total assets 323,258,008 287,207,770
Segment liabilities 247,415,567 222,392,033 13,447,253 8,944,242 2,122,282 962,719 3,479,387 3,788,244 3,531,689 2,840,851 (2,537,207) (2,992,535) 267,458,971 235,935,554
Unallocated liabilities 25,232,336 24,498,608
Total liabilities 292,691,307 260,434,162
Cash ows from
operating activities (6,068,453) 35,419,533 (4,520,676) 2,640,209 141,456 15,282 592,170 55,354 789,197 759,098 (1,472,408) 1,497,450 (10,538,714) 40,386,926
Cash ows from
investing activities
(3,047,844) (25,928,465) - -
(396,200) 25,791 (451) (796) (745,694) (734,363) 1,242,213 (293,855) (2,947,976) (26,931,688)
Cash ows from
nancing activities 4,490,365 (8,280,981) - - 317,625 - (225,040) - (56,250) (47,906) (131,696) (1,088,303) 4,395,004 (9,417,190)
Capital expenditure 1,052,402 1,181,806 474 315 10,319 39,012 451 796 44,944 69,013 30,691 (57) 1,139,281 1,290,885
Depreciation 660,701 583,350 1,103 1,023 13,975 11,693 110,485 110,414 30,355 26,933 (6,020) (6,120) 810,599 727,293
Amortisation 168,711 165,420 50 1,216 1,394 1,013 79 79 9,983 8,279 (220) (242) 179,997 175,765
**Stock broking, Securities dealings, Remittances and Foreign currency related services.
NOTES TO THE
FINANCIAL STATMENTS
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 245
52 EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
There are no events occurring after the Balance Sheet date which require adjustments to or disclosure in the Financial Statements, other than
those disclosed below:
52 (a) Proposed Dividends
Refer Note No 38 (a)
52 (b) Sub-division of Shares - without a Change to the Stated Capital
Board of Directors has recommended that the ordinary shares (voting and non-voting) of the Bank be increased by sub-dividing the existing
shares on the basis of one ordinary voting share for every existing two ordinary voting shares and one ordinary non-voting share for every
existing two ordinary non-voting shares without making any changes to the Bank’s Stated Capital, which is to be approved at the annual
general meeting to be held on 31st March 2011.
The basic and diluted Earnings per Share (EPS) disclosed in the Income Statement and in Note 21 to these nancial statements has not been
adjusted for the said sub-division of shares. If the sub-division of shares is considered for the EPS computation, the adjusted EPS would be:
For the year ended 31st December 2010
Bank Group
Basic Earning per Share (Rs) 12.56 13.47
Diluted Earnings per Share (Rs) 12.50 13.41
Retrospective adjustments have not been made as the above sub-division of shares is yet to be approved at the annual general meeting to be
held on 31st March 2011.
53 DIRECTORS’ RESPONSIBILITY STATEMENT
The Board of Directors of the Bank is responsible for the preparation and presentation of these Financial Statements.
Please refer to page 156 for the statement of the Directors’ Responsibility for Financial Reporting.
246 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
CAPITAL
ADEQUACY
Capital adequacy is a measure of a bank’s nancial strength and its
ability to withstand liquidity shocks during the course of its business
activities. The nancial crisis in 2008 clearly revealed the need for
regulators and banks alike to review existing capital and liquidity
requirements and to assess a bank’s capability of absorbing losses in
its daily course of business and during economic and market stress
situations.
RISK ASSESSMENT UNDER BASEL II
The primary objective of the Capital Adequacy Ratio (CAR) de ned
under Basel II is to protect a bank’s depositors, whilst maintaining
con dence and giving stability to the world banking system. The
regulators attempt to accomplish this by setting the capital reserves
a bank needs to hold in relation to the risk the bank exposes itself
to through its business activities. Keeping in line with international
standards, the Central Bank of Sri Lanka has supported these regulatory
reforms by enhancing them in accordance with local funding and
liquidity requirements. The capital adequacy of local banks is monitored
by CBSL on a regular basis.
The Bank computes CAR as a ratio of its capital to its risk weighted
assets. Calculations of the risk weightings de ned under credit risk
and market risk are based on the standardized approach whereas
operational risk is computed by using the basic indicator approach.
As the Basel II guidelines are phased in and more sophisticated risk
measurement systems and models are implemented, banks will be in a
position to move from the standardized methods to the more re ned
and robust requirements of the advanced approaches.
HNB’s capital ratios of 10.99% and 12.64% remain comfortably above
CBSL’s current capital requirements of Tier 1 and Total Capital Ratios of
5% and 10% respectively.
CHANGES AND IMPLICATIONS OF BASEL III
The latest package of reforms de ned under Basel III contains several
important changes for banks’ capital structures. Recently endorsed at
the G-20 Summit held in November 2010 in Seoul, the new standards
were nalized in mid-December 2010.
Summary of changes proposed under Basel III
• Increase in capital requirements
The minimum requirement for Tier 1 capital is to be raised from 4%
to 6%, the focus shifting from tier 1 capital to “core tier 1” capital, the
concentration being on common equity where tougher minimum
standards have been set.
• Introduction of a capital conservation bu er
Banks will be required to maintain additional capital up to 2.5%
that can be used to absorb losses during periods of nancial and
economic stress. Although banks are permitted to draw on the bu er
during periods of stress, the closer their regulatory capital ratios
approach the minimum requirement, the greater the constraints on
the distribution of earnings.
• Implementation of a countercyclical framework
Capital between 0% – 2.5% of common equity or other fully loss
absorbing capital to be introduced at the discretion of national
regulators. The aim of the countercyclical bu er is to force banks to
start building up an extra reserve when the economy is in boom
and when supervisors see excessive credit in the system that could
reverse in the form of loan losses during a slump.
• New liquidity and funding standards
The liquidity coverage ratio (LCR) and the net stable funding ratio
(NSFR) are to be introduced to ensure that banks have su cient
high-quality liquid assets to withstand a stressed funding scenario.
• Introduction of a leverage ratio
The objective of this ratio is to put a oor on the build-up of leverage
in the banking sector and to put additional safeguards in place by
supplementing risk-based measures with a more straightforward
absolute measure.
• Revised framework for credit risk
Revised measures have been introduced to better address
counterparty credit worthiness.
In view of Basel III, it is imperative that banks begin to measure their
readiness on the new measures of liquidity and leverage. HNB has
reviewed the impact of this initiative and will continue to monitor
regulatory developments in this area.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 247
CAPITAL BASE
As at 31st December 2010 2009
(Rs Mn) (Rs Mn)
TIER 1
Voting ordinary shares 3,113 2,903
Non-Voting ordinary shares 2,206 2,181
Statutory reserve fund 1,510 1,260
Published retained earnings 4,420 3,849
General and other reserves 13,000 10,700
Less: Deductions from Tier 1 capital (Note 1) (1,591) (1,332)
Eligible Tier 1 Capital 22,658 19,561
TIER II
50% of approved asset revaluation reserves (Note 2) 1,042 1,042
General provision for loan losses 1,451 1,317
Approved subordinated term debt 2,303 2,455
Tier II Capital 4,796 4,814
Less: Deductions from Tier II capital (Note 1) (1,394) (1,195)
Eligible Tire II capital 3,402 3,619
Capital Base 26,060 23,180
Risk Adjusted capital ratios
Tier 1 ( Eligible Tier 1 capital / Total risk adjusted balances) * 10.99 11.10
Total (Capital base / Total risk adjusted balances) ** 12.64 13.16
* Statutory minimum 5% ** Statutory minimum 10%
RISK ADJUSTED ON - BALANCE SHEET EXPOSURE
Balance Risk Risk Adjusted
Rupees Million Weights Balance
As at 31st December 2010 2009 (%) 2010 2009
Exposures
- To Central Government and CBSL 73,122 64,164 - - -
- To banks / foreign sovereigns 12,539 22,420 20 - 150 2,871 4,682
- To nancial institutions 3,297 1,739 20 - 150 1,663 891
- To corporates 68,908 64,910 20 - 150 66,456 62,997
- To retail sector (excluding claims secured by residential properties) 56,033 38,056 75 - 100 45,384 30,466
- Secured on residential property mortgages 21,202 19,798 50 - 100 13,215 10,333
- Non performing advances 5,511 6,865 50 - 150 5,810 7,433
- Other exposures 3,861 3,431 20 - 150 3,861 3,431
- Cash and cash items in the process of collection
7,911
6,707 0 - 20 414 327
- Other assets 14,025 13,867 100 14,025 13,867
Total assets 266,409 241,957 153,699 134,427
248 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
RISK ADJUSTED OFF - BALANCE SHEET EXPOSURE
Rupees Million Amount of Credit Credit Risk Risk Adjusted
O -Balance Conversion Equivalent Weights Balance
Sheet Items Factor Amount
As At 31st December 2010 (%) 2010 (%) 2010 2009
Financial guarantees, bank acceptances
and other guarantees 9,216 100 9,216 0 -100 8,553 6,421
Performance related guarantees and
warranties and stand by LCs related to
perticular transactions 17,266 50 8,633 0 -100 8,633 5,416
Shipping guarantees, documentary
letter of credit and trade related acceptances 18,960 20 3,792 0 -100 3,792 2,824
Other commitements with an
original maturity of < one year 10,949 0 - 20 16 0 -100 16 25
> one year 28 50 14 0 -100 14 362
Foreign exchange contracts 69,329 2 1,386 0 -100 1,386 463
Interest rate contracts 210 7 15 0 -100 15 102
Total o - balance sheet exposures 125,958 23,072 22,409 15,613
CAPITAL CHARGE FOR MARKET RISK
Rupees Million
Capital Charge Risk Adjusted
Balance
As at 31st December 2010 2009 2010 2009
Interest rate 1.1 - 11 -
Equity 72.0 7.9 720 79
Foreign exchange and gold 96.0 46.3 960 463
Total risk adjusted balance for market risk 169.2 54.2 1,692 542
CAPITAL CHARGE FOR OPERATIONAL RISK
Rupees Million
Capital Charge Risk Adjusted
Balance
As at 31st December 2010 2009 2010 2009
Average gross income 18,922.6 17,066.4
15% of average gross income 2,838.4 2,560.0
Total risk adjusted balance for operational risk 2,838.4 2,560.0 28,384 25,600
Total risk adjusted balances (credit risk,market risk, operational risk) 206,184 176,182
NOTES
(1) Deductions
T
ier I Tier II
2010 2009 2010 2009
Additional investment in Sithma Development (Pvt) Ltd 450 450 450 450
Employee share option plan 197 137 - -
Others 944 745 944 745
Total deductions 1,591 1,332 1,394 1,195
(2) Revaluation reserves approved by CBSL is Rs 2,084 Mn.
(3) The capital adequacy computation has been indicated for the Bank only.
CAPITAL
ADEQUACY
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 249
INCOME STATEMENT
IN US DOLLARS
Bank Group
For the year ended 31st December 2010 2009 2010 2009
US$ 000 US$ 000 US$ 000 US$ 000
INCOME 320,714 344,037 343,456 361,020
Interest income 272,651 302,625 275,486 304,514
Less: interest expenses 132,527 175,172 133,194 177,281
Net interest income 140,124 127,453 142,292 127,233
Foreign exchange pro t 9,157 7,895 9,142 7,897
Fee and commission income 25,322 20,378 28,081 20,782
Dividend income 1,891 1,900 1,794 1,712
Other income 11,693 11,239 28,953 26,115
OPERATING INCOME 188,187 168,865 210,262 183,739
Less:
OPERATING EXPENSES
Personnel expenses 41,681 35,784 45,881 38,864
Premises, equipment and establishment expenses 26,846 24,831 25,432 23,086
Fee and commission expenses 1,213 1,204 1,220 3,033
Provision for employee retirement bene ts 7,957 7,130 8,056 7,197
Provision for loan losses 4,338 6,191 4,338 6,191
Diminution / (appreciation) in value of investments 72 18 10 18
Impairment of Goodwill - - - 45
Loans written o 2 2 2 2
Other expenses 45,404 41,979 59,939 51,464
127,513 117,139 144,878 129,900
PROFIT FROM OPERA
TIONS 60,674 51,726 65,384 53,839
Share of pro t / (loss) of associates (net of income tax) - - (22) 67
PROFIT BEFORE INCOME TAX 60,674 51,726 65,362 53,906
Less: income tax expense 20,438 13,688 21,315 14,104
PROFIT FOR THE YEAR 40,236 38,038 44,047 39,802
Attributable to: - - - -
Equity holders of the Bank 40,236 38,038 43,145 39,190
Minority interest - - 902 612
PROFIT FOR THE YEAR 40,236 38,038 44,047 39,802
BASIC EARNINGS PER SHARE (US$) 0.17 0.16 0.18 0.17
DILUTED EARNINGS PER SHARE (US$) 0.17 0.16 0.18 0.17
DIVIDEND PER SHARE (US$) *0.06 0.06 *0.06 0.06
Exchange rate of US$ 1 was Rs 110.945 as at 31st December 2010 (Rs 114.40 as at 31st December 2009)
*Calculated on interim dividend paid and nal dividend proposed, which is to be approved at the Annual General Meeting.
The Income Statement given on this page is solely for the convenience of the shareholders, bankers, investors, customers and other users of Financial
Statements and do not form part of the audited Financial Statements.
250 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
BALANCE SHEET
IN US DOLLARS
Bank Group
As at 31st December 2010 2009 2010 2009
US$ 000 US$ 000 US$ 000 US$ 000
ASSETS
Cash and cash equivalents 162,293 237,345 166,808 241,243
Statutory deposit with Central Banks 112,593 96,713 112,723 96,843
Government treasury bills - - 8,801 2,673
Dealing securities 13,137 345 22,572 6,012
Securities purchased under re-sale agreements 10,688 4,371 24,459 8,310
Non-current assets held for sale - - 26 25
Bills of exchange 12,629 12,653 12,629 12,653
Commercial papers 1,433 1,828 1,911 2,473
Lease receivable within one year 41,737 34,363 41,737 34,363
Lease receivable after one year 79,470 43,821 79,470 43,821
Loans and advances 1,694,838 1,392,022 1,676,351 1,368,536
Investments securities 529,128 471,676 543,068 488,179
Investments in Associates 754 1,782 1,767 1,977
Investments in Joint Venture 5,904 2,185 - -
Investments in Subsidiaries 19,641 19,050 - -
Investment properties 3,187 3,066 1,565 1,508
Property, plant and equipment 67,366 62,758 131,018 125,288
Intangible assets 5,201 5,902 6,335 6,206
Other assets 69,452 60,198 82,438
70,447
T
otal Assets 2,829,451 2,450,078 2,913,678 2,510,557
LIABILITIES
Deposits from customers 2,109,794 1,840,094 2,108,077 1,838,839
Dividends payable 447 1,885 461 1,885
Securities sold under re-purchase agreements 107,727 75,918 121,890 82,285
Borrowings 97,441 72,641 97,377 72,670
Current tax liabilities 28,191 25,535 29,375 26,025
Bills payable 11,764 10,150 11,764 10,150
Subordinated debentures 24,555 23,367 24,314 23,192
Insurance provision - Life - - 21,499 16,202
Insurance provision - General - - 6,586 5,239
Deferred tax liabilities 6,633 8,210 6,619 8,202
Other liabilities 197,068 183,361 210,204 191,833
Total Liabilities 2,583,619 2,241,161 2,638,166 2,276,522
EQUITY
Stated capital 47,939 44,441 47,939 44,441
Statutory reserve fund 13,610 11,014 13,610 11,014
Retained earnings 39,842 33,645 39,254 31,034
Other reserves 144,441 119,817 169,404 144,051
Total equity attributable to equity holders of the Bank 245,832 208,917 270,207 230,540
Minority interest - - 5,305 3,495
T
otal Equity 245,832 208,917 275,512 234,035
Total Liabilities and Equity 2,829,451 2,450,078 2,913,678 2,510,557
Commitments and Contingencies 1,119,208 550,937 1,119,208 551,046
Exchange rate of US$ 1 was Rs 110.945 as at 31st December 2010 (Rs 114.40 as at 31st December 2009)
The Balance Sheet given on this page is solely for the convenience of the shareholders, bankers, investors, customers and other users of
Financial Statements and do not form part of the audited Financial Statements.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 251
ANALYSIS OF
DEPOSITS
2006 2007 2008 2009 2010
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Local currency deposits
Current 12,635,473 12,482,701 12,748,863 15,090,759 24,214,105
Savings 50,697,086 53,565,590 54,544,453 66,080,330 83,981,743
Time 48,869,303 66,836,282 75,828,902 80,572,001 78,198,953
Certi cate of Deposit 3,348,716 4,021,045 4,269,993 5,439,817 5,576,315
115,550,578 136,905,618 147,392,211 167,182,907 191,971,116
Foreign currecy deposits
Current 1,188,634 1,348,573 1,522,500 1,191,309 794,003
Savings 13,600,463 15,784,655 14,178,854 14,715,443 15,033,471
Time 17,217,780 21,620,727 23,676,297 27,417,146 26,272,495
32,006,877 38,753,955 39,377,651 43,323,898 42,099,969
Total deposits 147,557,455 175,659,573 186,769,862 210,506,805 234,071,085
Re nance 3,582,587 5,749,624 6,424,054 6,169,445 6,314,639
Total deposits & re nance 151,140,042 181,409,197 193,193,916 216,676,250 240,385,724
Analysis of
T
otal Deposits
2006
2007
2008
2009
2010
0
50
100
150
200
250
Rs.Bn
Local Currency Deposits
Foreign Currency Deposit
s
Analysis of
Local Currency Deposits
2006
2007
2008
2009
2010
0
50
100
150
200
Rs.Bn
Current
Savings
Time
Certicate of Deposit
s
Analysis of
Foreign Currency Deposits
2006
2007
2008
2009
2010
0
10
20
30
40
50
Rs.Bn
Current
Savings
Time
252 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
ANALYSIS OF
ADVANCES
2006 2007 2008 2009 2010
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Local Currency Advances (Gross)
Overdrafts 27,455,224 33,776,672 35,393,588 32,264,297 40,673,843
Short term loans 5,636,464 5,129,706 7,074,630 9,704,995 11,223,962
Trust receipts 6,876,898 7,097,272 7,642,331 6,347,877 7,461,863
Packing credit 618,787 763,188 375,633 252,283 211,285
Term loans 68,451,741 86,692,434 94,493,224 93,899,250 108,681,036
109,039,114 133,459,272 144,979,406 142,468,702 168,251,989
Leasing facilities 12,036,467 13,772,361 12,038,851 9,398,642 13,919,317
Total local currency advances 121,075,581 147,231,633 157,018,257 151,867,344 182,171,306
Foreign currency advances (Gross) 18,412,257 18,988,347 24,696,099 23,371,444 26,240,327
Total Advances 139,487,838 166,219,980 181,714,356 175,238,788 208,411,633
Analysis of
T
otal Advances
2006
2007
2008
2009
2010
0
50
100
150
200
Rs.Bn
Local Currency Advances
Foreign Currency Advances
Analysis of Advances by Type
Packaging Credi
t
Trust Receipts
Short Term Loans
Overdrafts
Leasing
2010
7.6%
22.3%
6.2%
4.1%
0.1%
59.7%
Term Loans
Analysis of Advances by Security
2010
26%
39%
17%
18%
Secured by cash, quoted shares and
other readily realisable assets
Secured by mortgage over immovable assets
Secured by mortgage over movable assets
Other (clean and third party guarantees
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 253
PROVINCEWISE ANALYSIS OF
DEPOSITS AND ADVANCES
As at 31st December 2010
Province No of Deposits % Advances % Deposit
Branches (Rs Mn) Including Utilisation
Leasing %
(Rs Mn)
WESTERN 95 162,884 70 153,524 73 94
SOUTHERN 17 8,957 4 8,569 4 96
UVA 10 5,046 2 3,471 2 69
NORTH CENTRAL 7 4,153 2 3,893 2 94
NORTH WESTERN 16 9,926 4 8,404 4 85
EASTERN 16 7,422 3 5,995 3 81
NORTHERN 13 11,859 5 8,112 4 68
SABARAGAMUWA 10 7,506 3 5,707 3 76
CENTRAL 21 16,318 7 10,738 5 66
TOTAL 205 234,071 100 208,412 100 89
Province-wise Advances
2010
4%
73%
3%
4%
2%
4%
2%
3%
5%
North Central
Uva
Southern
Western
Central
Sabaragamuwa
Nothern
Eastern
North Western
Province-wise Deposits
2010
3%
70%
5%
3%
4%
4%
2%
2%
7%
North Central
Uva
Southern
Western
Central
Sabaragamuwa
Nothern
Eastern
North Western
254 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
SOURCES AND UTILISATION
OF INCOME
2006 2007 2008 2009 2010
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
SOURCES OF INCOME
Interest 18,451,961 26,250,038 32,431,158 34,620,276 30,249,230
Exchange 772,825 1,114,313 1,166,979 903,210 1,015,987
Commission 1,795,340 2,081,569 2,364,434 2,331,278 2,809,330
Dividend 76,983 125,142 538,321 217,353 209,762
Other 396,586 423,656 650,194 1,285,746 1,297,312
Total 21,493,695 29,994,718 37,151,086 39,357,863 35,581,621
UTILISATION OF INCOME
Employees
Salaries and other payment to Sta 3,164,917 3,657,112 4,348,690 4,909,419 5,507,101
Suppliers
Interest Paid 9,797,449 15,189,698 19,751,667 20,039,646 14,703,256
Other expenses 4,529,175 5,544,177 6,488,202 6,250,003 6,668,020
14,326,624 20,733,875 26,239,869 26,289,649 21,371,276
Net Income before Government Taxes and Levies 4,002,154 5,603,731 6,562,527 8,158,795 8,703,244
Government
Income Tax, SRL, NBT, VAT, Debit Tax, (Incl. Deferred Tax) 1,781,665 2,581,275 3,343,547 3,807,143 4,239,277
ShareHolders
Dividends 588,824 824,353 942,118 1,533,065 1,647,692
Retained Pro ts 1,631,666 2,198,103 2,276,862 2,818,588 2,816,275
Total 21,493,695 29,994,718 37,151,086 39,357,863 35,581,621
Sources and Utilisation of Income
2010
4%
3%
8%
1%
84%
Other
Dividend
Commission
Exchange
Interest
15%
27%
58%
Net Income before
Taxes and Levies
Employees
Suppliers
19%
32%
49%
Retained prots
Dividends
Government taxes
2010 2010
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 255
VALUE ADDED
STATEMENT
2010 % 2009 %
Rs 000 Rs 000
Value Added
Income earned by providing banking services 34,502,529 38,598,619
Cost of services 20,051,377 24,828,375
Value added by banking services 14,451,152 13,770,244
Non-banking income 1,079,092 759,245
Provision for fall in value of investments (8,025) (2,038)
Provision for bad debts (481,309) (708,227)
15,040,910 13,819,224
Value allocated to employees
Salaries, wages & other bene ts 5,507,101 36.62 4,909,419 35.53
To providers of capital
Dividends to shareholders 1,647,692 10.95 1,533,065 11.09
To Government
Value Added Tax 1,859,676 2,193,577
Income Tax 2,452,944 1,496,206
Debit tax 11,156 10,845
Nation Building Tax 50,786 36,691
Stamp Duty 50,175 4,424,737 29.42 163 3,737,482 27.05
To expansion and growth
Retained income 2,816,275 18.72 2,818,588 20.40
Depreciation and Amortization 830,565 5.52 751,009 5.43
Deferred Taxation (185,460) (1.23) 69,661 0.50
15,040,910 100.00 13,819,224 100.00
Analysis of Value Addition
2010
37%
11%
29%
23%
2009
36%
11%
27%
26%
To expansion and growth
To Government
To provider of capital
Value allocated to employees
256 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
QUARTERLY
STATISTICS
For the three months ended 2010 2009
December September June March December September June March
31st 30th 30th 31st 31st 30th 30th 31st
Balance Sheet Data
(Rs Mn)
Total assets 313,913 295,368 286,240 281,901 280,289 268,639 266,971 260,969
Loans, leases and bills 210,067 190,876 180,245 174,595 177,229 180,471 174,829 178,040
Deposits 234,071 221,384 216,529 214,611 210,507 203,934 201,366 193,338
Shareholders’ funds 27,274 25,689 24,642 23,393 23,900 22,557 21,649 20,638
Average assets 304,641 290,804 284,071 281,095 274,464 267,805 263,970 258,840
Income Statement Data
(Rs 000)
Net interest income 4,244,428 3,866,343 3,816,891 3,618,312 3,795,833 3,695,410 3,629,466 3,459,921
Foreign exchange pro t 294,833 305,317 235,793 180,044 185,139 240,847 261,460 215,764
Other income 797,669 1,077,139 1,239,536 774,078 687,518 856,333 925,253 621,419
Total revenue 5,336,930 5,248,799 5,292,220 4,572,434 4,668,490 4,792,590 4,816,179 4,297,104
Provision for loan losses (Net of recovery) 42,394 (36,574) (10,041) (49,380) 338,662 (66,093) (166,447) (70,780)
Non-interest expenses (3,062,824) (3,688,019) (3,584,388) (3,330,100) (3,292,291) (3,246,588) (3,101,588) (3,051,719)
Provision for income tax (596,777) (572,259) (558,271) (540,177) (44,150) (572,375) (537,820) (411,522)
Net pro t after tax 1,719,723 951,947 1,139,520 652,777 1,670,711 907,534 1,010,324 763,083
Ordinary Share Information
Market Price per Share (Rs) V NV V NV V NV V NV V NV V NV V NV V NV
High 445.00 260.00 390.00 250.00 300.00 207.00 189.50 145.00 175.00 107.00 168.00 87.00 129.00 55.00 98.00 47.50
Low 380.00 190.70 270.00 173.60 185.00 132.25 168.00 105.00 150.00 80.00 116.00 48.75 72.00 34.00 68.00 32.00
Closing 399.90 214.60 386.10 239.90 281.00 190.25 188.25 140.00 170.25 104.75 164.50 85.50 119.00 51.00 78.00 38.00
V - Voting NV - Non Voting
Book value per ordinary share (Rs) 114.61 108.00 103.97 99.14 101.37 95.77 91.92 87.62
Financial Measures
Pro tability
Return on average
Shareholders’ equity (annualised) (%) 17.45 14.89 14.93 11.04 19.57 16.54 16.77 14.81
Productivity
Non interest expenses to total revenue (%) 57.39 70.26 67.73 72.83 70.52 67.74 64.40 71.02
Capital
Risk Weighted Capital Ratios
Tier 1 (%) 10.99 10.49 10.40 10.50 11.10 9.87 9.79 8.84
Total (Tier 1+2) (%) 12.64 12.25 12.31 12.47 13.16 11.93 11.85 10.93
Asset Quality
Gross NPA ratio (%) 4.51 5.94 6.48 7.40 6.15 8.44 8.73 8.17
Net NPA ratio (%) 1.95 3.09 3.30 4.11 2.90 3.67 3.86 3.48
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 257
TEN YEAR
STATISTICAL SUMMARY
Year ended 31st December (Rs Mn) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
OPERATING RESULTS
Income 11,564 11,799 14,831 14,087 16,915 21,494 29,995 37,151 39,358 35,582
Interest Income 9,336 9,399 11,537 11,469 14,130 18,452 26,250 32,431 34,620 30,249
Interest Expense 7,201 6,258 6,909 5,962 7,281 9,797 15,190 19,752 20,040 14,703
Exchange Income 516 382 506 662 646 773 1,114 1,167 903 1,016
Other Income 1,712 2,018 2,788 1,956 2,139 2,269 2,630 3,553 3,834 4,316
Operating Expenses 4,061 4,873 6,830 7,175 7,785 8,677 10,470 12,615 13,401 14,147
Pro t before Income Tax 301 669 1,092 950 1,850 3,019 4,335 4,785 5,918 6,731
Income Tax on Pro t (2) 80 83 (26) 195 799 1,312 1,566 1,566 2,267
Pro t after Taxation 303 589 1,008 976 1,655 2,220 3,022 3,219 4,352 4,464
LIABILITIES AND SHAREHOLDERS’ FUNDS
Customer Deposits 75,599 87,884 101,026 118,524 128,284 147,557 175,660 186,770 210,507 234,071
Re nance Borrowings 1,565 1,659 1,764 2,066 2,712 3,583 5,750 6,424 6,169 6,315
Other Liabilities 16,000 19,354 23,161 22,787 23,464 31,687 32,472 42,064 38,773 45,518
Deferred Taxation 215 304 387 350 314 314 606 872 939 736
Shareholders’ funds 5,753 6,235 6,993 9,052 11,239 12,930 18,419 20,581 23,900 27,274
Total 99,132 115,436 133,331 152,780 166,012 196,070 232,906 256,711 280,289 313,913
ASSETS
Bills of Exchange 3,153 2,690 2,412 2,077 2,027 1,911 2,069 2,187 1,447 1,401
Loans and Advances (Net) 50,473 62,152 75,326 88,594 101,609 119,997 144,985 161,073 159,247 188,034
Lease Rentals Receivable 2,898 4,032 5,085 6,838 8,864 11,552 13,289 11,547 8,944 13,447
Cash, Short Term Funds and Statutory
Deposits with Central Bank of Sri Lanka 17,377 21,479 21,119 25,013 24,400 30,200 32,565 35,149 38,216 30,497
Property , Plant & Equipment 2,509 2,781 3,414 3,387 3,059 2,908 6,083 6,866 7,180 7,474
Other Assets 22,722 22,302 25,975 26,870 26,053 29,502 33,915 39,888 65,254 73,060
Total 99,132 115,436 133,331 152,780 166,012 196,070 232,906 256,711 280,289 313,913
RATIOS
Return on Average Shareholders’ Funds (%) 5 10 15 12 16 18 19 17 20 17
Income Growth (%) 20 2 26 (5) 20 27 40 24 6 (10)
Return on Average Assets (%) 0.3 0.6 0.8 0.7 1.0 1.2 1.4 1.3 1.6 1.5
Dividend Cover (times) 3.1 2.8 3.5 2.8 3.5 3.8 3.7 3.4 2.8 2.7
Advance to Deposits & Re nance (%) 73 78 81 81 86 88 88 90 78 84
Property, Plant & Equipment to Shareholders Funds (%) 44 45 49 37 27 22 33 33 30 27
Total Assets to Shareholders Funds (Times) 17 19 19 17 15 15 13 12 12 12
(As speci ed in the Banking Act No. 30 of 1988)
Capital Funds to Liabilities including
Contingent Liabilities (%) 1.2 1.2 1.0 1.0 1.0 1.0 1.3 1.2 1.1 1.1
Liquid Assets to Liabilities (%) 28 32 27 25 24 22 22 22 29 24
SHARE INFORMATION
Market Value per Share (Rs)
- Voting 52.00 79.00 69.00 57.00 112.50 155.75 122.50 69.75 170.25 399.90
- Non Voting 36.00 47.00 36.75 32.75 41.50 70.00 53.25 32.00 104.75 214.60
Earnings per Share (Rs) 4.66 8.24 14.10 9.75 14.05 18.86 12.83 13.67 18.47 18.84
Earnings per Share (Adjusted) (Rs) * 1.28 2.49 4.26 4.12 6.98 9.37 12.76 13.58 18.37 18.84
Price Earnings Ratio 11.16 9.59 4.89 5.84 8.01 8.26 9.55 5.10 9.22 21.23
Net Assets per Share (Adjusted) (Rs) ** 24.42 26.47 29.69 38.43 47.71 54.89 78.19 87.37 101.46 115.78
Dividend per share (Rs) 1.50 3.00 4.00 3.50 4.00 5.00 3.50 4.00 6.50 7.00
Gross Dividends (Rs Mn) 98 215 286 350 471 589 824 942 1,533 1,648
OTHER INFORMATION
No. of Employees 4,137 4,280 4,203 4,180 4,259 4,287 4,334 4,395 4,302 4,352
No. of Customer Centres 123 137 138 142 148 151 167 177 186 205
No. of Student Banking Centres 122 144 151 152 152 152 152 152 153 159
No. of other Financial Centres 110 110 110 110 113 113 114 114 115 121
* Earnings per share has been adjusted for weighted average number of shares during the current year.
** Net Assets per share has been computed for the current number of issued shares as at 31st December 2010.
258 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
TEN YEAR
GRAPHICAL REVIEW
Distribution of
Prots
2006
2007
2008
2009
2010
2001
2002
2003
2004
2005
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Rs.Mn
Prot available after appropriation
Taxation
Dividends
Advances, Deposits and
Re-Finance Borrowings
2006
2007
2008
2009
2010
2001
2002
2003
2004
2005
0
50,000
100,000
150,000
200,000
250,000
Rs.Mn
Advances
Deposits and Renance Borrowing
s
Deposits
Balance Sheet Growth
(Base year 2001)
2006
2007
2008
2009
2010
2001
2002
2003
2004
2005
0
100
200
300
400
500
%
Deposits
Total Assets
Advances
Shareholders’ Funds
Earnings per Share and
Dividends per Share
2006
2007
2008
2009
2010
2001
2002
2003
2004
2005
0
4
8
12
16
20
Rs.
Earnings per Share
Dividends per Share
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 259
SEGMENTAL
ANALYSIS
Business Segments
Banking Leasing Dealings* Property Insurance Total
2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009
Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000
Interest 28,359,178 32,659,198 - - 150,040 116,426 - - 448,742 453,759 28,957,960 33,229,383
Exchange 1,015,987 903,210 - - 3,711 265 - - (5,489) (94) 1,014,209 903,381
Lease, Premium and Brokering - - 1,890,052 1,961,078 306,003 82,159 - - 1,905,506 1,572,270 4,101,561 3,615,507
Commissions and Rent 2,801,579 2,327,312 7,751 3,966 15,407 7,136 715,532 727,721 - - 3,540,269 3,066,135
Other 1,507,074 1,503,099 - - 131,704 42,793 - - 8,689 12,118 1,647,467 1,558,010
Total Revenue 33,683,818 37,392,819 1,897,803 1,965,044 606,865 248,779 715,532 727,721 2,357,448 2,038,053 39,261,466 42,372,416
* Stock broking, Securities dealings, Remitences and Foreign currency related services
Segmental Analysis of Revenue
Property
Insurance
Dealing
Banking and Leasing
2010
90%
2%
2%
6%
2010
9%
74%
10%
3%
4%
Leasing, Premium
and Brokering Income
Exchange
Interest
Other
Commission
Segmental Analysis of Revenue
2009
92%
1%
2%
5%
2009
7%
78%
9%
2%
4%
Property
Insurance
Dealing
Banking and Leasing
Leasing, Premium
and Brokering Income
Exchange
Interest
Other
Commission
260 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
SHARE AND DEBENTURE
INFORMATION
Resident Non-Resident Total
No of Share No of % No of Share No of No of Share No of
holders Shares holders Shares % holders Shares %
1 - 1,000 2,741 881,015 0.64 39 17,954 0.04 2,780 898,969 0.50
1,001 - 10,000 1,095 3,728,067 2.71 37 132,744 0.32 1,132 3,860,811 2.16
10,001 - 100,000 366 9,757,844 7.10 31 1,160,273 2.79 397 10,918,117 6.10
100,001 - 1,000,000 39 9,208,106 6.70 11 2,380,395 5.72 50 11,588,501 6.47
Over 1,000,000 11 113,836,130 82.85 10 37,940,136 91.13 21 151,776,266 84.77
4,252 137,411,162 100.00 128 41,631,502 100.00 4,380 179,042,664 100.00
ANALYSIS OF SHAREHOLDERS
Resident / Non-Resident
31st December 2010 31st December 2009
No of No of % No of No of %
Shareholders Shares Shareholders Shares
Resident 4,252 137,411,162 76.75 4,075 128,779,859 68.97
Non-Resident 128 41,631,502 23.25 94 57,937,576 31.03
Total 4,380 179,042,664 100.00 4,169 186,717,435 100.00
Individuals / Institutions
31st December 2010 31st December 2009
No of No of % No of No of %
Shareholders Shares Shareholders Shares
Individuals 4,086 27,304,716 15.25 3,923 18,866,761 10.10
Institutions 294 151,737,948 84.75 246 167,850,674 89.90
Total 4,380 179,042,664 100.00 4,169 186,717,435 100.00
As at 31st December 2010 the average size of holding of ordinary shareholding was 40,877 voting shares.
(31st December 2009 - 44,787 voting shares)
As per the rule No. 7.6 (iv) of Colombo Stock Exchange, percentage of public holding as at 31st December 2010 was 63 approximately.
1. STOCK EXCHANGE LISTING
The issued ordinary shares of Hatton National Bank PLC are listed with the Colombo Stock Exchange. The audited Income Statement for the
year ended 31st December 2010 and the audited Balance Sheet of the Bank as at date have been submitted to the Colombo Stock Exchange
within three months of the Balance Sheet date.
Stock exchange code for Hatton National Bank PLC shares is “HNB”. Reuter code of Hatton National Bank PLC is “HNBL”
2. ORDINARY SHAREHOLDERS
SHARE INFORMATION - VOTING
There were 4,380 registered Voting Shareholders as at 31st December 2010 (2009 - 4,169) distributed as follows.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 261
SHARE INFORMATION - NON VOTING
There were 11,536 registered Non Voting Shareholders as at 31st December 2010 (2009 - 11,252) distributed as follows:
Resident Non-Resident Total
No of Share No of % No of Share No of No of Share No of
holders Shares holders Shares % holders Shares %
1 - 1,000 7,410 2,450,636 6.05 57 24,124 0.39 7,467 2,474,760 5.30
1,001 - 10,000 3,561 9,770,106 24.11 49 165,520 2.68 3,610 9,935,626 21.28
10,001 - 100,000 399 9,938,570 24.53 17 720,560 11.67 416 10,659,130 22.83
100,001 - 1,000,000 34 9,228,226 22.77 5 1,006,200 16.30 39 10,234,426 21.92
Over 1,000,000 1 9,133,274 22.54 3 4,256,200 68.96 4 13,389,474 28.67
11,405 40,520,812 100.00 131 6,172,604 100.00 11,536 46,693,416 100.00
ANALYSIS OF SHAREHOLDERS
Resident / Non-Resident
31st December 2010 31st December 2009
No of No of % No of No of %
Shareholders Shares Shareholders Shares
Resident 11,405 40,520,812 86.78 11,142 40,538,994 87.65
Non-Resident 131 6,172,604 13.22 110 5,710,538 12.35
Total 11,536 46,693,416 100.00 11,252 46,249,532 100.00
Individuals / Institutions
31st December 2010 31st December 2009
No of No of % No of No of %
Shareholders Shares Shareholders Shares
Individuals 11,249 21,385,974 45.80 11,032 24,182,823 52.29
Institutions 287 25,307,442 54.20 220 22,066,709 47.71
Total 11,536 46,693,416 100.00 11,252 46,249,532 100.00
As at 31st December 2010 the average size of holding of ordinary shareholding was 4,048 non-voting shares.
(31st December 2009 - 4,110 non- voting shares)
As per the rule No. 7.6 (iv) of Colombo Stock Exchange, percentage of public holding as at 31st December 2010 was 96 approximately.
3 SHARE TRADING
2010 2009
VOTING
Number of transactions 8,997 3,984
Number of shares traded (Mn) 95.5 35.1
Rank (As per CSE) 41 33
Value of shares traded (Rs Mn) 27,130.9 5,635.5
Rank (As per CSE) 2 4
NON VOTING
Number of transactions 11,745 14,138
Number of shares traded (Mn) 19.4 26.3
Value of shares traded (Rs Mn) 3,538.0 1,859.9
262 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
4 DIVIDENDS
2010 2009
Interim (Rs) 1.50 Paid in November 2010 1.50 Paid in November 2009
Final (Rs) 5.50 Proposed to be paid in April 2011 5.00 Paid in April 2010
5 EARNINGS
2010 2009
Earnings per share (Rs) 18.84 18.47
Price earnings ratio (Times) 21.23 9.22
6 MARKET VALUE
Highest Lowest Year End
Rs Rs Rs
2006 - Voting 161.00 100.00 155.75
- Non Voting 74.25 39.00 70.00
2007 - Voting 225.00 90.00 122.50
- Non Voting 120.00 35.00 53.25
2008 - Voting 135.00 65.00 69.75
- Non Voting 57.50 31.00 32.00
2009 - Voting 175.00 68.00 170.25
- Non Voting 107.00 32.00 104.75
2010 - Voting 445.00 168.00 399.90
- Non Voting 260.00 105.00 214.60
7 MARKET CAPITALISATION AS AT 31ST DECEMBER
Capital & HNB Market CSE Market HNB Market Market
Reserves Capitalization Capitalization Capitalization as Capitalization
Rs Mn Rs Mn Rs Mn a % of CSE Market Ranking
Capitalization
2006 12,930 16,361 834,763 1.95 10
2007 18,419 25,653 820,652 3.13 6
2008 20,581 14,684 488,813 3.00 7
2009 23,900 32,266 1,092,138 2.95 8
2010 27,274 76,491 2,210,452 3.46 7
* HNB Market Capitalization includes only Voting shares
Shareholders’ Funds and
Market Capitalisation
2006
2007
2008
2009
2010
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Rs.Mn
Shareholders’ Funds
Market Capitalisation
*HNB Market Capitalisation include
s
both Voting and Non voting shares
Net Assets per Share and
Closing Price per Share
2006
2007
2008
2009
2010
0
100
200
300
400
Rs
Net Assets per Share
Closing Price per Shar
e
(Voting Shares)
Dividend per Share
and Dividend Yield
2006
2007
2008
2009
2010
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
Rs. %
Dividend per Share
Dividend Yield (Voting Share)
SHARE AND DEBENTURE
INFORMATION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 263
8 INFORMATION ON MOVEMENT IN SHARE CAPITAL
Year Issue Basis No. of Shares
Prior to public issue 50,000
1971 Public issue 220,000
1977 Rights issue (@ Rs 10/-) 42:50 230,000
1980 Rights issue (@ Rs 10/-) 1:1 500,000
1982 Bonus 1:1 1,000,000
1988 Bonus 1:1 2,000,000
1990 Bonus 1:2 2,000,000
1993 Bonus 1:1 6,000,000
1996 Bonus 2:3 8,000,000
1998 Bonus 1:2 10,000,000
1999 Bonus 2:3 20,000,000
1999 Rights (non voting @ Rs 70/-) 3:10 15,000,000
2001 Bonus 1:10 6,500,000
2004 Rights (voting @ Rs 55/-) 2:5 22,000,000
2004 Rights (non voting @ Rs 33/-) 2:5 6,600,000
2005 Issue of underlying shares for GDR - 17,664,700
2007 Bonus 1:1 117,764,700
2009 Shares issued under ESOP 240,747
2010 Shares issued under ESOP 2,198,875
Total 237,969,022
9 PRICE VOLUME CHART
264 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
10. TWENTY MAJOR SHAREHOLDERS (VOTING) OF THE BANK AS AT 31ST DECEMBER 2010
Name % on No. of No. of
total capital Shares 2010 Shares 2009
1. Sri Lanka Insurance Corporation Limited (Life fund) 11.95 28,448,832 11,533,832
2. Employees Provident Fund 7.58 18,042,000 5,700,000
3. Milford Exports (Ceylon) Limited 6.46 15,373,050 15,373,050
4. Stassen Exports Limited 5.60 13,324,850 13,324,850
5. Brown and Company Limited 5.55 13,205,230 12,612,690
6. Mr. Sohli Edulji Captain 4.03 9,589,060 -
7. HSBC International Nominees Ltd - SSBT- Janus Overseas Fund 3.98 9,473,600 -
8. Sonetto Holdings Limited 3.55 8,445,206 8,445,206
9. Distilleries Company of Sri Lanka Limited 2.51 5,961,708 5,961,708
10. National Savings Bank 2.34 5,578,200 -
11. HSBC International Nominees Ltd - Janus Aspen Series Overseas Port Fol 1.80 4,292,400 -
12. Standard Chartered Bank Singapore S/A HL Bank Singapore Bran. 1.69 4,013,800 -
13. HSBC International Nominees Ltd-BBH-GMOEMERGING Markets Fund 1.37 3,266,130 -
14. FI-CIBLUX S/A Batterymarch Global Emerging Market Fund 1.11 2,648,000 2,648,000
15. Northern Trust Co S/A The Royal Bank of Scotland as Trustee 0.79 1,875,000 -
16. Mr.Yonmerenne Simon Hewage Indra Kumar Silva 0.75 1,781,600 1,000,000
17. BNY-CF Ru er Investment Funds: CF Ru er Paci c Fund 0.66 1,564,500 -
18. The Ceylon Investment PLC A/c No.2 0.63 1,500,000 1,500,000
19. Deutsche Bank Trust Company Americas 0.55 1,311,500 35,329,400
20. HSBC International Nominees Ltd - SSBT- Deutsche Bank AG Singapore 0.44 1,050,000 -
Sub total 63.34 150,744,666
* Unregistered Shares 5.14 12,232,942
Balance held by 4,360 voting shareholders 11.89 28,297,998
(Total voting shareholders- 4,380)
Total voting shares 80.37 191,275,606 189,520,615
Shares held by 11,536 Non-voting shareholders 19.63 46,693,416 46,249,532
Total No. of Ordinary shares 100.00 237,969,022 235,770,147
* An entity has been removed from the register of shareholders with e ect from 19th August 2010 on a direction given by the CBSL in terms of
Sec. 12(IC)(c) of the Banking Act.
SHARE AND DEBENTURE
INFORMATION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 265
11. TWENTY MAJOR SHAREHOLDERS (NON-VOTING) OF THE BANK AS AT 31ST DECEMBER 2010
Name % on No. of No. of
total capital Shares 2010 Shares 2009
1. Legalinc Trustee Services (Pvt) Limited (HNBL ESOP Trust) 3.84 9,133,274 9,133,274
2. Perching LLC S/A Averbach Grauson & Co. 0.79 1,873,100 2,168,100
3. Fast Gain International Ltd 0.51 1,213,000 1,397,000
4. HINL-JPMCB-Butter eld Trust (Bermuda) Limited 0.49 1,170,100 -
5. Employees Trust Fund Board 0.35 826,130 -
6. DFCC Bank A/c 1 0.34 797,600 797,600
7. National Savings Bank 0.27 650,000 -
8. Asian Alliance Insurance PLC - A/c 02 (Life Fund) 0.27 638,800 303,400
9. Deutsche Bank AG-National Equity Fund 0.19 442,400 -
10. Bank of Ceylon No.1 A/c 0.18 439,900 -
11. Deutsche Bank AG as Trustee for Namal Acuity Value Fund 0.17 413,300 489,800
12. Bank of Ceylon A/c Ceybank Century Growth Fund 0.17 408,700 -
13. Hatton National Bank PLC - A/c No.2 0.14 338,638 338,638
14. BNYM SA/NV-The Walter Fund 0.14 337,500 -
15. Union Assurance PLC/No.01A/C 0.13 297,900 -
16. Waldock Mackenzie Ltd/Mr.H M S Abdulhussein 0.12 290,200 300,200
17. Swiss Lloyd Limited 0.10 248,000 -
18. Mr.Dickowita Kankanamge Weeratunga & Mr.Dickowita
Kankanamge Athula Kithsiri Weeratunga 0.10 237,760 537,760
19. Saboor Chatoor (Pvt) Limited 0.09 225,000 -
20. Lanka Synthetic Fibre Co.Limited 0.09 220,000 220,000
Sub total 8.48 20,201,302
Balance held by 11,516 Non-voting shareholders 11.15 26,492,114
(Total Non-voting shareholders-11,536)
Total Non-voting shares 19.63 46,693,416 46,249,532
Shares held by 4,380 voting shareholders 75.23 179,042,664 186,717,435
Unregistered voting Shares 5.14 12,232,942 2,803,180
Total voting shares 80.37 191,275,606 189,520,615
Total No. of Ordinary shares 100.00 237,969,022 235,770,147
12. RELATED PARTY TRANSACTIONS EXCEEDING 10% OF THE EQUITY OR 5% OF THE TOTAL ASSETS OF THE BANK
The Bank carried out transactions in the ordinary course of business with the following parties and the aggregate monetary value of these
transactions exceeded 10% of the share holders’ equity of the Bank as at 31st December 2010.
Sithma Development (Pvt) Ltd
Stassen Exports (Pvt) Ltd*
Hatton National Bank Retirement Pension Fund
Hatton National Bank Employee Provident Fund
The details of these transactions are given in Note 48 (C ) ii (page 230), 48 (f) I (page 232) and 48 (f ) ii (page 237) respectively.
* For the above computation the credit limit granted to this company by the Bank of Rs 4,286 Mn was considered, although the outstanding as
at the Balance Sheet date was Rs 541.09 Mn.
266 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
HNB DEBENTURES 2002
i) Market Value
12 months ended 31st December 2010
Highest price - Rs 95.00
Lowest price - Rs 95.00
Last traded price - Rs 95.00
ii) Interest Income
12 months ended 31st December
2010 2009
Coupon Yield of Coupon Yield of
Interest comparable Interest comparable
Govt. Security Govt. Security
10 year Fixed Rate (14.20% p.a.) 14.20 7.75 14.20 17.33
10 year Floating Rate (6 months TB +1.25% p.a.)* 12.00 7.75 13.25 17.33
* The oating rate debentures have a cap of 17.00% p.a. and a oor of 12.00% p.a.
The above rupee coupon interest rates are applicable for the next interest payment due on the 15th of February 2011.
HNB DEBENTURES 2006
i) Market Value
12 months ended 31st December 2010
These debentures have not traded for the period ended 31st December 2010
Ii) Interest Income
12 months ended 31st December
2010 2009
Coupon Yield of Coupon Yield of
Interest comparable Interest comparable
Govt. Security Govt. Security
6 year Floating Rate (6 months TB + 2.25% p.a.) * 9.63 7.61 10.87 10.90
7 year Floating Rate (6 months TB + 2.25% p.a.) * 9.63 8.03 10.87 10.90
8 year Floating Rate (6 months TB + 2.25% p.a.) * 9.63 8.81 10.87 11.63
15 year Fixed Rate (11.00% p.a.) 11.00 N/Q 11.00 N/Q
18 year Fixed Rate (11.25% p.a.) 11.25 9.49 11.25 11.05
* The oating rate debentures have a cap of 16.00% p.a. and a oor of 8.00% p.a.
N/Q – Not quoted for the period ended 31st December
The above rupee coupon interest rates are applicable for the next interest payment due on the 30th of June 2011.
SHARE AND DEBENTURE
INFORMATION
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 267
HNB DEBENTURES 2007
i) Market Value
12 months ended 31st December 2010
These debentures have not traded for the period ended 31st December 2010
ii) Interest Income
12 months ended 31st December
2010 2009
Coupon Yield of Coupon Yield of
Interest comparable Interest comparable
Govt. Security Govt. Security
10 year Fixed Rate (16.00% p.a.) 16.00 N/Q 16.00 12.10
15 year Fixed Rate (16.75% p.a.) 16.75 N/Q 16.75 N/Q
N/Q – Not quoted for the period ended 31st December
The above rupee coupon interest rates are applicable for the next interest payment due on the 30th of June 2011.
HNB DEBENTURES 2008
i) Market Value
12 months ended 31st December 2010
These debentures were not listed as at 31st December 2010
Ii) Interest Income
12 months ended 31st December
2010 2009
Coupon Yield of Coupon Yield of
Interest comparable Interest comparable
Govt. Security Govt. Security
Yield of comparable Govt. Security
5 year Floating Rate (1 year TB + 1.00% p.a.) 10.27 8.07 13.93 10.46
The above rupee coupon interest rates are applicable for the next interest payment due on the 30th of June 2011.
Ratios
2010 2009
Debenture to Equity Ratio (%) 10.00 11.20
Debenture Interest Cover (times) 19.60 16.27
Liquid Asset Ratio (LAR) 23.55 29.22
268 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
GLOSSARY
A ACCOUNTING POLICIES
The speci c principles, bases, conventions, rules
and practices adopted by an entity in preparing
and presenting Financial Statements.
ACCRUAL BASIS
Recognising the e ects of transactions and
other events when they occur without waiting
for receipt or payment of cash or cash
equivalent.
AMORTISATION
The systematic allocation of the depreciable
amount of an intangible asset over its useful life.
ASSOCIATE
An associate is an entity, including an
unincorporated entity such as a partnership,
over which the investor has signi cant in uence
and that is neither a subsidiary nor an interest in
a joint venture.
B BIS SURPLUS
The total Capital Adequacy in excess of the
minimum stipulated by Basel International
Standards and as modi ed to suit local
requirements by the Central Bank of Sri Lanka.
C CAPITAL ADEQUACY RATIO
The percentage of risk-adjusted assets
supported by capital as de ned under the
framework of risk-based capital standards
developed by the Bank for International
Settlements (BIS) and as modi ed to suit local
requirements by the Central Bank of Sri Lanka.
CAPITAL RESERVE
Capital Reserves consist of revaluation reserves
arising from revaluation of properties owned by
the Bank and Reserve Fund set aside for speci c
purposes de ned under the Banking Act, No 30
of 1988 and shall not be reduced or impaired
without the approval of the Monetary Board.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid
investments that are readily convertible to
known amounts of cash and which are subject
to an insigni cant risk of changes in value.
COMMITMENT TO EXTEND CREDIT
Credit facilities available to clients either in the
form of loans, bankers’ acceptances and other,
on-balance sheet nancing or through
o -balance sheet products such as guarantees
and letters of credit.
CONTINGENT LIABILITIES
Conditions or situations at the balance sheet
date, the nancial e ect of which are to be
determined by the future events which may or
may not occur.
COST INCOME RATIO
Operating expenses as a percentage of net
income.
COST METHOD
Cost method is a method of accounting for an
investment whereby the investment is
recognised at cost. The investor recognises
income from the investment only to the extent
that the investor receives distributions from
accumulated pro ts of the investee arising after
the date of acquisition. Distributions received in
excess of such pro ts are regarded as a recovery
of investment and are recognised as a reduction
of the cost of the investment.
COST-PUSH INFLATION
A continuous increase in average price levels
due to an increase in production costs.
D DEFERRED TAX
Sum set aside in the nancial statements for
taxation that may become payable in a nancial
year other than the current nancial year.
DEPRECIATION
The systematic allocation of the depreciable
amount of an asset over its useful life.
DIVIDEND COVER
Pro t after tax divided by gross dividends. This
ratio measures the number of times dividend is
covered by the current year’s distributable
pro ts.
DIVIDEND YIELD
Dividend earned per share as a percentage of its
market value.
DOCUMENTARY LETTERS OF CREDIT (L/Cs)
Written undertakings by a bank on behalf of its
customers, authorising a third party to draw on
the bank up to a stipulated amount under
speci c terms and conditions. Such
undertakings are established for the purpose of
facilitating international trade.
E EARNINGS PER SHARE (EPS)
Pro t attributable to ordinary shareholders,
divided by the number of ordinary shares in
issue.
EFFECTIVE TAX RATE
Provision for taxation excluding deferred
taxation divided by the pro t before tax.
EQUITY METHOD
The equity method is a method of accounting
whereby the investment is initially recognised
at cost and adjusted thereafter for the
post-acquisition changes in the investor’s share
of net assets of the investee. The pro t or loss of
the investor includes the investor’s share of the
pro t or loss of the investee.
F FAIR VALUE
Fair value is the amount for which an asset
could be exchanged between a knowledgeable,
willing buyer and a knowledgeable, willing
seller in an arm’s length transaction.
FOREIGN EXCHANGE INCOME
The realised gain recorded when assets or
liabilities denominated in foreign currencies are
translated into Sri Lankan Rupees on the
balance sheet date at prevailing rates which
di er from those rates in force at inception or
on the previous balance sheet date. Foreign
exchange income also arises from trading in
foreign currencies.
G GENERAL PROVISIONS
General provisions are established for leasing
transactions, housing loans, pawning advances
and others for anticipated losses on aggregate
exposures where credit losses cannot yet be
determined on an individual facility basis.
GROSS DIVIDENDS
The portion of pro t inclusive of tax withheld
distr
ibuted to shareholders.
GROUP
A group is a parent and all its subsidiaries.
GUARANTEES
Primarily represent irrevocable assurances that a
bank will make payments in the event that its
customer cannot meet his / her nancial
obligations to third parties. Certain other
guarantees represent non- nancial
undertakings such as bid and performance
bonds.
I IMPAIRMENT
This occurs when recoverable amount of an
asset is less than its carrying amount.
INTANGIBLE ASSET
An identi able non-monetary asset without
physical substance held for use in the
production / supply of goods / services or for
rental to others or for administrative purposes.
INTEREST MARGIN
Net interest income as a percentage of average
interest earning assets.
INTEREST SPREAD
This represents the di erence between the
average interest rate earned and the average
interest rate paid on funds.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 269
J JOINT CONTROL
Joint control is the contractually agreed sharing
of the control over an economic activity and
exists only when the strategic nancial and
operating decisions relating to the activity
require the unanimous consent of the parties
sharing control.
JOINT VENTURE
A joint venture is a contractual arrangement
whereby two or more parties undertake an
economic activity that is subject to joint control.
K KEY MANAGEMENT PERSONNEL
Key management personnel are those persons
having authority and responsibility for planning,
directing and controlling the activities of the
entity, directly or indirectly.
L LIQUID ASSETS
Assets that are held in cash or in a form that can
be converted to cash readily, such as deposits
with other banks, bills of exchange and treasury
bills.
LOAN LOSS PROVISION
Please refer Provision for Bad and Doubtful
Debts below.
M MARKET CAPITALISATION
Number of ordinary shares in issue multiplied
by the market value of each share at the year
end.
MARKET RISK
This refers to the possibility of loss arising from
changes in the value of a nancial instrument as
a result of changes in market variables such as
interest rates, exchange rates, credit spreads
and other asset prices.
N NET ASSET VALUE PER SHARE
Shareholders’ funds divided by the number of
ordinary shares in issue.
NET-INTEREST INCOME
The di erence between what a bank earns on
assets such as loans and securities and what it
pays on liabilities such as deposits, re nance
funds and inter-bank borrowings.
NON-PERFORMING ADVANCES
All loans are classi ed as non-performing when
a payment is 90 days in arrears.
NON-PERFORMING ADVANCES COVER (NPA
COVER)
Cumulative loan provision as a percentage of
total non-performing advances (net of interest
in suspense).
NPA RATIO
Total non-performing advances (net of interest
in suspense) divided by total advances portfolio
(net of interest in suspense).
O OPERATIONAL RISK
This refers to the risk of loss resulting from
inadequate or failed internal processes, people
and systems, or from external events.
P PARENT
A parent is an entity that has one or more
subsidiaries.
PRICE EARNINGS RATIO (P/E RATIO)
Market price of an ordinary share divided by
earnings per share (EPS).
PROVISION FOR BAD AND DOUBTFUL DEBTS
A charge to income which is added to the
allowance for loan losses. Speci c provisions are
established to reduce the book value of speci c
assets (primarily loans) to estimated realisable
values.
R RETURN ON AVERAGE ASSETS (ROA)
Net income expressed as a percentage of
average total assets, used along with ROE, as a
measure of pro tability and as a basis of
intra-industry performance comparison.
RETURN ON AVERAGE EQUITY (ROE)
Net income, less preferred share dividends if
any, expressed as a percentage of average
ordinary shareholders’ equity.
REVENUE RESERVE
Reserves set aside for future distribution and
investment.
REPURCHASE AGREEMENT
This is a contract to sell and subsequently
repurchase government securities at a given
price on a speci ed future date.
REVERSE REPURCHASE AGREEMENT
Transaction involving the purchase of
government securities by a bank or dealer and
resale back to the seller at a given price on a
speci c future date.
RISK-ADJUSTED ASSETS
Used in the calculation of risk-based capital
ratios. The face amount of lower risk assets is
discounted using risk weighting factors in order
to re ect a comparable risk per rupee among all
types of assets. The risk inherent in o -balance
sheet instruments is also recognised, rst by
adjusting notional values to balance sheet (or
credit) equivalents and then by applying
appropriate risk weighting factors.
RIGHTS ISSUE
Issue of shares to the existing shareholders at an
agreed price, generally lower than market price.
S SEGMENT REPORTING
Segment reporting indicates the contribution
to the revenue derived from business segments
such as banking operations, leasing operations,
stock broking and securities dealings, property
and insurance.
SHARE PREMIUM
Amount paid by a shareholder, over and above
the par value of a share.
SHAREHOLDERS’ FUNDS
Shareholders’ funds consist of stated capital plus
capital and revenue reserves.
SUBSIDIARY
A subsidiary is an entity, including an
unincorporated entity such as a partnership,
that is controlled by another entity (known as
the parent).
SWAPS (CURRENCY)
The simultaneous purchase of an amount of a
currency for spot settlement and the sale of the
same amount of the same currency for forward
settlement. Alternatively a simultaneous spot
sale and forward purchase of a currency.
T TIER I CAPITAL
Consists of the sum total of paid up ordinary
shares, non cumulative, non redeemable
preference shares, share premium, statutory
r
eserve fund, published retained pro ts, general
and other reserves, less goodwill.
TIER II CAPITAL
Consists of the sum total of revaluation reserves,
general provisions, hybrid capital instruments
and approved subordinated debentures.
TOTAL CAPITAL
Total capital is the sum of Tier I capital and Tier II
capital.
V VALUE ADDED
Value added is the wealth created by providing
banking services less the cost of providing such
services. The value added is allocated among
the employees, the providers of capital, to
government by way of taxes and retained for
expansion and growth.
270 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
NOTICE OF
MEETING
Notice is hereby given that the Forty Second (42nd) Annual General Meeting of the Hatton National Bank PLC is convened on Thursday the Thirty First
(31st) of March 2011 at the Auditorium on Level 22 of “HNB Towers” at No: 479, T.B. Jayah Mawatha, Colombo 10, at 10.00 in the forenoon when the
following Ordinary Business will be transacted.
To receive and consider the Annual Report of the Board of Directors along with the Financial Statements of the Bank for the year ended 31st December
2010, the Auditors’ Report thereon.
To declare a nal dividend of Rs 5.50 per share for the year 2010, to the shareholders as recommended by the Directors.
To re-elect Mr R K Obeyesekere who retires by rotation at the Annual General Meeting, a Director of the Bank in terms of Article 87 of the Articles of
Association of the Bank.
To re-elect Mrs P C Cooray who retires by rotation at the Annual General Meeting, a Director of the Bank in terms of Article 87 of the Articles of
Association of the Bank.
To re-appoint the Auditors for the ensuing year and to authorise the Directors to x their remuneration.
To authorise the Directors to determine payments for the year 2011 for charitable and other purposes.
By Order Of The Board
INDRANI GOONESEKERA
DGM (LEGAL) / BOARD SECRETARY
Colombo, Sri Lanka.
18th February 2011
Notes :
1. A member entitled to attend or attend and vote at the meeting is entitled to appoint a proxy to attend or attend and vote as the case may be, in
his stead.
2. A proxy need not be a member of the Company. The Form of Proxy is enclosed.
3. The completed Form of Proxy should be deposited with the Board Secretary at the Registered O ce of the Company at “HNB Towers”, Level 19,
No: 479, T.B. Jayah Mawatha, Colombo 10, not less than 48 hours before the time appointed for holding the meeting.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 271
I/We …………………………………………………………………………………………………………………….….…………….….…
of ……………………………………………………………………………………………………….………………… being *a member/
members of the Hatton National Bank PLC, hereby appoint …………….….…………….….………...………………………………………
………………. of …………………………………………………….….…………….….…………………………….…….………….……
…………………………… or failing him/her Rienzie Theobald Wijetilleke or failing him Rajendra Theagarajah, or failing him Don Harold
Stassen Jayawardena, or failing him Manickam Vallipuram Theagarajah, or failing him Rajpal Kumar Obeyesekere or failing him Pamela
Christine Cooray, or failing her Ranjeevan Seevaratnam or failing him Nirmala Gihan Wickremeratne or failing him Mirihana Arachchige
Rose Chandralatha Cooray, as *my/our proxy, to represent *me/us and to vote for *me/us on *my/our behalf on the resolutions (including
the under mentioned) at the Forty Second (42nd) Annual General Meeting of the Bank to be held at the Auditorium on Level 22 of “HNB
Towers” at No. 479, T B Jayah Mawatha, Colombo 10 on the 31st day of March, 2011 at 10.00 in the forenoon and at any adjournment
thereof and at every poll which may be taken in consequence thereof :
To declare a dividend of Rs 5.50 per share
In favour
Against
To re-elect Mr R K Obeyesekere, a Director of the Bank
In favour
Against
To re-elect Mrs P C Cooray, a Director of the Bank
In favour
Against
To re-appoint Auditors for the ensuing year/authorise the Directors to x their remuneration
In favour
Against
To authorise the Directors to determine payments for charitable and other purposes
In favour
Against
Mark your preference with “
✓
”
Signed this …………. day ……….…………… 2011.
Signature/s ………………...…………………………
…………………………………………..
Please provide the details :
Shareholder’s NIC No / Company Registration No ……………………………………….……
Folio No / Number of Shares held .……………………………………………
Proxy holder’s NIC No (if not a Director) ….…………………………………………
Note - See reverse hereof for instructions to complete the proxy * Delete inappropriate words
FORM OF PROXY
[VOTING]
272 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
INSTRUCTIONS TO COMPLETE PROXY
1. The full name and the registered address of the shareholder appointing the proxy should be legibly
entered in the Form of Proxy, duly signed and dated.
2. The completed Proxy should be deposited with the Board Secretary, at the Registered O ce of the
Bank at “HNB Towers”, Level 19, No: 479, T B Jayah Mawatha, Colombo 10, not less than 48 hours
before the time appointed for holding the Meeting.
3. The Proxy shall -
(a) in the case of an individual be signed by the shareholder or by his attorney, and if signed by an
attorney, a notarially certi ed copy of the Power of Attorney should be attached to the
completed Proxy if it has not already been registered with the Bank.
(b) in the case of a company or corporate body, either be under its Common Seal or signed by its
attorney or by an o cer on behalf of the Company or corporate body in accordance with the
Articles of Association or the Constitution of that Company or corporate body.
The Bank may, but shall not be bound to, require evidence of the authority of any such attorney
or o cer.
(c) in the case of joint-holders, the rst joint-holder has the power to sign the proxy without the
concurrence of the other joint-holder/s.
4. Every alteration or addition to the Proxy must be duly authenticated by the full signature of the
shareholder, signing the Proxy. Such signature should as far as possible be placed in proximity to the
alteration or addition intended to be authenticated.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 273
FORM OF PROXY
[NON-VOTING]
I/We ............................................................................................................................................................................................................................................................................................. of
........................................................................................................................................................................................................................................................................................... being
*a member/members of the Hatton National Bank PLC, hereby appoint ..........................................................................................................................................
....................................................................................................................................................................... of .................................................................................................................................
....................................................................................................................................................................... or failing him/her Rienzie Theobald Wijetilleke or failing him
Rajendra Theagarajah or failing him Don Harold Stassen Jayawardena, or failing him Manickam Vallipuram Theagarajah, or failing him
Rajpal Kumar Obeyesekere or failing him Pamela Christine Cooray, or failing her Ranjeevan Seevaratnam or failing him
Nirmala Gihan Wickremeratne or failing him Mirihana Arachchige Rose Chandralatha Cooray, as *my/our proxy, to represent *me/us at
the Forty Second (42nd) Annual General Meeting of the Bank to be held at the Auditorium on Level 22 of “HNB Towers” at No. 479,
T B Jayah Mawatha, Colombo 10 on the 31st day of March, 2011 at 10.00 in the forenoon and at any adjournment thereof :
Signed this ........................................... day ....................................... 2011.
Signature/s ......................................................................................................
......................................................................................................
Please provide the details :
Shareholder’s NIC No./Company Registration No. ................................................................................................................................................
Folio No./Number of Shares held ................................................................................................................................................
Proxy holder’s NIC No. (if not a Director) ................................................................................................................................................
Note – See reverse hereof for instructions to complete the proxy
* Delete inappropriate words
274 HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
INSTRUCTIONS TO COMPLETE PROXY
1. The full name and the registered address of the shareholder appointing the proxy should be legibly
entered in the Form of Proxy, duly signed and dated.
2. The completed Proxy should be deposited with the Board Secretary, at the Registered O ce of the
Bank at “HNB Towers”, Level 19, No: 479, T B Jayah Mawatha, Colombo 10, not less than 48 hours
before the time appointed for holding the Meeting.
3. The Proxy shall -
(a) in the case of an individual be signed by the shareholder or by his attorney, and if signed by an
attorney, a notarially certi ed copy of the Power of Attorney should be attached to the
completed Proxy if it has not already been registered with the Bank.
(b) in the case of a company or corporate body, either be under its Common Seal or signed by its
attorney or by an o cer on behalf of the Company or corporate body in accordance with the
Articles of Association or the Constitution of that Company or corporate body.
The Bank may, but shall not be bound to, require evidence of the authority of any such attorney
or o cer.
(c) in the case of joint-holders, the rst joint-holder has the power to sign the proxy without the
concurrence of the other
joint-holder/s.
4. Every alteration or addition to the Proxy must be duly authenticated by the full signature of the
shareholder, signing the Proxy. Such signature should as far as possible be placed in proximity to the
alteration or addition intended to be authenticated.
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010 275
INVESTOR FEEDBACK
FORM
To request information or submit a comment / query to the Company, please complete the following and return this page to -
Senior Deputy General Manager - Strategy & Compliance,
Hatton National Bank Limited,
No. 479, T.B. Jayah Mawatha (Darley Road)
Colombo 10.
Sri Lanka
Email : [email protected]
Name :
Permanent Mailing Address :
Contact Numbers - (Tel) :
Country Code Area Code Number
- (Fax) :
Country Code Area Code Number
E-mail :
Name of Company :
(If Applicable)
Designation :
(If Applicable)
Company Address :
(If Applicable)
Please tick (
✓ ) the appropriate box Yes No
Would you like to receive soft copies of the HNB annual and interim reports via e-mail?
Would you like to receive news and press releases of HNB via e-mail?
Would you like to receive any information on our products / services?
Queries / Comments
SRI LANKA IS GROWING; AND HNB IS AT THE
FOREFRONT OF THIS DRIVE, DELIVERING A
SPECTRUM OF SOLUTIONS THAT HELP DEVELOP
A NATION, ECONOMY AND ITS PEOPLE ON THE RISE.
OUR NATIONAL COMMITMENT HAS ALWAYS BEEN
TO CONVERT WORLD-CLASS FINANCIAL
SOLUTIONS TO PEOPLE FRIENDLY BANKING
PRODUCTS THAT HELP INDIVIDUALS AND
BUSINESS REALIZE THEIR PROMISE. OUR
UNDERSTANDING AND OUR RESPONSE TO
NATIONAL FINANCIAL NEEDS HAS BEEN
LONGSTANDING.
THIS IS WHAT TRULY MAKES US A NATIONAL BANK.
AND WE KNOW THERE IS NO BETTER TIME THAN
NOW, TO SHARE THE NATIONAL FOCUS AND GIVE
SRI LANKANS THE IMPETUS TO SURGE AHEAD.
CORPORATE
INFORMATION
NAME OF COMPANY
HATTON NATIONAL BANK PLC
LEGAL FORM
A public limited Company incorporated on 5th March 1970 under the Laws of
the Republic of Sri Lanka. The Company was re-registered under the Companies
Act No 7 of 2007 on 27th September, 2007. It is a Licensed Commercial Bank
under the Banking Act.
COMPANY REGISTRATION NUMBER
PQ 82 (previous PBS 613)
ACCOUNTING YEAR END
31st December
STOCK EXCHANGE LISTING
The ordinary shares and the Unsecured Subordinated Redeemable Debentures
of the Bank are listed on the Colombo Stock Exchange in Sri Lanka.
Global Depository Receipts of the Bank are listed on the
Luxembourg Stock Exchange.
REGISTERED OFFICE
No 479, T B Jayah Mawatha (Darley Road),
P O Box 837, Colombo 10, SRI LANKA
HEAD OFFICE
“HNB Towers”,
No 479, T B Jayah Mawatha (Darley Road),
P O Box 837, Colombo 10, SRI LANKA
Cable Address: HATNABANK
Telephone Nos 2664664, 2662772, 4764764
Fax Nos 2662814, 2662832 International – 2446523
Telex Nos 21259 Hatnbk Ce, 2166 Haynfx Ce
Swift : Bic Code – HBLILKLX
e-mail : [email protected]
Web : www.hnb.net
CREDIT RATINGS
The Bank has been assigned AA-(lka) national credit rating for implied
long term unsecured senior debt by Fitch Ratings Lanka Limited
ASSOCIATE COMPANIES
Delma Exchange 20.00%
Remittances and Foreign Currency Related Services
Browns Engineering (Pvt) Ltd 32.63%
Construction and Engineering
JOINT VENTURE COMPANIES
Acuity Partners (Pvt) Ltd 50.00%
Financial Services
SUBSIDIARY COMPANIES
HNB Assurance PLC 60.00%
Insurance Services
Sithma Development (Pvt) Ltd 100.00%
Property Development
Majan Exchange LLC 40.00%
Remittances and Foreign Currency Related Services
Commercial Interlink Services Inc 100.00%
(O/A of Delma Exchange Canada)
Remittances and Foreign Currency Related Services
AUDITORS
KPMG Ford, Rhodes, Thornton & Co.,
Chartered Accountants
No 32A, Sir Mohamed Macan Markar Mawatha,
Colombo 3,
Sri Lanka
INVESTOR INFORMATION
Institutional Investors, Stock Brokers and Security Analysts requiring nancial
information should contact the Senior DGM - Strategy & Compliance at:
“HNB Towers”, Level 16,
No 479, T B Jayah Mawatha (Darley Road),
Colombo 10,
Sri Lanka.
Telephone : 2662705, 2664705
Fax : 2662815
e-mail : nihalk[email protected]
BOARD OF DIRECTORS
Mr Rienzie T. Wijetilleke (Chairman)
Mr Rajendra Theagarajah (Managing Director / CEO)
Mr D H S Jayawardena
Mr M V Theagarajah
Mr R K Obeyesekere
Ms Pamela C. Cooray (Senior Director)
Mr Ranjeevan Seevaratnam
Mr N G Wickremeratne
Ms M A R C Cooray
BOARD SECRETARY
Ms Indrani Goonesekera
Attorney-at-Law & Notary Public
BOARD AUDIT COMMITTEE
Mr Ranjeevan Seevaratnam (Chairman)
Mr D H S Jayawardena
Ms Pamela C. Cooray
Mr N G Wickremeratne
BOARD NOMINATION COMMITTEE
Mr Rienzie T. Wijetilleke (Chairman)
Mr D H S Jayawardena
Mr M V Theagarajah
Mr R K Obeyesekere
BOARD REMUNERATION COMMITTEE
Ms Pamela C. Cooray (Chairperson)
Mr Rienzie T. Wijetilleke
Mr R K Obeyesekere
Mr N G Wickremeratne
BOARD INTEGRATED RISK MANAGEMENT COMMITTEE
Mr M V Theagarajah (Chairman)*
Mr Rienzie T. Wijetilleke*
Ms M A R C Cooray*
Mr Rajendra Theagarajah (Managing Director / CEO)**
Mr J D N Kekulawala – Senior DGM - Strategy & Compliance**
Mr D P N Rodrigo – DGM - Risk**
* Representatives of the Board
** Representatives of the Management
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HATTON NATIONAL BANK PLC - ANNUAL REPORT 2010
HATTON NATIONAL BANK PLC ANNUAL REPORT 2010
www.hnb.lk
