Fitch Ratings has maintained the Rating Watch Negative (RWN) on
Fitch has also maintained HNBF's subordinated debt ratings of 'BBB-(lka)' on RWN.
Key Rating Drivers
RWN Reflects Parent's Rating: The RWN on HNBF's ratings reflects that on its parent -
We see the funding and liquidity conditions of domestic finance and leasing companies (FLC) as tied to those of the banks, and any signs of funding or liquidity stress in the banking sector would carry contagion risk for FLCs. The RWN reflects our view that HNBF is not immune to these system-wide stresses, which will continue to exert pressure on the prospects for parental support.
Shareholder Support Drives Ratings: HNBF's rating is driven by our view that the parent, HNB, would provide extraordinary support to HNBF, if required. HNB's ability to support HNBF is reflected in its credit profile, which is underpinned by its standalone strength. Our support assessment also takes into consideration HNB's majority 51% shareholding, its oversight of HNBF's strategic direction through board representation and the common HNB brand, which elevates reputational risk for the parent should the subsidiary default.
Limited Importance to HNB group: HNBF is rated two notches below its parent to reflect our view that the subsidiary is of limited importance to the HNB group. HNBF's loan book accounts for just 4.2% of group gross loans and is focused on vehicle financing and microfinance, which are not seen as core products for HNB. HNBF caters to customer segments that are beyond the bank's risk appetite. Furthermore, the subsidiary has considerable management independence and there is limited operational integration between the entities.
Weak Standalone Profile: We assess HNBF's standalone credit profile as being weaker than its support-driven rating because of its weak financial profile, small franchise with a 3.3% market share of sector assets at end-2022, limited history of successful operation and evolving business model.
Capital Ratios Below Regulatory Floors: HNBF's merger with Prime Finance in the first quarter of the financial year ended
Slow Recovery in Earnings: HNBF posted heavy losses in 1HFY23 after the sharp increase in interest rates in
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
HNBF's rating is sensitive to changes in HNB's credit profile, as reflected in HNB's National Long-Term Rating, as well as Fitch's opinion around HNB's ability and propensity to extend timely extraordinary support. Developments that could lead to a downgrade include:
insufficient or delayed liquidity support from HNB relative to HNBF's needs, which hinders HNBF's ability to meet its obligations in a timely manner
delay in the provision of sufficient ordinary capital, which suggests increasing uncertainty around HNB's commitment to support the subsidiary
intervention by authorities that constrain HNBF's ability to service its obligations
increased size relative to the parent that makes extraordinary support more onerous for the parent
The ratings may also be downgraded if we perceive a weakening in the parent's propensity to support its finance subsidiary due to weakening links.
The resolution of the RWN is contingent upon developments in the operating environment, the parent's credit profile and the evolution of the finance company's funding and liquidity position, which may take more than six months to emerge.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is limited scope for upward rating action given the RWN.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
HNBF's outstanding subordinated debentures are rated two notches below its National Long-Term Rating. We have applied our Bank Rating Criteria in rating these instruments, as we view the prudential capital framework for finance companies to be closer to that for banks in
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The subordinated debt rating will move in tandem with HNBF's National Long-Term Rating.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
HNBF's rating is driven by HNB's National Long-Term Rating.
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