Join us at the GLOBAL ISLAMIC FINANCE FORUM 2022 on Oct 5-6.
  of  

or
Sign in to continue reading...

Hatton National Bank: Annual Report 2021

IM Insights
By IM Insights
2 weeks ago
Hatton National Bank: Annual Report 2021

Islamic banking, Credit Risk, Net Assets, Participation, Provision, Receivables, Reserves, Sales


Create FREE account or Login to add your comment
Comments (0)


Transcription

  1. Here , Now, Beyond. HNB, supporting the DREAMS of a NATION HATTON NATIONAL BANK PLC INTEGRATED REPORT 2021
  2. Here , Here at HNB, we’re proud of the achievements we have made in helping individuals, and businesses across the country reach their visions of success and build for a better tomorrow. From supporting higher education, to assisting entrepreneurs, and enabling seniors to plan for their futures, we’ve built a legacy of dedication, compassion, and purpose.
  3. Now , Now, over 130 years later, we’re leading the way in shaping the face of banking as a catalyst of hope and resilience during unprecedented times. We are empowering people and businesses to revive and thrive, enabling access to essential services, building sustainable livelihoods, creating change for the environment and building a brighter future for all.
  4. Beyond . Beyond what we have already accomplished, we envision a digital landscape where our bank delivers sustainable value and wealth creation to all stakeholders. Our future will be driven by the digitalisation of our core services to serve everyone better; we will foster the prospects of our nation by promoting a greener future through green financing and minimising our carbon footprint. We’re immensely honoured by the hard work and dedication of our teams in building the future ready operations we have today, setting the foundation for a transformative banking experience that will continue to add value for generations to come.
  5. Contents THE STRATEGIC REPORT 16 8 10 14 About the Report About HNB Group Performance Highlights Chairperson ’s Message 20 70 76 78 Board of Directors Corporate Management Senior Management Managing Director/CEO’s Message 24 29 36 Operating Landscape Listening to Stakeholders 41 60 Business Line Review 6 Value Delivered to our Communities HATTON NATIONAL BANK PLC Financial Review Scan the QR Code with your smart device to view this report online. Read our HNB Corporate Governance and Risk Management Report 2021.
  6. MANAGEMENT DISCUSSION & ANALYSIS Operating Landscape 24 Listening to Stakeholders 29 GOVERNANCE REPORTS SUPPLEMENTARY INFORMATION Board of Directors 70 Income Statement in US Dollars 331 Corporate Management 76 Senior Management 78 Statement of Profit or Loss and Other Comprehensive Income in US Dollars 332 Statement of Financial Position in US Dollars 333 A Transformative Strategy 32 Corporate Governance: Annual Report of the Board of Directors on the Affairs of the Company 84 How We Create Value for Stakeholders 34 HR and Remuneration Committee Report 96 Nomination Committee Report 98 Value Added Statement 335 Financial Review 36 Business Line Review 41 Board Integrated Risk Management Committee Report 101 Determining Materiality 30 Value Delivered to Customers 44 Value Delivered To Employees 52 Value to Investors 58 Value Delivered to our Communities 60 Board Audit Committee Report 106 Related Party Transactions Review Committee Report 109 Directors’ Statement On Internal Control Over Financial Reporting 111 Independent Assurance Report 113 Directors’ Interest in Contracts with the Bank 114 Risk Review 2021 118 FINANCIAL REPORTS Financial Calendars 126 Sources and Utilisation of Income 334 Value Created to Stakeholders336 Ten Year Statistical Summary 337 Quarterly Statistics 338 Investor Relations 339 Independent Assurance Statement 351 Annexure354 GRI Index355 Sustainability Disclosure Topics & Accounting Metrics 363 Glossary of Financial/Banking Terms 364 Branch Network 2021 370 Corporate Information 372 Notice of Meeting 373 Form of Proxy [Voting] 379 Form of Proxy [Non-Voting] 381 Investor Feedback Form 383 Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement 127 Directors’ Responsibility for Financial Reporting 128 Independent Auditor’s Report 130 Financial Highlights - Bank 135 Income Statement 136 Statement of Profit or Loss and Other Comprehensive Income 137 Statement of Financial Position 138 Statement of Changes in Equity 140 Statement of Cash Flows 144 Notes to the Financial Statements 146 7 INTEGRATED REPORT 2021
  7. About the Report This is the 9th Integrated Annual Report of Hatton National Bank PLC (the Bank) which has been prepared in accordance with the Integrated Reporting Framework. It is also the 15th year of reporting in accordance with GRI Standards which reflects our commitment to integrated thinking. The report seeks to provide a balanced review of how the Bank and its subsidiaries created value during the financial year ending 31st December 2021. PERFORMANCE: INTEGRATED ANNUAL REPORT 2021 This report is primarily prepared for providers of financial capital. It is acknowledged that it may be of interest to other stakeholders due to the holistic nature of the information provided. Care has been taken to ensure that information provided is comprehensive, complete and comparable. Frameworks Applied » Companies Act No.7 of 2007 Assurance has been provided by » Sri Lanka Financial Reporting Standards issued by the Institute of Chartered Accountants of Sri Lanka KPMG on the Financial Statements including the Notes to the Accounts. » IR Framework issued by the International Integrated Reporting Council » GRI Standards DNV has provided assurance that the report is in compliance with the IR Framework » Communicating Sustainability issued by the Colombo Stock Exchange » Sustainability Disclosure Topics & Accounting Metrics FINANCIAL STABILITY: CORPORATE GOVERNANCE, RISK & CAPITAL MANAGEMENT REPORT Provides deeper insights for providers of financial capital and regulators on the Bank’s approach to managing risk and financial capital. Frameworks Applied » Code of Best Practice on Corporate Governance issued by the Institute of Chartered Accountants of Sri Lanka Assurance has been provided by KPMG to Central Bank of Sri Lanka on Compliance with the Banking Act Direction No.11 of 2007 and subsequent amendments. » Banking Act Direction No.11 of 2007 and subsequent amendments thereto » Directions issued by Central Bank of Sri Lanka on Risk Management including the Basel Capital Accord (III) » Sri Lanka Financial Reporting Standards issued by the Institute of Chartered Accountants of Sri Lanka » Companies Act No.7 of 2007 REPORT EVOLUTION We have changed the structure of the report this year, adopting an approach that allows readers to readily assess the value created for stakeholders which is different to the capitals approach used in the previous years. Information relating to the business lines and the capitals are retained in summarised form enabling readers to assess performance through multiple lenses while minimising repetition. What Changed 2021 2020 Approach Value Created to Stakeholders Nurturing Capitals Business Line Performance Summarised from page 41 - 43 Described fully from page 74 to 101 Overall Length of Narrative Report 124 pages 140 pages 8 HATTON NATIONAL BANK PLC
  8. SCOPE & BOUNDARIES Financial information is presented in accordance with regulatory requirements and presents a view of both the Bank and the Group including all subsidiaries. Non-financial information presented within the report, unless explicitly stated, refers to information relating only to the Bank and excludes the subsidiaries as the Bank accounts for over 85% Group PAT, Total Assets & Total Liabilities. 2021 Bank 2020 Bank Rs Mn % Rs Mn % Total Operating Income 84,404 78% 72,074 78% PAT 20,084 86% 13,662 84% Total Assets 1,453,651 93% 1,371,483 94% Total Liabilities 1,270,383 95% 1,211,823 96% FORWARD LOOKING STATEMENTS The report contains forward looking statements which are based on our perceptions, opinions and views based on external and internal information available to us at present. These are provided to facilitate assessment of the Group’s ability to create value in the future. Such statements, assessments and estimates have varying degrees of uncertainty associated with them which can be confirmed only with the benefit of hindsight as they relate to future events, outcomes and impacts which are beyond our control. The unprecedented stresses of the past three years and their impact have been wide ranging, impacting multiple variables and highlighting the fallibility of forecasts issued by even the most renowned think tanks of the world. As countries seek to manage often conflicting priorities in the aftermath of the COVID-19 pandemic, we wish to advise users of the heightened levels of uncertainty in forward looking statements and the fluidity of markets and key economic indicators which remain extremely volatile. Users are advised to make their own judgements using the latest information available at the time of assessment. All forward looking statements are provided without recourse or any liability whatsoever to the Board or other preparers of the Annual Report due to the reasons enumerated above. STATEMENT OF RESPONSIBILITY Management of the Hatton National Bank PLC has prepared and reviewed the Integrated Annual Report and the Corporate Governance, Risk & Capital Management Report and submitted the same to the Board Audit Committee which recommended the reports to the Board for approval in accordance with the delegation of authority. The Board acknowledges its responsibility to ensure that the Annual Integrated Report provides a balanced view of its performance in 2021 and is of the opinion that it addresses all material issues that it believes may have a bearing on the Group’s capacity to create value over the short term. The reports were unanimously approved by the Board on 18th February 2022 and is signed on its behalf by Aruni Goonetilleke Chairperson Colombo, Sri Lanka 18th February 2022 Devaka Cooray Chairman Board Audit Committee Jonathan Alles Managing Director / CEO 9 INTEGRATED REPORT 2021
  9. About HNB Group Hatton National Bank PLC is an innovative bank , continuously evolving to set new benchmarks in the country’s banking sector. It is a domestically significant bank in Sri Lanka with a track record of inclusive banking for over 133 years. Consistent investments in digitalisation have strengthened our value proposition to customers and enhanced the appeal to an increasingly tech savvy youth. A comprehensive portfolio of innovative financial products catering to customer lifecycles across diverse customer segments supports our growth. Diversification within the financial services sector enables realisation of group synergies, making the HNB Group the largest and the most diversified financial services powerhouse in the country. Correspondent banks in 3 countries Correspondent banks in 7 countries THE BANK HNB Group consists of a 60% owned insurance group, fully fledged joint venture investment bank, 51% voting rights in a Non-Bank Financial Institution (NBFI) and a 100% owned real estate arm. The listed insurance subsidiary HNB Assurance PLC offers life insurance while its fully owned subsidiary HNB General Insurance Ltd offers general insurance. The NBFI, HNB Finance PLC was acquired in 2014 and in 2021, it acquired a 97% stake in Prime Finance PLC. The fully fledged investment bank comprises of corporate finance, stock brokering, primary dealership, asset management and venture capital. Wholesale Banking Group Corporate Banking Retail Banking Treasury solutions SME Trade Finance Microfinance Payments & Cash Management Islamic Banking Custodian Services 10 HATTON NATIONAL BANK PLC Retail Banking Group
  10. Correspondent banks in 31 countries Correspondent banks in 26 countries KEY BANK NUMBERS 5 ,042 2.4 Mn 255 TOTAL ASSETS LOANS & ADVANCES CUSTOMER DEPOSITS EMPLOYEES CUSTOMERS Rs Bn CUSTOMER TOUCHPOINTS Correspondent banks in 6 countries Correspondent banks in 2 countries SUBSIDIARIES AND JOINT VENTURE 1,358 Rs Bn Rs Bn 1,076 929 RELEVANCE TO ECONOMY 9.5% Insurance Group Finance Business Investment Banking Group Real Estate HNB Assurance PLC HNB Finance PLC Acuity Partners (Pvt) Ltd Sithma Developers Ltd. HNB General Insurance Ltd. Prime Finance PLC Acuity Securities Ltd. Acuity Stockbrokers Ltd. Lanka Ventures PLC 9.6% OF TOTAL ASSETS OF LOANS & ADVANCES 9.7% 8.7% CUSTOMER DEPOSITS OF BRANCHES 12% ATMS Guardian Acuity Asset Management Ltd. 11 INTEGRATED REPORT 2021
  11. A Comprehensive Product Portfolio FOR INDIVIDUALS HIGH NETWORTH CLUB Singithi Kiriketiyo Minor Investment Plan Singithi Lama HNB Teen Minor Investment Plan PRIORITY MASS MARKET FOR BUSINESS Branches | SSMs Internet Banking | Mobile Banking 24x7 Omni Channel Call Centre Education Loan HNB You Sathkara Housing Loans Personal Loans Credit Cards Leasing Premier Current Account Salary Smart Micro Finance Premier Current Account Major Investment Plan Insurance Custody Services Margin Trading SME Emerging Corporates and Corporates Working Capital Project Finance Leasing Trade Finance Treasury PCM Custody and Trustee Value Chain Financing Syndicated Loans Insurance Capacity Building Channels Payment Solutions 12 HATTON NATIONAL BANK PLC Branches, SSMs, Internet Banking Point of Sale (POS), Mobile POS, Payment App – SOLO, IPG
  12. VISION To be the acknowledged leader and chosen partner in providing financial solutions through inspired people MISSION Combining entrepreneurial spirit with empowered people and leading edge technology to constantly exceed stakeholder expectations VALUES ê Treasure professional and personal integrity at all times. ê Demonstrate mutual respect in all our interactions. ê Passionate about everything we do. ê Committed to being customer centric ê Courage to change, challenge and be different. ê Demonstrate unity in diversity. 13 INTEGRATED REPORT 2021
  13. Performance Highlights FINANCIAL Bank For the year ended 31st December Financial Performance Income Net interest income 2020 Change 2021 2020 Change Rs Mn Rs Mn % Rs Mn Rs Mn % 115,047 135,710 115,814 (0.7) 49,559 44,709 10.8 7,545 27.5 65,735 56,328 16.7 18,951 28.4 7,488 (6.2) 11,463 50.9 11,463 50.9 9,623 Net fee and commission income Total operating income 24,324 Profit Before VAT & Tax Taxation (Incl. VAT, NBT & DRL on Financial Services, Deferred tax) 7,024 17,300 Net profit after taxation 17,300 Profit Attributable to equity holders of the Bank Financial Position 152,041 Shareholders' funds (Capital and Reserves) Deposits from customers 134,002 13.5 1,075,709 967,821 11.1 814,543 14.0 1,358,337 1,291,852 1.31 0.95 8.77 38.0 34.43 39.27 (12.3) 928,972 Gross loans and receivables to customers Total assets Profitability Return on assets (%) 12.10 Return on equity (%) Cost to income ratio (%) Investor Information 32.90 Earnings per share (Rs) 289.10 Net assets per share (Rs) 9.00 Total Dividend per Share (Rs) 6.50 Cash Dividend per Share (Rs) Regulatory Ratios Core capital ratio (%) (Minimum Req. - 2021 - 8.50%; 2020 - 8.50%) Total capital ratio (%) (Minimum Req. - 2021 - 12.50%; 2020 - 12.50%) Group 2021 14.53 18.16 134,436 0.9 56,462 50,837 11.1 8,026 28.5 84,404 72,074 17.1 21,222 29.7 10,316 27,521 7,729 20,084 19,025 176,668 7,967 (3.0) 13,662 47.0 13,095 45.3 154,249 14.5 1,107,066 994,949 11.3 846,721 14.4 5.1 1,453,651 1,371,483 6.0 37.6 1.42 1.06 33.7 8.74 31.6 44.25 48.29 (8.4) 21.80 50.9 254.80 13.5 8.00 12.5 4.50 44.4 14.73 (1.4) 17.98 1.0 968,907 11.50 36.18 335.93 24.90 45.3 293.30 14.5 14.45 17.80 14.99 (3.6) 18.02 (1.2) ROA & ROE PROFITABILITY Rs Bn % 25 2.0 20 1.5 15 1.0 10 0.5 5 20 15 10 5 0 2017 2018 PAT - Bank PAT - Group 14 HATTON NATIONAL BANK PLC 2019 2020 2021 0.0 % 2017 ROA - Bank ROA - Group 2018 2019 ROE - Bank ROE - Group 2020 2021 0
  14. SOCIAL PERFORMANCE KEY INDICATORS Customers Employees Community UNIT 2021 2020 Customer Centres No 255 252 Self Service Units No 794 787 Branches outside Western Province % 58% 59% No of Digital transactions Mn 31.3 16.6 Value of digital transactions Rs Bn 2,488 815 Investments in technology Rs Mn 870 1,014 No of Employees No 5,024 4,836 Retention Rate % 91 94 Training Hours Hours 111,976 107,461 Gender Diversity Male : Female 57 : 43 57 : 43 Lending to Micro Entreprenuers (Rs Bn) Rs Bn 29.1 25.9 Moratoria granted as a % of loan book % 9 15 Taxes paid Rs Mn 7,024 7,488 Strategic CSR spend Rs Mn 12.3 25.1 UNIT 2021 2020 83 75 ENVIRONMENTAL IMPACT KEY INDICATORS Environmental Impact Loans screened for E&S by ESMS unit No Energy Consumption MWh 14,793 14,949 Solar Power Generated MWh 2,638 2,946 Solar Power Generated as a % of Energy Consumption % 17.8 19.7 Carbon Footprint tCO2e 9,592 5,238 Paper Reused/Recycled % 100 100 Renewable Energy Portfolio Rs Bn 7.31 8.03 15 INTEGRATED REPORT 2021
  15. Chairperson ’s Message Our journey from inception amongst the tea plantations to being one of the top 1,000 banks in the world has been a story of shared prosperity, a legacy that continues to shape our corporate values and long-term strategy. 16 HATTON NATIONAL BANK PLC
  16. Dear Stakeholders , 2021 was a test of endurance and agility as the COVID-19 pandemic continued to disrupt lives and economic activity. While the rollout of vaccines paved the way for a return to work and schools, supply chain and macroeconomic stresses deepened creating divergent paths for recovery for industries and economies. Building resilience, balancing stakeholder needs and allocating resources were key priorities as the operating environment remained fluid. We were deeply saddened by the untimely demise of Mr. Nilanth De Silva, our former Chairman and two dedicated members of the Bank. Some of you would have lost your loved ones and friends due to COVID-19 and I would like to extend my deepest sympathies to everyone who has suffered during the pandemic. During the tumultuous year, our 5,042 colleagues around the country, led by our Managing Director/CEO Jonathan Alles and the Management Team have focused on protecting the interests of shareholders, while ensuring the wellbeing of colleagues, supporting our customers and showing solidarity with our communities. The resilient performance recorded by the HNB Group during 2021 is testimony to the people, structures, policies and processes of this 133-year-old institution that I am honoured to lead as Chairperson of the Board of Directors. It is with great pride that I have witnessed the commitment, determination, agility and drive of the people across our network as we weathered the challenges, working together to move forward with optimism. FULFILLING OUR PURPOSE A business model based on channeling domestic savings to productive sectors of the economy and facilitating trade and transaction banking are focus areas to drive profitability and sustainable growth. All this must deliver value to its key stakeholders, engaging them effectively to share prosperity and growth. Our journey from inception amongst the tea plantations to being one of the top 1,000 banks in the world has been a story of shared prosperity, a legacy that continues to shape our corporate values and long-term strategy. Customer deposits comprise 79% of our funding base and enhancing their value proposition has been a strategic priority for the Bank. By rallying resources and efforts around the key strategic pillar of Customer Experience, HNB has significantly enhanced its offering with the goal of making banking enjoyable for customers. The Net Promoter Score of 56% affirms that we moved beyond mere convenience in banking to deliver positive banking experiences. We were able to grow our advances by 14% and deposits by 11%. Total Dividend per share Rs 9.00 Total Market Capitalisation Rs 70 Bn 12% increase Group PAT Rs 20 Bn Shareholder funds account for 11% of funding and the HNB Group delivered 47% earnings growth to record Rs 20 Bn as profit after tax despite macroeconomic stress and uncertainty. The statistics presented below reflect our commitment to delivering sustainable returns to shareholders. In total, our shareholders received Rs 6.50 as cash dividends during the year while market capitalisation increased by 12% to Rs 70 Bn. The transformation within the Bank refined our business model, diversifying revenue streams and ensuring we stay ahead of the curve to compete effectively in the era of the digital consumer. We also streamlined our processes and improved turnaround times, enhancing capacity, scalability and operational efficiencies which will support future profitability, customer experience and growth. RISK & RESILIENCE Balancing the fine line between profitability and stability is both a science and an art that must consider the quantitative and qualitative impacts of potential threats, which then need to be stress-tested for the unknown. Strong Earnings per share and Net Assets per share Rs Rs 350 40 300 35 250 30 200 25 20 150 15 100 10 50 0 5 2012 2013 NAV (LHS) 2014 2015 2016 2017 2018 2019 2020 2021 0 EPS (RHS) 17 INTEGRATED REPORT 2021
  17. Chairperson ’s Message risk management frameworks and processes supported by a prudent risk appetite, built resilience. De-risking the loan portfolio was a key area of focus as extended moratoria and continuing stressed conditions increased default risk. Cybersecurity was strengthened in view of increased digitalisation, remote working arrangements and external threat levels. Foreign exchange liquidity stress increased exponentially throughout the year as the Country’s foreign exchange reserves declined sharply. Increased regulation to address the issue continued to be a challenge for the industry in catering to customers’ requirements and curtailed trade flows. Capital adequacy ratios remain well above regulatory requirements at 14.53% for Tier I and 18.16% for total capital indicating sufficient headroom for growth and to sustain further shocks. ALIGNING PRIORITIES & RESOURCES The Banking industry is transforming to counter competitive threats from other industries which are making inroads into allied areas, leveraging technology. We continue to work in collaboration with Telcos and FinTechs to extend our reach and transform in the digital space. The Bank has continued to support impacted clients with debt moratoria and working capital funding whilst managing the impact on revenues and balance sheet. We are also living in a time of heightened uncertainties and social pressures that impact our clients encompassing all segments of society. Consequently, the allocation of resources to respond effectively to competitive threats, regulatory measures and stakeholder concerns will be a priority in the immediate term. HNB Group continues to invest in digitalisation, infrastructure, capacity building and our people. The digital transformation of the Bank has underpinned our transformation as a future ready bank. We are now focusing on strengthening our team to deliver on the capabilities put in place, nurturing talent and supporting their transition to a new era of banking. Collectively, these investments enhance our insights with sharper analytics, enabling continuous refinement, recalibration of strategic priorities and resource allocation in a dynamic operating environment. 18 HATTON NATIONAL BANK PLC Inclusive financing is vital to the economic progress of any community and an island wide footprint reflects HNB’s relevance and the role it plays in the Country. We are a large investor in the SME and Microentrepreneur segments of Sri Lanka, supporting their growth in line with their aspirations. HNB continues to invest in this sector leveraging a large field force, specialised knowledge, tailored products and capacity building initiatives, offering a comprehensive value proposition to tomorrow’s corporates. COMMITTED TO COMMUNITIES Inclusive financing is vital to the economic progress of any community and an island wide footprint reflects HNB’s relevance and the role it plays in the Country. We are a large investor in the SME and Microentrepreneur segments of Sri Lanka, supporting their growth in line with their aspirations. HNB continues to invest in this sector leveraging a large field force, specialised knowledge, tailored products and capacity building initiatives, offering a comprehensive value proposition to tomorrow’s corporates. More recently, we have focused on the integration of these segments into the digital marketplace with promising results. We are committed to investing in building relevant products and platforms to promote the growth of these two vital segments that are essential building blocks of communities. Similarly, we are committed to supporting the integration of our customers and communities into a digital era of banking and transacting, which is key to, their integration into a global marketplace, creating opportunities for communities and people. Capital Adequacy % 20% 15% 10% 5% 0% Our work with farmers and renewable energy has heightened awareness of the impact of climate change on our own portfolios. HNB 2017 Tier 1 Tier 2 2018 2019 2020 2021 Tier 1 Regulatory Requirement Tier 2 Regulatory Requirement
  18. is putting together its own climate agenda to drive meaningful change as we seek to invest for good , driving meaningful change towards a carbon neutral economy. We will also continue to invest in reducing our own carbon footprint in our journey to be carbon neutral. Admittedly, this is a journey, and we are at the stage of charting a suitable course for the Bank which will then be rolled out across the Group. GOVERNANCE MATTERS The Board was expanded to ensure that, collectively, we had the requisite skills and governance structure to navigate an increasingly volatile economic and changing business landscape. The composition of the Board changed with the resignations of Mr. Dinesh Weerakkody who served as Chairman until 30th March 2021, Mr. Harsha Cabraal who served as Acting Chairman until 5th July 2021, Mr. Duliksha Soosaipillai on 30th March 2021, and Mr. Rusi Captain who retired in April 2021 having completed nine years as a member of the Board. Mr. Osman Chandrawansa and I were appointed to the Board as NonExecutive Directors on 1st April 2021 and Mr. Saldin who previously served as alternate director to Mr. Rusi Captain was appointed as a Non-Executive Director. Mr. Nihal Jayawardene, joined the Board in August 2021 and I was appointed as Chairperson following the demise of Mr. Nilanth De Silva on 29th September 2021. We welcomed to the Board Mr. Rasitha Gunawardana and Mr. Kithsiri Gunawardena in January 2022 further enhancing the skills and experience of the Board. Heightened risk awareness across all three lines of defense, robust engagement with internal and external stakeholders combined with sharp analytics to enable early identification of potential threats would be key to driving sustainable performance. ACKNOWLEDGEMENTS I wish to thank the Chief Executive Officers of the HNB Group and our teams for rallying together to deliver a commendable performance amidst personal and work related challenges. The Board joins me in expressing our sincere appreciation of your commitment and loyalty and count on your support in the year ahead. I also wish to record our appreciation of the officials of the Central Bank of Sri Lanka for their advice and cooperation on regulatory matters. I conclude by thanking our customers, business partners and investors for the trust and confidence placed in HNB over the past year. Aruni Goonetilleke Chairperson Colombo, Sri Lanka 18th February 2022 NAVIGATING BEYOND 2021 Progress on vaccinations, launch of effective therapeutics and the reduced severity of the Omicron variant have given hope to a pandemic-weary world that COVID-19 is reaching endemicity. The lifting of travel restrictions in several countries point to the revival of the tourism industry. For HNB Group, reaping the dividends of our investments in digitalisation and our people will be a key differentiator as industry disruption continues. We have built resilience to face downside risks with adequate buffers but remain vigilant to potential shocks which may require recalibration of resource allocations. 19 INTEGRATED REPORT 2021
  19. Managing Director /CEO’s Message HNB has demonstrated remarkable resilience. Although our journey over the past 133 years has been through many peaks and troughs, we have continuously strengthened our risk management, compliance and governance, thereby enhancing our processes, which in the past year have helped us overcome the challenges and are testament to our stable performance. 20 HATTON NATIONAL BANK PLC
  20. To Our Shareholders , HERE, NOW Humanity faced the crisis of a generation. The Covid-19 pandemic continues to pummel the economy, taking its toll on lives and livelihoods. 2021 was a year in which we observed increased stress in the operating environment. Having barely recovered from the 2019 Easter Sunday terror attack, the prolonged pandemic has wreaked carnage on the local economy. Pressure built up with disruptions to economic activity, while the impact on tourism sector, sovereign downgrades and policy uncertainty placed Sri Lanka at a critical juncture. Against this backdrop, HNB has demonstrated remarkable resilience. Although our journey over the past 133 years has been through many peaks and troughs, we have continuously strengthened our risk management, compliance and governance, thereby enhancing our processes, which in the past year have helped us overcome the challenges and are testament to our stable performance. A FRAGILE RECOVERY Year 2021 saw a fragile economic recovery as the country and the world moved out of a recession wrought by the COVID-19 pandemic. By the end of the year, it was apparent that global recovery was divergent as developing countries with high levels of debt were impacted by access to vaccines, dwindling foreign exchange reserves and limited policy options to support recovery. Sri Lanka is estimated to have grown by 4.0% in 2021 as per Central Bank of Sri Lanka, supported by a strong vaccination programme. We witnessed a sharp decline in interest rates in 2020, as central banks adopted accommodative monetary policy to support businesses and people through the pandemic. However, as the duration of the pandemic lengthened, many central banks including the Central Bank of Sri Lanka, commenced quantitative tightening in 2021. While policy rates moved up a mere 0.5% during 2021, a further 50 bps increase was witnessed in January 2022 indicating that there is head room for interest rates to move up further. Depreciation of the Sri Lankan rupee was curtailed to 7.5% in 2021 through intervention as foreign currency reserves declined sharply with debt repayments coupled with low foreign currency inflows. This had a significant impact on foreign currency and the ability of the banking sector to support foreign trade. Moratoria, some of which have been extended from 2019, are scheduled to end in June 2022. A significant portion of the moratoria outstanding is in the tourism industry. Given that it is a major source of foreign exchange income for the country, we need strategies and policies that will enable tourism industry as well as other sustainable sources of foreign exchange income such as education, agriculture, healthcare, IT, KPO and BPO to thrive. LENDING COVID-19 SUPPORT We believe that as constructive members of society, banks have an integral role in supporting real people, real lives, real economies, and sharing the pain in a downturn. Amid the trying times, HNB was quick to provide cashflow support, lower the cost of lending, provide new kinds of lending to marginal borrowers, and help customers do their banking digitally. THINKING LIKE A STARTUP, IGNITING NEW AREAS OF GROWTH We partnered our stakeholders to make people and institutions financially resilient. In the past three years, we drove a strategy of helping SME and Microfinance customers - two of the most important but vulnerable sectors of the economy - get back on their feet. Significant support was provided in the form of moratoria, working capital finance and capacity building, with HNB entering into a partnership with USAID to strengthen the MSME sector through funding and technical assistance. Our partnerships with Telco operators and Fintechs have supported growth of our POS, mobile payment solutions and ecommerce. These partnerships have supported our customers transition to digital platforms, integrating them to an increasingly vibrant local digital market with exposure and opportunity to a global marketplace. During the year, HNB partnered with Cord360.com, the first ever digital marketplace to enable local exporters and manufacturers to engage with global supply chains, extending the work undertaken to support growth aspirations of local entrepreneurs. PERFORMANCE HNB Group recorded a profit after tax of Rs 20.1 Bn in 2021, an increase of 47% over the previous year. The moderate growth of 11% in NII of the Group to Rs 56.5 Bn is largely attributable to advances growth of 14% as interest rates remained well below 2020 levels until the policy rate hike in August. Fee based income increased by 27% to Rs 10.7 Bn as the Bank recorded healthy growth in trade flows while card revenues increased due to higher consumption levels. Impairment charges increased by 21.7% to Rs 19.5 Bn compared to the previous year, largely on account of the impact on the dollar denominated government securities portfolio with the sovereign downgrade to CC by Fitch Ratings. Operating Income increased by 17% to Rs 84.4 Bn as we maintained controls over rising costs due to the pandemic and inflation. The extension of retirement age to 60 years resulted in a reversal of Rs 2.3 Bn in provision for pension and retirement benefits, while other overheads were maintained below 2019’s pre-pandemic levels. Group cost to income ratio improved by 404bps to 44.3% while the Bank’s cost income ratio for 2021 was 34.4% compared to 39.3% in 2020. Group assets recorded modest growth of 6% to Rs 1.45 Trillion as excess liquidity was utilised to fund important sectors of the economy. The balance sheet remains strong with capital adequacy ratios comfortably above regulatory requirements at 14.53% for Tier I and 18.16% for Total Capital. The Net Advances grew by 14% to Rs 911 Bn and accounted for 63% of Total Assets. Deposit growth moderated to 11%, crossing the Rs1 Trillion mark to close the year at Rs 1.1 Trillion accounting for 76% of Total Liabilities & Equity. Retail Banking The Retail Banking Group recorded a Net Operating Profit of Rs 24.7 Bn largely due to healthy growth in loan book and improved fee income through cards, trade and loan disbursements. Strong CASA and deposit mobilisation efforts yielded deposit growth of 12%. Impairment charges for the Retail Banking business reduced by Rs 1.9 Bn due to 21 INTEGRATED REPORT 2021
  21. Managing Director /CEO’s Message greater focus on NPA management. However, impairment on SME and Micro finance verticals increased on account of the stressed market conditions. Retail Banking Group which encompasses, personal, Micro and SME businesses continues to be the most profitable business line for the HNB Group accounting for 38% of Group Net Operating Income. Wholesale Banking The Wholesale Banking Group delivered steady growth of 17% in assets and 5% in liabilities during the year supported by a proactive team that worked together to provide effective solutions to changing customer needs. Clients were supported throughout the crisis with insights and knowledge with many reducing dependency on moratoria, regularising performance and building resilience. Growing the export portfolio was one key focus during the year. Treasury Foreign Exchange Income from Treasury operations recorded a stellar year amidst significant challenges. Overall, Operating Income improved by 50% to Rs 21.3 Bn. Net operating income was impacted by the impairment charges on foreign currency sovereign holdings. Insurance Insurance business recorded growth in both Life and General Insurance business, outpacing the industry. Group synergies played a key role in driving volumes as well as the digital transformation underway to drive engagement with customers and business partners. The HNBA Group recorded a profit of Rs1.2 Bn, an increase of 4% over the previous year supported by an optimal sales mix and cost efficiencies throughout the supply chain. The rating also improved for both HNB Assurance and HNB General Insurance from A(lka) to A+(lka) with stable outlooks reflecting the improved capital positions. Finance HNB Finance recorded a profit of Rs 513 Mn in 2021 recovering from the loss of Rs 273 Mn in 2020. HNB Finance purchased a controlling interest in Prime Finance PLC and has made a mandatory offer to purchase the balance. 22 HATTON NATIONAL BANK PLC Integration of Prime Finance will follow a similar strategy to the successful integration of Prime Grameen, which is now HNB Finance. Investment Banking The Acuity Partners Group delivered a strong performance as markets remained buoyant. Strong investor interest supported the performance of Acuity Stockbrokers while issuer interest strengthened the Corporate Finance pipeline for debt and equity. However, the share of profit from the joint venture decreased by 28% to Rs 293 Mn as 2020 saw exceptional growth in primary dealership business due to the drop in interest rates. CREATING AN ENJOYABLE BANKING EXPERIENCE We believe in offering an enjoyable banking experience to our customers through all our touch points. In 2021, the ‘Committed to Serve’ initiative was launched at 40 selected branches to upgrade knowledge, skill and resources required to deliver an unparalleled experience. The initiative was rolled out to the entire network in January 2022. The down-payment we made in digital transformation in recent years and the focus on being a future ready bank, position us well to ride these challenging times. Our mobile banking solution and digital payment app SOLO are rated the highest among peers and we continue to enrich the value proposition to our customers through enhanced features and user experience. SHARPER INSIGHTS Managing asset quality was a key priority and increased rigour of processes enabled the Bank to record the lowest NPA among peers as per the latest published information. We were also successful in minimising new entrants into the NPA portfolio affirming the effectiveness of the strengthened credit evaluation processes. Overall, risk management dashboards supported sharper insights as we worked within approved parameters. Volatile conditions led to minimising market risk exposures in line with a prudent risk appetite aligned to the operating environment. INVESTING IN OUR PEOPLE Building a talent pipeline for leadership and investing time to understand the skills required in a future fit organisation were needs that we embarked on. We developed an aggressive succession plan and would be assessing the current skill set, performance and potential vis-a-vis the role and tailormaking training, based on gap analysis. We’ve adopted a structured approach to this with coaching for Corporate Management team with industry experts, Catalyst programme for C-1, Acumen programme for next level and Aspire programme to develop the next layers of leaders. Our brand is one of the most trusted brands in the country, evolving with the times to ensure that it remains relevant to a new generation of stakeholders. Our brand must appeal to people from all walks of life with a portrayal of the Bank’s personality. We have spent a significant amount of time with the internal transformation to ensure that our systems support our promise and that our team is onboard with the brand values and promise.
  22. The Bank has focused on training to align employee capabilities with the Bank ’s strategic goals, the evolution of the industry and a digitalised workplace. We have also embedded client experience into the performance management system, making it a performance objective. Creating a happy and bright team is a key goal and we have undertaken a ‘Great Place To Work’ assessment to understand areas for improvement. We are committed to investing in our people and creating a great place to work to attract and retain talent. It’s critical that we understand the mindset of millennials and changing aspirations. This year also saw the extension of the retirement age to 60 enabling us to retain our trained talent at the highest levels. While this has provided a buffer, we need to recruit and develop the next generation of employees to man the frontlines. BRAND EVOLUTION Our brand is one of the most trusted brands in the country, evolving with the times to ensure that it remains relevant to a new generation of stakeholders. Our brand must appeal to people from all walks of life with a portrayal of the Bank’s personality. We have spent a significant amount of time with the internal transformation to ensure that our systems support our promise and that our team is onboard with the brand values and promise. The internal work is nearing completion and the new brand will be unveiled in 2022 as we commence the external transformation which will reflect the new HNB personality. & LOOKING BEYOND, ADVANCING THE SUSTAINABILITY AGENDA Sustainable solutions need to be developed fast to ease the prevailing situation in the country. It is also important to look ahead with positivity and capitalise on the opportunities. The rapid vaccination drive is expected to minimise disruptions as a result of the pandemic and support increased economic activity. Our plans are aligned towards our country’s economic growth. We are encouraging entrepreneurs to export and have collaborated to create relevant products and platforms to empower them and connect them to markets. We have also strengthened our efforts to encourage Sri Lankans living overseas to place funds with us. The revival of business post moratorium has been a key concern and we reduced the affected portfolio considerably down to 9% of the total portfolio from over 40% at the beginning of the pandemic. Approximately 30% of the remaining portfolio on moratorium is related to tourism and we expect the sector to recover as more countries reduce travel restrictions to kickstart this vital industry. Retail banking will continue to thrive as we leverage our knowledge, reach and strong customer value proposition, to drive growth. SMEs and Microfinance portfolios will continue to expand and are expected to add significantly to our value proposition. The Wholesale Banking Group will continue to support priority sectors of the economy as we stay committed to playing a pivotal role in the economic resurgence of our Country. Our continuous focus on being future ready will support onboarding clients and growth in digital transactions, as we enhance our capabilities, solutions and platforms to provide a greater experience to our customers. We will also continue to enhance the stability and security of our systems and digital channels given the increased level of risks and threats with higher usage. Insurance is also on an encouraging growth trajectory and will be supported by a digital transformation which will drive customer experience and efficiency. Investment Banking has a strong pipeline as issuer interest increased with the vibrancy of the stock market and attractive valuations. HNB Finance will adopt an approach of cautious growth, and we will see the integration of Prime Finance as the NBFI sector goes through a consolidation amidst uncertain economic conditions. focus more on stakeholder capitalism and not just shareholder capitalism. At the same time, we must continue to invest in building digital capabilities, championing the sustainability agenda, and in finding new avenues of growth. ACKNOWLEDGEMENTS Staying on course in 2021 was possible only with the support, determination and commitment of the employees of the HNB Group and I thank everyone for pulling together in a difficult year. I commend the performance of the Group Chief Executives, Corporate Management and Heads of Departments for motivating and coaching their teams to deliver on the strategic goals. I thank the Board for their visionary guidance and counsel in charting our course and overcoming multiple challenges during the year. I wish to express my appreciation of the contribution over the years of late Mr. Nilanth De Silva who served on the Board and was appointed Chairman of the Bank in July 2021, shortly before his untimely demise in September 2021. We were also deeply saddened by the demise of two of our colleagues during the year who will be fondly remembered by the HATNA family. I thank our customers for entrusting HNB Group to support their financial aspirations and commit to continuous improvement of our services. Our business partners have enabled us to explore new dimensions in banking and we count on their capabilities to transform banking together. We are also appreciative of the cooperation extended by the Governor and officials of the Central Bank of Sri Lanka. In closing, I thank our investors for their continued confidence in the HNB Group to deliver sustainable shareholder value. We will look back at 2021 as a seminal year and COVID-19 as a major inflection point. For one, the pandemic dramatically accelerated digital consumption demand. In addition, it has underlined the importance of the environmental, social and governance agenda. Issues around inequity, the rich-andpoor-divide and climate change will be on the minds of governments and people in the next five to 10 years. All businesses, including financial institutions, will be under pressure to Jonathan Alles Managing Director / CEO Colombo, Sri Lanka 18th February 2022 23 INTEGRATED REPORT 2021
  23. Operating Landscape A MACRO PERSPECTIVE Global economies continued to recover from the disruptions caused by the COVID-19 pandemic in 2020 . IMF has estimated global growth at 5.9% in 2021 and forecasts moderation in growth to 4.4% in 2022 and 3.8% in 2023. Sri Lanka’s economic growth is estimated around 4.0% for 2021 by the Central Bank of Sri Lanka. Economic prospects have diverged across regions with inflation, roll out of the country’s vaccines, the extent of policy support and supply chain disruptions emerging as the key factors driving the global economic recovery in this period. Most countries have experienced temporary price pressures due to supply-demand mismatches amidst the pandemic. Central banks commenced tightening monetary policy signalling the end of a period of extraordinary policy support. KEY UNCERTAINTIES Real GDP Growth » The duration of the pandemic will have a significant impact on forecasts with a longer duration expected to worsen the outlook and have knock on impacts on social factors % 8 6 4 2 0 -2 -4 -6 2018 2019 2020 World Advanced economies 2021 2022F » The US has commenced tightening monetary policy as these changes impact market perceptions and reactions which, in turn, may have significant impacts on emerging market economies 2023F » A prolonged pandemic can continue to disrupt supply chains hindering growth and exerting pressure on inflation Emerging markets and developing economies Sri Lanka Source: World Economic Outlook (WEO) Trade volumes regained strength, growing by 9.3% in 2021 after declining by 8.2% in 2020 due to the pandemic. Trade growth is projected to moderate to 6% in 2022 and 4.9% in 2023 as supply chain shocks abate. Consumer Prices Trade Volumes % % 7 6 5 4 3 2 1 0 15 10 5 0 -5 -10 -15 2019 2020 2021 2022F World Advanced Economies Emerging Markets and Developing Economies Source: World Economic Outlook (WEO) 24 Inflation increased to 3.1% for advanced economies and 5.7% for emerging market economies in 2021 while Sri Lanka recorded 12.1% as measured by the CCPI. Inflation is expected to increase in 2022 as fuel and food prices are expected to rise. These conditions are expected to ease in 2023 with stronger demand for services. HATTON NATIONAL BANK PLC 2018 2019 2020 2021 2022F Advanced Economies Emerging Markets and Developing Economies Sri Lanka Source: World Economic Outlook (WEO) » Potential for tighter labour markets to increase pressure on wages which may also lead to persistently higher inflation » Other factors such as the slowdown in China’s real estate sector, climate change, geopolitical tensions and social unrest could also pose downside risks to the forecast.
  24. SRI LANKAN ECONOMY Following the COVID-19 pandemic induced 3 .6% GDP contraction recorded in 2020, the Sri Lankan economy saw a strong rebound at the start of this year. This was supported by unprecedented monetary and fiscal policy stimulus measures which included debt relief for pandemichit sectors from the government. Businesses also embraced digitalisation to adapt to the post-pandemic environment supporting economic recovery. All subsectors of the economy recorded an impressive growth compared to the same period last year, admittedly from a low base. However, the re-emergence of the COVID-19 pandemic and related preventive measures dampened the growth momentum to some extent during the second half of the year. The sovereign rating of the country was downgraded to Caa2 from Caa1 by Moody’s, amidst concerns that the country would not be able to meet its debt obligations. While Standard and Poor’s also followed suit, Fitch Ratings downgraded the sovereign by another notch to CC. The successful rolling out of the national COVID-19 vaccination programme and the government’s strategy to impose only selective mobility restrictions is expected to sustain the momentum of economic activity in the period ahead. However, the foreign currency liquidity crisis remains a critical issue as it has a significant impact on imports of fuel, essential goods and the country’s supply chains across all sectors. GDP Rs Bn % 10,000 4 8,000 2 6,000 0 4,000 -2 2,000 0 17 18 19 Agriculture Manufacturing 20 21F -4 Services GDP Growth Quarterly GDP Growth % 12 7 2 -3 -8 -13 -18 External Trade Sri Lanka’s export sector commenced recovery during the latter part of 2020 recording a faster than expected recovery in almost all subsectors, including industrial, agricultural, and mineral exports. Leading garment manufacturers quickly adopted to manufacturing and exporting personal protective equipment which also contributed to the export sector reaching prepandemic levels at a good pace. However, export growth slowed down since May 2021 with the onset of the third wave of the pandemic, recovering in the 4th quarter due to the continuation of stimulus policies and a more targeted vaccination drive allowing workers of key sectors such as the apparel sector to be vaccinated. To avoid an unfavourable balance of payments and foreign exchange reserve position, the government swiftly implemented import controls. Despite the import controls remaining in place in 2021, a rise in oil prices and a recovery in demand resulted in a considerable rise in the import bill. The trade deficit expanded to USD 7.0 Bn with the increase in expenditure on imports, compared to USD 5.4 Bn for the same period in 2020, leading to a widening of the external current account. External Trade & Exchange Rate Movement USD Mn USD/ LKR 2,500 2,000 1,500 1,000 500 250 -500 -1,000 -1,500 50 Q1 Q2 2020 Q3 2021 Foreign Currency Reserves & External Sector Indicators USD Bn 10 8 6 4 2 0 17 18 19 20 21 Gross Official Reserves Worker remittances Tourism 200 150 100 0 0 2020-Jan 2020-Apr Merchandise Imports Merchandise Exports 2020-Jul 2020-Oct 2021-Jan 2021-Apr 2021-Jul 2021-Oct Trade Deficit Exchange rate 25 INTEGRATED REPORT 2021
  25. Operating Landscape Inflation The NCPI and CCPI accelerated during the year mainly driven by high food inflation and some acceleration in non-food Inflation . Supply chain disruptions, rise in the global commodity prices, depreciation of the exchange rate and import restrictions were the main causes of inflationary pressures on the economy. The envisaged improvements in aggregate demand conditions and the Worker Remittances Worker US $ Mn Remittances 2020-Jan 2020-Jan 2020-Feb 2020-Feb 2020-Mar 2020-Mar 2020-Apr 2020-Apr 2020-May 2020-May 2020-Jun 2020-Jun 2020-Jul 2020-Jul 2020-Aug 2020-Aug 2020-Sep 2020-Sep 2020-Oct 2020-Oct 2020-Nov 2020-Nov 2020-Dec 2020-Dec 2021-Jan 2021-Jan 2021-Feb 2021-Feb 2021-Mar 2021-Mar 2021-Apr 2021-Apr 2021-May 2021-May 2021-Jun 2021-Jun 2021-Jul 2021-Jul 2021-Aug 2021-Aug 2021-Sep 2021-Sep 2021-Oct 2021-Oct 2021-Nov 2021-Nov 2021-Dec 2021-Dec 900 US $ Mn 800 900 700 800 600 700 500 600 400 500 300 400 200 300 100 200 0 100 0 Source: Central Bank of Sri Lanka Source: Central Bank of Sri Lanka likely increases in global energy and other commodity prices may generate further inflationary pressures in 2022, requiring preemptive policy measures to ensure the maintenance of Inflation in mid-single digit levels over the medium term Interest Rates Policy rates edged upwards by 50 basis points in August 2021. AWPLR which was around 5.50% - 6% during the first eight months moved up to 8.61% as at end of the year. One year Treasury Bill rate moved faster increasing from 4.69% in January 2021 to 8.16% as at end of the year. Inflation- NCPI & CCPI % 26 HATTON NATIONAL BANK PLC Credit to the private sector expanded to Rs 6,920.1 Bn by end November 2021 due to the low interest rates and surplus liquidity levels in the market. Credit obtained by the public sector from the banking system, particularly net credit to the government, also increased during the year to Rs 1,183.7 Bn by end November 2021. Interest rates 10 8 6 4 2 0 NCPI AWDR CCPI Source: Department of Census & Statistics The Banking industry played a supportive role in 2021 with the extension of moratoria until end June 2022 and the implementation of wide-ranging policies to manage the foreign exchange liquidity crisis. The Banking sector assets increased by 12.5% to Rs 16.49 Tn up to the end of the 3rd quarter of 2021 as economic activity picked up and low interest rates supported private sector credit growth. Accordingly, gross loans and advances of the Banking sector increased by 13.9% to Rs 10.36 Tn at the end of the third quarter 2021. The gross non-performing advances ratio improved marginally from 4.9% in 2020 to 4.8% by third quarter 2021 as asset quality improved due to increased vigilance over stressed assets. Credit Growth % 12 16 14 12 10 8 6 4 2 0 BANKING INDUSTRY Growth In January 2022, policy rates were increased by a further 0.5% to curtail the potential build up of pressure from underlying demand pressures in the economy. 2020-Jan 2020-Feb 2020-Mar 2020-Apr 2020-May 2020-Jun 2020-Jul 2020-Aug 2020-Sep 2020-Oct 2020-Nov 2020-Dec 2021-Jan 2021-Feb 2021-Mar 2021-Apr 2021-May 2021-Jun 2021-Jul 2021-Aug 2021-Sep 2021-Oct 2021-Nov 2021-Dec Workers’ remittances, which remained resilient amidst the pandemic moderated during the latter half of this year. 2020-Jan 2020-Feb 2020-Mar 2020-Apr 2020-May 2020-Jun 2020-Jul 2020-Aug 2020-Sep 2020-Oct 2020-Nov 2020-Dec 2021-Jan 2021-Feb 2021-Mar 2021-Apr 2021-May 2021-Jun 2021-Jul 2021-Aug 2021-Sep 2021-Oct 2021-Nov 2021-Dec Worker Remittances Deposit growth recorded a 11.9% growth up to the 3rd quarter of 2021 compared to 21.6% recorded for 2020 with funds being utilised with the pick up in economic activity. CASA ratios improved to 33% by the 3rd quarter with balances growing by a healthy 22% while time deposits also recorded strong growth of 11%. AWPR 365 Day TB Source: Department of Census & Statistics Banking sector of Sri Lanka 6 Licensed Commercial Banks Licensed Specialised Banks 24
  26. Earnings Profitability of the sector improved up to third quarter supported by improved interest income , fee income and efficiencies. A number of players reaped the benefits of investments in digitalisation which was a necessity in a pandemic era, taking the banking sector towards a digital era. Net Interest Income of the Banking Sector improved by 27.4% upto third quarter 2021 due to sound growth in assets. NIMs improved from 3.1% in 2020 to 3.4% by the close of the third quarter 2021 reflecting rise in interest rates and corrections in pricing of risk as market sentiments remained uncertain across a number of sectors. Non-Interest income also increased by 18.5% upto third quarter 2021 due to higher economic activity and foreign exchange income which increased by 59.2%. The Efficiency ratio improved from 51.8% in 2020 to 47.5% by third quarter 2021 supported by digitalizing of the sector and improved efficiencies as everyone adjusted to a socially distanced lifestyle. Impairments charges declined up to third quarter 2021 reflecting the improvement in economic activity and the measures taken by banks to manage asset quality. third quarter Profit Before and After Taxes of the Banking sector indicate favourable movements for the year which is reflected in the improvement of ROE from 11.4% in 2020 to 15.1% by third quarter 2021. Stability The banking sector continued to operate with adequate levels of capital, statutory liquid assets ratios and provision coverage ratios during the year. Despite the relaxation provided to drawdown the Capital Conservation Buffer (CCB) by 100 basis points for Domestic Systematically Important Banks (D-SIBs) and 50 basis points for non-D-SIBs, the banking sector was primarily in compliance with the required Capital Adequacy Ratios without drawing down the CCB. Capital ratios are expected to improve with the retention of profits and raising of new capital to meet the increased minimum capital requirements. The banking sector operated with an adequate liquidity buffer above the minimum regulatory requirement of 20%. Growth of Banking Sector Credit Growth Rs Bn Rs Bn 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 17 18 19 20 Total Assets Loans and advances Q3 21 Investments Deposits Asset Quality 19 20 21 Profitability Rs Bn Rs Bn % 600 6 600 500 5 500 400 4 400 300 3 300 200 2 200 100 1 100 0 0 0 18 19 20 Gross NPL Net NPL ratio Q3 21 % % 140 120 100 80 60 40 20 0 60 25 50 20 40 30 20 19 18 19 20 Q3 21 PBT PAT Capital Adequacy Ratio Rs Bn 18 17 NII Non-Interest Income Gross NPL Ratio Key Expences & Ratios 17 18 Source:CBSL *as at 2021 November Source:CBSL 17 17 Credit to Private Sector Credit to Public Corporations 20 Q3 21 15 10 10 5 0 0 Staff Cost Provision for Bad & Doubtful Advances ROE Efficiency 17 18 19 20 Q3 21 Core CAR Total CAR Net NPA to Capital Ratio Liquidity % 100 80 60 40 20 0 17 18 19 20 Q3 21 Liquid Assets Ratio Credit to Deposit Ratio 27 INTEGRATED REPORT 2021
  27. Operating Landscape FUTURE OUTLOOK Uncertainty regarding forecasts for 2022 are elevated with the prevailing foreign currency situation , which could impact sustainable growth of economic activity. Risks to global growth outlined above would also be applicable to the country’s outlook. Sri Lanka, as a nation, holds immense potential in many sectors including exports, tourism, education, healthcare, IT, KPO, BPO etc. Growth in several export sectors in 2021 and the pickup in the tourism industry over the past few months has been encouraging. The relaxation of travel restrictions by several nations also augurs well for the tourism industry. We believe that sustainable solutions will be developed to revive the economy of Sri Lanka. OPPORTUNITIES FOR HNB GROUP Digital Dividends The Bank commenced its digital transformation nearly a decade ago and was ready for the mass digitalisation of the industry. Onboarding customers to digital platforms was accelerated with the onset of the pandemic. It is vital for the Group to capitalise on the strength of its digital infrastructure already in place and increase the onboarding of clients to enhance customer experience and make banking more convenient, supporting digital revenue growth and operational efficiencies. Grow Exports The Bank’s portfolio was weighted to importers and increasing restrictions on imports necessitated growth of the export portfolio urgently. Products such as Expo Credit provided a strategic advantage as well as the ISO certified trade finance department who were among the most knowledgeable professionals in the market. Combined with a comprehensive customer value proposition, 2021 was a year to grow the export portfolio and strengthening this vital sector would be a key focus going foward. Grow Renewable Energy Portfolio Increased focus on renewable energy to mitigate climate change and reduce the country’s reliance on imports of fossil fuels provided a lucrative opportunity for the Bank to formulate a strategy for climate action. Aside from reducing its own carbon footprint, the Bank has an opportunity to invest in renewable energy through its lending activities as well as through investments through Lanka Ventures PLC, its venture capital associate. Deposit & CASA Growth As the uncertainty about financial stability of institutions spilled over into 2021 and perhaps on to 2022, HNB had and has a strategic opportunity to grow its deposits and CASA as depositors favoured stability over returns. A 133 year heritage, a strong domestic franchise, 255 customer touchpoints and a portfolio of innovative digital products are key strengths to capitalise on this opportunity. Deeper Client Relationships & Group Synergies HNB’s innovative and future forward range of products and digital platforms support deeper customer relationships, extending the customer lifecycle. Strong customer satisfaction scores provide further impetus to reap the dividend that cross selling can bring. Bancassurance has been a key success area as well as Investment Banking and Custodian Banking. The Payments and Cash Management platform will be a focus area in 2022 Create the Next Gen Team The HATNA family is a tried and tested team that understands the corporate value well. We are now transforming this team to take banking to a new era with a multi faceted people transformation programme that encompasses creating the next generation of leaders, talent fitment to ensure people are happy doing what they do and to make banking enjoyable for our customers through positive interactions. CHALLENGES FOR HNB GROUP Foreign Currency Liquidity The country’s foreign currency crisis has constrained economic growth and stifled growth of trade finance income. The capacity of the Bank and the sector to support foreign trade flows would depend largely on how fast solutions are formulated to overcome the situation. Tightening Monetary Policy As monetary policy tightens and interest rates move up, the market dynamics can change and pose additional threats which include threats to increased default risk and moderating credit 28 HATTON NATIONAL BANK PLC growth. Strong risk management structures and asset and liability managements structures support management of various potential risk factors and we remain vigilant about developments in this regard. End of Moratoria Moratoria have been extended to customers since 2019, particularly those in the tourism sector, and these are scheduled to end in June 2022. The moratorium affected portfolio has been reduced from 40% of gross loans and advances to a mere 9 % as at end of 2021, with moratoria to the tourism sector being under 3% of the gross loans. While, credit risk processes have been strengthened, this systemic impact requires careful management and the Bank is working closely with its affected clients to ease the transition. Sovereign Rating Downgrade A sovereign rating downgrade could have a negative impact on the profitability of the Bank as additional impairment charges will have to be booked on account of investments in foreign currency denominated government securities.
  28. Listening to Stakeholders Listening to stakeholders has been institutionalised and is critical to our strategic formulation and performance management processes . Dedicated functions for monitoring Customer Experience, Employee Experience and Investor Relations have been in place for a few years and have matured to provide reliable and timely information on their concerns. These have formed the basis for several initiatives launched to address identified stakeholder concerns and monitor the effectiveness of these interventions and strategies. STAKEHOLDER EXPECTATIONS MODE OF ENGAGEMENT FREQUENCY ANN Investors » » » » » » Stable macro situation Sound financial performance Sustainable shareholder returns Transparent reporting Integrated risk management Sound ESG practices MON QUA DED AREQ ASPE CON Investor Relations team Investor Forums Road shows One-on-one meetings Webinars Annual Report /Annual General Meeting Email communication Corporate Website CSE announcements Customers » » » » » » Excellence in service delivery Innovative and relevant products Supporting business revival Ease of access Privacy and security of information Grievance handling mechanism Call Centre Relationship managers One-on-one meetings Public advertisements and press releases Complaints Corporate Website Social media Focus groups/surveys Workshops Employees » » » » » » Fair remuneration & benefits Career progression Training and development Conducive work environment Health and safety at work place Work life balance Chief Employee Experience Officer CEO Newsletter Engagement Surveys Employee days Grievance mechanism Managers conference Regional review meetings Special events Hatna Magazine Community Regulator / Government » » » » » Responsible lending Financial inclusion Climate action Strategic philanthropy Waste management » Compliance with regulations » Partnering economic growth of the country » Stable financial performance » Supporting business revival Press releases Public events Social Media Corporate website Formal communication Periodic reporting CEO’s meeting Meetings / discussions Feedback on draft papers and regulations ANN Annual | MON Monthly | | QUA Quarterly | DED Dedicated | AREQ As required | ASPE As specified | CON Continuous 29 INTEGRATED REPORT 2021
  29. Determining Materiality The process for determining material issues has evolved over the years as our commitment to sustainability and understanding deepened . Stakeholder concerns How we create value 2021 Rank Our Material Matters Economic and Policy Uncertainty The impact of the pandemic has taken a toll on the economy leading to increased policy uncertainty. Opportunities & Risks EXTREMELY HIGH Stakeholder Health and Safety This remains a critical factor as banking is an essential service. Long list of potential material matters Customer Experience Making banking enjoyable is key to our strategy. Technology and Future Readiness This is critical to service delivery and customer experience. Integrated Risk Management Key to ensuring stability and resilience and the level of priority is higher under volatile conditions. Brand and Reputation This impacts our ability to create value as banking business is highly dependent upon trust Talent attraction, development and retention As a service organisation, nurturing our value creators is key to success HIGH Materiality Test » Impact on strategic goals » Common Interests » Trade Offs Financial stability and profitability A major concern for several stakeholders including the regulator » Managing accountability, oversight and reporting HIGH Ethics, Governance and Compliance A strong foundation for creating value Stakeholder Concern Inclusive growth and responsible lending It is necessary to balance our depositors and investors concerns with responsible lending practices for sustainable growth LOW HIGH FUNDAMENTAL Innovation Innovation is key to honing our competitive edge and ensuring we remain relevant to changing customer requirements Business network relationships Managing relationships with correspondent banks, franchise owners, merchants, agents and suppliers and other business partners is necessary for service delivery. Climate Action Assessing environmental impacts of businesses we lend to, managing our own consumption and taking positive action. Concern for HNB Group The level of priority of our material matters remained unchanged from 2020. 30 HATTON NATIONAL BANK PLC
  30. GRI Topic UN SDG Goals Sustainable Banking Principles 201-1 , 201-4, 203-1, 203-2, 207-1, 207-2, 207-3 7, 9 403, 416 3 102-43, 102-44, 418-1 3 203-1, 203-2 4, 7, 8 102-15, 102-30 1, 5, 10 102-2 6, 10 404-1, 404-2, 404-3, 405-1, 405-2, 412-2 8 201-1 10, 11 102-16, 102-17, 102-18 1, 6, 10, 11 102-15, 201-1 1, 4, 5, 6, 11 201-2 9 102-12 9 201-2, 302-1, 302-2, 302-3, 302-4, 302-5, 304-3, 305-1, 305-2, 305-4, 305-5, 306-2 1, 2, 5, 7 31 INTEGRATED REPORT 2021
  31. A Transformative Strategy The business strategy finalised in 2020 with the onset of the COVID-19 pandemic was revisited in 2021 , as the operating environment continued to evolve. While the five key pillars of our strategy continue to remain relevant, we reset our medium-term goals in line with our objectives. We highlight below the progress towards our goals in 2021, and our short term, medium term and long term plans to realise our aspirations. INVESTOR SOCIETY Business Growth Pillar Business Sustainability Objectives To be the No. 1 Bank among private sector banks in Sri Lanka To be the most sustainable and resilient bank Medium Term goals » Most profitable Bank and Group among private sector banks » Best among peers in terms of asset quality and capital » Operational losses < 1% of Profits » Zero regulatory fines » To be carbon neutral Alignment to SDG targets 1.4, 2.3, 4.3, 6.1, 8.3, 9.1, 11.1 16.5, 16.6, 3.5, 3.9, 6b, 7.2, 8.7, 8.10, 10.1, 12.4, 1.2.5, 13.3 Plan 2021 » Capture new business opportunities » Relationship management » Improve sales culture » Strengthen governance » Improve, credit, compliance and risk management culture » Enhance cyber and information security Our Scores for 2021 » » » » » » » » » » » » » » NPA : 3.38% (best amongst peers as at Sep 21) CAR : 18.16% LAR : 28% LCR : 208% Operational losses : 0.2% of profits Regulatory fines : Zero Carbon footprint : 9,592 tCO2e Our Future Plans » Support national growth by lending to priority sectors MSME, agriculture, exports, health, education, renewable energy etc. » Continue the transformation journey » Focus on optimising group returns through organic and inorganic means. » » » » » » » » Support business revival Drive a risk and compliance culture. Strengthen governance framework Refine the climate action plan Obtain carbon neutral certification Significantly grow the green portfolio Focus on supporting micro entrepreneurs Promote diversity Short term | 32 Medium Term | HATTON NATIONAL BANK PLC Loan growth : 14% Deposit growth : 11% CASA growth : 15% Fee growth : 27% ROA : 1.3% ROE : 12.1% Cards # 1 acquirer Long Term
  32. OUR VISION OUR MISSION OUR STRATEGY • Most Admired Bank • Most Customer Centric Bank • Best Digital Bank • Most Preferred Employer Business Growth Improve Customer Experience & Productivity People Development Technology Enablement Business Sustainability CUSTOMER Productivity Improvement and Customer Experience EMPLOYEE Technology Enablement People Development To be the Most Customer Centric Bank in Sri Lanka To be the Best Digital Bank in Sri Lanka To be the Most Preferred Employer » NPS > 65% » Cost to income <30% » Additional income : Rs 1Bn » New customers to be on-boarded : 1 Million » Employee Engagement Score of 70% 8.2 17.8 5.1 8.5 » Continuous improvement of processes » Cost optimisation » Automation » Stabilise core systems » Develop enabling systems » Improve analytic capabilities » Capability development » Strategic workforce planning » Succession planning » NPS : 56% » Cost to income : 34.4% » Growth in digital transactions : 89% » Customers on boarded to digital channels : 20% » Investment in technology : Rs 870 Mn » Retention : 91% » Training hours per employee : 22.2 » Increase in participants covered : 51.6% » » » » » » » Continuous improvement of processes through re-engineering and automation External rollout of the brand transformation Launch innovative products to suit all market segments Enhance capability of digital products and services Drive digital usage Increase usage of data and analytics Enhance information security and system stability » Formulate development plans for succession » Strategic Workforce planning » Improve coverage on learning and development [M] » Implementation of remote/flexible working arrangements » Revamping of performance management system and rewards mechanism 33 INTEGRATED REPORT 2021
  33. How We Create Value for Stakeholders STRATEGY OUR VISION Business Growth Improve Customer Experience & Productivity People Development Technology Enablement Business Sustainability Our Inputs Core Functions & Enablers Financial Capital » Customer Deposits: Rs 1,076 Bn » Equity: Rs 152Bn Interest Expense » Debt : Rs 67 Bn Customer Deposits CO Social & Relationship Capital an ess to global trad e Acc Fin ation o rm nsf Tra bling transaction s Ena Risk Mana g em en t 34 » 14,793 MWh energy » 98 MT paper » Rs 7.3 Bn in renewable energy projects HATTON NATIONAL BANK PLC Trade Finance Services Inf Natural resources consumed in carrying out our business activities Fees & Commission n S U S TA Natural Capital t tio » Investments to enhance features and capability The branch network » 255 branches and tangible assets » 794 ATMs represented by Property, » Investments of Rs 707 Mn in 2021 Plant & Equipment excluding Software en Transforming lives, livelihoods, businesses and communities through effective financial intermediation Software and networks » Mobile Banking and Internet that enable digitalisation Banking of our activities » Digital Payment solutions Manufactured Capital em ce savings an an of dw odi ea t s lth Cu or m a Digital Capital ag pliance » Organisation Culture Man ider of finance Prov Our brand, organisation » 133 Year heritage structures, policy » Brand value Rs 23.1 Bn frameworks, systems and processes and the tacit » Domestically Significant Banking Institution knowledge of our team » Certifications & Accolades Talent al CE Com Intellectual Capital R AT E G O V E R N A N gy Our customers, » > 2.4 Mn Customers business partners, » > 900+ Correspondents correspondents, suppliers, investors and » > Business Partners communities we operate in g Le RPO Interest Income olo The Hatna Team and the » 5,000+ Employees structured processes to » 111,976 Hours of Training engage, develop and retain them Loans & Advances hn Human Capital c Te Financial assets, liabilities and equity INABILITY Fees & Commissions Transaction/ Remittance Platforms
  34. VALUES Outputs Outcomes Financial Capital Stakeholders impacted Financial Capital + ROE increased to 12.1% + NBV per share increased to Rs 336/+ Cash Dividend increased to Rs 6.50 per share + Market Price increased by 7% Human Capital Human Capital + Rs 10.8 Bn in remuneration and benefits + Zero retrenchments or pay cuts + Attrition 9% Rs 929 Bn Loans Rs 1,076 Bn Customer Deposits Rs 49 Bn Social & Relationship Capital - NPS reduced to 56% with improvement in measurement methodology Social & Relationship Capital + Grant to 200 Micro entrepreneurs + Strategic CSR investment of Rs 12.3 Mn + Taxes paid of Rs 7Bn Intellectual Capital + Brand value maintained Intellectual Capital + Tacit knowledge Interest Paid Rs 139 Bn Imports Rs 90 Bn Digital Capital + 89% increase in digital transactions Digital Capital + Transactions of Rs 2.5 Trillion through digital channels + 205% growth in value of digital transactions Exports Rs 86 Bn Moratoriums Manufactured Capital + 3 New branches Manufactured Capital + Rs 25 Bn of tangible assets Natural Capital - Carbon footprint 9,592 tCO2e Natural Capital + 100% paper recycled + 2,638 MWh solar energy generated 35 INTEGRATED REPORT 2021
  35. Financial Review EARNINGS INCOME Net Interest Income Rs Bn Non Interest Income Rs Bn 56 .5 Total Operating Income Rs Bn 27.9 84.4 Net Interest Income Non-Interest Income Total Operating Income Rs Bn % Rs Bn Rs Bn 60 6 30 100 50 5 25 80 40 4 20 30 3 15 20 2 10 10 1 5 0 0 0 2017 2018 Bank Subsidiaries 2019 2020 2021 Bank NIM Group NIM 60 40 20 2017 2018 2019 Bank Subsidiaries 2020 0 2021 2017 2018 2019 2020 2021 Group NII Group Non Interest Income Insurance Premium Bank net fee income NET INTEREST INCOME NON-INTEREST INCOME TOTAL OPERATING INCOME Net Interest Income (NII) of the Group increased by 11.1% to Rs 56.5 Bn in 2021 driven by loans and advances growth of 14.4% and CASA growth of 14.9%. Net Interest margins also improved from 4.3% to 4.4% supported by strong CASA growth and increase in interest rates with the increase in policy rates. Net Fee & Commission Income increased by 28.5% to Rs 10.3 Bn supported by increased transaction volumes in cards and trade, in comparison with 2020, which was a dull year for these two business segments. Net Other Operating Income was a key contributor to Non-Interest Income which was largely attributable to the position revaluations as the exchange rate depreciated by 7.5% in 2021. Net Insurance premiums increased by 19.5% to Rs 10.6 Bn as HNB Assurance, continued its steady growth trajectory as they completed two decades of business. Total Operating income increased by 17.1% to Rs 84.4 Bn supported by sound growth in NII complemented by increased Commission Income and Exchange Gains as economic activity picked up in 2021. The Bank accounted for 77.9% of Total Operating Income. The charts below reflect the NII and Total Operating Income from the Group’s key business lines and also provide a view of the components of Non Interest Income. Composition of Non Interest Income Segmental Non Interest Income Contribution Segmental NII contribution 7% 5% 11% 8% 4% 27% 21% 2020 23% 24% 19% 2% 34% 15% 2% Corporate Retail SME Micro 36 2021 Treasury Property Development Insurance NBFI HATTON NATIONAL BANK PLC 38% 25% 15% 5% 42% 2020 2021 38% 37% Net insurance premium income   Net fee and commission income Net gains arising on derecognition of financial assets Net other operating income 3% 14% 5% 17% 11% 12% 2021 11% 1% 9% 10% 1% 11% 2020 47% 5% 42% 4% Corporate Retail SME Micro Treasury Property Development Insurance NBFI
  36. CHARGES AND EXPENSES Impairments Rs Bn PROFITS PBT Rs 23 .1 Bn PAT Rs 20.1 Bn Operating Expenses Rs Bn 19.5 37.3 Impairment Operating expenses Rs Bn Rs Bn % Rs Bn % 20 40 35 30 25 20 15 10 5 0 60 35 30 25 20 15 10 5 0 60 15 10 5 0 2017 2018 2019 2020 2021 Group 50 40 30 20 10 2017 2018 2019 2020 2021 0 50 40 30 20 10 2017 Personnel cost Benefits, claims & underwriting Other operating expenses Bank cost to income Group cost to income Impairment on loans Other Impairment 2018 2019 Corp tax VAT, NBT & DRL PAT 2020 2021 0 Total tax rate Group Impairment charge increased by 21.7% to Rs 19.5 Bn largely due to a sharp increase of 144.9% in impairment charge for debt instruments triggered by the downgrade in the sovereign rating by Fitch to CC. The Group made a total impairment of Rs 6.8 Bn on account of investments in dollar denominated government securities. The share of profits from joint ventures declined by 28.1% to Rs 292.8 Mn as the primary dealership arm performed exceptionally well in 2020 due to the reduction in interest rates. Taking in to account exposures to elevated risk industries and the impact on portfolios once the moratorium period ends, significant overlay was built in to the impairment charges on account of loans and advances in 2021 similar to 2020. Nevertheless, impairment charges for loans and advances declined 5.5% to Rs 12.4 Bn reflecting the reduction of loans under moratorium and the improvement in asset quality during the year. This was possible due to the focus and increased rigor placed on managing credit risk and recoveries. Group Taxation declined by 3% to Rs 7.7 Bn mainly due to the reduction in corporate tax rate to 24% and settlement of several assessments during the year resulting in the reversal of tax over provisions. Total Operating Expenses of the group increased by 7.3% with claims and benefits of the insurance group increasing by 21.4% compared to a subdued 2020. Although there were no staff outlays or salary cuts, personnel expenses declined by 2% YoY on account of a Rs 2.3 Bn reversal on provision for pension and retirement benefits in the Bank with the extension of retirement age to 60 years. Other overheads increased by 8.8% YoY however, this was still 3.9% less than pre-pandemic 2019 level, due to the drive on cost optimisation and operational efficiency. Net Operating income Accordingly, Group cost efficiency ratio improved from 48.3% in 2020 to 44.3% in 2021, while Bank cost to income ratio improved from 39.3% to 34.4%. If adjusted for the one off reversal in the pension fund, the cost to income ratios would be 37.9% and 47% for the Bank and the Group respectively. Profit After Tax improved by 47.0% at Group level to Rs 20.1 Bn driven by commendable performances of the Bank and the subsidiaries. Profit Attributable to Shareholders improved by 45% to Rs 19 Bn. Earnings per share increased from Rs 24.90 to Rs 36.18 in 2021. Bank Rs Bn Rs Bn % 70 60 50 40 30 20 10 0 35 30 25 20 15 10 5 0 50 2017 2018 Bank Subsidiaries 2019 2020 2021 40 30 20 10 2017 2018 2019 2020 2021 0 Corp tax VAT, NBT & DRL PAT Total tax rate 37 INTEGRATED REPORT 2021
  37. Financial Review FINANCIAL POSITION ASSETS Group Total Assets Rs Bn 1 ,453.6 Group Total Assets ROA Rs Bn % % 1,000 900 800 700 600 500 400 300 200 100 0 7 6 5 4 3 2 1 0 2.0% 2017 2018 2019 2020 2021 Loans and advances Other Assets NPA 1.5% 1.0% 0.5% 0.0% 2017 2018 2019 2020 2021 ROA Bank ROA Group Having adopted a cautious approach towards credit growth over the previous two years, 2021 saw credit growth picking up with economic activity improving towards the latter part of 2021. Group and Bank net loans and advances increased by 13.8% and 13.4% to Rs 911.3 Bn and Rs 876.3 Bn respectively in 2021. Accordingly, loans and advances portfolio accounted for 62.7% of Total Assets compared to 58.4% in 2020. Loan growth was funded largely by liquidating investments in GOSL securities which grew over the past couple years due to lackluster credit growth. Investment in sovereign bonds and Sri Lanka development bonds also reduced from15% of total assets to 12% with the maturities in 2021. Asset quality has remained a key focus for the HNB Group supporting a decrease in Stage 2 loans and advances by 24.7% while curtailing growth of Stage 3 to a mere 0.8%. These measures have enabled the Bank to manage NPA at 3.4% in 2021 compared to 4.3% in the previous year despite challenges within the economy. Accumulated impairment for the Bank increased across all three stages reflecting prudent provisioning while impairment cover against stage 3 loans improved from 48.4% in 2020 to 56.1%. Total assets increased by 5.1% and 6.0% to Rs 1,358.3 Bn and Rs 1,453.6 Bn respectively for the Bank and the Group reflecting prudent growth strategies. Segmental Assets 3% 3% 1% 28% 2% 1% 31% 3% 2020 33% 28% 2021 15% 16% 2% 2% 17% 16% Corporate Retail SME Micro 38 Treasury Property Development Insurance NBFI HATTON NATIONAL BANK PLC
  38. LIABILITIES EQUITY Group Liabilities Rs Bn Shareholder ’s Equity Rs Bn 1,270.4 Group Liabilities 183.3 Total Equity Rs Bn % Rs Bn 1,400 1,200 1,000 800 600 400 200 0 42 200 40 38 36 34 32 2017 2018 2019 Deposits Other Liabilities 2020 2021 50 0 Accordingly, deposits now account for 76% and 79% of Group and Bank funding respectively at the balance sheet date, an increase over the 73% and 75% at the close of 2020 as it increased in significance. Total Liabilities amounted to Rs 1,270.4 Bn recording a growth of 5% which was largely driven by deposit growth for the Group. The Bank accounts for 96% of Group Liabilities which were Rs 1,206.3 Bn at the close of the year. Segmental Liabilities 2017 2018 2019 2020 2021 Stated Capital Statuary reserve fund Other reserves Retained earnings Non controlling interest CASA (Bank) Foreign currency deposits which account for nearly 21% of total deposits of the Bank grew by Rs 44.7 Bn, at a faster pace of 24.3% during the year due to the concerted efforts in mobilising foreign currency deposits during the year. Equity accounted for 23.8% of Group and 23.1% of Bank funding as retained earnings increased by 48.6% to Rs 43.6 Bn. At the close of the year, Total Equity of the Group was Rs 183.3 Bn while the Bank recorded Rs 152.0 Bn for the same. Group ROE improved from 8.7% to 11.5% while the Bank ROE improved from 8.8% to 12.1% as at end of 2021. No interim dividends were paid during the year due to prudential concerns and the restrictions on discretionary payments which were in force until the close of the year. The Board of Directors of the Bank declared a final dividend of Rs 9.00 per share consisting of a cash dividend of Rs 6.50 per share and scrip dividend of Rs 2.50 per share. Dividends 14% 1% 3% 3% 15% 2020 100 30 Deposit growth remained steady at 11.3% and 11.1% for Group and Bank respectively. During the year, the Bank surpassed Rs 1 Trillion mark in total deposits recording Rs 1.07 Trillion and Rs 1.1 Trillion for the Bank and the Group respectively as at 31st December 2021. CASA deposits grew at a much faster pace of 15% for both Bank and the Group. Accordingly, the CASA ratio improved to 41% for the Bank compared to 39.6% as at end of 2020. 4% 3% 1% 3% 3% 1% 8% 1% 16% 16% 150 2021 Rs % 10 60 8 50 40 6 30 4 20 2 54% 57% Corporate Retail SME Micro Treasury Property Development Insurance NBFI 0 10 2017 2018 Dividends 2019 2020 2021 0 Cash Payout Total payout 39 INTEGRATED REPORT 2021
  39. Financial Review OVERVIEW OF SEGMENTS Our rating was affirmed at AA- (lka) by Fitch Rating Lanka Ltd with a stable outlook which is the highest rating among local licensed commercial banks in the country. Rs Bn Liabilities RATING 900 Retail Banking 800 700 600 500 400 SME & Micro 300 Corporate Banking Other Subsidiaries 200 NBFI 100 Treasury Insurance 50 150 200 300 250 350 400 450 500 Rs Bn Assets CAPITAL ADEQUACY ASSET QUALITY LIQUIDITY Tier I Capital Stagewise Loans % 7% 16% 77% 8% 25% 67% 18 15 12 9 Liquid Asset Ratio 2020 % 2021 6 3 0 2017 2018 2019 2020 2021 Bank Group Stage 1 Total Capital Stage 3 NPA % 20 8 7 6 5 4 3 2 1 0 300 The regulatory requirement for Tier I is 8.5% and Tier II is 12.5%. HATTON NATIONAL BANK PLC Q4 21 Q3 21 Bank Group Q2 21 2021 50 Q1 21 2020 100 Q4 20 2019 150 Q3 20 2017 2018 2021 200 Q2 20 0 2020 250 Q1 20 5 2019 Liquidity Coverage Ratio % 10 2017 2018 Liquid Asset Ratio Bank Liquid Asset Ratio LCB Statutory Liquid Assets Ratio % 15 40 Stage 2 40 35 30 25 20 15 10 5 0 Bank NPA NPA LCB NPA 3.4% (2021) 4.3% (2020) Stage III loans 2.6% (2021) 3.4% (2020) Stage III provision 56.1% (2021) 48.4% (2020) 0 2017 2018 2019 2020 2021 Liquidity Coverage Ratio - Bank Liquidity Coverage Ratio - LCB Statutory Liquidity Coverage Ratio LAR 28% (statutory requirement 20%) LCR 208% (statutory requirement 100%)
  40. Business Line Review CORPORATE BANKING RETAIL BANKING SME Highlights 2021 Highlights 2021 Highlights 2021 » Intensified focus on driving exports and other defensive sectors of the economy » 17% growth in loan book » NII impacted due to relatively lower interest rates » Moratoria reduced by approximately 45% through proactive business rehabilitation » 93% increase in digital transaction volumes » The first WBG Impact programme to develop talent pipeline completed » New Payment and Cash Management Solution under implementation » Best Retail Bank in 2021 by International Finance magazine » 20% growth in housing loans » 41% growth in income from cards through higher consumption and focussed drive » Launch of minor and major investments plans and premier current account » 18% CASA growth due to innovative, customer focused saving products » 148% increase in digital transaction volumes » 19% reduction in segment NPA base through prudent management » SME Bank in 2021 by International Finance Bank » Continuous support for business revival and approximately 20% reduction in loans under moratorium » 11% growth in deposits » Support to carry out business activity through digital platforms and payment solutions » 13% reduction in segment NPA base through concerted efforts » MOU with USAID to expand support to SME sector and assistance to SME through collaborations. Rs Mn 2021 2020 Change NII 5,881 11,409 -48.5% Fee & Commission income 3,691 2,190 68.5% Impairment Charge 6,229 6,809 -8.5% Net Operating income 3,343 6,790 -50.8% Advances 445,909 382,561 16.6% Deposits 169,176 155,485 8.8% Rs Mn NII Fee & Commission income Change 14,298 13,163 8.6% 4,515 2,423 86.3% Rs Bn 20 20 NII 7,773 10,284 -24.4% Fee & Commission income 2,611 2,089 25.0% Impairment Charge 3,588 2,460 45.9% 41.2% Net Operating income 6,796 9,913 -31.4% Advances 238,502 205,465 16.1% Advances 228,282 208,950 9.3% Deposits 687,137 614,187 11.9% Deposits 190,505 171,963 10.8% Earnings Rs Bn Rs Bn 20 20 15 15 10 5 5 0 0 0 -5 2021 Change -59.8% 15 2020 2020 3,165 10 2019 2021 12,422 15 2018 Rs Mn 1,272 Earnings Rs Bn 2017 2020 17,541 Impairment Charge Net Operating income Earnings 2021 10 10 5 5 2017 NII Fee & Commission income Impairment Charge Net Operating income 2018 2019 2020 2021 0 2017 NII Fee & Commission income Impairment Charge Net Operating income Portfolio Portfolio Portfolio Rs Bn Rs Bn Rs Bn 500 800 250 400 600 200 300 0 2017 2018 Advances Deposits 2019 2020 2021 0 2020 2021 100 200 100 2019 150 400 200 2018 NII Fee & Commission income Impairment Charge Net Operating income 50 2017 2018 Advances Deposits 2019 2020 2021 0 2017 2018 2019 2020 2021 Advances Deposits 41 INTEGRATED REPORT 2021
  41. Business Line Review MICRO FINANCE TREASURY INSURANCE Highlights 2021 Highlights 2021 Highlights 2021 » 40% growth in deposits » 11% reduction in segment NPA base through close monitoring and support » Comprehensive differentiated offering with value chain financing, micro leasing and micro insurance » Support to carry out business through digital payment solutions » Programmes for capacity building and financial literacy » Continues to be one of the largest treasuries in the country providing unparalleled services to customers » 50% increase in operating income through higher NII and FX » 14% reduction in investments in SLDBs and SLSBs with the maturities during the year. » Approximately Rs 7 Bn impairment on account of sovereign downgrades » Growth of Life Insurance GWP by 29% outpacing industry growth » Growth of General Insurance GWP by 13% despite an overall decline in the general Insurance industry » PAT of Rs 1.2 Bn for the year » Rating improved from A(lka) to A+(lka) with a stable outlook in 2021 » Continued the digital transformation journey, with approximately 75% of applications routed digitally. Rs Mn 2021 2020 Change NII 857 1,058 -19.0% Fee & Commission income 162 106 52.7% Impairment Charge 697 241 189.1% Net Operating income 322 923 -65.1% Advances 29,077 25,939 12.1% Deposits 9,971 7,134 39.8% Rs Mn NII FX income 2021 2020 16,045 11,933 34.5% Gross Written Premiums 3,258 2,281 42.8% PAT 12 1,062 -98.9% Total Comprehensive Income 19,547 15,276 28.0% Trading gains Income Total operating income Change Rs Mn Total Assets 2021 2020 Change 12,740 10,485 21.5% 1,222 1,164 4.9% 1,172 1,188 -1.4% 35,852 31,725 13.0% Insurance Contract Liabilities 20,343 17,064 19.2% General 3,736 3,309 12.9% Equity 8,123 8,194 -0.9% 4% 16% Life ROE Rs Bn Rs Bn 1.5 1.3 1.1 0.9 0.7 0.5 0.3 0.1 -0.1 Capital Adequacy Ratios & Capital Structure Earnings Earnings Rs Bn Rs Bn 25 25 40 400 20 20 30 300 15 15 10 10 20 200 5 10 100 0 0 5 2017 2018 2019 2020 2021 0 2017 2018 2019 2020 2021 NII FX Profit Total operating income NII Fee & Commission income Impairment Charge Net Operating income Rs Bn Rs Bn 35 30 25 20 15 10 5 0 500 15 400 12 300 9 200 6 100 3 2018 2019 2020 Advances Deposits 42 HATTON NATIONAL BANK PLC 2021 2018 2019 2020 2021 CAR Life CAR General Rs Bn 2017 2018 2019 2020 Investments in GOSL Securities 0 Gross Written Premium Investment in GOSL Securities 2017 2017 Other liabilities Contract liabilities Equity Portfolio 0 % 2021 0 % 2017 2018 General Life 2019 2020 2021 PAT Growth (%) ROE 250 200 150 100 50 0 -50 -100
  42. NBFI REAL ESTATE INVESTMENT BANKING (JOINT VENTURE) Highlights 2021 Highlights 2021 Highlights 2021 » Listed among the top 50 most valuable consumer brands in Sri Lanka by LMD » PAT of Rs 513 Mn compared to a loss of Rs 273 Mn in 2020 » Launch of a new Supply Chain Financing scheme » Moratoria of over Rs 8 Bn granted to more than 114,000 customers » Acquisition of a 97% stake in Prime Finance PLC » Owns A grade HNB Head Office building » Rental income dropped marginally by 3% due to the concessions granted to external tenants owning to the pandemic » 100% occupancy rate maintained in 2021 » Rental agreements renewed despite industries moving in to new ways of working » PAT of Rs 464 Mn » Raised Rs 11.9 Bn in capital for customers in 2021 through IPOs and rights issues » Assets Under Management of Rs 22.4 Bn » PAT of Rs 994Mn for year » Expansion of renewable energy portfolio to Bangladesh. Rs Mn 2021 2020 NII Change Rs Mn 3803 3,025 25.7% Rental Income Fee & Commission income 468 340 37.8% Investment Income PAT 514 (273) 288% ROE 10.7% -5.9% Advances 34,747 27,573 26.0% Deposits 33,799 29,678 13.9% Earnings 2017 2020 965 997 37 38 Change Rs Mn 2021 2020 -3.3% Fund based income 1,359 1,681 -17.0% -2.6% Fee based income 628 204 207.9% Profit attributable to shareholders 945 1,188 -20.5% 1,215 1,296 -6.3% 11% 16% PBT 648 628 3.1% PAT 464 410 13.1% ROE 5.6% 5.7% 2018 2019 2020 2021 Total Comprehensive Income ROE Rs Mn Rs Mn % 1,200 1,000 800 600 400 200 0 1,000 20 800 15 600 10 400 5 200 2017 2018 2019 2020 2021 0 2017 2018 2019 Portfolio Assets / Liabilities Assets Under Management Rs Mn Rs Mn Rs Mn 40,000 12,000 10,000 8,000 6,000 4,000 2,000 0 30,000 25,000 20,000 15,000 10,000 5,000 0 20,000 10,000 0 2017 2018 Advances Deposits 2019 2020 2021 2017 2018 Assets Liabilities 2020 2021 0 Profit attributable for shareholders ROE Fee Income PBT PAT NII Fee & Commision income Impariment Charge Net Operating income 300,00 Change Earnings Earnings Rs Mn 6,000 5,000 4,000 3,000 2,000 1,000 0 2021 2019 2020 2021 2017 2018 2019 2020 2021 Assets Under Management 43 INTEGRATED REPORT 2021
  43. Value Delivered to Customers As one of the most diversified financial services conglomerates in the country , we offer our customers the full gamut of financial services including retail banking, corporate finance, primary dealership, stock brokering, asset management, venture capital, life and general insurance. 2.4 Mn Customers Net Promoter Score 56% 20% of customers onboarded to digital platforms 89% increase in number of digital transactions Our value proposition to customers however goes well beyond our comprehensive financial product portfolio and aims to empower our customers and support their financial aspirations by making our products more accessible, more convenient and more enjoyable. COVID-19 Support A Trusted Financial Intermediary » Supporting our customers by offering loan repayment flexibility, concessionary working capital and financial advice to facilitate sustainable operations. 1,000 800 600 0 Access to Finance 2017 2018 2019 2020 2021 Deposits Supporting customers’ financial aspirations throughout their life using a comprehensive portfolio of products with responsibility » We provide access to financial products and services to customers from all walks of life and all age groups through a variety of channels. HATTON NATIONAL BANK PLC Rs Bn 1,200 200 Capacity Building 44 Deposits 400 » We provide multiple channels for customers to conduct their financial transactions combining our branch network, digital infrastructure and relationships with global networks. » We contribute to enhancing financial literacy and capacity particularly of SMEs and micro entrepreneurs through regular awareness and capacity building programmes. Custodian of Savings/ Wealth Superior Customer Experience » We combine technology with a human touch to offer customers a seamless banking experience. Innovative Banking » We continue to offer our customers innovative banking solutions that meet increasingly complex customer needs and expectations.
  44. PREFERRED CUSTODIAN OF WEALTH AND FINANCIAL INTERMEDIARY As a custodian of customer wealth , we are conscious of the need to maintain a prudent risk appetite to strengthen the resilience of the Bank. Our strong domestic franchise and the trust built over 130+ years standing strong, weathering many different challenges has been a key contributor. Deposits are the beginning of a mutually rewarding lifelong relationship with a customer and we are able to enhance the relationship by adding other services and products that empower customers to manage their finances. We are encouraged by the pace of growth as deposits grew by 11% in 2021, while CASA deposit grew by a higher rate of 15%. Customers earned interest of Rs 41 Bn from their deposits during the year. Advances Deposits Rs Bn Rs Bn 1,000 1,200 800 1,000 800 600 600 400 400 200 0 200 2017 2018 2019 Corporate Retail 2020 0 2021 SME Micro 2017 2018 Corporate Retail 2021 10% Rs Bn 42% 120 10% 8% 80 60 10% 40 20 0 2020 SME Micro An Islandwide Domestic Franchise Interest Received and Interest Paid to Customers 100 Apart from offering conventional banking products and services, the Bank also facilitates Islamic Financing in compliance with Shariah Law. 2019 2017 2018 2019 2020 2021 Interest Received Interest Paid 4% 5% 4% 7% Central Eastern Northern Southern North Central North Western Sabaragamuwa Uva Western ACCESS TO FINANCE We provide access to financial capital for customers enabling realisation of their aspirations. A structured product portfolio enables retail customers to purchase their own vehicle, house and perhaps, set up their own business. Similarly, a relevant suite of products are available for businesses of all sizes across multiple industry sectors supporting their growth and connecting them to markets through a variety of channels as set out on page 12. During the year, the Bank opened three new branches in high foot fall locations. Two of these centres were aimed at serving customers visiting two key hospitals while the other was to support the immigrant workers. As part of our efforts to support the MSME sector, the Bank entered into a MOU with USAID in 2021 to expand financing to MSME’s and build SME capacity. We also launched a Rs 20 Mn grant fund to support 200 microfinance customers affected by the COVID-19 pandemic and introduced micro-leasing to provide leasing facilities specifically for farmers. 45 INTEGRATED REPORT 2021
  45. Value Delivered to Customers FACILITATING TRANSACTIONS The Bank facilitates a range of specialised transactions which require high levels of professional knowledge , secure platforms and global and local networks that enable secure transfer of funds. Trade Services, Treasury and Custodian Services are some of the services offered to support the specialised needs of business customers, enabling them to structure transactions with adequate safeguards, facilitating economic growth. Facilitating Inward Remittances is another specialised area where the Bank is a dominant player enabling migrant workers to send money to their families. Understanding the national priority to drive exports of the country, the Bank intensified North Central Province 10 29 North Western Province 18 its focus in supporting exporters. During the year, HNB entered into a partnership with Cord 360 offering exporters a new online business to business platform connecting buyers with exporters. As part of our efforts to galvanise SME exporters in the country, we also revamped our SME Export Credit facility with a range of value-added services including market linkages to export markets. HNB also partnered with the National Chamber of Exporters of Sri Lanka (NCE) as the exclusive banking partner of the ‘Sri Lanka Export Brand’ exhibition at the World Expo 2020 in Dubai, United Arab Emirates to attract foreign direct investments related to export oriented manufacturers. Northern Province 21 Market Leader in Trade Finance for 2019 and 2020 Inward Remittances facilitated through: » Network of 147 agents in 42 countries » Three Franchise Partners Rs Bn 250 200 Eastern Province 150 100 Western Province 64 50 0 Sabaragamuwa Province 373 11 Southern Province 46 Asiamoney Import & Export Volumes 80 56 25 » Best Service in Trade Finance 60 25 107 » Best Service in Trade Finance Euromoney » Over USD 1 Bn inward remittances facilitated in 2021 Central Province 26 For the 3rd consecutive year 63 HATTON NATIONAL BANK PLC 34 Branches 35 2018 2019 Import Facilitated Export Facilitated Uva Province 12 2017 Self Service Machines 2020 2021
  46. EUROPE » Austria » Belgium » Bulgaria » Channel Islands » Cyprus » Czech Republic » Denmark » Finland » France » Germany » Greece » Hungary » Ireland » Isle of Man » Italy » Kosovo » » » » » » » » » » » » » » » ASIA Latvia Liechtenstein Luxembourg Macedonia Netherlands Norway Poland Portugal Romania Slovakia Spain Sweden Switzerland Turkey United Kingdom NORTH AMERICA » Canada » Mexico » United States of America » » » » » » » » » » » » » » SOUTH AMERICA » Argentina » Colombia » Bolivia » Ecuador » Brazil » Peru » Chile CUSTOMER CONFIDENCE Our customers recognise the differentiated value we bring to them in terms of superior service delivery, innovative solutions and responsiveness to their needs. The year 2020 saw our net promoter score improving to 76. Having reviewed the process, we made several improvements in 2021, by increasing the sample size and enhancing scope to cover five key customer journeys. With these changes, the score for 2021 was at 56 and we will continue to refine this process to understand our customers and their needs better. AFRICA » Egypt » Ethiopia » Kenya Bahrain Bangladesh China Hong Kong Georgia India Indonesia Israel Japan Jordan Republic of Korea Kuwait Lebanon Malaysia » » » » » » » » » » » Maldive Islands Nepal Oman Pakistan Philippines Qatar Saudi Arabia Singapore Taiwan Thailand United Arab Emirates » Vietnam AUSTRALIA » Australia » New Zealand » Mauritius » Seychelles » South Africa A comprehensive product portfolio is aimed at meeting all our customers’ personal and business needs, while an island-wide branch network, multiple digital channels and global correspondent banking network make our products and services easily accessible. 47 INTEGRATED REPORT 2021
  47. Value Delivered to Customers COVID-19 SUPPORT As a gazetted essential service , our priority during the year was to continue to provide banking services with minimal disruptions whilst proactively identifying areas in which we could support our customers to recover from the impact of the pandemic. Digital and online platforms were strengthened to enable more customers to carry out their banking transactions remotely. Meanwhile, key branches operated throughout the lockdown period and several mobile banking vehicles were operated across the country to support customers who did not have access to digital banking services. Meanwhile, as the pandemic evolved during the year, we continued to extend our support to customers who were financially affected by the pandemic. During the first phase of the pandemic in 2020, approximately 40% of our loan book was under moratoria. Timely support by way of moratoria enabled majority of these clients to revive their businesses and as at end December 2021, this amount reduced to 9% of the loan book. Approximately 32% of these loans under moratoria are in the tourism sector, which is extended up to June 2022. The Bank will continue to work closely with the affected clients and provide necessary support to be back in businesses as a priority. Loans under moratoria 9% of loans Moratoria to Tourism sector 3% of loans CUSTOMER SATISFACTION Net Promotor Score 56 HNB Digital Banking (Play Store Rating) 4.6 (App Store Rating) 4.4 SUPERIOR CUSTOMER EXPERIENCE SOLO (Play Store Rating) Evolving market dynamics and rising expectations have made customer experience a key differentiator in an increasingly competitive market landscape. We therefore continue to strive to make banking with HNB an enjoyable experience by combining digital enablement with service excellence and efficient processes. (App Store Rating) Superior Customer Experience Digital Enablement 48 HATTON NATIONAL BANK PLC Service Excellence Efficient Processes 4.4 4.3
  48. MAKING BANKING ENJOYABLE INNOVATIVE BANKING SOLUTIONS A friendly staff , an extensive branch network, 24/7 call centres and a future ready digital infrastructure provide customers a number of options for conducting their transactions when banking with HNB. We have embarked on a holistic transformation of every aspect of banking to integrate customer centricity into all aspects of our operations with a view to making banking enjoyable for our customers. We continue to push the boundaries of banking by offering our customers innovative banking solutions that meet the increasingly complex needs and expectations of a new generation of customers. We are increasingly using data analytics and artificial intelligence (AI) to gain deeper insights into our customers’ needs, wants and aspirations in order to offer more meaningful financial solutions. 24/7 Call Centres During 2021 the Bank introduced three new products. An education loan which considers the future repayment capacity of the student was launched, providing financial assistance to students to build their future. The Bank also launched investment plans for both children and adults enabling them to save according to their choice for future events. A premier current account was launched providing a variety of benefits to both personal and business clients. Our call centre operated 24/7 despite disruptions during the year Dedicated Customer Experience Team Monitors the customer pulse through regular surveys and initiates remedial action for pressure points identified from surveys Changing Our Culture Articulating expected values, personality and behaviour to become more customer centric Investing in Technology Digital platforms to empower customers to new dimensions as we redefine banking 49 INTEGRATED REPORT 2021
  49. Value Delivered to Customers DIGITAL BANKING HNB ’s pivot to digitally-enabled products and services gathered momentum during the year, as customers increasingly sought to carry out their banking transactions remotely. The unprecedented adoption of digital banking services saw an exponential growth in users across our digital channels with the volume of digital transactions growing by almost 89% during the year on mobile banking, internet banking, IPG, Payfast and SOLO. To support this growth, we continued to invest in our digital value proposition, by enhancing our capabilities and strengthening security controls. Key among these developments was enhancing the capabilities of SOLO and the digital app. We also focused on fine-tuning our cyber security protocols to ensure the highest level of data security. There were no complaints concerning substantiated breaches of customer privacy or losses of customer data during the year. Key value additions to our digital value proposition during the year are listed below. Solutions What we offer SOLO » The payment app facilitates bank or non-bank customers to make digital payments through a card or account at any bank. Utility bill payment, direct pay and biometric features were introduced during the year. The fully-fledged digital wallet is to be launched in 2022. 818% IPG » Enables local or international debit, credit, Visa and MasterCard payments through secure transaction channels. 80% PAYFAST » Enables customers to credit multiple beneficiaries at any bank. » Real- time payments to the Inland Revenue Department (IRD) were added during the year together with, enhanced security with two factor authentication 32% Self Service Machines » Includes 794 SSMs spread across the country comprising of dispensers, recyclers, cash deposit machines, cheque deposit machines and bill payment kiosks. Pay on ID and cash to mobile feature enabling cash payout to HNB Assurance customers was introduced during the year. 16% E Banking (mobile and internet banking) » The new digital app was launched towards the end of 2020 with improved user interface and experience. Many new features such as Pay on ID, Government payments, service requests, FD opening were introduced on the new app in 2021. » Plans are underway currently to migrate the existing Internet banking module also under the digital layer during 2022. 133% Payment & Cash Management » HNB became the first Sri Lankan bank to offer Open API banking enabling real time payments and high levels of connectivity through B2B2C and C2B business integrations.  The new payment and cash management system is currently being implemented. Service Excellence Service Excellence remains at the heart of our customer value proposition. A dedicated Customer Experience Unit continues to drive service excellence programmes across the Bank. A key initiative during the year was the “Committed to Serve” programme, a multipronged service campaign, aimed at driving service excellence across the branch network based on the findings of the Customer Satisfaction survey carried out in 2020. A pilot project of the initiative was implemented across 40 high footfall branches during the year and rolled out across the network in January 2022. While face to face interactions were impacted by the disruptions caused by the pandemic, we continued to leverage technology to 50 HATTON NATIONAL BANK PLC Year on Year growth engage closely with our customers. Our 24x7, multilingual and Omni channel Contact Centre enabled customers to reach us any time of the day from any part of the world. The HNB Chatbot Habio meanwhile was implemented during the year for general inquiries, inquiries related to CASA, Credit Cards, other lending products as well as Value Added Services and e-Banking. Meanwhile, customer surveys on products and service levels continue to provide invaluable insights and enable us to continue to improve service levels. Efficient Processes We continue to re-engineer and automate our processes with the aim of simplifying transactions and providing our customers a seamless banking experience. Robotic Process Automation (RPA) for ATM reimbursement 93% CUSTOMER ENGAGEMENT Over 958,000 voice interactions Over 66,000 non-voice interactions Over 48,000 automated conversations via Chat-Bot
  50. process , Bin Balancing, BDM/CRM error rectification and inward remittances was implemented during the year, resulting in reduced turn-around times and improved efficiencies. Continuous improvement of processes with the usage of robotics would be a key area of focus going forward. Several processes including the home loan processes, mandatory savings buildup procedure and High Net worth Individual (HNI) servicing model were also re-vamped during the year. CAPACITY BUILDING AND TECHNICAL SUPPORT Empowering our customers lies at the heart of our customer value proposition. We therefore allocate significant resources towards capacity building and financial literacy programme for our customers. During the year, we entered into a MOU with USAID to expand financing to micro, small, and medium enterprises (MSMEs) in Sri Lanka. In addition to providing access to much needed capital for SME clients, the programme will also support advisory services and capacity building programmes. LISTENING TO CUSTOMER VOICES Surveys Carried out During Survey the year Population Monthly mystery shopper surveys on staff product knowledge 1,936 Annual Independent customer satisfaction Survey 1,043 Corporate, SME, Priority customer survey 7,800 CSAT Surveys Product Responsibility Product responsibility and marketing integrity is key to gaining customer confidence. We ensure that our product offerings conform with applicable laws and regulations and meet our ethical standards. Information on fees and charges, product features, terms and conditions are clearly communicated to clients through branch staff and through our contact center, “HNB Connect”. Product related information is also readily available through our corporate website. There were no instances of non-compliance concerning product and service information or marketing communications during the year. Process Improvements Implemented During the Year 11,280 Customer Suggestions and Feedback through HNB Connect 261 » The Home Loan Process was redesigned to provide swift and more convenient service to home loan customers and was rolled out across the branch network. » Mandatory savings build up procedure has been developed and finalised. » Finalisation of HNI policy document that sets out service levels provided to HNI’s 51 INTEGRATED REPORT 2021
  51. Value Delivered To Employees VALUE DELIVERED We strive to foster a dynamic and supportive work environment that empowers our employees to reach their full potential . From exciting training and career development opportunities to an inclusive and open environment, our employee value proposition aims to create happy and bright employees well prepared to take on the future of banking. Payments to Employees Rs 10.8 Bn Learning Opportunities 25,648 No. of Training Programmes 525 Training Investment Rs 15 Mn Average Feedback Rating on Training 94% Our Employee Value Proposition Life Long Learning Opportunities Fair Remuneration » We provide ongoing training and development that provide holistic learning opportunities » We ensure fair remuneration commensurate with performance A bright and happy team that is inspired and motivated to reach higher » Performance based career development opportunities motivate employees to reach their full potential An Inclusive Work Environment » A strong governance framework and policies support a culture that embraces and celebrates diversity. Safe Work Spaces » We provide a work environment that ensures the physical and mental wellbeing of all our employees 52 HATTON NATIONAL BANK PLC Career Development Opportunities
  52. HUMAN CAPITAL GOVERNANCE Human Capital (HC) practices at HNB are governed by a comprehensive Human Capital policy framework and supported by robust processes and procedures. We continue to review and update our policies and processes in response to evolving dynamics, ensuring that our HC practices are relevant, up to date and address the changing business and workforce requirements. During the year, several key policies including Talent Acquisition policy, Prevention of Harassment policy, AntiCorruption and Bribery policy and Whistle Blower policy were reviewed and updated further, strengthening Human Capital governance at HNB. The Human Capital Department (HCD) is responsible for the Human Capital function of the Bank. The structure consists of the centre of expertise that design the human capital solutions, the operations vertical which manages the transactional element and the Human Capital Business Partners that provide the high touch experiential element of Human Capital Management and Development. we are now in the process of implementing a scientific data driven approach towards evaluating the demand for resources and ensuring optimum deployment of resources with the required skills and traits. We also implemented a revamped Talent Acquisition Policy during the year to streamline the hiring process and attract competent and culture fit candidates. Meanwhile, the comprehensive Talent Mobility policy introduced last year provides a greater balance in meeting organisation requirements and managing employee expectations. LIFE LONG LEARNING OPPORTUNITIES AND CAREER DEVELOPMENT Data driven decision making is facilitated through a Human Capital MIS Dashboard which tracks key HC indices which provide the necessary insights to drive Human Capital strategies. Training and Development is a key component of our People Development pillar. Amidst the unprecedented disruptions caused by the pandemic, we continued to provide uninterrupted learning and development opportunities by exploring innovative learning solutions such as bitesized, virtual and gamified learning and by focusing on digital adoption in learning. Consequently, although total classroom learning hours were lower than in the past, we successfully increased the number of learning engagements in a safe and costeffective manner. STRATEGIC WORKFORCE PLANNING Training We strive to offer our employees fulfilling roles that match their individual talents, capabilities and personalities. Following the talent-fitment exercise carried out last year which mapped employees to different roles based on their affinities and capabilities, With the operating landscape and learning environment continuing to be disrupted by the pandemic, the Talent Centre adopted a more agile approach to training and development activities in 2021. The training focus during the year shifted from functionality-based core learning Employee Profile Permanent Fixed Term Contract Male 2,616 243 Female 1,932 251 Below 30 1,168 410 30-50 2,953 59 427 25 Over 50 Western Province 2,901 489 Central Province 311 1 Eastern Province 220 1 North Central Province 126 - Northern Province 227 1 North Western Province 240 1 Sabaragamuwa Province 142 - Uva Province 100 - Southern Province 281 1 Remuneration Committee CEO Nomination Committee HUMAN CAPITAL DEPARTMENT Centre of Expertise Operations Regional Business Partners 53 INTEGRATED REPORT 2021
  53. Value Delivered To Employees TRAINING FOCUS AREAS 2021 BUSINESS GROWTH CUSTOMER EXPERIENCE AND PRODUCTIVITY PEOPLE DEVELOPMENT TECHNOLOGY ENABLEMENT Programmes Programmes Programmes Programmes Hours Hours Hours Hours 102 98 13 ,941 5,631 New Recruits 164 5,869 25 645 2,006 Training modalities also changed with “bitesize” virtual training and gamified learning substituting traditional classroom training sessions. Several innovative learning solutions were also introduced during the year to create an eco-system of learning in the new normal. A total of 111,976 learning hours were offered through over 525 programmes to 25,648 participants during the year. 90% of these training hours were provided virtually through our e-learning platform “Talent Space” and virtual platforms. 83% of the programmes, usually delivered via classroom training, were delivered virtually but redesigned to be bitesized and virtual friendly. 54 HATTON NATIONAL BANK PLC Performance Management Executives are appraised bi- annually based on KPIs that have been communicated at the beginning of the year. All other employees are evaluated on an annual basis. Despite the disruptions caused by the pandemic, 100% of employees received performance evaluation reviews during the year. Leadership Development During the year leadership development initiatives for senior management and senior middle level leaders were re-designed and re-launched to better reflect the evolving business requirements. Accordingly, a tailormade coaching programme was carried out for C-suite while Catalyst 2 was launched for Senior Managers with Corporate Management potential. This was followed by ‘Acumen for Leaders’ and ‘Acumen for Business’ two separate leadership development programmes targeted at high potential Senior Managers. The ‘Impact’ programme was also launched for Wholesale Banking Group in line with current business needs. Gender Age modules to supporting employees navigate the pandemic and respond effectively and practically to the unprecedented challenges. Accordingly, business needs during the pandemic were revisited and virtual modules were created to specifically address these evolving business needs within the framework of our overall strategic pillars. (see Training Focus Areas diagram above). Among the key programmes conducted during the year was the “Committed to Serve” initiative aimed at enhancing service levels. The programme which was rolled out across 40 branches involved customised learning modules for each branch based on training areas identified by a cross functional team. Hours 15,641 New Recruits Exits No. Rate No. Rate Male 310 48% 226 51% Female 335 52% 213 49% Under 30 581 90% 256 58% 30-50 Over 50 Western Province 136 836 Employee Hires and Turnover BUSINESS SUSTAINABILITY Programmes Talent Movements 55 9% 96 22% 9 1% 87 20% 559 87% 386 88% Central 15 2% 13 3% Eastern 16 2% 8 2% North Central 10 2% 5 1% Northern 13 2% 5 1% North Western 11 2% 2 0.5% Sabaragamuwa 6 1% 4 1% Uva 5 1% 3 1% 10 2% 13 3% Southern Innovative Learning Solutions introduced during the year » #Learning Virus - Learning flyers circulated vis WhatsApp » Future of Work Animated Videos » “Chau and How”Animated Videos » Gamified Learning - 6 new games launched on Talent Space » Learning Premier League - A novel gamified learning intervention
  54. Safe Work Spaces Training and Development Learning Coverage Number of programmes Participants covered 30 ,000 600 500 25,000 400 20,000 300 15,000 200 10,000 100 0 2017 2018 2019 2020 2021 5,000 Number of programmes Participants covered Learning Hours Hours 200,000 160,000 120,000 80,000 40,000 0 2017 2018 2019 2020 2021 Talent Space Classroom Learning External Learning Total Learning Hours per Employee (LHpE) % 45 Ensuring both the physical and mental health of our employees remains a key priority as we navigate the challenges of the pandemic. A comprehensive Employee Health and Safety policy is in place to ensure a safe and secure working environment for all employees while a special cross functional COVID-19 Committee was formed at the onset of the pandemic to proactively monitor the threat of the contagion and formulate an action plan to support employees through the pandemic. The Human Capital Department which is in constant contact with Health Authorities and local PHI’s has implemented stringent health and safety measures such as regular deep cleaning, socially distanced office seating, and rotation based shifts across the branch network. Meanwhile, ongoing engagement with employees enable health and safety information to be effectively communicated to employees and concerns to be raised with HCD. All full-time employees are entitled to life insurance and healthcare benefits such as reimbursement of surgical and hospitalisation expenses for self and family. We also conduct periodic health and wellness programmes to promote better health among our employees. During the year, several virtual programmes were conducted to create awareness on non-communicable diseases and immunity boosting habits. 36 27 Fair Remuneration 18 We ensure that our remuneration and benefits are on par with industry standards and that our employees are adequately compensated for their efforts. In addition to a guaranteed fixed pay component, all permanent employees are entitled to a variable pay component that 9 0 2017 2018 2019 Industry Norm HNB LHpE 2020 2021 Catalyst 2.0 To groom participants to successfully transition to a C-suite role in the short run 26 C-1 Leaders participated Acumen for Leaders To groom participants to successfully transition to a C-suite role in the medium to long term and become a transformational Change Agent, 30 C-1 and C-2 Leaders participated Acumen for Business To support participants in excelling in their current role and groom them for future leadership roles. 24 Regional heads and 6 identified successors participated 55 INTEGRATED REPORT 2021
  55. Value Delivered To Employees is linked to performance of the individual and the Bank . In addition to remuneration, permanent employees are offered a wide range of benefits including life insurance, medical allowances, disability and invalidity coverage, maternity leave, pension benefits, holiday allowances, reimbursement of professional subscriptions and stock options among others. An Inclusive Work Environment We are committed to fostering a work environment that celebrates diversity and provides a level playing field for all our employees. Our zero-tolerance policy on any form of discrimination and long standing commitment promoting diversity at the work place is indicative from our diverse employee base. Meanwhile we continue to create a culture of non-discrimination through awareness sessions and a robust grievance mechanism. There were no reported incidents of discrimination during the year. Powering Women We continue to strive towards gender parity at all levels and are proud of the significant strides we have taken to ensure a conducive work environment for our female colleagues. Listening to our Employees Voices We encourage our employees to make their voices heard by providing multiple channels of communication at all employee levels. Maintaining strong communication channels with employees was rendered even more important due to the restrictions on physical proximity. MS Teams, webinars, social media and e mail were used extensively to maintain constant dialogue with employees during the lockdown period. An employee opinion survey was launched in December and all staff were encouraged to provide candid feedback. During the year, we also released the “Culture Book” a vibrant booklet that communicates the HNB Persona i.e. VALUES PERSONALITY and BEHAVIOURS that make us HNB. When we understand them, imbibe them and practice them, we would create and offer products and services that make customer experiences simple, easy, useful, profitable and memorable. ENSURING THE HEALTH AND SAFETY OF EMPLOYEES DURING COVID-19 » Two Vaccination Programmes were conducted at HNB Towers for over 400 staff members. » Provision of staff transportation facilities for staff required to report to work » Intermediate care facilities for COVID positive patients » Awareness programmes » Ambulance service for infected staff » Provision of food and essential items to COVID infected staff. » Provision of sanitizers, masks, gloves and glass shields to network staff. » Procuring emergency oxygen cylinders, oxygen concentration machines and essential drugs. » Work from Home Facilities with remote connectivity We also continue to engage closely with trade union representatives and maintain amicable relations with all unions. 72% of our staff were members of the Ceylon Bank Employees Union (CBEU) and the HNB Officers’ Union as at the end of 2021. Notice period and provisions for consultation and negotiation are specified in the Collective Agreements with respective trade unions. There were no incidents of industrial action during the year. OUR DIVERSE WORKFORCE By Gender Employees Age By Province 3,500 9% 43% 31% 2,800 60% 2,100 1,400 57% 700 56 HATTON NATIONAL BANK PLC Uva Western North Western By region Sabaragamuwa Southern North Central 30 to 50 years Under 30 Over 50 Northern Central Male Female Eastern 0
  56. Responsible Brand Gender Gap Indicators Composition Enablers GENDER PARITY AT HNB Specific goals and strategies together with strong policies enables us to provide a conducive , empowering work environment for our female colleagues. Meanwhile, our branded female empowerment initiative “Woman at Work initiative” provides female employees career development opportunities, training opportunities and invaluable support throughout their career at HNB. We continue to strive to archive greater gender equality in the workplace by providing equal opportunities for our female colleagues in all aspects including recruitment, promotions and management opportunities. We are proud of the significant strides we have made in reducing the gender gap as indicative from a consistent improvement in key Gender Gap Indicators Financial empowerment of women remains a key focus and we continue to find innovative ways of providing women of all walks of life access to finance. Mobility Promotion Policy Equality and Diversity Policy Prevention of Harassment Policy Human Rights Policy Grievance Policy Percentage of Women in Senior Management 21% Percentage of Women in Middle Management 27% Percentage of women received Promotions 28% Percentage of Female New Recruits Female labour turnover 52% 10% 2021 Percentage of Women who returned to work after parental leave and were still employed 12 months after returning to work 94% Proportion of Females who Received a Performance Bonus 32% » , Partnered with Pink Drives (Pvt) Ltd., Sri Lanka’s first and only woman driven taxi service for woman and children to offer a bundled financial service. Supporting the livelihoods of visually impaired women, through donations to the members of the Sri Lanka Welfare Society of the Blind Women. 57 INTEGRATED REPORT 2021
  57. Value to Investors HNB has continued to provide stable and sustainable returns on equity to shareholders , although profitability inevitably moderated during 2019 and 2020 due to the Easter terror attacks and the pandemic. In 2021, we have improved ROE to 12%, as we strategised to regain the momentum while ensuring readiness for the next era of banking and a dynamic business landscape. Total Dividend per Share Rs 9.00 Cash Dividend per Share Rs 6.50 Net Book Value per Share Rs 335.93 Earning per Share Rs Enhance Value Valuation Nurturing the value of the share price through performance, liquidity and sound governance Rs 400 350 300 250 200 150 100 50 0 Market Capitalisation Rs 70 Bn Net Book Value Rs 36.18 177 Bn 2017 2018 2019 2020 2021 Net Book Value Per share Market Value Per share Returns Dividends Rs % 9 8 7 6 5 4 3 2 1 0 7 6 5 4 3 2 1 0 2017 2018 2019 Scrip Dividend Cash Dividend 58 HATTON NATIONAL BANK PLC 2020 2021 Dividend Yield Market Price (Rs) Earnings per Share (Rs) Price Earnings (Times) Net Book Value per Share (Rs) 2021 2020 135.00 126.50 36.18 24.90 3.7 5.1 335.93 293.30 Price to Book Value (Times) 0.40 0.43 Cash Dividend per Share (Rs) 6.50 4.50 Scrip Dividend per Share (Rs) 2.50 3.50 Cash Dividend Yield (%) 4.8 3.6 Total Dividend Yield (%) 6.7 6.3
  58. Group PAT Profitability Delivering sustainable returns to shareholders Rs 25 40 35 30 25 20 15 10 5 0 20 Profit After Tax Rs Rs Bn 20 Bn 15 10 5 0 2017 2018 2019 Group PAT 2020 2021 Average Equity Rs Rs Bn Rs Bn 400 200 800 300 150 600 200 100 100 50 1 ,000 400 200 0 0 2017 2018 2019 2020 2021 2017 Return on Risk Weighted Assets % % 20 2.0 15 1.5 2018 2019 2020 2021 Return Risk Weighted Assets 0 2021 0 % 15 10 5 0.5 2020 20 10 1.0 2019 Return on Equity/ Return on Core Capital Core Capital Ratio 2.5 2018 Average Equity Net Assets per share Average Risk Weighted Assets 2017 Bank ROA was 1.31% as at end of 2021 compared to 0.95% in the previous year and Bank ROE was 12.1% compared to 8.77% in 2020. EPS Risk Weighted Assets 0.0 HNB Group recorded a ROA of 1.42% in 2021 compared to 1.06% in 2020 while Group ROE improved to 11.5% from 8.74% in 2020. 5 2017 2018 2019 Core Capital Ratio 2020 2021 0 2017 2018 2019 2020 2021 Return on Equity Return on Core Capital 59 INTEGRATED REPORT 2021
  59. Value Delivered to our Communities We create value for our communities by setting the standards for responsible corporate behaviour and facilitating sustainable long-term socio- economic growth . The pandemic has highlighted the need for resilient economies, communities, organisations and individuals and we remain committed to building this resilience through sustainable economic growth. VALUE DELIVERED Grant funding to MSME sector Rs 20 Mn Renewable Energy projects funded Rs Rs 7.3 Bn CSR Spend 12.3 Mn WASTE MANAGEMENT » Paper Usage 98,154 » Recycled 100% kg » Increased online transactions 133% » No of customers converted to e - statements 183,434 Managing our Environmental Footprint » Online customer migration increased 177% Promoting a Green Economy »1,576 trees »162,689 litres of oil Responsible Corporate Citizen Strategic CSR Our investment in paper recycling translate to the saving of »370,800 kWh of electricity »2,946,006 litres of water »278 cubic meter of landfill »92,700 kg of Co2 of GHG emission (Estimated savings confirmed by our paper recycling partner) Responsible Lending Supporting Rural Economic Growth 60 HATTON NATIONAL BANK PLC
  60. MANAGING OUR ENVIRONMENTAL FOOTPRINT We are committed to reducing our environmental footprint by incorporating sustainable business practices into all aspects of our operations . This commitment is inculcated into our organisational culture through the “Green Pledge”- a promise by every incoming HNB employee to integrate environmentally friendly practices into their daily activities at work and at home. We strive to achieve greater energy efficiency by the gradual solarisation of branches and by investing in energy efficient technology such as LED lighting, energy efficient lifts and invertor air-conditioning. We also closely monitor the usage of key materials such as paper, electronic equipment and computer equipment and strive to ensure responsible consumption and disposal of these materials. Recycling is practiced extensively with contracted third-party recyclers to ensure the safe disposal of e-waste. Whilst the paperless initiative which commenced in 2015 had made steady progress over the years, we experienced a negative impact during the year with total paper consumption increasing by 9 % due to the surge in documentation requirements of moratorium and restructuring of facilities offered to customers impacted by COVID-19. Monitoring and reporting on our performance against sustainability KPIs is an important part of managing our environmental footprint and is systematically done through the CEO’s sustainability dashboard. Progress on key E&S indicators such as carbon footprint, material usage and disposal, supply chain assessments and risks etc are monitored on a quarterly basis and reported to the HNB Sustainability Foundation every two months . A sustainability assurance audit (external) is conducted annually by DNV-GL. There were no instances of non-compliance with environmental laws and/or regulations during the year. PROMOTING A MORE SUSTAINABLE ECONOMY As a key lender to the nation, we are aware of the significant role we can play in promoting a more equitable and sustainable economy for future generations. Rural Sector Growth We continue to drive growth in the rural economy through ongoing support for the MSME sector by addressing key barriers in the sector including access to finance, access to markets and access to technical knowledge. (Refer SME and Microfinance sector reviews). Meanwhile, ongoing awareness and capacity building programmes are carried out for underbanked segments of society with the aim of promoting financial inclusion. During the year, we also entered into an MOU with Gammadda Sri Lanka, the country’s largest rural development movement to develop infrastructure facilities in the Yaya 6 Village, Mahawilachiya, Anuradhapura. ESMS process Check against exclusion list Initial inspection and E&S Risk categorisation into High/Medium and Low risk categories E&S Due diligence process according to the risk category Documentation – E&S reports and E&S loan covenants Monitoring and Follow up through client visits and ongoing engagement ENERGY EFFICIENCY Investment in efficient invertor air conditioning technology Rs 26.5 Mn Energy Mix kWh 20,000,000 15,000,000 10,000,000 50,00,000 0 2018 2019 2020 2021 Energy from Diesel (kWh) Energy from National Grid (kWh) Energy from Solar (kWh) BRANCH SOLARISATION Supporting Rural Economic Growth No of Solarised Branches 95 Solar Generation Capacity 2,637 kWh Capacity Building Towards a Sustainable Economy (17.8% of Total Energy Consumption) Promoting a Green Economy Responsible Lending 61 INTEGRATED REPORT 2021
  61. Value Delivered to our Communities Responsible Lending A comprehensive Environmental and Social Policy together with Environmental and Social Management System (ESMS) ensures that our lending activities and operations are environmentally and socially responsible and compatible with the applicable regulatory environmental and social standards, country regulations as well as globally accepted best practices and standards such as IFC Performance standards and ADB Safeguards as applicable. A total of 83 lending projects were evaluated by the central ESMS unit during the year, out of which three were rejected on the basis that they did not comply with our ESMS standards. As part of our efforts to align the impacts of the Bank’s lending with United Nation’s Sustainable Development Goals, the ESMS unit evaluates the business outcomes in different sectors and identifies the challenges in these sectors due to climate change, negative impacts to the environment and the society. Based on the findings, necessary recommendations are proposed to avoid, minimise, mitigate or offset the negative impacts of specific industries whilst recommending how to respond to the climate related challenges. Promoting a Greener Economy We remain committed to combating climate change by promoting projects and activities that contribute to a greener, more sustainable economy in Sri Lanka. We continue to lead the way in large scale renewable energy financing both locally and overseas whilst promoting sustainable energy options through our “solar energy system” personal loan scheme. Capacity Building We are also actively engaged in educating and supporting our clients and partners to understand the benefits of a more environmentally and socially sustainable operation. Awareness and capacity building workshops are conducted for targeted groups periodically in addition to regular engagement with suppliers and customers. 62 HATTON NATIONAL BANK PLC Reflecting our industry leadership position in E&S Management, the Bank’s E&S Coordinator was invited to conduct training programmes on E&S Risk Management by the Centre for Banking Studies of the Central Bank of Sri Lanka for the staff of banks handling credit evaluations and four such programmes have been completed during 2021. No. of staff trained on ESMS 22* No. of projects evaluated by ESMS unit 83 (*No of physical training) RESPONSIBLE SOURCING Projects Evaluvated By ESMS Unit No. 120 No. 5 100 4 80 ESMS CAPACITY BUILDING No. of suppliers screened using environmental and social criteria 69 3 60 2 40 1 20 0 2019 2020 2021 0 Projects evaluvated Projects rejected Energy Consumption Renewable Energy Portfolio kWh 20,000,000 Rs Bn 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 15,000,000 10,000,000 5,000,000 0 2018 2019 2020 2021 2017 Energy Consumption (kWh) 2019 2020 2021 Renewable Energy Portfolio by Capacity Paper Usage and Disposed Kg 250000 Mw Waste 200000 Biomass 150000 Solar 100000 Wind 50000 Hydro 0 2018 Lending for Renewable Energy 2019 2020 Paper Used (kg) Paper Disposed (Kg) 2021 0 10 2019 20 30 40 2020 50 60 70 2021 80 Mw
  62. “HNB Tn fjkqfjka wms” MICROFINANCE GRANT PROJECT “HNB Tn fjkqfjka wms” is an initiative launched by the HNB Sustainability Foundation in 2020 during the first wave of COVID-19 pandemic in the country. It exhibits a way of playing a supporting role during a global and national crisis to ensure the safety of the society we operate in. The project espouses HNB’s philosophy “Partner in Progress’ and aims at business revival amidst the pandemic. This was also the time in which the value of engaging social sustainability into every aspect of organisational strategy in a manner that serves the needs of the many, is recognised unreservedly. Bank provided Rs 20 Mn as a grant fund to support 200 microfinance customers affected by the ongoing COVID-19 pandemic across the country. The Bank incorporated from role of lender to benefactor in a landmark shift to support grass root level entrepreneur sustainability. MF Grant Sector Distribution 12% 2% 3% 26% 4% 4% 4% 10% 1% 11% 15% 8% Agriculture Construction Dairy and Poultry Fishery Food Processing Furniture and Other Manufacturing Garment Manufacturing Groceries shop Handicraft Restaurant Retail & Trading Services 63 INTEGRATED REPORT 2021
  63. Value Delivered to our Communities HNB ’S ‘HNB Tn fjkqfjka wms‘ INITIATIVE STRIVES TO ASSIST NATIONAL HEALTH SERVICE COMBAT COVID- 19 The Bank has donated large amounts of medical and protective equipment, in an effort to save lives of COVID-19 patients and health workers across the country, with its timely ‘Tn fjkqfjka wms’ initiative. One of the key donations made under the initiative was the provision of a state-ofthe-art ultrasound scanning machine, to facilitate the diagnosis of serious conditions arising from COVID-19 and other infectious diseases, to the National Institute of Infectious Diseases Hospital (IDH). The ‘Tn fjkqfjka wms’ initiative, funded by the generous contribution of a day’s pay by HNB’s staff members and a matching contribution by the Bank, also provided much-needed equipment to several other key hospitals. This is part of HNB Sustainability Foundation’s focus on assisting healthcare services to combat the pandemic. Through "the HNB Tn fjkqfjka wms‘" initiative, HNB employees donated medical equipment, to 39 Hospitals and MOH offices. CONTRIBUTION TO UNITED NATION’S SUSTAINABILITY DEVELOPMENT GOALS Distribution of Funding by SDG As a key lender to the nation, our lending activities contribute to the achievement of several of the United Nations Sustainable Development Goals. Rs Bn 120 100 80 60 40 20 0 UN SDG GOAL 64 HATTON NATIONAL BANK PLC
  64. STRATEGIC CSR HNB ’s Sustainability Foundation was established in 2009 to drive the Bank’s corporate citizenship agenda. Accordingly, the Foundation undertakes CSR projects in the key areas of education, healthcare, community, economic empowerment and the environment which also contribute to several of the United Nations Sustainable Development Goals. Key programmes carried out during the year are as follows, Grant Funding for MSME’s The HNB Sustainability Foundation established a Rs 20 Mn grant fund in 9 regions to support 200 microfinance customers affected by the ongoing COVID -19 pandemic. Lending for paddy cultivation in poverty provinces Income generation to the farmers and employment generation in poverty province through our lending for paddy cultivation in 2021 Northern Eastern Uva Gross Income (Rs Mn) Employment Generation (Man days)* 602 1,830 164 54,420 165,580 14,820 *Hired Labour » Total lending to Micro Finance sector Rs 29.1 Bn End poverty in all its forms everywhere Total Lending for poverty provinces in 2021 The Bank donated 300 dry ration packs and 300 white canes to Sri Lanka Welfare Society of the Blind Womens and the special event was hosted at HNB Towers. Funds were gathered through voluntary contributions from the Bank employees and sales of scrip dividend income utilised towards this initiative Eastern Rs 15,370 Mn Northern Rs 19,593 Mn Uva Rs 11,186 Mn ADB Funded credit lines During the year 2021, we have provided financial grants to our MSME clients through the following ADB funded credit components. » SMELoC (Small & Medium Enterprises Line of Credit) – We-Fi grant (only for women entrepreneurs - ownership 100% or above 51%) Rs 15.575 Mn » SMELoC – Tea component – for small holder tea planting community (less than 10 acres)- Rs 5.460 Mn Total income and employment generation through our lending for paddy cultivation in 2021 Gross income generation to the farmers. Employment generation Food production from our lending in 2021 Rs 4,797 Mn 434,040 (man days) Assumptions used for the above calculations 1. Paddy cultivation in Sri Lanka under different water management (irrigation and rain-fed) in two seasons (Yala and Maha). (Total cost and other figures considered under irrigation water management (large amount of commercial paddy cultivation occur under the IR) 2. Total cost Including cost of farmer owned inputs 3. For employment generation, only considered hired labour *Used information for calculations Cost per cultivation of one hectare of paddy / Average Yield per hectare Employment Requirements per hectare / Gross return per hectare Sources- Socio Economics and Planning Centre of the Department of Agriculture, Peradeniya Paddy Minor foods* Area cultivated (ha) Production (Mt) 21,702 1,819 114,220 9,095 79,874 Mt of Rice from paddy production. It could produce the equivalent of 272 million meals in 2021, or enough food to provide approximately 746.486 people for a year * Big Onions, Chillies, Potatoes, Red Onions, Cowpea, Green Gram, Ground Nuts, Kurakkan and Maize Used information for calculations Cost per cultivation of one hectare of paddy Average Yield per hectare Cost of cultivation of minor food crops and average yield per hectare Sources- Socio Economics and Planning Centre of the Department of Agriculture, Peradeniya Assumption-Total rice production use only for human consumption Used information for calculations 1 MT rice = 1.43 MT paddy (paddy conversion factor) Source: Central Bank of Sri Lanka Rice per capita consumption / Total Population in Sri Lanka Source: Department of Census and Statistics Sri Lanka 65 INTEGRATED REPORT 2021
  65. Value Delivered to our Communities Medical equipment donations to hospitals Through the “HNB Tn fjkqfjka wms” initiative, HNB employees donated medical equipment to 39 Hospitals and MOH offices. Financial support for cancer patients and families Over 15000 cancer patients and families identified by the Counselling Center at the Apeksha Hospital, Maharagama have been provided financial support through the HNB Sustainability Foundation. This supplement is afforded over a period of 6 months and renewed depending on need. Ensure healthy lives and promote well-being for all at all ages Lending for health care services development projects Rs 18,815 Mn Pharmaceutical and healthcare product manufacturing Rs 2,480 Mn Pharmaceutical imports Rs 1,006 Mn Considering the social impacts, we do not finance for production or trade in alcoholic beverages (excluding beer and wine) and production or trade in tobacco for new customers engaged in these industries. Bank felicitated Sri Lanka paralympic heroes as an inspiration to new generation of athletes Recognising their outstanding performances which included securing Gold and Bronze medals and establishing a new world record, HNB’s Sustainability Foundation felicitated the award-winning athletes, coaches and officials who were part of the delegation. 66 HATTON NATIONAL BANK PLC Supporting healthier lifestyles HNB “Walk the Talk” campaign was re-launched to promote eco friendly commuting amongst staff members. Staff members at HNB Towers were requested to join this campaign by either walking or cycling to work.
  66. Contribution to industry knowledge School uniform drive As part of the Sustainable Banking Initiative , HNB facilitated the e-learning module of sustainable banking on the SLBA Website. The drive sought to encourage underprivileged children from rural areas to continue their schooling amidst financial difficulties through the provision of uniforms. Quality education Nenapubuduwa initiative Recognizing the powerful ability of books and libraries to enrich and empower the lives of school children, HNB continued its groundbreaking work expanding the ‘NenaPubuduwa’ programme with over 200 Nenapubuduwa school libraries island-wide. » Facilitated SLBA Website for e-Learning for employees on sustainable banking » Total lending to quality education Rs 9.1 Bn Lending for Quality Education 12% 7% 81% Development of primary and secondary education Development of tertiary education Other education developments activities Ensure access to affordable, reliable sustainable and modern energy for all Personal loan scheme to install solar panels on houses- 181 Ensure availability and sustainable management of water and sanitation for all Financing for drinking water supply projects in the country. In 2021, Rs 16,034 Mn disbursed to construction of water supply projects. No. of Beneficiaries of Water Supply Projects Financed by the Bank Investment of sustainable energy projects We have financed sustainable energy projects with installed capacity of 61.1MW hydro power, 30.2 MW of wind power and 43 MW of solar power as at end 2021 No of Benificiries 36% 9% 14% Monaragala - Buttala Integrated Water Supply project  1% Anamaduwa Integrated Water Supply Project                Laggala New Town Water Supply Project                            Greater Matale Water Supply Project                        26% 14% Kelani Right Bank Water Treatment Plant Phase II        Amapara Water Supply Project                                              67 INTEGRATED REPORT 2021
  67. Value Delivered to our Communities Promote sustained , inclusive and sustainable economic growth full and productive employment and decent work for all Employee wages and benefits Rs 10.7 Bn Interest on deposits / debentures Rs 49 Bn Financing to main export crops Financing Export of Production Amount (Rs Mn) of Lending for Production Production from Lending 11,889 3,026 3,539 24,576 Mt 165 No Mn nuts 11,917Mt Tea Coconut Rubber Dividend payments Rs 3.4 Bn Paid to the government as Taxation Rs 10.7 Bn Tea: Used information for calculations, Total cost of production per one kg of tea (Sources: Sri Lanka Tea Board ) Coconut: Used information for calculations ,Total cost of production per one nut (Sources: Coconut Development Authority) Rubber: Used information for calculations ,Total cost of production per one kg rubber (Sources: Sri Lanka Rubber research institute) 12% 1% 3% 3% 1% 1% 1% 3% 1% 15% 18% 1% 7% 18% 15% Lending to minor export crops production Rs 165 Mn Lending to tourism sector development Rs 59,876 Mn Gems Diamonds Handicrafts Mineral Ceramic products Leather Products Garments and Fabrics Food Items Tea Coconut Rubber Minor export crops Fish and marine products Unprocessed Agricultural Products Other Make cities and human settlements inclusive, safe, resilient and sustainable - Value of Rs 16, 734 Mn Housing loans and Rs 4,619 Mn for residential property development. - Improve passenger transport- Rs 549 Mn Our Network Over 252 customer contact points are spread out across the island giving wide spread access to financial services. Infrastructure facilities for underserved communities The Bank signed a Memorandum of Understanding with The Capital Maharaja Groups initiative Gammadda Sri Lanka, the country’s largest rural development movement to develop infrastructure facilities of the Yaya 6 village Mahawilachchiya, in the Anuradhapura District. Bank has funded for: Road Development Projects Rs 28, 523 Mn Telecommunication sector development Rs 1,557 Mn Development of Information Technology and Communication sector Rs 9,613 Mn 68 HATTON NATIONAL BANK PLC Promote peaceful and inclusive societies Protect, restore and promote sustainable use of terrestrial ecosystems We do not provide financial support for the production or activities involving harmful or exploitative forms of forced labour or harmful child labour. HNB does not finance commercial logging operations for use in primary tropical moist forest, production or trade in wood or other forestry products other than from sustainably managed forests and trade in wildlife or wildlife products regulated under CITES
  68. Protecting marine life Measuring our impact HNB Tn fjkqfjka wms ” initiative, donated Personal Protective Equipment (PPE) to Clean Ocean Force Lanka, as part of our efforts to reduce plastic pollution in beaches and waterways. Continuing our commitment to the HNB Green Pledge, the Bank introduced Smart Carbon Calculator (SCC) system across the Bank including all branches to accurately quantify our usage of energy, resource consumption and carbon footprint. This system allows us to better understand our impact / contribution to climate change, identify where emissions are created, and understand which areas the Bank needs to address to reduce emissions. As per the bank environment policy we don’t finance illegal fishing methods such as “Drift net fishing in the marine environment using nets in excess of 2.5 km. in length” to ensure the sustainable use of marine resources. Habitat Protection The HNB Sustainability Foundation has undertaken to protect the catchment of Thundola (Galle) a conducive habitat for aquatic species. A robust ESMS policy 83 projects were evaluated for social and environmental criteria in line with the Bank’s ESMS Policy to ensure there was no adverse impact on the environment. Meanwhile, we regularly review our restrictive sectors to ensure socially responsible lending. Kanneliya conservation project The Kanneliya Conservation Project initiated to develop a biodiversity credit accrual system for Sri Lanka continued during the year in partnership with Biodiversity Sri Lanka and in partnership with the Forest Department and IUCN Sri Lanka. In the past, we have only considered emissions attributed to electricity and diesel consumption. Standardization of the assessment and the inclusion of many additional sources have drastically increased the emissions attributed to the Bank. ISO 14064 CERTIFICATE The Bank’s carbon footprint for 2021 has been accounted as 9,592 tCO2e by Climate Smart Initiatives (Pvt) in accordance with the ISO 14064-1-2018 standard. A total of nine emission sources1 covering both direct and indirect emission sources of the Bank were considered for this analysis. Further, the Sri Lanka Climate Fund operating under the Ministry of Environment performed an independent third-party verification in accordance with the ISO 14064- 3-2018 guidelines and awarded the prestigious ISO 14064 certificate to the Bank. 69 INTEGRATED REPORT 2021
  69. Board of Directors MRS ARUNI GOONETILLEKE Chairperson (Non-Executive/Independent) MR JONATHAN ALLES Managing Director/Chief Executive Officer (Executive Director) MR DEVAKA COORAY Director (Non-Executive/Independent) MR DILSHAN RODRIGO Chief Operating Officer (Executive Director) MR OSMAN CHANDRAWANSA Director (Non-Executive/Independent) DR PRASAD SAMARASINGHE Alternate Director to Mr Damien Fernando – Director (Non-Executive/Non-Independent) MRS K A L THUSHARI RANAWEERA Company Secretary 70 HATTON NATIONAL BANK PLC
  70. MR AMAL CABRAAL Director (Non-Executive/Independent) MR DAMIEN FERNANDO Director (Non-Executive/Non-Independent) MR PRAWIRA RIMOE SALDIN Director (Non-Executive/Non-Independent) MR NIHAL JAYAWARDENE Director (Non-Executive/Non-Independent) MR MADU RATNAYAKE Director (Non-Executive/Independent) 71 INTEGRATED REPORT 2021
  71. Board of Directors ARUNI GOONETILLEKE JONATHAN ALLES Appointed Director : April 2021 Chairperson: September 2021 Appointed: July 2013 Executive Director Appointed: May 2013 Skills & Experience: Skills & Experience: Aruni Goonetilleke is a financial services expert with over twenty-five years of experience in regional financial markets. She has extensive experience in enterprise risk management, credit, audit and business origination and has held leadership positions in local and international Banks. An experienced banker counting over 35 years of Banking experience, having served in several international Banks including the National Bank of Abu-Dhabi, Saudi British Bank-Riyadh, British Bank of the Middle-East and HSBC, Dubai and Colombo, before taking on the reins at HNB. Holds an MBA from the University of Stirling, UK and is an Associate of the Institute of Bankers of Sri Lanka. Chairperson She has a Master of Laws from Harvard Law School, USA and a Bachelor of Laws (Honours) from the Faculty of Law, University of Colombo. She has been a visiting lecturer in law at the Faculty of Law and lectured in Gender Studies at the Department of Graduate Studies, University of Colombo. She has a special interest in issues relating to Women’s Empowerment, Diversity and Inclusion in the workplace. She was appointed as a Director of the Bank on 1st April 2021 and was appointed as the Chairperson on 29th September 2021. At the time of her appointed as the Chairperson of the Bank, Mrs Goonetilleke held the Chair of the Board Integrated Risk Management Committee of HNB PLC. Other Current Appointments: She currently holds the positions of NonExecutive / Independent Director of Tea Small Holder Factories PLC, Softlogic Finance PLC, Goodhope Asia Holdings Ltd and Eswaran Brothers Exports Pvt Limited. Previous appointments Her last role was Head of Corporate Banking at People’s Bank, where she was responsible for a large portfolio of public and private sector clients. Immediately prior to that, she was the Head of Credit for Commercial Banking, at Standard Chartered Bank, Singapore. She has also held the positions of Head of Credit for SME at Standard Chartered Bank, Singapore, Chief Risk Officer, Standard Chartered Bank, Sri Lanka and Global Audit roles in Wholesale and Retail Banking at Standard Chartered Bank. 72 HATTON NATIONAL BANK PLC Managing Director /Chief Executive Officer Other Current Appointments: Mr. Alles is a Director of the Sri Lanka Banks’ Association (SLBA). He is also a Director of the Asian Bankers Association (ABA) and serves as the Chairman of its Advisory Council. He is also a member of Sri Lanka Institute of Directors. Mr Alles is a dynamic Banker and a corporate leader; he has contributed to HNB’s macro development with the Bank now operating through 255 customer centres, using cutting edge technological platforms and enabling a new paradigm in Sri Lanka’s banking culture. Under his leadership, HNB has received recognition from numerous international and local institutions and continues to set new benchmarks in the Sri Lankan banking industry. Previous appointments He served on many Boards within the HNB Group as well as in the Banking Industry. He was the Chairman of Sri Lanka Banks’ Association (Guarantee) Ltd from 2014 to 2016 and in 2018, he was elected Chairman of Asian Bankers Association for the period 2018 to 2021. He also served as the Chairman of Financial Ombudsman Sri Lanka (Guarantee) Ltd, HNB Finance PLC, Acuity Partners (Pvt) Ltd, Lanka Ventures PLC, LVL Energy Fund and Lanka Financial Services Bureau Ltd. He served as the Vice Chairman of Banking, Financial & Insurance Services Group of the Employers’ Federation of Ceylon. Mr Alles was also a Director of Lanka Clear (Pvt) Ltd, HNB Assurance PLC, Sithma Development (Pvt) Ltd, HNB General Insurance Ltd, Acuity Stock Brokers (Pvt) Ltd and Prime Grameen Micro Finance Ltd. He served as a member of the Main Committee of the Ceylon Chamber of Commerce and was also a member of the Advisory Committee of Sri Lanka Business & Biodiversity Platform. AMAL CABRAAL Independent / Non-Executive Director Appointed: April 2014 Skills & Experience: Counts over four decades of business experience predominantly in a multinational corporation with leadership roles in General Management, Marketing and Customer Management in Sri Lanka and overseas. Is an Executive Education Alumnus of INSEAD - France and holds a MBA from the University of Colombo. A Marketer by profession and a Fellow of the Chartered Institute of Marketing - U.K. Other Current Appointments: Mr. Cabraal is the Chairman of Ceylon Beverage Holdings PLC and Lion Brewery (Ceylon) PLC and also the Chairman of Sunshine Holdings PLC, Silvermill Investment Holdings and CIC Feeds Group of Companies. He is also a Non-Executive Director of John Keells Holdings PLC and serves as a business advisor to a number of companies. He is a member of the Board of the Ceylon Chamber of Commerce and serves on the Management Committee of the Mercantile Services Provident Society. Previous Appointments: Chairman and CEO of Unilever Sri Lanka. DAMIEN FERNANDO Non Independent / Non-Executive Director Appointed : October 2018 Skills & Experience: Mr Fernando is a Fellow of the Chartered Institute of Management Accountants of United Kingdom and was awarded a Masters Degree in Business Administration from Postgraduate Institute of Management, University of Sri Jayawardenapura in 1992. Other Current Appointments: Mr. Fernando is a Director of Addison (Pvt) Ltd, HealthCey (Pvt) Ltd, HNB Assurance
  72. PLC and HNB General Insurance Ltd . He has held Board and other positions in several sectors including Finance, Life & General Insurance, Assets Management & Unit Trusts, Management of healthcare, food & beverages, manufacturing and in retail. Previous Appointments: Mr Fernando served as a Non-Executive Director in the HNB Board from April 2012 to March 2017. He has also served as the Executive Director of Sri Lanka Insurance Corporation Ltd from year 2003 – 2009. He was a Director of Distilleries Co. of Sri Lanka PLC from February 2006 – December 2008. Mr Fernando also served in the Director boards of Lanka Hospitals Corp. PLC (Sept.2006 – June 2009 and May 2009 – June 2016), Melstacorp PLC (June 2010 – Dec. 2011), Pelwatte Sugar PLC (April 2011 – Nov. 2011) and National Asset Management Ltd (Sept.2007 – April 2010). MADU RATNAYAKE Independent/Non-Executive Director Appointed : October 2018 Skills & Experience: A Chartered Engineer, he holds a MBA from the Postgraduate Institute of Management (Sri Jayawardenapura), a First Class Honours Degree in Software Engineering from City University in London and Dip.in Computer System Design (NIBM) Sri Lanka Has over 20 years’ experience in IT, digital transformation, project and service delivery. He has experience in large scale business transformation program design and execution, driving corporate innovation, cyber security, solution architecture, customer support, consultancy and general management in UK, USA, Australia, India and Sri Lanka. He has delivered multi-million dollar projects to Fortune 1000 companies with geographically spread software teams. Other Current Appointments: Mr Ratnayake is the Co-Founder and Chairman of Scybers (Pvt) Ltd, a global cybersecurity consulting and managed services company, an Independent/Non-Executive Director of Sri Lanka CERT (Pvt) Ltd, National Cybersecurity Agency, Director of Information Communication Technology Agency (ICTA), the National Agency for Digital Government and Director of HSenid Business Solutions (Pvt) Ltd, first listed software technology company in Sri Lanka. He is also the Founder Director and former Chairman of Sri Lanka Association for Software and Services Companies (SLASSCOM), the industry body for IT and BPM in Sri Lanka and the Chairman of Sarvodaya Fusion, the ICT4D arm of Sarvodaya, the largest NGO in Sri Lanka; He represents the IT industry on the boards of several leading universities / institutions. Previous Appointments: Mr. Ratnayake was the Executive Vice President / Global CIO and the Center Head for Virtusa Sri Lanka. He had also served as a Director of Sanasa Development Bank from December 2014 to January 2016 and Sri Lanka Institute of Information Technology. DEVAKA COORAY Independent/Non-Executive Director Appointed: July 2020 Skills & Experience: Mr Cooray is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka and the Chartered Institute of Management Accountants of the United Kingdom. Other Current Appointments: Mr. Cooray is the Chairman of United Motors PLC and its subsidiaries. He is also the Managing Director of Management Systems (Pvt) Ltd and its subsidiaries. He serves as Director of Life Insurance Corporation (Lanka) Ltd, HVA Foods PLC and JAT Holdings PLC. Previous Appointments: He has worked with Ernst & Young for over 40 years of which 30 years was as a Senior Assurance and Talent Partner. He functioned as the Deputy Managing Partner from 2016 to 2019 and served as a member of Ernst & Young’s Management Committee from the time the Management Committee was established in 1998 until his retirement in 2019. He was instrumental in establishing the Ernst & Young Practice in the Republic of Maldives in 1995 and functioned as the Partner responsible for the overall management of the Maldivian Practice from its inception. He represented Sri Lanka and Maldives for a number of years in the EY ASEAN Regional Partner Forum. He was seconded to EY USA for a year, where practical experience was gained by being part of assurance teams that performed audit engagements on several large enterprises. Mr. Cooray also spearheaded the Ernst and Young Sri Lanka/ Maldives Family Business Centre for Excellence which was instrumental in sending several eminent second generation family members to business schools worldwide. He has also served as a member of the Council of the Chartered Institute of Management Accountants UK. DILSHAN RODRIGO Executive Director / Chief Operating Officer Appointed : July 2020 Skills & Experience: Mr. Rodrigo possesses over two decades in banking experience and is the Executive Director / Chief Operating Officer of Hatton National Bank PLC. He provides administrative leadership to Finance, Credit, Operations, Risk Management, Banking Services, Compliance and Internal Audit functions. He is overseeing the cross functional teams involved in improving governance and compliance by serving in several Board and Management committees in the Bank. Mr. Rodrigo holds a MBA from Cranfied University UK, FCMA UK and FCCA UK. He has played a catalyst role in the bank’s transformation and cultural change by being the driving force towards centralization, automation, outsourcing and process improvement initiatives and is recognised for driving a performance culture through training, talent acquisition and introducing several break through cost optimization initiatives. Other Current Appointments: Mr Rodrigo has held many senior positions in multiple industries ranging from banking, insurance, investment banking and apparel. He presently functions as Chairman of HNB Finance PLC and holds Directorships in HNB Assurance PLC, Guardian Acquity Assets 73 INTEGRATED REPORT 2021
  73. Board of Directors Management Limited , Lanka Financial Services Bureau and Credit Information Bureau. Mr Rodrigo serves on the councils of the Sri Lanka Institute of Directors (SLID) and was the Chairman Policy Advocacy Committee of Asian Bankers Association (Taiwan) during 2011/12 and 2019/20. Previous Appointments: He has served as a lecturer and examiner on various undergraduate and postgraduate programs (CIMA, ACCA, PIM and University of Wales MBA programs) and is a Guest Lecturer for SLID, Director Certification Program. He has presented various technical papers in various forums locally and overseas on Strategy, Business Transformation and Risk Management. Mr. Rodrigo has also served on local governing councils of CIMA, APB, ACCA and Risk Professional Forum and in the latter two as President. OSMAN CHANDRAWANSA Independent / Non-Executive Director Appointed: April 2021 Skills & Experience: Mr Chandrawansa served as the Controller of Exchange in Central Bank of Sri Lanka from 2009 to 2014 till his retirement. He holds a Master of Science degree in Banking and Finance and a postgraduate Diploma in Money and Banking from the University of Birmingham U K. Mr Chandrawansa has published papers on Foreign Exchange Forward Market in Sri Lanka and Measures for Development, Feasibility of Inflation Targeting in Sri Lanka and empirical studies of the exchange rate volatility after the floatation of the Rupee and its implications for the Economy. He has contributed his knowledge in the capacity of a member of the Central Banks’ Financial Stability Committee, Study Team on Inflation Targeting for Sri Lanka and Annual Reports Perpetration Committee from time to time. He is a regular writer to the weekly papers published in the Island as well. Previous Appointments: Mr Chandrawansa had a long term service in the Central Bank starting from the year 1975. During his tenure he has held the positions in the Central Banks’ EPF Department, Matara 74 HATTON NATIONAL BANK PLC Regional Office, International Operations Department, Economic Research Department as a Senior Economist, Domestic Operations Department, Financial System Stability Department, Department of Supervision on Non-Bank financial institutions and the Exchange Control Department. He had received extensive training in banking & finance both internationally and locally. Mr Chandrawansa also served in the Ex-officio office of the National Gem & Jewellery Authority as a Director ex-officio from August 2009 to September 2014. PRAWIRA RIMOE SALDIN Non Independent / Non-Executive Director Appointed: April 2021 Skills & Experience: Appointed as a Director in April 2021. He is a fellow of the Institute of Chartered Accountants of Sri Lanka, an associate of Institute of Chartered Accountants of England and Wales, a fellow of the Chartered Institute of Management Accountants of London and a Certified Management Accountant, Australia. Mr Saldin has over 30 years of experience in Finance, Operations and General Management. Prior to being appointed to the Board of Directors of Hatton National Bank PLC, Mr Saldin functioned as Alternate Director to Mr R S Captain from 26th July 2018 to 2nd April 2021. Other Current Appointments: He is presently the Director/CEO of Polypak Secco Ltd, a Director of Paints & General Industries Ltd and Polytex Properties and Investments Ltd. He is also the Chairman of Chemanex PLC and a Director of CIC Holdings PLC and serves on the Board of Directors of a number of companies in the CIC Group. Mr. Saldin is an alumni of the Asia Institute of Management. Previous Appointments: Mr. Saldin has served as the Commercial Director and Group Finance Director of CIC Holdings PLC for the period 1995-2005. He was the Country Controller & Group Finance Director for Shell Sri Lanka for the period 2005-2010 and also the Group Chief Operating Officer, Browns Group of Companies PLC and the Managing Director of Browns Investments PLC from 2010-2014. NIHAL JAYAWARDENE PC Non- Independent / Non-Executive Director Appointed: August 2021 Skills & Experience: Mr Jayawardene joined the Bar in 1983. He has his career experience as an officer of the Attorney General’s Department of Sri Lanka in excess of 20 years, Senior Lecturer of Sri Lanka Law College and Legal Consultant and Board Member in numerous Institutions. He is an Attorney at Law of the Supreme Court of Sri Lanka and Solicitor of the Supreme Court of England & Wales. Mr. Jayawardene has actively contributed towards many law reform initiatives which took place in Sri Lanka in the field of Civil Aviation, Company Law, and has extensive experience in Public Enterprises reforms programmes carried out in the areas of Insurance, Telecommunication, Aviation, Port & Shipping and Plantation sectors. In recognition of the immense contribution made to the Legal Profession as an eminent senior counsel in Corporate, Commercial, Aviation and Public Law, he was appointed as a President’s Counsel in the year 2012. Mr Jayawardene also played a leading role in the process of drafting the Colombo Port City Economic Commissions Act. Other Current Appointments: He is presently the Chairman of Company Law Advisory Commission and a Member of the Board of Civil Aviation Authority of Sri Lanka. He is also a member of Board of Governors in Asian Institute of Business and Science (AIBS) and the in-house Counsel of Capital City Law. Previous Appointments: Mr. Jayawardena has served as the founder Chairman of Lanka Sathosa Limited and a Director of Hotel Developers Lanka Limited from 2004 to 2015, a Director of Milco (Pvt)
  74. Ltd from 2005 -2008 and he also served as a Director of People ’s Leasing and Finance PLC. DR PRASAD SAMARASINGHE Alternate Director to Mr Damien Fernando – Director, HNB PLC Appointed: July 2019 Skills & Experience: Appointed as alternate Director in July 2019. Dr Prasad Samarasinghe holds a Doctorate in Telecommunications bestowed upon him by Australian National University of Canberra. He achieved Master of Engineering and Bachelor of Science in Electronics and Telecommunications with a First Class from University of Moratuwa. In addition, Dr Samarasinghe is a Licentiate of Part I and Part II of Institute of Chartered Accountants of Sri Lanka and the recipient of Best Achiever Status from the Institute in Financial Accounting, Business Mathematics Statistics and Data Processing in the year 1991. Other Current Appointments: Dr Samarasinghe is the Managing Director/ Director of Lanka Bell (Pvt) Ltd from July 2005 and also the Managing Director of Telecom Frontier (Pvt) Ltd and Bell Solutions (Pvt) Ltd from September 2008. Dr Samarasinghe is also a Director of Hayleys Fibre PLC, serving in its Board from September 2017, Director of DCSL Brewery (Pvt) Ltd and Techno Park Development Co (Pvt) Ltd. Dr Samarasinghe represents Mr Damien Fernando on the Boards of HNB Assurance PLC and HNB General Insurance Ltd, as his alternate Director. the Commercial Bank of Ceylon and served as Manager/Communications Engineer till January 2001, Chief Manager IT from 2001 to May 2002, prior to becoming the Head of IT in May 2002 till September 2003. He was the Deputy General Manager (ICT) of Sri Lanka Insurance from 2003 to July 2005. Dr Samarasinghe had been a Director – E-Channelling (Pvt) Ltd from September 2004 to June 2009 and became the Chief Operating Officer (support services) of Sri Lanka Insurance in July 2005 and served till 2008 March. He was the Managing Director of Bellvantage (Pvt) Ltd from September 2008 to December 2011. THUSHARI RANAWEERA (MRS) Company Secretary Appointed: January 2012 Skills & Experience: She is an Attorney-at-Law and counts over 30 years of experience in Banking. Mrs Ranaweera holds a Master’s Degree in Law (LLM) – University of Cambridge, U.K. and a Diploma in International Affairs – Bandaranaike Centre for International Studies, Sri Lanka. Other Current Appointments: Deputy General Manager - Legal of HNB, a Director of Acuity Stock Brokers (Pvt) Limited, Vice President of Sri Lanka Bank Company Secretaries Association. Previous Appointments: Member of Board of Governors of Sri Lanka National Arbitration Centre (2012-2017) and was a Council Member of Association of Professional Bankers of Sri Lanka (APB). He is holds professional membership as a Board Director of TRACE, ICTSC and is the Chairman of FITIS. Previous Appointments: Dr Samarasinghe was a Director of LK Domain Registry (2017 – 2019), a council member of CSSL (2015 -2016), and a General council member of SLASSCOM from 2015 – 2016. Dr Samarasinghe held the position as the Systems Engineer (Data Communications) at Electroteks (Pvt) Ltd from September 1996 to June 1998. Thereafter, he joined 75 INTEGRATED REPORT 2021
  75. Corporate Management JONATHAN ALLES DILSHAN RODRIGO THUSHARI RANAWEERA M .B.A. - Finance (Stirling), A.I.B. (Sri Lanka) M.B.A. (Cranfield), F.C.M.A.(UK), C.G.M.A., F.C.C.A. (UK) Attorney at Law, LL.M. (Cambridge), Dip. in Int’l Affairs (BCIS) Managing Director/Chief Executive Officer Executive Director / Chief Operating Officer Deputy General Manager - Legal/Company Secretary RUWAN MANATUNGA CHIRANTHI COORAY NIROSHANA SENEVIRATNE F.C.M.A (UK), C.G.M.A, F.C.A (Sri Lanka) M.B.A. (Wales), S.C.P. SHRM (USA), I.P.M.A. - CP (USA), Chartered MCIPM PhD (Aldersgate), F.C.A., F.I.B., C.P.A., C.I.S.A. (USA) Deputy General Manager – Risk / Chief Risk Officer Deputy General Manager / Chief Human Resource Officer / Chief Transformation Officer Deputy General Manager - Internal Audit / Chief Internal Auditor SANJAY WIJEMANNE DAMITH PALLEWATTE ARJUNA ABEYGUNASEKARA B.Sc. Business & Finance (Mount Saint Mary’s University, USA) M.B.A. (PIM-SJP), BSc. Mgmt. (Hons.) London School of Economics, A.C.M.A (UK), C.G.M.A., FRM. (GARP), A.C.I. M.B.A. (Colombo), B.Sc. (Colombo), A.C.M.A. (UK), C.G.M.A., A.C.I. Deputy General Manager - Wholesale Banking Group Deputy General Manager - Treasury & Markets NIROSH PERERA TYRONE HANNAN M.B.A. (Manipal), Dip. in Marketing - L.B.S. (Sri Lanka) M.B.A (Australia) Deputy General Manager / Chief Credit Officer Head of Custody and Trustee Services Deputy General Manager - Retail Banking Group 76 HATTON NATIONAL BANK PLC
  76. ROHAN BUULTJENS RAJIVE DISSANAYAKE Master of Business in Information Technology RMIT University (Australia) C.F.A. (USA), F.C.M.A.(UK), C.G.M.A., B.B.A. (Colombo) Chief Technology & Digital Officer Assistant General Manager / Chief Financial Officer JANATH ILANGANTILEKE HISHAM ALLY M.B.A. (Manipal), B.A. (Hons) - Northumbria (UK), A.I.B. (Sri Lanka), F.C.M.A. (UK), C.G.M.A., C.P.A. (Australia) M.I.M. (Sri Lanka) Assistant General Manager - Compliance Assistant General Manager - Islamic Banking MAJELLA RODRIGO INDRAJITH SENADHIRA A.C.M.A (UK), C.G.M.A., M.B.A. (Colombo), B.Sc. (Colombo) M.B.A. (Sri J.), M.A.L.S. (Colombo), LL.B (Sri Lanka), Attorney-at-Law, Dip in Marketing (S.L.I.D.A.), Dip in Credit Mgmt. (S.L.I.C.M.), A.M.C.I.P.M. Assistant General Manager - Corporate Banking Assistant General Manager – Services DRUVINDA VAIDYAKULARATNE F.B.C.S (UK) VINODH FERNANDO Head of Micro Finance Assistant General Manager – Information Technology / Chief Information Officer 77 INTEGRATED REPORT 2021
  77. Senior Management CHAMMIKA WEERASINGHE M .B.A. (Sri J), M.C.I.M. (UK) SISIRA ATAPATTU Head of Recoveries Head of Digital Business NEIL RASIAH M.B.A. - Finance (USQ, Australia), M.A - Financial Economics (Colombo), B.Sc. (Colombo), A.I.B. (Sri Lanka), Dip. in Int. Trade (IBSL) Regional Credit Head - Colombo Region SAUMYA ARYASINGHA Head of Institutional Solutions KAILAVASAN INDRAVASAN SUPUN DIAS M.B.A. - Finance (Australia), C.M.A. (Australia), A.I.B. (Sri Lanka) M.C.I.M. (UK), M.S.L.I.M, Chartered Marketer, Dip in Marketing (UK) Head of SME Head of Network Management KANCHANA KARUNAGAMA VIJAYA VIDYASAGARA EOMAL MUNASINHA M.B.A. (Sri J), A.I.B. (SL), M.C.I.M. (UK), A.I.C.M. (SL) M.B.A. - Finance (Colombo), A.I.B (Sri Lanka) M.B.A. - Edith Cowan University - Australia Head of Personal Financial Services Deputy Head of Corporate Banking Chief Learning Officer PRIYANTHA SENEVIRATNE PRIYANKA WIJAYARATNE SIVARAJAH NANDAKUMAR A.C.I. M.B.A. (Sri J), A.C.M.A. (UK), C.G.M.A., B.Sc. (Colombo) M.B.A. (Sri J), A.I.B. (Sri Lanka) Chief Manager - Treasury (Corporate Sales) Head of Strategic Planning Head of Operations 78 HATTON NATIONAL BANK PLC
  78. DILUNIKA JAYASINGHE ANURADHI DELAGE SURESH EMMANUEL M .B.A. - Finance (USQ, Australia), F.C.A (Sri Lanka), B.Sc. (Colombo), A.C.S.I. (UK) A.C.A. (Sri Lanka), A.C.M.A (UK), C.G.M.A., B.Sc. Accountancy (Sri J) Chief Manager - Credit Risk Management Head of Finance M.B.A (Cardiff - UK), M.B.C.S. (UK), NCC-IDIC (UK), C.I.S.M (USA), C.I.S.A (USA), C.D.P.S.E. (USA), C.D.P.P, S.I.E.M 101, C.P.C.I.S.I., ITIL LV 3 (USA), ISO 27001 LA, ISO 9001 LA, DISSCA. Chief Information Security Officer THUSITHA EDIRIWEERA MURTAZA NORMANBHOY SAMPATH KUKULEVITHANA M.B.A. (UK), LLB (Sri Lanka), Attorney-at-Law, Notary Public & Commissioner for Oaths, M.C.I.C.M. (UK), F.I.C.M. (Sri Lanka), M.I.M.S.L. F.C.A. (Sri Lanka), F.C.M.A. (Sri Lanka) M.B.A. (Manipal), Dip. in Marketing (UK) Chief Manager - Internal Audit Regional Credit Head - North Western Region SOTHIRATNAM MATHANAN RAJEEV RAJARATNAM SOMASKANDASARMA NARENTHIRAN M.B.A. (Australia), F.A.B.E. (UK) A.I.B. (Sri Lanka) M.B.A. (UK) Chief Manager - Credit Operations Head of IT Project Delivery & Portfolio Management Regional Business Head - Colombo Region VIRANGA GAMAGE SHIROMI HALLOLUWA THANGARAJAH THAYALAN LL.B (Sri Lanka), M.B.A (Colombo), Attorney-at-law Attorney-at-Law & Nortary Public, Company Secretary M.B.A. (Australia), A.I.B. (Sri Lanka), M.A.B.E. Head of Deposits Head of Legal Senior Manager - Foreign Exchange & Money Markets Chief Manager - Legal (Recoveries) 79 INTEGRATED REPORT 2021
  79. Senior Management ROSHANTHA JAYATUNGE DEEPAL UDUKUMBURA ROSHAN FERNANDO A .I.B. (Sri Lanka) M.B.A. (Colombo), B.Sc. Eng (Hons) (Moratuwa), M.I.E.T. (UK) Senior Manager - Training Delivery N. Dip. Technology (Hardy TTI), P.G. Dip Management (Rajarata) Regional Credit Head - North Central Region Director/Chief Operating Officer – Sithma Development (Pvt) Ltd / Senior Manager – Services RUKSHAN SENARATNE SURANGA PEIRIS DAMIAN RANJIT M.B.A. (Malaysia) Senior Manager - Centralized Credit Operations M.B.A. - Finance (USQ, Australia), A.C.M.A. (UK), C.G.M.A., A.I.B. (Sri Lanka) PG. Dip. in Business & Financial Administration (ICASL), A.I.B. (Sri Lanka) Head of Emerging Corporates Regional Credit Head - Greater Colombo Region VINDHYA WIJEGUNAWARDANE PASINDU DHARMASIRI ARUNA SUMANASINGHE M.B.A. (Cardiff Metropolitan University. UK) M.B.C.S. (UK) Head of Customer Experience B.Sc. (Hons.) - IT (London Metropolitan Uni. - UK), M.Sc. (IT) - (Charles Sturt Uni. - Australia) ANGELINA DHARMARAJ UDARA PATHINAYAKE CHAMARA GUNAWARDENA M.B.A. (UK), A.C.S.I. (UK), A.I.B. (Sri Lanka) M.B.A. (Uni. of Preston - USA) PG. Dip in Computer Science (Colombo), B.I.T. (Colombo) Head of Centralized Credit Administration Head of Pawning Head of Application Development & Maintenance 80 HATTON NATIONAL BANK PLC Head of Payment & Cash Management Senior Manager - Application Management
  80. BANDULA MONNEKULAMA UPUL ADIKARI RAJEEV PERERA N .D.T. - Agriculture (HTTI) M.B.A. (UK) Regional Business Head - North Central Region M.B.A. (Sri J.), Chartered Marketer, M.C.I.M. (UK), M.S.L.I.M., P. Mkt (SL) DAPHNE GAMAGE DILANKA DE SILVA SUSITH PERERA M.B.A. (UK) A.C.I.M. (UK) A.I.B. (Sri Lanka) Senior Manager - Inward Remittances/Swift Senior Manager - Head Office Branch Regional Business Head - Uva/Sabaragamuwa Region SIVASARAVANABAWAN SUNTHARESWARAN GAUTHAMI NIRANJAN NILUKA AMARASINGHE C.M.A. (Sri Lanka), M.B.A. (Edith Cowan University - Australia) M.B.A. (Manipal), BSc Hons. (Agriculture) Head of Card Issuance PhD. Management (MSU), M.B.A. (Peradeniya) A.I.B. (Sri Lanka) SIDDIQUE FALEEL AMILA RANASINGHE PRASANNA KUMARA M.B.A. - Finance (USQ, Australia) A.C.M.A. (UK), C.G.M.A. Senior Manager - Retail Recoveries Senior Manager - MI & Analytics A.C.A (Sri Lanka), M.B.A. (Colombo), B.Sc. Accountancy Special (Sri J.) Head of Marketing Head of HR Business Partnering Regional Business Head - North Western Region Head of Leasing Senior Manager - Finance & Regulatory Reporting 81 INTEGRATED REPORT 2021
  81. Senior Management LALINDRA TISSERA ROHANA AMARASIRI M .B.A (Colombo), A.C.M.A. (UK), C.G.M.A., M.C.I.M. (UK), A.I.B. (Sri Lanka) B.Sc. in Physical Science (Sri J), Senior Manager – Rajagiriya Branch UNMEELA EKANAYAKE SHALINDRA KARUNARATNE Regional Credit Head - Southern Region Senior Manager – Service Delivery (ITD) RAJITHA WIJENAYAKE Senior Manager – Legal Operations MICHELLE DE SILVA Senior Manager – Priority Banking (Greenpath Branch) PRASAD TENNAKOON MANOJ PITADENIYA SOHAN FERNANDO M.B.A (Wales, UK), M.B.C.S. (UK), IT Diploma (Tech, SL) A.I.C.A (UK), A.I.C.M (UK), A.I.C.M (Sri Lanka), Diploma In Credit Management M.B.A (Cardiff Metropolitan,UK), Diploma in Finance & Bank Management (IBSL), Diploma in Credit Management (IBSL) Senior Manager – Compliance Senior Manager – City Office VATHULAN GANESHAN Regional Business Head - Greater Colombo Region AJITH KANDARAMAGE Attorney at Law, Notary Public Head of Security & Assurance (ITD) MAHINDA SENEVIRATHNE M.B.A (Cardiff Metropolitan, UK), Diploma in Agri. (SLSA) Regional Business Head – South Western Region 82 HATTON NATIONAL BANK PLC N.D.E.S (Mechanical Engineering) Regional Business Head - Southern Region B.Sc. in Computer Networks & Systems Security (NorthWest, USA), M.B.C.S. (UK) Head of IT Operations
  82. MEWAN GUNAWARDENA VAJIRA ABEYSUNDERA C .F.A. (USA), A.C.M.A (UK), A.C.I. Diploma Senior Manager - FI Trading & Customer Sales A.C.M.A. (UK), C.G.M.A., B.A. (Hons) (Northumbria, UK), Master of Financial Economics (Colombo), A.I.B. (Sri Lanka) VIRAJ MENDIS SHERAN PERERA A.I.B. (Sri Lanka) M.B.A. (UK), A.I.B. (Sri Lanka) Head of Credit Operations Head of HR Operations TISSA NANAYAKKARA Head of Card Operations ROZANNE DE ALMEIDA SHANKAR DHARMARATNE A.I.B. (Sri Lanka) B.Sc in Business Administration - University of Coventry (UK) Head of Trade & Financial Institutions Head of Digital Services Senior Manager - FX Trading & Customer Sales NIMAALI DE MEL SUBRAM PARAMESHWARAN A.I.B. (Sri Lanka) M.B.C.S. (UK) Senior Manager - Outward Remittances Senior Manager - Service Operations Centre V T SAMPANTHER Head of Centralized Credit Monitoring 83 INTEGRATED REPORT 2021
  83. Corporate Governance : Annual Report of the Board of Directors on the Affairs of the Company The Board of Directors of Hatton National Bank PLC (the ‘Bank’ or the ‘Company’) takes pleasure in presenting its Annual Report to the shareholders for the financial year ended 31st December 2021 together with the audited financial statements of the Bank, consolidated financial statements of the Group for the said year and the Auditor’s Report on those financial statements, conforming to the requirements of the Companies Act No 7 of 2007, Banking Act Direction No 11 of 2007 (Corporate Governance for Licensed Commercial Banks and subsequent amendments thereto) and Listing Rules of the Colombo Stock Exchange (‘CSE’). The Report is also guided by the recommended best practices on Corporate Governance. The Annual Report of the Board of Directors on the Affairs of the Company has been expanded to enlarge disclosures on the Bank’s Corporate Governance practices. A more detailed report on Corporate Governance forms part of the suite of reports produced by the Bank and is included as a supplement to the Annual Report. Hatton National Bank PLC is a Licensed Commercial Bank registered under the Banking Act No 30 of 1988 and was incorporated as a public limited liability Company in Sri Lanka on 5th March 1970 under the Companies Ordinance No 51 of 1938. The Bank was re-registered as required under the provisions of the Companies Act No 7 of 2007 on 27th September 2007. The reregistration number of the Bank is PQ 82. The ordinary shares (both voting and nonvoting) and unsecured subordinated/senior redeemable debentures of the Bank are listed on the Colombo Stock Exchange. The Bank has been assigned a National Long-Term Rating of AA- (lka) with a Stable Outlook by Fitch Ratings Lanka Ltd. The registered office and Head Office of the Bank is located at “HNB Towers” No 479, T B Jayah Mawatha, Colombo 10, Sri Lanka. The financial statements were reviewed and approved by the Board of Directors on 18th February 2022. 84 HATTON NATIONAL BANK PLC OUR APPROACH TO CORPORATE GOVERNANCE The Bank aspires to the highest standards of governance, integrity and professionalism. Our Governance Framework is benchmarked to global best practice and references the principles of the Banking Act Direction No.11 of 2007 on Corporate Governance and the Code of Best Practice on Corporate Governance issued by the Institute of Chartered Accountants of Sri Lanka in 2017. Details of compliance are set out on pages 26 to 41 of CG and RR Report, 2021. A ROBUST GOVERNANCE FRAMEWORK Our Governance Framework promotes integrated thinking and decision-making that balances strategic outcomes over time, reconciling the interests of the Bank, stakeholders and society in creating and protecting sustainable shared value. Strong leadership, checks and balances at all levels, a clear organisational structure with welldefined lines of responsibility, effective risk management and controls and a value driven ethical culture, support robust governance structures that provide clear direction for quick and responsive decision-making and promotes responsible behaviour. As the overall custodian of good corporate governance, the Board is fully committed to realising the four Governance Framework outcomes of Sustainable Value Creation, Effective Control, Ethical Leadership and Accountability, as explained on pages 7 to 25 of the CG and RR Report, 2021.
  84. GOVERNANCE STRUCTURE BOARD OF DIRECTORS MANDATORY BOARD SUB-COMMITTEES VOLUNTARY BOARD SUB-COMMITTEES Board Audit Committee Strategy & Investment Review Committee HR & Remuneration Committee Procurement & Assets Disposal Committee Nomination Committee Board Credit Committee Board Integrated Risk Management Committee Board Recoveries Committee Related Party Transactions Review Committee Board Digital Banking Committee Managing Director / CEO Executive Director / COO Chief Internal Auditor Chief Risk Officer Compliance Officer LEADERSHIP The Board of Directors holds ultimate responsibility for the performance and affairs of the Bank. They collectively set the risk appetite of the Bank, lead in formulating the Bank’s strategy, monitor the achievement of objective set and oversee the Bank’s governance frameworks and control environment. The Board has delegated specific oversight responsibilities that warrant greater attention, to ten (10) Board SubCommittees. Of these, five are mandated and are compliant with regulations. Daily management of the Bank and implementation of the Bank’s strategic plan has been delegated to the Executive Management lead by the Managing Director CORPORATE MANAGEMENT TEAM Compliance Committee Asset & Liability Management Committee Strategic Business Committee IT Steering Committee Operational Risk Steering Committee Information Security Committee HR Committee Executive Risk Management & Credit Policy Committee / Chief Executive Officer (MD/CEO). Our Executive Management are empowered to take decisions within the defined framework. Their complementary skills and diverse experience strengthen the Bank’s ability to deliver on strategy. Roles and responsibilities are clearly clarified by mandates and job descriptions, through which authority and responsibility are effectively delegated. The segregation of roles and responsibilities of the Chairperson and MD/CEO supports balance of power. The MD/ CEO reports directly to the Board. Management is open and transparent with the Board and brings to attention any matters of concern in a timeous manner. Executive Directors and the Bank’s Key Management Personnel (KMP) attend Board meetings, increasing contact between the Board and Management. Regular reporting on key matters enables effective oversight by the Board. GOVERNANCE IN 2021 2021 continued to test the rigour, resilience, and agility of our governance structures as we sought to drive sustainable growth for the Bank in alignment with our Vision and Values, carefully balancing interests of our stakeholders. Clearly defined governance structures enabled the Board to maintain ongoing and effective oversight and leadership as the medium to long-term 85 INTEGRATED REPORT 2021
  85. Corporate Governance : Annual Report of the Board of Directors on the Affairs of the Company impacts of the pandemic unfold. The Board received regular updates supported by increased analysis and reporting on key issues affecting the Bank and its stakeholders. Compliance, Risk Management, Recoveries, and Internal Control remained key priorities. The Board, directly and through its subcommittees, considered actions to successfully face challenges, manage crisis and harness opportunities while recalibrating strategy, to protect and create value for the Bank and its stakeholders. In deliberating strategy, the Board adopted an integrated approach to value creation, embracing stakeholder inclusivity while considering the Environmental, Social and Governance (ESG) impacts on the organisation. The Board considered Management updates on stakeholder engagement initiatives undertaken and through reports from Board sub-committees, as fully described in Stakeholder Expectations – page 29 in IR. The annual review of strategy for the year 2022, was conducted by the Board in November 2021, in consultation with the Corporate Management Team, and considered impacts of the pandemic, risk and opportunities in approving the Bank’s business plan and setting revised short, medium and long-term targets. THE BOARD As at 31st December 2021 Non-Executive Independent Directors Mrs. Aruni Goonetilleke Chairperson Mr. Amal Cabraal Mr. Devaka Cooray Mr. Madu Ratnayake Mr. Osman Chandrawansa Non- Executive Non- Independent Directors Mr. Damien Fernando Executive Directors Mr. Jonathan Alles Managing Director / Chief Executive Officer Mr. Dilshan Rodrigo Chief Operating Officer Alternate Director Dr. Prasad Samarasinghe Mr. Rimoe Saldin Mr. Nihal Jayawardene PC The Board is considered to be of appropriate balance and mix of skills and experience. The Boards’ diversity contributes to varied perspectives and objective evaluation of matters set before them. Non-Executive Directors are eminent professionals in their respective fields. Gender diversity improved with the appointment of Mrs. Aruni Goonetilleke to the Board in April 2021. Careful succession planning and deliberate processes ensure that the skills and experience of the Board remain relevant to the Bank’s needs. The Board adopts a Skills Matrix to support director recruitment and succession planning. Directors are appointed through a formal and transparent process, assessed for their independence and approved by the Central Bank of Sri Lanka. The nomination of Directors 86 HATTON NATIONAL BANK PLC has been delegated to the Nomination Committee (NC), which recommends the appointment of new Directors for approval by the Board having reviewed the combined knowledge, experience and diversity of the Board in relation to the Bank’s strategic plans and any gaps thereof. During the year, four new Directors were appointed to the Board to fill vacancies that arose in 2021. The NC spent a considerable amount of time in identifying the most suitable candidates, to build the right team to steer the Bank into the future. New Board members participate in an induction programme aimed at providing them with the information and support needed to be effective. Directors continue to keep abreast of changes in regulations and the business environment by attending seminars, workshops, conferences and formal training programmes to build their capability to guide the Bank through key challenges. The meeting agenda and papers are made available to the Directors generally seven days before the meeting and minutes of the preceding meeting circulated two weeks before the subsequent Board Meeting, allowing members sufficient time to review them, make their observations and be prepared for the forthcoming meeting. The Chairperson sets the Board agenda, assisted by the Company Secretary. Care is taken to ensure that the Board spends sufficient time considering matters critical to the Bank’s success, as well as compliance, risk and administrative matters.
  86. Total Meetings Held 17 8 4 6 10 Mrs Aruni Goonetilleke 01st April 2021 12 /12 *3 2/2 1/1 6/6 Mr Nilanth De Silva (Until his demise on 29th September 2021) 30th April 2015 12/12 5/5 0/1 3/3 Mr Dinesh Weerakkody (Retired w.e.f 30th March 2021) 29th June 2017 5/5 1/1 2/2 01st May 2013 17/17 Mr Jonathan Alles Mr Rusi Captain (Retired w.e.f 2nd April 2021) 02nd April 2012 *4 *4 **6/6 **3/3 Mr Amal Cabraal 01st April 2014 17/17 4/4 Mr Duliksha Soosaipillai (Retired w.e.f 30th March 2021) 30th April 2015 4/4 1/1 Mr Damien Fernando 25th October 2018 **17/17 **4/5 Mr Madu Ratnayake 25th October 2018 17/17 26th September 2019 8/8 Mr Dilshan Rodrigo 01st July 2020 16/17 *8 Mr Devaka Cooray 03rd July 2020 17/17 8/8 Mr Osman Chandrawansa 01st April 2021 12/12 5/5 Mr Rimoe Saldin 30th April 2021 11/11 4/4 17th August 2021 6/6 Dr Harsha Cabral (Resigned w.e.f 05th July 2021) Mr Nihal Jayawardene 3/3 The Bank’s Remuneration Policy supports the motivation and reward of performance of employees while meeting regulatory requirements and stakeholder expectations. Remuneration consists of two components fixed remuneration and variable remuneration including that of an annual performance bonus. Details of Directors’ emoluments and other benefits paid in respect of the Group and the Bank during the financial year ended 31st December 2021 are given in Note 18 to the financial statements in IR page 215. Board Evaluation In line with our commitment to good corporate governance practices, performance evaluations designed to improve the Board’s effectiveness and that of its Committees, are 4 3/3 **4/4 **2/2 **1/1 3/3 2/2 *2,8/8 *9 Board Recoveries Committee Board Credit Committee Procurement & Assets Disposal Committee Strategy & Investment Review Committee Board Digital Banking Committee 29 18/29 10/10 2/2 3/3 **7/7 **11/11 **5/5 4/6 **27/29 29/29 2/2 6/6 *11 *5 *9 6/8 5/5 3/3 7/7 8/9 5/5 *6 2/2 4/4 7/7 6/7 *10 10 7/7 *5 5/5 1/1 5 1/1 *7 1/2 **10/10 1/1 11 2/2 *5 3/3 7 5/5 **1/2 * Meetings attended by invitation | ** Includes Meetings attended by an alternative Director | Remuneration Related Party Transaction Committee Board Integrated Risk Management Committee Nomination Committee HR & Remuneration Committee Board Audit Committee Date of Appointment to the Board Board Member Board Details of Directors’ meetings are given below *14 2/2 *2,7/7 1/2 2/3 1/1 1/1 Chairman/Chairperson as at 31st December 2021 conducted annually. Each member of the Board carries out a self-assessment of his effectiveness as an individual as well as the effectiveness of the Board as a whole. The 2021 appraisal was held in January 2022. The outcome of the appraisal indicated that the performance of the Board met expectations. Areas identified for improvement were communicated to the Board. Directors Interests and Related Party Transactions The Board is committed to the highest standards of professional and ethical conduct. Directors declare their outside business interests on appointment and quarterly thereafter, details of which are recorded in the Directors’ Interests Register, and available for inspection in terms of the Companies Act. Directors have no direct or indirect interest in a contract or a proposed contract with the Bank other than those disclosed on page 114 to 117 in IR. The Related Party Transactions Review Committee considers all transactions that require approval in line with the Bank’s Related Party Transactions Policy and in compliance with the relevant regulations of CSE and Central Bank of Sri Lanka, ensuring transactions are fair and in the best interests of the Bank. Related party transactions are disclosed in Note 60 to the financial statements in IR page 318. 87 INTEGRATED REPORT 2021
  87. Corporate Governance : Annual Report of the Board of Directors on the Affairs of the Company Independence The independence of Non-Executive Directors is reviewed on an annual basis as part of the Directors’ evaluation process. When the Board considers any matters in which a conflict is manifestly evident, Directors withdraw from participating in the meeting and recuse themselves from the particular deliberation and decision. Compliance During the year, the Bank met urgent and rapidly evolving regulatory requirements as the operating environment continued to be increasingly volatile. The Bank remained extra vigilant, expanding the scope and rigour of processes to mitigate emerging threats and ensure compliance. Continued investments in new systems, platforms and processes including the use of advanced analytics and Artificial Intelligence solutions and establishment of a Compliance Audit team, strengthened the compliance function and improved efficacy in prevention, detection, and reporting. The Bank is compliant with all relevant statutory and regulatory requirements, including the Listing Rules of the CSE and directions issued by the Central Bank of Sri Lanka. The Board is also guided in the conduct of business by the Bank’s policies, values, standards and Code of Conduct & Ethics. The Compliance Officer who reports to the Board Integrated Risk Management Committee, tables a report on compliance at the quarterly meetings of the Committee and where necessary, such non-compliant issues are escalated to the Board for necessary action. 88 HATTON NATIONAL BANK PLC The Board comprises five (5) Independent Non-Executive Directors, in compliance with regulatory requirements. However, the Bank remained non-compliant with this provision for a period of forty-three (43) days, following the sudden demise of Mr Nilanth De Silva, Independent Non-Executive Director on 29th September 2021 and until 11th November 2021. The number of Independent Directors on the Bank’s Board fell to three, being less than one third of the total number of Directors. Subsequent to appropriate action being taken by Mrs Aruni Goonetilleke and Mr Amal Cabraal, the Board deemed them “Independent” based on the criteria specified in the Banking Act Direction No.11 of 2007. Consequently, the nature of the directorships of Mrs Goonetilleke and Mr Cabraal were amended to Independent/Non-Executive from Non-Independent/Non-Executive with effect from 12th November 2021 and 16th November 2021, respectively. Risk Governance & Internal Control The Board is responsible for formulating and implementing effective risk management and internal control systems to safeguard shareholder interests and the assets of the Bank, in meeting strategic objectives. These systems cover all controls, including financial, operational and compliance and are monitored and regularly reviewed for effectiveness by the Board. The systems are governed by mandated board and management committees with appropriate expertise and resources and are compliant with statutory and regulatory requirements. The overall risk profile of the Bank increased in the period under review, as the pandemic continued to weigh heavily on the economy and society. In response, the Bank enhanced its risk management capabilities to mitigate exposure as described in the Risk Review on pages 118 to 124. Innovation and Technology Governance The Board is cognizant of the benefits of agility, scalability, and innovation that digital platforms provide. Directors ensure implementation of an effective and properly resourced digital technology strategy that delivers exceptional client and employee experiences and is aligned to the Bank’s overall business strategy. The Board is equally committed to safeguarding the Bank’s information assets and operational systems. Information and Cyber Security risk remains inherently high as a result of the increase in volumes of digital transactions and remote working vulnerabilities amid the pandemic. During the year, governance structures were strengthened, and surveillance and monitoring tools enhanced to meet the Bank’s information and cyber security requirements. Group Corporate Governance The Board seeks to establish a common standard of corporate governance across group subsidiaries. Policies and procedures are aligned to that of the Bank and yet shaped to meet the intrinsic business structure and risks of each entity.
  88. Statutory Disclosures Section 168 of the Companies Act No 7 of 2007 , requires the following information to be published in the Annual Report prepared for the year under review. No. Disclosure requirements Reference to the Companies Act No 7 of 2007 1 The nature of the business of the Bank and Section 168 (1) (a) the Group 2 Financial statements for the accounting period completed and signed in accordance with Section 152 Section 168 (1) (b) Disclosure reference for compliance Page About HNB Group IR 10 - 11 The financial statements of the Group and the Bank for the year ended December 31, 2021 IR 136 - 145 Signed on page IR 139 3 Auditor’s report on the financial statements Section 168 (1) (c) of the Bank and the Group Independent Auditors’ Report IR 130 - 134 4 Any change in accounting policies made during the accounting period Section 168 (1) (d) Note 3.6 to the financial statements - Changes in Accounting Policies and Disclosures IR 157 5 Particulars of entries in the Interests Register made during the accounting period Section 168 (1) (e) Directors’ Interest in Contracts with the Bank IR 114 - 117 Corporate Governance Report - Conflict of Interest, provides details of management of Directors’ Interests CG&RR 22 Remuneration and other benefits of Directors during the accounting period Section 168 (1) (f) Note 18 to the financial statements - Other Expenses IR 215 Corporate Governance Report - Fair and Responsible Remuneration, provides details of the remuneration framework CG&RR 23 7 Total amount of donations made by the Company during the accounting period Section 168 (1) (g) Note 18 to the financial statements - Other Expenses IR 215 8 Names of the persons holding office as Directors of the Company as at the end of the accounting period and the names of any persons who ceased to hold office as Directors of the Company during the accounting period Section 168 (1) (h) Board Profiles IR 72-75 9 Amounts payable by the Company to the person or firm holding office as auditor of the Company as audit fees and as a separate item, fees payable by the Company for other services provided by that person or firm Section 168 (1) (i) Note 18 to the financial statements – Other Expenses IR 215 6 89 INTEGRATED REPORT 2021
  89. Corporate Governance : Annual Report of the Board of Directors on the Affairs of the Company No. Disclosure requirements Reference to the Companies Act No 7 of 2007 10 Section 168 (1) (j) Particulars of any relationship (other than that of auditor) which the auditor has with or any interests which the auditor has in the Company or any of its subsidiaries Disclosure reference for compliance Page The Bank’s auditors during the period under review were Messrs. KPMG, Chartered Accountants. Independence and Objectivity of the External Auditor CG & RR page 19, provides details of the Policy for the Engagement of the External Auditor for Audit and NonAudit services. CG&RR 19 Based on the declaration provided by Messrs. KPMG, and as far as the Directors are aware, the auditors do not have any relationship or interest with the Bank that in our judgement, 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 (CA Sri Lanka), applicable on the date of this Report. A resolution re-appointing Messrs KPMG Sri Lanka as Auditors for the ensuing year and authorising the Directors to fix their remuneration will be proposed at the Annual General Meeting. 11 90 Signed on behalf of the Board by two Directors and the Company Secretary HATTON NATIONAL BANK PLC Section 168 (1) (k) Complied with IR 95
  90. Additional Disclosures The following information is additionally disclosed . The details are provided within notes to the Annual Report, which form an integral part of the Annual Report of the Board of Directors. No. Disclosure requirements Note reference Page 1 Vision, Mission and Corporate Conduct Vision and Mission IR 13 2 Principal Activities About HNB Group IR 10 3 Changes to the Group Structure There were no changes to Group structure during the year, except for the transaction referred in Note 35 (d) - 4 List of Directors of Subsidiaries and Joint Ventures of the Bank as at 31st December 2021 Subsidiaries HNB Assurance PLC Mrs. M. A. R. C. Cooray Mr. D. P. N. Rodrigo Mrs. S. N. Wickramasinghe Dr. S. Selliah Mr. D. R. Abeysuriya Mr. L. U. Damien Fernando Mr. S. A. Chapman Mr. Ashok Goonesekere Dr. T. K. D. A. Prasad Samarasinghe (Alternate Director to Mr. L U D Fernando) The Bank is committed to upholding high standards of business conduct and ethics in the work place at all times, paramount in retaining the trust of our stakeholders. All employees of the Bank abide by the Bank’s Code of Conduct and Ethics, which has been communicated via electronic and visual mediums and been made available in three languages. The Code of Conduct and Ethics for Directors is embodied in the Board Charter. Sithma Development (Pvt) Ltd Mr. P R Saldin Ms. Anuradhi U Delage Mr. U A Roshan Fernando Dr. Rohan Karunaratne HNB Finance PLC Mr. D.P.N Rodrigo Mr. B. M. D. C. Prabhath Mr. P. A. H. D. Wijesundara Mr. A. S. Wijesinha Dr. S. U. H. Fernando Mr. A. G. R. Dissanayake Mr. M. Perera Mr. D. K. G. Perera Mr. R.D. Manatunga Mr. P.L.P Withana Joint Ventures Acuity Partners (Pvt) Ltd Mr. Ray Abeywardena Mr. Thimal Perera Mr. Rajive Dissanayake Mr. Damith Pallewatte Mr. Lalith Withana Mr. Sachith Perera 91 INTEGRATED REPORT 2021
  91. Corporate Governance : Annual Report of the Board of Directors on the Affairs of the Company No. Disclosure requirements Note reference Other Group Companies HNB General Insurance Ltd (Subsidiary of HNB Assurance PLC) Mrs. M. A. R. C. Cooray Mr. M. O. F. Salieh Ms. M. A. Tharmaratnam Mr. L. U. Damien Fernando Mr. M. Sanjay Wijemanne Mr. A. V. Abeygunasekara Mrs. L. Chiranthi Cooray Dr. T. K. D. A Prasad Samarasinghe (Alternate Director to Mr. L U D Fernando Acuity Securities Ltd Mr. Ray Abeywardena Mr. Amal Fernando Mr. Ravi Dassanayake Mr. P G D B Pallewatte Mr. Sachith Perera Mr. A V Abeygunasekara Page Lanka Ventures PLC Mr. P G D B Pallewatte Mr. L H A L Silva Mr. A R Munasinghe Mr. M R Abeywardena Mr. J D N Kekulawala Mr. R A Dassanayaka Mr. A G R Dissanayake Acuity Stockbrokers Ltd Mr. Ray Abeywardena Mr. Prashan Fernando Mr. Thimal Perera Mrs. K A L T Ranaweera Mr. M S Wijemanne LVL Energy Fund PLC (Subsidiary of Lanka Ventures PLC) Mr. P G D B Pallewatte Mr. L H A L Silva Mr. A M Wijetunge Mr. A R Munasinghe Mr. M R Abeywardena Mr. J D N Kekulawala Mr. M M Wijetunge Mr. C Dharmawardena Mr. R A Dassanayaka Mr. A G R Dissanayake 5 6 7 Review of Operations Future Developments Financial Statements Chairperson’s Message IR 16 -19 Managing Director/CEO’s Message IR 20 - 23 Stakeholder Reports IR 44 - 69 Business Line Reviews IR 41 - 43 Chairperson’s Message IR 16 - 19 Managing Director/CEO’s Message IR 20 - 23 Stakeholder Reports IR 44 - 69 Business Line Reviews IR 41 - 43 The financial statements of the Bank and the Group have been prepared in accordance with Sri Lanka Accounting Standards laid down by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and they comply with the requirements of Companies Act No 7 of 2007 and Banking Act No 30 of 1988 (as amended). The financial statements of the Group and the Bank for the year ended December 31, 2021 IR 136 - 145 8 Directors’ Responsibility for Financial Reporting Directors’ Responsibility for Financial Reporting IR 128 - 129 9 Auditors’ Report Independent Auditor’s Report IR 130 - 134 10 Significant Accounting Policies Note 2.1 and 3 to the financial statements - Basis of Preparation and Significant Accounting Policies, respectively IR 147 - 157 92 HATTON NATIONAL BANK PLC
  92. No . Disclosure requirements Note reference Page 11 Going Concern Note 2.1.5 to the financial statements – Going Concern IR 148 12 Income Note 7 to the financial statements – Gross Income IR 201 13 Financial Results and Appropriations Statement of Profit or Loss and Other Comprehensive Income IR 137 Statement of Changes in Equity IR 140 - 143 14 Reserves Statement of Changes in Equity IR 140 - 143 15 Corporate Donations Note 18 to the financial statements - Other Expenses IR 215 The Bank did not make any donations to Government approved charities 16 Taxation Note 21 to the financial statements - Income Tax Expense IR 217 17 Statutory Payments The Directors, to the best of their knowledge and belief, are satisfied that all statutory payments in relation to the Government and the employees have been made up to date. - 18 Dividends on Ordinary Shares Note 23 to the financial statements - Dividends Paid and Proposed IR 221 19 (i) 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 1,211,320,000/- and Rs 1,724,390,000/- respectively. (2020 Bank: Rs 1,397,380,000/and Group: Rs 1,639,389,000/- Details are given in Note 36, 37 and 39 to the financial statements. IR 264 - 288 (ii) Capital commitments Capital expenditure approved and contracted for and approved and not contracted for, as at IR 317 balance sheet date are given in Note 59 (b) to the financial statements – Capital commitments. 20 Property, Plant and Equipment Note 37 to the financial statements - Property, Plant and Equipment IR 270 - 281 21 Net Book Value of Freehold Properties Note 37 to the financial statements - Property, Plant and Equipment. IR 270 - 281 22 Outstanding Litigation In the opinion of the Directors and the Bank’s Lawyers, pending litigation against the Bank disclosed in Note 59 (c) of the financial statements, will not have a material impact on the financial position of the Bank or its future operations. IR 317 Notes 59 (c) to the financial statements - Litigation against the Bank 23 Events after the Reporting Date Note 64 to the financial statements - Events Occurring After the Reporting Period IR 330 24 Stated Capital and Debentures Notes 54 and 52 to the financial statements – Stated Capital and Subordinated Term Debts, respectively IR 311 and 302 25 Share Information Investor Relations 339 - 350 26 Shareholdings Investor Relations 339 - 350 27 Equitable Treatment to Shareholders The Bank has at all times ensured that all shareholders (both voting and non-voting) are treated equitably except for the right to vote. - 28 Register of Directors and Secretaries As required under Section 223 (1) of the Companies Act No 7 of 2007, the Bank maintains a Register of Directors and Secretaries which contains the name, surname, former name (if any), residential address, business, occupation, dates of appointment and dates of resignation (if applicable) of each Director and the Secretary. - 93 INTEGRATED REPORT 2021
  93. Corporate Governance : Annual Report of the Board of Directors on the Affairs of the Company No. Disclosure requirements 29 Directors’ Interests in the Ordinary Shares (Voting and Non-Voting) Note reference Name Page As at 31st December 2021 No of Shares Mr Dinesh Weerakkody * As at 31st December 2020 No of Shares 2,214 2,143 Dr Harsha Cabral ** - - Mr A N de Silva *** 106 104 - - Mrs Aruni Goonetilleke Mr Amal Cabraal Mr Jonathan Alles Mr Rusi Captain **** - - 131,855 128,355 7,737 7,544 Mr Duliksha Soosaipillai ***** Mr Damien Fernando - - 3,480 637 Mr Madu Ratnayake - - Mr Devaka Cooray 8,607 8,330 Mr D P N Rodrigo 25,702 153,700 Mr Osman Chandrawansa - - 3,180 3,078 Mr Nihal Jayawardene - - Dr Prasad Samarasinghe (Alternate Director to Mr L U D Fernando) - - Mr P R Saldin (Alternate Director upto 30th March 2021 and Director since 30th April 2021) - * Resigned w.e.f. 30th March 2021 ** Resigned w.e.f. 05th July 2021 *** Until demise on 29th September 2021 **** Retired (upon completing 09 years on the Board) w.e.f. 30th March 2021 ***** Resigned w.e.f. 30th March 2021 30 Directors’ Interest in Debentures Name As at 31st December 2021 No of Debentures Mr Amal Cabraal - As at 31st December 2020 No of Debentures - 100,000 31 Directors’ Remuneration Note 18 to the financial statements - Other Expenses IR 215 32 Human Resources Value Delivered To Employees IR 52 - 57 33 Employee Share Option Plan Note 54 to the financial statements - Stated Capital IR 311 34 Environmental Protection To the best of knowledge of the Board, the Bank has complied with the relevant environmental laws and regulations. The Bank has not engaged in any activity that is harmful or hazardous to the environment. IR 44 - 69 35 Risk Management and Internal Control CG & RR - Risk & Capital Reviews CG&RR 42 - 107 36 Directors’ Statement on Internal Control Directors’ Statement on Internal Control Over Financial Reporting IR 111 - 112 37 Corporate Governance Corporate Governance Report CG&RR 4 - 41 38 Insurance and Indemnity Pursuant to a decision of the Board, the Bank obtained an Insurance Policy to cover Directors’ and Officers’ liability. - Specific measures taken to protect the environment are found in the Stakeholder Reports. 94 HATTON NATIONAL BANK PLC
  94. No . Disclosure requirements Note reference Page 39 Material Foreseeable Risk Factors (As per Rule No 7.6 (VI) of the Listing Rules of the Colombo Stock Exchange) Risk & Capital Reviews CG&RR 42 - 107 40 Material Issues Pertaining to Employees and Industrial Relations Pertaining to the Bank (As per Rule No 7.6 (VII) of the Listing Rules of the Colombo Stock Exchange) No material issues occurred during the year - 41 Operational Excellence Performance Highlights IR 14 - 15 NOTICE OF ANNUAL GENERAL MEETING The 53rd Annual General Meeting of the Bank is convened on 30th March 2022, at 10.00 in the forenoon, at the Auditorium on Level 22 of “HNB Towers”, No 479, T B Jayah Mawatha, Colombo 10 (Registered Office). The Notice of the 53rd Annual General Meeting is enclosed. ACKNOWLEDGEMENT OF THE CONTENTS OF THE REPORT As required by Section 168 (1) (k) of the Companies Act No 7 of 2007, the Board of Directors hereby acknowledges the contents of this Annual Report. For and on behalf of the Board of Directors, K A L Thushari Ranaweera Deputy General Manager (Legal)/Board Secretary Jonathan Alles Managing Director/Chief Executive Officer Aruni Goonetilleke Chairperson Colombo, Sri Lanka 18th February 2022 95 INTEGRATED REPORT 2021
  95. HR and Remuneration Committee Report “A balanced approach to remuneration policy formulation considering both employee concerns and alignment to strategic goals is key to driving sustained growth and performance.” Mr Madu Ratnayake Chairman Human Resources & Remuneration Committee Composition & Meetings The HR & Remuneration Committee of the Board comprises three Non-Executive Independent Directors whose details are given below: Chairman » Mr Madu Ratnayake (IND/NED) – (Member w.e.f. 5th April 2021/Chairman w.e.f. 5th October 2021) Other Members » Mr Amal Cabraal (IND/NED) » Mrs Aruni Goonetilleke (IND/NED) appointed w.e.f 5th October 2021 » Mr Nilanth De Silva (IND/NED) Appointed as Chairman w.e.f. 30th July 2021 and demised on 29th September 2021 » Mr Dinesh Weerakkody -(IND/NED) Resigned w.e.f. 30th March 2021 » Mr D Soosaipillai (IND/NED) Resigned w.e.f. from 30th March 2021 (IND – Independent Director, NIND – Non Independent Director, NED – Non Executive Director and MD/CEO – Managing Director and Chief Executive Officer) Brief profiles of the Directors are given on page 70 to 75 in IR. Invitees of the Board » Mr. Jonathan Alles (MD/CEO) except when his remuneration or performance is discussed. The Human Resources & Remuneration Committee, functions within agreed terms of reference and is committed to the principles of accountability and transparency whilst ensuring that remuneration structures are equitable and aligned with the performance of the Bank and long-term interests of the Bank and its shareholders. POLICY The Bank’s HR Remuneration Policy is focused on attracting, motivating and retaining employees with the appropriate professional, managerial and operational expertise, necessary to achieve the objectives of the Bank. During the year, the Committee supervised and provided direction for the implementation of strategic human resource objectives of the Bank in keeping with the following Terms of Reference (TOR). “The Committee shall consider/evaluate the performance of the MD/CEO and Key Management Personnel (KMP) periodically against the targets and goals set by it and determine the basis for revising the remuneration, increments, bonuses and other performance-based incentives of the MD/ CEO and KMPs. The Committee shall consult the MD/CEO and take into account his/her recommendations when determining the performance of the KMPs, increments, bonuses and other performance-based incentives payable to such KMPs.” SCOPE The Committee is vested with the power to examine, evaluate and recommend to the Board of Directors on any matter that may impact the Human Resources of the Bank and any other matter referred to it by the Board or any other Sub-Committee. In discharging its responsibilities, the Committee focuses on the following: » Practices that attract, develop and retain High-Performing Talent 96 HATTON NATIONAL BANK PLC » Short and long-term incentives that are competitive and linked to the creation of sustainable performance and shareholder returns. » Learning and development strategy and annual training plan » Workforce representation » Leadership Talent Acquisition & Retention To achieve these goals, the Committee » Sets targets and goals for the MD/CEO and the KMPs annually. » Reviews the Human Resource policies and interventions, salary structures and incentive schemes benefiting Senior Management. In this process, necessary information and recommendations are obtained from the MD/CEO and the Chief Human Resource Officer (CHRO)/Asst. General Manager Services. The Committee evaluates their performance, deliberates and recommends to the Board of Directors the remuneration packages, annual increments and bonuses of the MD/CEO, Executive Director/Chief Operating Officer (COO), members of the Corporate Management and Senior Management staff. » The organisation structure is reviewed annually and changes are made in line with the Bank’s strategic direction. » An on-going priority is to ensure proper succession for critical positions in the Bank. » Recruitment and promotion of staff at management level are considered and approved by the Committee based on proposals submitted by the MD/CEO and Human Capital Management Department (HCMD) following a formal process of evaluation. » Provide strategic oversight for skill and capability building, taking into consideration market dynamics and emerging
  96. Management Participants » Mr. Indrajith Senadhira – CHRO / Assistant General Manager - Services Secretary to the Committee » The Board Secretary functions as the Secretary to the committee MEETINGS The Committee met four (4) times during 2021. Attendance details of meetings held during 2021 are as follows. Eligible to attend /Attended Mr Madu Ratnayake © 3/3 Mr Amal Cabraal 4/4 Mrs Aruni Goonetilleke 2/2 Mr D Soosaipillai 1/1 Mr Dinesh Weerakkody 1/1 Late Mr A N De Silva 1/0 Mr Jonathan Alles 4* Meetings of the Human Resources & Remuneration Committee (the “Committee”) shall be held as necessary but at least twice a year and at such other times as the Chairman of the Committee shall deem necessary. The proceedings of the Committee meetings are regularly reported to the Board and minutes are circulated to all Directors. requirements in regulatory, technology and market developments. » In respect of diversity, to review and recommend to the Board in relation to: i. Bank’s diversity policy; ii. Establishment of measurable objectives for achieving diversity across the Group, annual assessment of both objectives and progress in achieving them; annually, review the relative proportion of women and men in the workforce at all levels. Reviewing remuneration by gender to identify whether any pay gaps exists as a result of gender gaps and where relevant, provide recommendations to the Board. that are necessary to improve the overall performance of the Bank. The table below reflects the employment report of the Company as at 31st December 2021. Levels Total Top Management 16 Senior Management Mid Management Junior Management, Supervisors and Clerical Staff » Approval was given to resource the critical talent gaps of the Bank. 3,375 Secretaries 176 Workers (Electricians, Drivers, Labourers, Peons, Lift Operators) 132 Total Permanent 4,548 Employees on Contract KEY INITIATIVES IMPLEMENTED IN 2021 62 787 Total 494 5,042 PROFESSIONAL ADVICE » Broadly reviewing the Talent Management process. The Committee is authorised to seek external professional advice on matters within its purview. » The recruitment of the Chief Information Officer. COMMITTEE EVALUATION » Revised and Strengthened the Whistle Blowing Policy and reporting. » Adopted a new Policy on Talent Acquisition » Adopted new policies on Anti- Bribery and Corruption and Prevention on Harassment » Review of succession plans and readiness of the top 50 KMPs in the Bank. » Necessary advice & guidance was provided by the Committee on a proactive basis to ensure health and safety of all employees during the recurrence of pandemic. » Guidance on Wage negotiations » Implementation of the new Plan on Training and follow up on same To ensure that the Committee’s performance is optimal, a self-evaluation of the Committee members was also carried out and circulated amongst the members of the Committee for necessary action. CONCLUSION In 2022, the Bank will continue to focus on introducing and strengthening HR policies, practices and systems in the area of performance management, employee recognition, strategic workforce planning & productivity, capability development, employee engagement and succession management. Through these initiatives we expect to broaden our employment value proposition and thereby enhance the productivity of the Bank. EMPLOYMENT REPORT In order to achieve our goals, the Bank needs a workforce that is skilled and representative of the stakeholders we serve. Therefore, the current and future success of the Bank is dependent on the knowledge and collective skill of our employees and in the face of new pressure to adapt faster to a far more diverse and mobile workforce. The Bank is fully committed to invest in Human Capital Development to enhance the level of skill and the acquisition of new skill and knowledge Madu Ratnayake Chairman Human Resources & Remuneration Committee Colombo, Sri Lanka 18th February 2022 97 INTEGRATED REPORT 2021
  97. Nomination Committee Report “The Nomination Committee had an active year ensuring that succession plans were in place in a year that saw significant change. We also reviewed the Bank’s governance structures and policy frameworks which were revised to reflect regulatory and other external changes as well as changes to internal processes.” Mr Devaka Cooray Chairman Nomination Committee Composition & Meetings The following Directors serve/served on the Nomination Committee: Chairman Mr Devaka Cooray (IND/NED) Other Members » Mr Madu Ratnayake (IND/NED) member (appointed w.e.f. 4th October 2021) » Mrs Aruni Goonetilleke (IND/NED) member (appointed w.e.f.4th October 2021) » Mr Dinesh Weerakkody - (IND/NED) (Resigned w. e f 30th March 2021) » Dr Harsha Cabraal (IND/NED) (Appointed w.e.f. 23rd April 2020 / Chairman w.e.f. 5th April 2021 and resigned w.e.f. 5th July 2021) » Mr Nilanth De Silva - (IND/NED) (Appointed as a member w.e.f. 5th April 2021/ Chairman w.e.f 30th July 2021 until demise on 29th September 2021) (IND – Independent Director, NIND – Non Independent Director, NED – Non Executive Director and MD/CEO – Managing Director and Chief Executive Officer) Brief profiles of the Directors are given on page 70 to 75 in IR. Invitees of the Board » Mr. Jonathan Alles - Managing Director/ Chief Executive Officer participated at the meetings on invitation as and when necessary. 98 HATTON NATIONAL BANK PLC ACTIVITIES IN 2021 COMMITTEE RESPONSIBILITIES Year 2021 saw many changes to the Board of Directors of the Bank. The Nomination Committee is responsible for reviewing the composition of the Board and Board Sub - Committees to ensure that they are appropriately constituted in line with the required skills, experience and diversity. In addition, the Committee is entrusted with the responsibility of: During the year, the Committee reviewed the Bank’s adequacy of Corporate Governance Framework, policies, guidelines, principles and skills required to enable achievement of strategic goals at Board and Key Management levels. In doing so, it considered the balance of skills, experience, attributes, independence and diversity of the Board and Key Management Personnel (KMPs) to ensure that each leadership tier collectively has the requisite skills to Implement the strategic plans and the Board has the ability to provide informed and constructive challenges to the Management. The Committee reviewed successionplanning extensively for the Board and the Key Management Personnel (KMPs) to ensure continuity of operations and build strong talent pipelines. Talent management and succession planning for roles below Board level have been a key topic for discussion and the Committee continued to monitor activities and initiatives to strengthen the Bank’s talent pipeline. Recommendations were also made to appoint KMPs to take on group Director positions on Group Company Boards to ensure alignment of corporate values, policies, processes and cultures. In addition to the above, the fitness and propriety of the Directors and the new KMPs were examined during the year as and when required to ensure compliance with the CBSL requirements. At Board level, similar metrics were applied and all the vacancies on the Board during the year 2021 were filled with Directors with the requisite skills to meet its requirement under the skill matrix/diversity policy. » Recommending to the Board the appointment of new Directors and Key Management Personnel (KMP) and ensuring the implementation of the approved procedure in selecting such Directors and Key Management Personnel; » Recommending the re-election of current Directors to the Board of Directors, taking into account the performance and contribution made by such Directors towards the overall discharge of responsibilities by the Board; » Reviewing criteria such as qualifications, experience and key attributes required to be considered for the appointment or promotion to the post of Managing Director/CEO and/or the Key Management positions; » Ensuring that the Directors, Managing Director/CEO and the Key Management Personnel are fit and proper persons to hold office as required by the Banking Act and other applicable statutes; » Assessing from time to time the requirements of additional/new expertise and the succession arrangements for retiring Directors and Key Management Personnel with a view to providing advice and recommendations to the Board on any such appointment; » Overseeing the process by which the Board, its Committees and individual Directors assess their effectiveness, and report to the Board on findings and recommendations.
  98. Secretary to the Committee » The Board Secretary functions as the secretary to the Committee. Meetings The Committee met six (06) times during the year under review. Attendance by the Committee members at the meetings is given in the table below. Eligible to attend /Attended Mr. Dinesh Weerakkody 2/2 Mr. R S Captain 2/1** Dr. Harsha Cabral 5/5 Mr. Amal Cabraal 3/3 Late Mr. A N De Silva 3/3 Mr. Devaka Cooray © 1/1 Mr. Madu Ratnayake 1/1 Mrs. Aruni Goonetilleke 1/1 Mr. Jonathan Alles – MD / CEO 5* Mr. P R Saldin (Alternate Director to Mr. Rusi Captain) 2/1 THE TERMS OF REFERENCE Board Effectiveness The Terms of Reference (TOR) of the Nomination Committee, adopted by the Board in 2012, was further refined in 2013 and 2014. It was further reviewed and amended by the members at their meetings held on 19th January 2018 and 4th April 2020. The Committee: » Reviewed the Appointment Process of the MD/CEO, KMPs and Directors; » Reviewed and recommended all new appointments to the Boards of subsidiaries and associate companies of the Bank. DUTIES DISCHARGED BY THE COMMITTEE HIGHLIGHTS 2021 Board Composition During the year, the Committee’s activities included: The Committee: » Reviewed the structure, skills and the composition of the Board and its committees on an ongoing basis, making recommendation to the Board as appropriate; » Reviewing Board composition, including the process for the appointment of new Chairman and Directors. During the year, the Committee undertook a thorough process to identify and assess suitable candidates to fill the vacancies created at Board level; » Identified the required skill gaps at Board level and recommended candidates to fill vacancies on the Board; » Reviewing succession plans for Board and KMPs; » Assessed the fitness and propriety of the Directors holding office in terms of the provisions of the Banking Act and the directions of the Monetary Board relating to Corporate Governance; » Recommended the appointment of Directors to fill casual vacancies created by the resignation and retirement of certain Directors and further recommended that the Directors so appointed be formally appointed by the shareholders at the 53rd Annual General Meeting to be held on 30th March 2022 in terms of Article 36 of the Articles of Association of the Bank. Succession Planning The Committee: » Reviewed the Succession Plans for Key Management Personnel and Directors; » Continuously assessed the adequacy of the expertise available at Corporate Management level; » Overseeing the Board evaluations undertaken during the year; » Monitoring environmental, social and governance developments as well as implications for the group; » Assessing the Board’s skill set and bench strength to ensure that the required balance of skills and experience, independence and knowledge is in place for the Board and its Committees to function effectively; » Appointing industry experts to the Boards of Group Companies to strengthen Board capacity; » Ensuring compliance with the Corporate Governance Code in the conduct of all affairs in the Committee; » Analysing the Organisation chart and skill gaps; » Overseeing succession planning for the incumbent MD/CEO and the Board Secretary. » Specifically discussed succession plans for critical positions of the Bank and reviewed potential candidates for those roles; 99 INTEGRATED REPORT 2021
  99. Nomination Committee Report Group Governance /Management Principles Re-election/Re-appointment of Directors at the 53rd Annual General Meeting » Based on the established Group Governance Code of 2016, the Committee, on 19th January 2022 assessed the level of compliance by the Bank’s Group Companies for the year 2021, and further recommended that the Compliance Department provide a report to the Committee that the governance principles prescribed in the code were complied with by the respective Group Companies. Two Directors namely Mr L U D Fernando (NID/NED) and Mr Madu Ratnayake (IND/ NED) representing not more than 1/3rd of the Board and having served three years since their last re-election, are to retire by rotation and are eligible to be re-elected/re-appointed at the 53rd Annual General Meeting to be held on 30th March 2022, under Article 34 of the Articles of Association. » Appointed suitable KMPs to Group Companies as HNB nominee Directors to ensure governance standards within the group are complied with. » Nominated industry experts to strengthen the Boards of the Group Companies Training The Committee ensured that the Bank carried out the induction programme for the newly appointed Directors during the year 2021 with sessions covering Board engagement, . Opportunities for In-person directors’ training were limited in 2021 as a result of social distance guidance. However, during the year, director training and developments were supported through Board deep dives, risk deep dives and functions reviews. 100 HATTON NATIONAL BANK PLC The Committee, taking into account their contribution recommended the abovementioned names to the Board of Directors for approval. Accordingly, the Board at its meeting held on 16th December 2021, recommended that Mr L U D Fernando (NID/NED) and Mr Madu Ratnayake (IND/NED) should be reelected/re-appointed as Directors of the Bank at the next Annual General Meeting. Directors - Mrs Aruni Goonetilleke, Mr Osman Chandrawansa, Mr Rimoe Saldin and Mr Nihal Jayawardena who were appointed during the year 2021 and Mr Rasitha Gunawardana and Mr Kithsiri Gunawardena who were appointed on 21st January 2022 to fill casual vacancies offered themselves for formal appointment under Article 36 of the Articles of Association. The re-appointment of Mrs Aruni Goonetilleke, Mr Osman Chandrawansa, Mr Rimoe Saldin and Mr Nihal Jayawardena were recommended by the Committee and the Board on 8th December 2021 and 16th December 2021 respectively. The re-appointment of Mr Rasitha Gunawardana and Mr Kithsiri Gunawardena was recommended by the Board on 18th February 2022. COMMITTEE EFFECTIVENESS The performance of the Committee is reviewed each year as part of the Board effectiveness review. The Committee completed its selfassessment for the year 2021, conducted by the Chairman and Committee Members and the review concluded that the Committee continues to operate effectively. This year review highlights that the Committee continues to be well constituted and that the role and the responsibilities are clear and well understood. The Committee’s Interaction with the Board, Board Sub Committees and the Management is considered effective despite the COVID-19 Pandemic situation. The Committee noted the need to continuously review the process used in relation to appointments, the Committee’s approach to succession planning and how best to attract a diverse pipeline of potential Non-Executive Directors. Devaka Cooray Chairman Nomination Committee Colombo, Sri Lanka 18th February 2022
  100. Board Integrated Risk Management Committee Report “Vulnerabilities and threats have increased both globally and locally due to the prolonged impact of the Covid-19 pandemic outbreak. The Bank adopted a more comprehensive approach towards navigating through these turbulences while enhancing the effectiveness of risk identification, monitoring and mitigation processes. Significant resources have been allocated to support the Bank and the Group delivering a resilient performance.” Mr. Rimoe Saldin Chairman Board Integrated Risk Management Committee Composition & Attendees The Board Integrated Risk Management Committee (BIRMC) comprised four (04) members throughout 2021, of which three (03) members were Non-Executive Directors as given below: Chairpersons: » Mr. Duliksha Soosaipillai - until 30th March 2021 » Ms. Aruni Goonetilleke from 5th April 2021 to 4th October 2021 » Mr. Rimoe Saldin from 5th October 2021 Other Members: » Mr Madu Ratnayake (IND/NED) » Mr Damien Fernando (NIND/NED) » Mr Jonathan Alles (MD / CEO) » Mr Rusi Captain (NIND/NED) through Alternate Director Mr Rimoe Saldin » Mr Rimoe Saldin (NIND/NED, Alternate Director to Mr Rusi Captain till 30th March 2021and Director since 30th April 2021) Other invitees from Board » Mr Devaka Cooray – Chairman, Audit Committee Brief profiles of the Directors are given on pages 70 to 75 in IR. MAJOR INITIATIVES IMPLEMENTED IN 2021 The risk of the Covid-19 pandemic impacted across the full spectrum of banking activities in 2021 and the Committee oversaw the implementation of the following initiatives supporting management of related risks: INTEGRATED RISK MANAGEMENT ICAAP was reviewed during the year to ensure capital adequacy was maintained well above minimum regulatory requirements. Stress testing was conducted for a number of variables including asset quality, asset concentrations, market risk factors etc., and the committee noted that the Bank capital adequacy levels were well above the regulatory requirement in these scenarios as well. CREDIT RISK » Implemented a state-of-the-art solution for assessing Individually Significant Loans (ISL). » Review and update Bank’s Credit and Collateral Framework policies including lending policies across Corporate Banking, SME, Microfinance, Retail Banking to ensure they are in line with Covid-19 market dynamics » Conducted periodic industry studies such as tourism, construction, agriculture and automobiles, which were significantly impacted by the pandemic and policy decisions. » Review of Credit Approval Structure against new NPAs, LRMs findings, Moratorium changes, Regulatory changes and other emerging credit risks to the loan book » Implemented RAROC across all business units in order to inculcate a risk-based pricing mechanism to measure customer relationship returns. » Strengthened controls over Margin Trading products in view of the volatility of underlying market variables. MARKET RISK » Increased review frequency of Treasury limits post the COVID-19 pandemic outbreak. OPERATIONAL RISK » Reviewed Business Continuity Policy to incorporate COVID related risks. » Developed and implemented a COVID-19 Threat and Response Matrix to support the changing working arrangements and to enhance organisation readiness. » Enhanced monitoring of Operational resilience in all DR Drills and escalation of deficits in operational resiliency in DR Drills. » Strengthened the Bank’s Operational Risk Management Framework in line with the current operating model and best practices. IT & CYBER RISKS » Carried out systemic functionality reviews, Vulnerability Assessments and Penetration Testing (VAPT) towards mitigating increased Cyber Security risks. » Reviewed policies on Information and Cyber Security to deal with emerging risks and risk assessed with regard to Bank’s Information and Cyber Security metrics against embedded and emerging risks. » Reviewed and risk assessed for Privilege Access Activities on Databases, Operating Systems and Applications of critical systems. 101 INTEGRATED REPORT 2021
  101. Board Integrated Risk Management Committee Report Management Participants » Mr. Ruwan Manatunga (DGM Risk/Chief Risk Officer » Mr. Janath Ilangantileke (Chief Compliance Officer) Regular Attendees by Invitation » Mr Dilshan Rodrigo - Executive Director/ Chief Operating Officer » Mr Niroshana Seneviratne - DGM Internal Audit/ Chief Internal Auditor » Mr Rohan Buultjens -Chief Technology and Digital Officer » Ms Dilunika Jayasinghe - Chief Manager - Credit Risk » Mr Kushan Jayasooriya - Head of operations and Market Risk (resigned w.e.f from 30th September 2021) » Mr Sampath Weerasinghe - Senior Manager Integrated Risk Secretary to the Committee » Mr Ruwan Manatunga – DGM – Risk/ Chief Risk Officer Eligible to attend /Attended Mr. D Soosaipillai 2/2 Mr. Madu Ratnayake 10/10 Mr. Rusi Captain 2/2 Mr. Damien Fernando through Alternate Director Dr Prasad Samarasinghe 10/10 Mr. Rimoe Saldin 7/7 Mrs. Aruni Goonetilleke 6/6 Mr. Jonathan Alles - MD/CEO 3/3 Mr. Dilshan Rodrigo 10/10 Mr. Devaka Cooray 10/9 COMPLIANCE RISK » Started using Data Analytics/AI tool to improve monitoring of alerts generated by the AML system. » Captured Purpose Code when performing transactions through Digital channels to enhance the monitoring process. » Strengthened review mechanisms and Compliance Audit carried out covering critical areas in branches and departments of the Bank. » Implemented quarterly group review on Risk, Compliance Finance and Audit to ensure regular monitoring of compliance risk of Group Subsidiaries LOOKING AHEAD The following initiatives have been identified for implementation in 2022: Credit Risk » Rollout of second phase of Loan Origination System for SME and Corporate businesses. » Upgrading and integrating the IRR assessments across all businesses to their respecting loan origination modules. Market Risk » Review caps, loss limits, measurement of volatility of Forex and Securities. Liquidity Risk » Increase scope and rigour of stress testing to be better aligned with regulatory Liquid Coverage Ratio. Operational Risk » Implement a Governance, Risk and, Compliance (GRC) system to strengthen operational risk monitoring. IT & Cyber Risk » Strengthening Cyber Risk Assessment methodology. » Implement a Digital Right Management (DRM) to enforce granular level controls over data sharing with external parties 102 HATTON NATIONAL BANK PLC » Implement an End Point Detection & Response (EDR) solution to enhance security of data and detect anomalous digital traffic and anomalous behavioural activity in the Bank’s IT systems Group Risk » Further Strengthen periodic assessment of Group Risk and Compliance monitoring. Compliance Risk » Enhance monitoring of Trade Based Money Laundering by monitoring Dual Usage of goods and Vessel Tracking, by linking the Dow Jones data base to the Trade core banking system through API connections. » Implement ITRS project (International Transaction Reporting System) initiated by CBSL to automate various International, Trade and Treasury related reports. SUMMARY OF BIRMC CHARTER Establishing a risk management framework that proactively supports the assessment, evaluation, monitoring and management of risk whilst creating a strong risk culture and supporting the Bank’s strategic objectives. Decisions are made in compliance with the Bank’s internal risk policy guidelines and regulatory supervisory requirements and corrective actions are taken to mitigate risks taken beyond the risk tolerance set by the committee. PRIMARY RESPONSIBILITIES OF BIRMC The terms of reference set out by the Board of Directors, include the following: » To ensure that the Bank and its subsidiaries have an enterprise wide comprehensive risk management framework, appropriate compliance policies and risk management systems in place » To assess all risk types, including but not limited to: credit, market, liquidity, operational and strategic/reputational risks /information and cybersecurity risk to the Bank are managed through appropriate risk indicators and management information and mitigants established » To ensure risk assessments and mitigating actions are taken in accordance with
  102. established delegated authorities and corrective actions are taken to manage risks taken beyond the risk tolerance set by the committee , based on the Bank’s policies, the Board’s Risk Appetite and regulatory and supervisory requirements » To monitor and assess the effectiveness of the Bank’s risk management system and the robustness of the risk management monitoring metrics in both embedded and forward risks » Periodically assess performance against the defined risk appetite and risk goals set for the Bank » Review issues raised by internal audit that impact the Bank’s risk metrics and refer to the Board Audit Committee (BAC) any matters that have come to the attention of the committee that require the committee’s action » Review compliance on the Basel III guidelines and provide risk insights on SLFRS 9 implementations » Examine any other matters referred to it by the Board. OTHER RESPONSIBILITIES OF THE COMMITTEE The BIRMC also supports the Board of Directors in fulfilling its oversight responsibilities relating to compliance matters. In this capacity, the Committee reviews the implementation of compliance programs, policies and procedures that are designed to respond to the various compliance and regulatory risks of the Bank. The Committee also reviews and monitors the Bank’s compliance report on money laundering and action taken in relation to it. The Committee is also responsible to review and refer for action to any subcommittee of Board matters that are either specifically referred to the attention of the Committee or that comes to the attention of the Committee from Board filings, that impact systemic risks to the Bank, with a clear objective of eliminating repeat findings or managing forward risks. COMPLIANCE The BIRMC was established as a Committee of the Board, in compliance with Section 3 (6) of the Banking Act Direction No 11 of 2007, on corporate governance for licensed commercial banks in Sri Lanka. The composition and the scope of work of the Committee conform with the provisions of this direction. The Bank has adopted an Integrated Risk Management (IRM) framework in line with the Central Bank of Sri Lanka (CBSL) Banking Act Direction No 7 of 2011. Further, BIRMC has adopted Basel III guideline issued under the Banking Act No 01 of 2016 as well and continues to improve the Bank’s adherence to these guidelines. As per Section 3(6)(v)(g) of Banking Act No. 11 of 2007 on Corporate Governance for Licensed Commercial Banks, the BIRMC submits a Risk Assessment Report within a week of each meeting to the Board of Directors in order to seek the Board’s views, concurrence and/or specific directions on material risks deliberated. ACTIVITIES IN 2021 The committee’s deliverables were underpinned by its primary escalation metric of monthly Risk Dashboards to BIRMC and BOD, supported by monthly Key Risk Concern statements. Integrated Risk Management » Reviewed Risk Management Policies pertaining to Integrated Risk Framework, Model Risk and Stress Testing to ensure that they are in line with industry best practices. » Reviewed and revised the Risk Appetite Statement and Risk Goals to align with the new normal stemming from COVID-19. » Evaluated the effectiveness of the Management Committees including the review of their KPIs to enhance their contribution to the Bank. » Reviewed adequacy of Liquidity Management, Business Continuity Plans, Cybersecurity safeguards and Working from Home practices of Group businesses. » Conducted periodic industry studies covering many sectors including tourism, construction, automobile and agriculture, which were significantly impacted by the pandemic and policy decisions. » Commenced concept development and implementation of a new comprehensive risk rating models for all business segments and products of the Bank. » Risk adjusted return on capital (RAROC) assessment process was introduced for corporate and emerging corporate segments facilitating assessment of risk based pricing when evaluating return on customer relationships. » ICAAP was strengthened by introducing Concentration Risk assessments for product, geography and maturity concentrations as well as Group Risk assessment. Credit Risk » Strengthened guidelines to capture customer behaviour analytics facilitating identification of early warning signs » Reviewed Credit Policies and Guidelines to ensure applicability to current market conditions. » Introduced additional credit evaluation criteria across all product portfolios aligning to the challenging business environment. » Completed the implementation of the new fully integrated Retail Loan Originating System (LOS) module across all branches in the network. » Introduced an enhanced TOD management process to identify and report on exceptions to the TOD approval guidelines. » Commenced circulation of credit bulletin to share organisation learnings on credit risk management to enhance credit underwriting and evaluation capabilities in the Bank » Introduced additional guidelines to strengthen identification of Watchlist and Management Review List (MRL) customers in order to take corrective action at the earliest instance. 103 INTEGRATED REPORT 2021
  103. Board Integrated Risk Management Committee Report » Monitored and reviewed the portfolios under moratoriums in order to proactively take steps to restructure facilities including identifying those that require greater credit supervision. » Implemented state-of-the-art solution for Individually Significant Loan (ISL) assessments for measurement of expected credit loss. » Reviewed large group exposures of the Bank with emphasis on exposures related to moratoria and elevated credit risk on quarterly basis. Operation Risk » Reviewed COVID-19 impacted industries to assess implications to Bank’s lending portfolio. » Existing IRR assessment process was streamlined until the introduction of enhanced IRR Models. Loan Review Mechanism (LRM) » Carried out the annual review of the LRM Policy aligning with the Bank’s focus on increasing credit underwriting standards and quality of the lending portfolio given the current challenging business environment. » Enhanced the scope of LRM reviews to capture the learnings from new additions to NPA, Watch Listed and Management Review List, accounts approved for Parate Auctions and highlighted areas for improvement in credit underwriting and monitoring. » LRM findings were circulated to Corporate Management for remedial action and also followed up on these corrective measures taken to ensure effective implementation. Additionally, the LRM unit also followed up on the implementation of Internal Audit Review recommendations with relevant business and operational units. Portfolio Risk Management » Provided valuable inputs to business units for decision making by making improvements to the monthly Portfolio Risk Dashboards that are circulated. » Introduced a new reporting process to effectively monitor and manage the temporary overdraft portfolio i.e. identifying and reporting exceptions to the new TOD approval guidelines. 104 HATTON NATIONAL BANK PLC » Strengthened the Bank’s Operational Risk Management Framework in line with the current operating model and best practices. » Redefined Near- Miss items to facilitate improved measurement, monitoring and management. » Carried out Risk & Control Self-Assessment (RCSA) across the Branch Network and achieved 100% coverage of the entire Bank despite the business disruptions » Public Health Policy was enhanced in response to prolonged duration of pandemic » Reviewed the Business Continuity Policy to incorporate both embedded and emerging COVID related risks » Enhanced Operational resilience by monitoring all Disaster Recovery Drills and strengthening perceived areas for improvement » Identified risk vulnerabilities of outsourced business activities and formulated a more stringent / focused outsourced business policy model. » Launched online training programs aligned to the Bank’s competency matrix. Information & Cyber Security » Policies on information and cyber security were reviewed to assess the Bank’s Information and Cyber security metrics against embedded and emerging risks to ensure that they are in line with industry best practices. » Guidelines were developed to strengthen the detection and prevention of supply chain related Cyber Attacks. » Conducted an independent review of limits assigned to core banking users by external consultants and implemented recommendations. » Digital Rights Management (DRM) solution was implemented to enhance security of data transfers with third party entities. » Implemented a Mobile Application Management (MAM) to provide secure email access via mobile devices. » Implemented Data Loss Prevention controls over the cloud email platform. » Conducted phishing simulations to test resilience of Bank and Bank staff to potential threats and assess Bank’s readiness against phishing attacks. » Reviewed Privilege Access Management. » Implemented Security Operations Centre (SOC) in order to strengthen Bank’s cyber security surveillance. » Conducted periodic reviews of the Bank’s Internal IT/IS Management by Information & Cyber Security Risk Team in addition to independent reviews conducted by Internal audit and CISO. Market Risk » Strengthened ALM Policy with improved risk assessment controls. » Reviewed Treasury Policy and supplementary policies related to Treasury such as Treasury Disputes Resolution Policy, Liquidity Policy and Contingency Funding Policy including changes to Treasury Limits in line with the current environment. » Reviewed appropriateness of current Delta limits in line with the Bank’s planned investments in securities. » Strengthened controls over exposures to securities markets. » Strengthened liquidity stress testing by introducing additional sensitivity scenarios including increasing the number of variables. » Counterparty limits were reassessed to align new business environment. Compliance Risk » Started using Data Analytics/AI tools to improve monitoring of alerts generated by the AML system.
  104. » Started capturing Purpose Code when performing transactions through Digital channels to enhance the monitoring process. » Strengthened review mechanisms and Compliance Audits carried out covering critical areas in branches and departments of the Bank. » Implemented quarterly group reviews on Risk, Compliance Finance and Audit to ensure regular monitoring of compliance risk of Group Subsidiaries. » Started capturing of the images of customers at the time of on-boarding. » Started identifying risk profile of customers based on their transaction patterns. » Started capturing NIC/ phone number for all deposits through CDMs / CRMs. » Commenced data cleansing projects covering beneficial ownership data collection, KYC data collection and Power of Attorney data collection as an ongoing exercise. PROFESSIONAL ADVICE The BIRMC is authorised to obtain legal or other professional advice internally and / or from outside the Bank as and when considered necessary, at the Bank’s expense. The Committee may also seek the views of other Board sub committees as required and may inform them of any relevant procurements that may be of relevance to their mandates. COMMITTEE EVALUATION The self-assessment of the BIRMC by its Committee members was carried out in February 2021 and the Committee agreed on a “satisfactory” rating score. Areas identified for improvement were addressed during the course of the year. Rimoe Saldin Chairman Board Integrated Risk Management Committee Colombo, Sri Lanka 18th February 2022 105 INTEGRATED REPORT 2021
  105. Board Audit Committee Report “ In a year of unprecedented challenges, we have focused on maintaining the rigour of our internal controls and deliberated in depth on matters requiring professional judgement to ensure the integrity of the financial reporting process and Financial Statements.” Mr Devaka Cooray Chairman Board Audit Committee Composition & Meetings The Board Audit Committee comprises three Non-Executive Directors, of whom two including the Chairman are Independent Directors. Chairman » Mr Devaka Cooray (IND/NED) Other Members: » Mr Osmand Chandrawansa (IND/NED) Appointed w.e.f. 05th April 2021 » Mr Rimoe Saldin (NIND/NED) Appointed w.e.f. 31st May 2021 » Mr Nilanth de Silva (IND/NED) Resigned w.e.f. 30th July 2021 » Mr Damien Fernando (NIND/NED) Resigned w.e.f. 30th July 2021 » Mr Rusi Captain (NIND/NED) Resigned w.e.f. 05th April 2021 » Mr Madu Ratnayake (IND/NED) Resigned w.e.f. 05th April 2021 Brief profiles of the Directors representing the committee are given on pages 70 to 75 in IR. SIGNIFICANT ACCOUNTING JUDGEMENTS CONSIDERED DURING 2021 Reviewed key assumptions and judgements including following areas » Loan Impairment Allowances and Charges and related management overlay » Basis for Debt Moratorium for COVID -19 affected Businesses and Individuals » Actuarial Valuation of Pension Liability » Tax Provisions » Going Concern » Carrying Value of Investments in Group Companies » Valuation of Financial Instruments CHARTER OF THE COMMITTEE The Board Audit Committee (BAC) assists the Board in the discharge of its responsibilities by exercising structured, systematic oversight over the Bank’s financial reporting, internal audit, internal controls and external audit practices. The BAC Charter clearly defines the Terms of Reference (TOR) of the Committee and regulates the composition, role and responsibilities of the BAC. Approved by the Board, the Charter was last reviewed and updated in 2019. KEY RESPONSIBILITIES OF THE AUDIT COMMITTEE » Review Bank’s compliance with relevant legal, regulatory and accounting standards in the preparation and presentation of Financial Statements, external reports, providing independent oversight of the integrity thereof. » Exercise independent oversight of the Bank’s assurance functions, including external & internal audit and ensure the independence and effectiveness of both external & internal audit functions. » Evaluate the adequacy, efficiency and effectiveness of the governance process. » Engagement of independent advisors for specialized functions where deemed necessary. » Reviewing the internal audit reports and liaising with the Bank’s corporate management to ensure that precautionary measures are taken to minimize and control weaknesses, procedure violations, frauds and errors. AUTHORITY OF THE AUDIT COMMITTEE The BAC has investigative authority conferred upon it under the TOR. Members have unrestricted access to records, data and reports and to management and staff to obtain relevant information considered necessary in the discharge of duties and responsibilities. The BAC may also engage independent counsel and/or other advisors, if deemed necessary. Key responsibilities include; » Monitor and review adequacy and effectiveness of accounting policies, financial and other internal control systems and financial reporting processes in order to provide accurate, appropriate and timely information to the Board, regulatory authorities, management and other stakeholders. 106 HATTON NATIONAL BANK PLC ACTIVITIES IN 2021 The Board Audit Committee (BAC) met eight (08) times during the year of which all meetings were held virtually through MS Teams due to the prevailing COVID -19 situation in the country. The Engagement Partner of the Bank’s external audit normally attends Committee meetings. The Committee also invited members of the Bank’s Senior Management
  106. Regular Attendees by Invitation » Mr Jonathan Alles Managing Director/Chief Executive Officer » Mr Dilshan Rodrigo Executive Director/Chief Operating Officer » Dr Niroshana Seneviratne Chief Internal Auditor/DGM (Internal Audit) team to participate in meetings, on a needs basis. Proceedings of BAC meetings are periodically reported to the Board. Activities of the Audit Committee in 2021 are summarised under the focus areas below. 10% 40% 30% » Mr Ruwan Manatunga Chief Risk Officer/DGM (Risk) » Mr Rajive Dissanayake Chief Financial Officer » Mr Janath Ilangantileke AGM (Compliance) » Mr Rohan Buultjens Chief Technology and Digital Officer » Mr Sivarajah Nandakumar Head of Operations The Engagement Partner of M/s KPMG (External Auditor) attended all meetings. The Chairman/ Chairperson of the BIRMC also attends meetings by invitation. Secretary to the Committee Chief Internal Auditor, Dr Niroshana Seneviratne functions as the Secretary to the Board Audit Committee. Meetings Membership attendance details of meetings held during 2021 are as follows. Eligible to attend /Attended Mr Devaka Cooray (IND/NED) 8/8 Mr Osmand Chandrawansa (IND/NED) 5/5 Mr Rimoe Saldin (NIND/NED) 5/5 Late Mr Nilanth de Silva (IND/NED) 5/5 Mr Damien Fernando (NIND/NED) 5/4* Mr Rusi Captain (NIND/NED) 3/3** Mr Madu Ratnayake (IND/NED) 3/3 *All meetings attended by his alternate Director, Dr Prasad Samarasinghe **All the meetings attended by his alternate Director, Mr Rimoe Saldin 20% Financial reporting External audit, auditor engagement and policy Internal audit and controls Others (including governance, tax, treasury and dividends FINANCIAL REPORTING The BAC reviewed the Bank’s financial reporting process on behalf of the Board to ensure that Financial Statements are prepared in accordance with the Bank’s accounting records, in compliance with regulatory provisions including the Sri Lanka Accounting Standards, Companies Act No 7 of 2007 and Banking Act No 30 of 1988 and amendments thereto and reflect a true and fair view on the financial position and performance of the Bank. The BAC satisfied itself that accounting policies and practices are appropriate and adequate internal controls and procedures are in place to provide reasonable assurance that the financial reporting system is effective and well managed to provide reliable and timely information. Reviewed the impact of the accounting treatment of significant risks and uncertainties and key estimates and judgements material to the Bank’s financial reporting and whether disclosures made in the published Financial Statements were adequate, appropriate and fair. During the year, the BAC placed additional focus on the assessment of adequacy of provision for Expected Credit Loss (ECL) recognized in the Financial Statements based on the internal models which were refined during the year with updated underlying assumptions, management overlay computed outside the model based on stress testing the exposures to risk elevated sectors, to address the potential implications of the COVID -19 pandemic and the moratorium schemes introduced to support the recovery of the economy and adjustments made to economic factors. BAC discussed the steps taken by the Management to align the internal processes and systems to comply with Direction No 13 and 14 of 2021 issued by the Central Bank of Sri Lanka on 14th September 2021 which has become effective from 1st January 2022 and will continue to focus on the internal control framework relating the new processes during the year 2022. The BAC reviewed and recommended to the Board for approval, the annual and the quarterly Financial Statements, prior to their release. The Committee assisted the Board on the selection of the Tax Consultant by providing required recommendations based upon Its assessment and evaluation. BAC assessed and monitored the adequacy, effectiveness and progress of Bank’s reconciliation processes through both internal audit function as well as periodic updates provided by the finance team. The Committee met with the Chief Financial Officer twice (02) during the year in the absence of Key Management Personnel to ensure the transparency and independence of the financial reporting function of the Bank. EXTERNAL AUDIT The Audit Committee assists the Board in assessing the independence, evaluating the performance of the External Auditors and making recommendations for engagement of the External Auditor. The Committee carried out the following activities in discharge of its duties in this regard: » Assisted the Board in engaging the External Auditor for audit services, in compliance with regulatory provisions. 107 INTEGRATED REPORT 2021
  107. Board Audit Committee Report » Monitored and assessed the independence, objectivity and effectiveness of the External Auditor during the year 2021. » Discussed the audit plan, scope and the methodology proposed to be adopted in conducting the audit with the external auditor prior to commencement of the annual audit. » Discussed all relevant matters arising from the interim and final audits together with the Management Letter and management responses thereto. » The Audit Committee met with the external auditors twice (2) during the year in the absence of Key Management Personnel to ensure that there were no limitations of scope in relation to the audit and to allow for full disclosure of any incidents which could have had a negative impact on the effectiveness of the external audit. The Committee concluded that there was no cause for concern. » The Policy on non-audit services provided by the External Auditor was reviewed during the year by the BAC and same was recommended to the Board for formal approval. The Committee also reviewed the non-audit services provided by the auditor against the policy, to ensure such functions do not fall within the restricted services and provision of such services would not impair the External Auditors’ independence and objectivity. RISKS AND INTERNAL CONTROL » Continued to assess the adequacy, efficiency and effectiveness of the Bank’s internal control systems. The Committee satisfied itself that adequate controls and procedures are in place to provide reasonable assurance to the effect that the Bank’s assets are safeguarded. » Assessed through the internal audit function that reports directly to the Audit Committee, the effectiveness of the Bank’s internal control over financial reporting as at 31st December 2021, as required by the section 3(8)(ii)(b) of the Banking Act Direction No 11 of 2007 on Corporate Governance for Licensed Commercial Banks in Sri Lanka and 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 (CA Sri 108 HATTON NATIONAL BANK PLC Lanka). Furthermore, External Auditor has issued an Assurance Report on Directors’ Statement on Internal Control over Financial Reporting. » BAC is satisfied as to the reliability of the system as disclosed on page 111 and 112 in the IR, Directors’ Statement on Internal Control over Financial Reporting. BAC confirms that the report given in IR page 113 does not suggest any fundamental concerns over the control framework or procedures. » Reviewed the processes for identification, recording, evaluation and management of all significant risks of the Bank. BAC receives regular reports from the Chief Internal Auditor on appraisal of systems of internal controls across these risk types and areas of operation of the Bank and setting out the internal audit function’s view of the control environment. Reports also include summary highlights of the most significant matters being highlighted by the internal audit department. » The BAC periodically reviewed and discussed the key financial issues of group companies during the year, with a view of identifying and managing associated risks in order to maintain the smooth flow of operations. INTERNAL AUDIT » Reviewed the independence, objectivity and performance of the internal audit function, the findings of the internal audits completed and their evaluation of the Bank’s internal control system in its capacity as the third line of defence. » Reviewed the annual audit plan for the year, prepared on risk based planning methodology. Evaluated the adequacy and frequency of coverage. » Reviewed the performance appraisal of the Chief Internal Auditor and other senior staff members of Internal Audit Department. » Conducted two (02) independent discussions with the Chief Internal Auditor in the absence of the management team to ensure independence of the Internal Audit Department’s operations. WHISTLE-BLOWING Reviewed issues relating to breach of ethics if any, and arrangements by which staff of the Bank may in confidence raise concerns about possible improprieties. The Committee ensures procedures for the independent investigations of such matters are appropriate and are in place. TRAINING AND DEVELOPMENT OF COMMITTEE MEMBERS Training and continuous professional development undertaken by BAC includes attending seminars, conferences, workshops, presentations done by external auditors on areas such as new accounting standards, tax and directions issued by the Central Bank of Sri Lanka. COMMITTEE EVALUATION The annual evaluation of the Committee was conducted by the Independent NonExecutive Chairman, with contributions from the individual assessments by the members of the Audit Committee, Managing Director/ CEO, Executive Director/COO, Chief Financial Officer, Chief Internal Auditor, other regular invitees and the external auditor in accordance with international best practices and was deemed to be satisfactory. » Reviewed major findings of internal investigations and management’s responses thereto. » Reviewed the internal audit reports, status of significant findings and their recommendations, management response and the status of the implementation on a regular basis. » Assessed the Internal Audit Department’s resource requirements including succession planning. Devaka Cooray Chairman Board Audit Committee Colombo, Sri Lanka 18th February 2022
  108. Related Party Transactions Review Committee Report “The Related Party Transactions Review Committee focused on increasing awareness of the Related Party Transactions guidelines and refining reporting processes to support discharge of its mandate” Devaka Cooray Chairman Related Party Transactions Review Committee Composition & Meetings The Bank’s Related Party Transactions Review Committee - RPTRC (the ‘’Committee’’) was established as a Board Sub Committee with effect from 1st January 2016. Its scope is to facilitate and monitor compliance with the requirements of the Code of Best Practices on Related Party Transactions (the “Code”) issued by the Securities and Exchange Commission of Sri Lanka (SEC) and Section 9 of the Listing Rules of the Colombo Stock Exchange. The present Committee comprises of the following Directors: Chairman » Mr Devaka Cooray - (IND/NED) Other Members: » Mr Jonathan Alles - (MD/CEO) » Mr Osman Chandrawansa - (IND/NED) » Mr. Nihal Jayawardene - (NIND/NED) (IND/NED) – Independent Non-Executive Director, (NIND) - Non Independent Director, (MD/CEO) - Managing Director and Chief Executive Officer. Other Directors » Mr Dilshan Rodrigo – Executive Director/ Chief Operating Officer Brief profiles of the Directors are given on pages 70 to 75 in IR. KEY INITIATIVES IMPLEMENTED DURING 2021 » A related party report was developed in the system to extract the related party transactions » Expanded training and awareness on Related Party Transactions (RPTs) guidelines by conducting training programmes for branch personnel. » The Related Party Transactions Policy Document was reviewed and revised taking into consideration changes which occurred since the previous revision. SUMMARY OF THE ‘TERMS OF REFERENCE’ (TOR) OF THE RELATED PARTY TRANSACTIONS REVIEW COMMITTEE The Related Party Transactions Review Committee is governed by the ‘Terms of Reference’ approved by the Bank’s Board of Directors. The Statutory and Fiduciary responsibilities of such Committee are those as envisaged in the ‘Code of Best Practices on Related Party Transactions’ published by the Securities and Exchange Commission of Sri Lanka (the “Code”), regulations promulgated by the Colombo Stock Exchange (“The CSE Rules”), Financial Reporting under LKAS 24, Banking Act Direction No: 11 of 2007 on Corporate Governance of Licensed Commercial Banks in Sri Lanka and ‘Code of Best Practices on Corporate Governance 2017’, issued by the Institute of Chartered Accountants of Sri Lanka. The TOR also spells out the constitution and the composition of the Committee; that the Chairman should be a Non - Executive Independent Director, and the Committee should meet at least once in every Quarter. It also sets out the guidelines on Related Party Transactions and its reporting requirements. As per the TOR, the Committee can directly access required data and information in order to discharge its duties and responsibilities and when necessary, the Committee has the right to obtain appropriate opinions from external specialists. The TOR is subject to periodic review based on Regulatory as well as Operational requirements. During the year 2020, the TOR was amended to accommodate desired changes. ALLOCATION OF AGENDA TIME OF THE RPTRC WAS AS FOLLOWS 10% 50% 10% 10% 20% Review and verification of Internal Controls and Regulatory requirements for RPs Transactions Verification of CBSL Reporting Review and verification of Related Party identification process Review of System modifications Others SCOPE OF OPERATIONS The principal function of the Committee is the review, verification and scrutiny of all transactions with Directors, Key Management Personnel (KMPs), Substantial Shareholders, Subsidiaries and Associate Companies of the Bank and those Substantial Shareholders and other Related Parties as defined in the “Code” and to determine and ensure that they have not received more favourable or preferential consideration vis a vis the other Shareholders and Customers of the Bank and thus all dealings have been done in conformity with the “Code”. In discharging the above responsibilities, the Committee relies on the integrity of periodically 109 INTEGRATED REPORT 2021
  109. Related Party Transactions Review Committee Report Management Participants » Ms K A L Thushari Ranaweera – DGM (Legal)/Board Secretary » Ms Anuradhi Delage – Head of Finance/ Secretary to the Committee » Mr Janath Ilangantilake – AGM (Compliance) » Ms Angelina Dharmaraj – Senior Manager (Credit Admin) In addition, the Committee summons other relevant Officials of the Bank to participate in Committee proceedings on a ‘need basis’. Secretary to the Committee The Bank’s Head of Finance functions as the Secretary to the Related Party Transactions Review Committee. Meetings In accordance with the Terms of Reference, the Committee meets whenever necessary, but not less than four (4) times a year, once in every three (3) months as stipulated in the Securities and Exchange Commission of Sri Lanka (SEC) Guidelines. During 2021, four (4) such meetings were held and the Minutes were circulated to the Board of Directors for their information and review. Membership attendance details of meetings held during 2021 are as follows: Eligible to attend /Attended Mr. Devaka Cooray 02/02 Late Mr. A N De Silva 02/02 Mr. Osman Chandrawansa 03/03 Mr. Nihal Jayawardena 02/01 Mr. Rusi Captain 01/01 (Through Alt Director Mr. P R Saldin) Mr. Jonathan Alles 04/04 110 HATTON NATIONAL BANK PLC reportable Related Party Transactions data sourced via the following: SELF-APPRAISAL OF COMMITTEE FUNCTIONS » Comprehensive list of Related Parties based on latest available declarations, signed by the responsible Directors/KMPs. An annual self-evaluation of the effectiveness of the Committee is conducted by the Chairman of the Committee with contributions by way of individual assessments by the Members of the Committee, Managing Director/CEO, participating KMPs referred to at the outset of this Report and the review for 2021 concluded that the Committee continues to operate effectively and competently. » Related Party Transactions confirmed by the Business Heads to the Committee. » The quarterly reporting to RPTRC which Is under the responsibility of Business heads, is in turn is further reviewed by the Head of Finance who is the ultimate reporting authority to the Committee as well as its Secretary. This review is carried out by comparing Related Party Transactions with bench - marked criteria applicable for comparable Non Related Party Transactions, to verify and determine that Related Parties have not received more favourable nor preferential consideration, based on the Reports submitted by the Business Heads to the Committee. The Bank’s Internal Audit Division is also mandated to periodically verify the integrity of reported data by carrying out Audit checks, to ensure greater transparency. As stated previously, wherever necessary, the Committee is empowered to obtain independent legal, financial & technical advice from Specialists in such fields, to review and determine transactions. Apart from obtaining independent Specialists’ advice wherever necessary, the Committee has access to data and information pertaining to Related Parties as well as the ability to call for clarifications from the Management & Auditors (External & Internal) on any allied matter. The Committee has reviewed the Related Party Transactions reported by the Business Heads and the comments /observations made during such reviews if any, have been communicated to the Board of Directors. In addition, the Committee shares information with the Board Audit Committee whenever necessary and appropriate to facilitate the Board Audit Committee to conduct its Statutory and Regulatory responsibilities with regard to Related Party Transactions. Note 60 to the Financial Statements on pages 318 to 324 set out the Information required on Related Party Transactions. In the opinion of the Committee, there were no transactions with Related Parties which were more favourable nor preferential during the period under review and the Bank had been compliant with the Code. Devaka Cooray Chairman Related Party Transactions Review Committee Colombo, Sri Lanka 18th February 2022
  110. Directors ’ Statement On Internal Control Over Financial Reporting RESPONSIBILITY KEY INTERNAL CONTROL PROCESSES The Board of Directors present this statement on Internal Control Over Financial Reporting of the Bank in accordance with Section 3 (8) (ii) (b) of Banking Act Direction No: 11 of 2007, and principle D.1.5. of the Code of Best Practice on Corporate Governance issued by the Institute of Chartered Accountants of Sri Lanka. The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls include the following: The Board of Directors (‘Board’) is responsible for the adequacy and effectiveness of Hatton National Bank PLC’s (‘the Bank’) system of internal controls. It is designed to manage the Bank’s key areas of risk within an acceptable risk profile and does not eliminate the risk of failure to achieve the business objectives and policies of the Bank. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatement of management and financial information and records against financial losses or fraud. The Board has established an on-going process for identifying, evaluating, and managing the significant risks faced by the Bank and this process includes enhancing the system of internal controls as and when there are changes to the business environment or regulatory guidelines. The process is regularly reviewed by the Board in accordance with the guidance for Directors of Banks on the Directors’ Statement on Internal Control issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). As per the said guidance, processes affecting significant accounts of the Bank were assessed along with the key risk areas. 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 the 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 robust to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes is in accordance with relevant accounting principles and regulatory requirements. The Board Sub Committees are established to assist the Board in ensuring: » the effectiveness of the Bank’s daily operations. » that the Bank’s operations are in accordance with the Bank’s declared objectives and strategies. » that the operations of the Bank are in line with the annual budget as well as the policies and business directions that have been approved by the Board. Internal Audit Division of the Bank checks for compliance with policies and procedures and the effectiveness of the internal control systems and highlights significant findings in respect of any non-compliance. Audits are carried out on majority of units and branches, the frequency of which is determined by the level of risk assessed by the internal audit, 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 Board Audit Committee and the findings of the audits are submitted to the Board Audit Committee for review at their periodic meetings. The Board Audit Committee of the Bank approves the annual audit plan, reviews internal control issues identified by the Internal Audit Division, the external auditors, regulatory authorities and management; and evaluates the adequacy and effectiveness 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 same. The minutes of the Board Audit Committee meetings are tabled for the information of the Board on a periodic basis. Further details of the activities undertaken by the Board Audit Committee of the Bank are set out in the Board Audit Committee Report on page 106 to 108 in IR. The Board Integrated Risk Management Committee (BIRMC) is established to assist the Board to oversee the overall management of principal areas of risk of the Bank. The Executive Risk Management Committee which includes representation from all key business and operating units of the Bank, assists the Board with the implementation of policies advocated at BIRMC. Operational committees have also been established with appropriate empowerment to ensure effective management and supervision of the Bank’s core areas of business operations. These committees include the Human Resource Management Committee, Assets and Liability Committee, the Information Technology Steering Committee, Executive Risk Management and Credit Policy Committee and the Operational Risk Steering Committee. In assessing the internal control system over financial reporting, identified officers of the Bank collated all procedures and controls that are connected with significant accounts and disclosures of the financial statements of the Bank. These, in turn, were observed and checked by the Internal Audit Division for suitability of design and effectiveness on an on-going basis. This assessment did not include Subsidiaries of the Bank. The Bank adopted SLFRS 9 – “Financial Instruments” in 2018 which became applicable for financial reporting periods beginning on or after 1st January 2018. The Bank continued to refine the statistical models used in the computations of Expected Credit Loss (ECL) and the data extraction procedures pertaining to the calculations performed in respect of SLFRS 9. Since adoption of this standard, progressive improvements on processes to comply with new requirements of classification, estimation of expected credit losses and disclosures were made whilst, further strengthening of processes continued to support the estimation of expected credit loss and financial statement disclosures. The existing models were further refined this year to validate the appropriateness of the underlying assumptions, incorporate the potential implications of COVID 19 Pandemic and the extended moratorium schemes introduced to support the recovery of the economy, based on stress testing the exposures to risk elevated sectors and adjustments made to economic factors. Considering the complexity involved in the computation of ECL from Loans and 111 INTEGRATED REPORT 2021
  111. Directors ’ Statement On Internal Control Over Financial Reporting Advances, the Bank will continue to strengthen the process with system supported procedures in order to minimize the manual intervention. Adequate training and awareness sessions have been conducted for the Board and the Senior Management with regard to this standard. Further, the Board ensures that processes and controls are put in place for use of management information systems and validation of information extracted to comply with SLFRS 9. The recommendations made by the external auditors in connection with the internal control system in previous years were reviewed during the year and appropriate steps have been taken to implement those. The Management has made many changes to the internal processes and systems to comply with Direction No 14 of 2021 issued by the Central Bank of Sri Lanka on 14th September 2021 which has become effective from 1st January 2022 and will continue to strengthen the internal control framework relating the new processes during the year 2022. Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka. REVIEW OF THE STATEMENT BY EXTERNAL AUDITORS Based on the above processes, the Board confirms that the financial reporting system of the Bank has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes has been done in accordance with Sri The external auditors, Messrs KPMG, have reviewed the above Directors’ Statement on Internal Control Over Financial Reporting for the year ended 31st December 2021 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 effectiveness of the internal control system of the Bank. Their Report on the Statement of Internal Control is given in IR page 113. Jonathan Alles Managing Director/Chief Executive Officer Aruni Goonetilleke Chairperson CONFIRMATION By order of the Board Devaka Cooray Chairman Board Audit Committee Colombo, Sri Lanka 18th February 2022 112 HATTON NATIONAL BANK PLC
  112. Independent Assurance Report TO THE BOARD OF DIRECTORS OF HATTON NATIONAL BANK PLC We were engaged by the Board of Directors of Hatton National Bank PLC (“Bank”) to provide assurance on the Directors’ Statement on Internal Control (“Statement”) included in this Annual Report for the year ended 31 December 2021. Management’s responsibility for the Statement on Internal Control Management is responsible for the preparation and presentation of the Statement in accordance with the “Guidance for Directors of Banks on the Directors’ Statement on Internal Control” issued in compliance with the section 3(8)(ii)(b) of the Banking Act Direction No. 11 of 2007, by the Institute of Chartered Accountants of Sri Lanka. Scope of the engagement in compliance with SLSAE 3050 Our responsibility is to issue a report to the Board on the statement based on the work performed. We conducted our engagement in accordance with Sri Lanka Standard on Assurance Engagements SLSAE 3050 – Assurance Report for Banks on Directors’ Statement on Internal Control issued by The Institute of Chartered Accountants of Sri Lanka. Summary of work performed Our engagement has been conducted to assess whether the Statement is both supported by the documentation prepared by or for Directors and appropriately reflects the process the Directors have adopted in reviewing the system of internal control for the Bank. To achieve this objective, appropriate evidence has been obtained by performing the following procedures: (a) Enquired the Directors to obtain an understanding of the process defined by the Board of Directors for their review of the design and effectiveness of internal control and compared their understanding to the Statement made by the Directors in the Annual Report. (b) Reviewed the documentation prepared by the Directors to support their statement made. (c) Related the statement made by the Directors to our knowledge of the Bank obtained during the audit of the Financial Statements. (d) Reviewed the minutes of the meetings of the Board of Directors and of relevant Board Committees. (g) Obtained written representations from Directors on matters material to the Statement on Internal Control where other sufficient appropriate audit evidence cannot reasonably be expected to exist. SLSAE 3050 does not require us to consider whether the Statement covers all risks and controls, or to form an opinion on the effectiveness of the Bank’s risk and control procedures. SLSAE 3050 also does not require us to consider whether the processes described to deal with material internal control aspects of any significant problems disclosed in the Annual Report will, in fact, remedy the problems. Our conclusion Based on the procedures performed, nothing has come to our attention that causes us to believe that the Statement included on pages 111 to 112 of this annual report is inconsistent with our understanding of the process the Board of Directors have adopted in the review of the design and effectiveness of internal control system over the financial reporting of the Bank. (e) Attended meetings of the Audit Committee at which the Annual Report, including the Statement on Internal Control is considered and approved for submission to the Board of Directors. (f) Considered whether the Directors’ Statement on Internal Control covers the year under review and that adequate processes are in place to identify any significant matters arising. Chartered Accountants Colombo, Sri Lanka 18th February 2022 113 INTEGRATED REPORT 2021
  113. Directors ’ Interest in Contracts with the Bank Related party transactions as required by LKAS 24 “Related Party Disclosures”, are detailed in Note 60 to the financial statements. In addition, the Bank carries out transactions in the ordinary course of its business at commercial rates with entities in which a Key Management Personnel (KMP) of the Bank is the Chairman or a Director of such entities, the details of which are given below. Also this complies with the requirements of section 168 of the Companies Act. No. 07 of 2007 and directions issued under section 47 (3), (4), (5) and (6) of the Banking Act No. 30 of 1988. 1. LENDING TRANSACTIONS WITH THE BANK Director/Company Name of the Nature of Transaction Director/ Relationship Aggregate Amount of Accommodation Security As at 31st December 2021 As at 31st December 2020 Limit Outstanding Limit Outstanding Rs.Mn Rs.Mn Rs.Mn Rs.Mn 200.00 *(200.00) *(200.00) 3,000.00 *(3,000.00) 6,000.00 2,991.09 12,191.09 200.00 3,000.00 6,000.00 2,991.09 12,191.09 200.00 *(200.00) *3,000.00 *(3,200.00) 6,000.00 6,000.00 2,991.09 12,191.09 200.00 3,000.00 6,000.00 6,000.00 2,991.09 12,191.09 2.50 2.50 2.50 2.50 32.50 32.50 32.50 32.50 100.00 20.00 3,000.00 *(400.00) *(110.00) 50.00 *(50.00) *(2,000.00) *(2,000.00) 3,170.00 18.66 110.00 128.66 100.00 20.00 3,000.00 *(400.00) *(614.00) 50.00 *(50.00) *(2,000.00) *(2,000.00) 3,170.00 614.00 614.00 50.00 50.00 - 50.00 50.00 - 1,200.00 200.00 *(100.00) *(500.00) *(270.00) *(40.00) *(400.00) 2.00 32.20 1,434.20 130.49 57.08 111.61 66.20 365.38 1,200.00 200.00 *(100.00) *(500.00) *(270.00) *(40.00) *(400.00) 2.00 32.20 1,434.20 130.49 57.08 111.61 66.20 365.38 Absolute ownership of leased vehicles, Duly Accepted usance Draft / Documents of Title, Forward Exchange Agreement, Clean, Overdraft Agreement, Letter of Indemnity, Concurrent Mortgage over Stocks/IL 300.00 15.00 315.00 1.19 1.19 300.00 15.00 315.00 29.09 29.09 Overdraft Agreement, LG Agreement (A) Mr Amal Cabraal John Keells Holdings PLC Director Ceylon Beverage Chairman Holding PLC Term loan 1 Total Lion Brewery (Ceylon) PLC Chairman Overdraft Letter of guarantee Money market loan Overdraft Term Loan 1 Letter of credit 1 Import loan 1 Letter of credit 2 Import loan 2 Total Sunshine Holdings PLC Director Overdraft Total Chairman Sunshine Healthcare Lanka Ltd. Sunshine Consumer Lanka Ltd 114 Overdraft Commercial paper Short Term Loan Overdraft/STL - II Short Term Loan Term Loan LG Total Director HATTON NATIONAL BANK PLC Letter of Credit Overdraft Letter of guarantee Import loan Forex Forward Booking Block lease facility Shipping guarantee Corporate CC Unadvised LC Block lease facility Total Overdraft Letter of Guarantee Total Clean Commercial paper agreement, Cash Back Board Resolution DPN LG Indemnity Loan Agreement OD Agreement Loan Agreement DPN/ Docs of Title DPN Docs of Title Import Loan Agreement Clean
  114. Director /Company Healthguard Pharmacy Ltd. Name of the Nature of Transaction Director/ Relationship Chairman Aggregate Amount of Accommodation Security As at 31st December 2021 As at 31st December 2020 Limit Outstanding Limit Outstanding Rs.Mn Rs.Mn Rs.Mn Rs.Mn Short term loan 1 Letter of Guarantee Overdraft 1 Overdraft 2 letter of credit Import loan Short term loan (Revolving) Total 20.00 10.00 *(5.00) 50.00 100.00 *(100.00) 5.00 7.00 20.00 10.00 *(5.00) 50.00 100.00 *(100.00) 5.00 7.00 15.94 - 15.94 Mortgage over stock Letter of Guarantee indemnity Docs of title. duly accepted usance drafts, Board Resolution, Clean 185.00 22.94 185.00 22.94 Akbar Pharmaceuticals (Pvt) Ltd Chairman LC Import Loan Export Bill Discounting MM Loans OD LG Total 200.00 *(200.00) *(100.00) *(100.00) 50.00 50.00 300.00 - - - Document of Title / Duly Accepted Usance Draft, Corporate Guarantee Lina Manufacturing (Pvt) Ltd Chairman LC Import Loan MM Loans OD LG Total 200.00 *(200.00) *(50.00) 125.00 25.00 350.00 - - - Document of Title / Duly Accepted Usance Draft, Corporate Guarantee 2,000.00 2,000.00 509.80 509.80 - - Clean 6.00 6.00 6.00 6.00 - - Lien over Savings Account 50.00 *(50.00) 50.00 - - - Clean (B) Mr W M M D Rathnayake Sri Lanka Institute Council Member of Information Technology (SLIIT) Hsenid Business Solutions (Pvt) Ltd Director Term Loan Total Bank Guarantee Total (C) Ms Aruni Goonetilleke Tea Small Holder NonFactories PLC Executive Director Overdraft MM Loan Total Celcius Solutions Spouse of (Pvt) Ltd Mrs.Aruni Goonetilleke is a Director LC Import Loan Term Loan I Term Loan II Term Loan III Total 100.00 *(100.00) 11.88 22.50 7.93 142.31 41.86 57.09 11.88 22.50 7.93 141.26 - - Documents of Title, Mortgage over stock, Guarantee Softlogic Finance Director PLC Overdraft /LG Term Loan Total 141.93 124.96 266.89 101.39 124.96 226.35 - - Clean / Indemnity Mortgage over Hire Purchase Receivables 115 INTEGRATED REPORT 2021
  115. Directors ’ Interest in Contracts with the Bank Director/Company Name of the Nature of Transaction Director/ Relationship Aggregate Amount of Accommodation Security As at 31st December 2021 As at 31st December 2020 Limit Outstanding Limit Outstanding Rs.Mn Rs.Mn Rs.Mn Rs.Mn (D) Mr L U D Fernando 100% Cash Margin HNB Assurance PLC Director LG Corp CC Total 26.69 1.00 27.69 26.69 1.00 27.69 26.69 1.00 27.69 26.69 1.00 27.69 HNB General Insurance Director Corp CC Total 2.00 2.00 2.00 2.00 - - 50.00 50.00 - 50.00 258.02 308.02 258.02 258.02 - 0.01 0.01 - - Clean 1,500.00 *(1,500.00) *(1,500.00) 1,500.00 159.09 320.25 479.34 - - Documents of Title, Duly Accepted Usance Drafts, CG of United Motors Lanka PLC 26.69 1.00 27.69 26.69 1.00 27.69 26.69 1.00 27.69 26.69 1.00 27.69 100% Cash back Margin, Board Resolution 1,000.00 1,000.00 0.15 2,000.15 300.00 300.00 1,000.00 1,000.00 0.15 2,000.15 - Negative Pledge, Corp. Guarantee/STO for the Recovery of 100% of CC o/s on due date 26.69 1.00 27.69 26.69 1.00 27.69 - - 100% cash margin Board Resolution 2.00 2.00 2.00 2.00 - - Clean Clean (E) Mr Prawira Rimoe Saldin Sithma Development (Pvt) Ltd. Chairman Overdraft Term Loan Total Commercial Property (F) Mr Devaka Cooray United Motors Lanka PLC Director TOD Total Unimo Enterprises Ltd Director LC Import Loan LG Total (G) Mr D P N Rodrigo HNB Assurance PLC Director LG Corp CC Total HNB Finance Chairman Overdraft MM Loan Corp CC Total (H) Mr T K D P Samarasinghe HNB Assurance PLC Alternate Director LG Corp CC Total HNB General Alternate Corp CC Insurance PLC Director Total * Figures in brackets indicate sub limits granted to respective entities. ** Approval was obtained for the excesses. 116 HATTON NATIONAL BANK PLC
  116. 2 . OTHER BUSINESS TRANSACTIONS WITH THE BANK Name of the Director / Relationship Nature of Transaction John Keels Holdings PLC Director Repo (outstanding as at year end) Interest on repurchase agreements Merchant Commission Healthguard Pharmacy Ltd. Director Sunshine Healthcare Lanka Ltd Director Chairman Company/Director (A) (B) 2021 2020 595.31 415.75 Merchant Commission 16.35 14.80 Merchant Commission 0.19 0.09 Repo (outstanding as at year end) Interest on repurchase agreements Rental paid Rental income 600.00 1.60 783.92 4.15 783.92 4.15 Director Premium paid Interest on repo Merchant Commission Rental income Dividend income Commission received Claims paid Commission and others 84.12 3.60 16.72 9.15 251.94 390.09 16.53 13.87 10.88 20.65 8.87 180.00 334.21 22.83 HNB Assurance PLC and HNB General Insurance Limited Director Premium paid Merchant Commission Rental income Dividend income Commission received Claims paid Interest on Repo Commission and others 84.12 16.72 9.15 251.94 390.09 16.53 3.60 13.87 10.88 20.65 8.87 180.00 334.21 22.83 - Credit Information Bureau of Sri Lanka Director CRIB Charges Investment-shares 46.08 0.53 47.12 0.53 Lanka Financial Services Bureau Ltd Director Swift Charges Investment-shares 5.65 5.00 8.55 5.00 12.50 0.30 - 6.37 6.14 5.88 15.93 0.10 13.96 Mr Amal Cabral Mr Prawira Rimoe Saldin Sithma Development (Pvt) Ltd. (C) Mr L U D Fernando HNB Assurance PLC and HNB General Insurance Limited (D) Mr D Rodrigo Guardian Acuity Asset Management (E) REPO Interest on repo Mr Devaka Cooray Management Systems Ltd (F) Amount (RsMn) Director Administration Expenses Alternate Director Merchant Commission Data Line Expenses Dr T K D A P Samarasinghe Lanka Bell Limited Collateral details of facilities for each company are grouped together without Identifying collateral, facility- wise. The above disclosure only pertains to the transactions carried out with directors who are holding office as at 31/12/2021. The above entities also held customer deposits with the Bank totalling to 21,030.03 Mn. and interest paid was 1,074.62 Mn. Interest income earned from loans and advances amounted to 712.63 Mn. & Net Fee Income totalling to 408.37 Mn. for the year ended 31/12/2021. 117 INTEGRATED REPORT 2021
  117. Risk Review 2021 The Bank continued to strengthen its risk management capabilities while refining the effectiveness of initiatives implemented in 2020 in response to elevated risks . Initiatives to strengthen the first line of defence through high levels of risk awareness gathered momentum in 2021 with activation of online training modules which enabled increased coverage and self paced learning. The prolonged impact of the COVID-19 pandemic has resulted in elevated risk levels across the countries, businesses sectors and increased the vulnerability of entities and people. The quantitative easing measures adopted by countries across the world played a key role in containing corporate bankruptcies and maintaining financial stability across markets. Countries have experienced divergent economic recovery paths with advanced economies reflecting more resilience than the emerging market economies as access to vaccines, inflationary pressures and balance of payment deficits exacerbated vulnerabilities. A significant number of emerging market economies, including Sri Lanka, increased policy rates during the second half of 2021 as headroom for maintaining the accommodative policies diminished. It is also important to note the increase in crypto currency assets which surpassed US$ 2 Trillion recording a 10-fold increase since the beginning of 2020, adding another dimension of risk to global financial markets due to its unregulated nature. financial transactions increased significantly due to the prolonged pandemic elevating operational risks and cyber threats. Increased focus on prudent financial management coupled with low interest rates and tax rates supported the recovery of a number of businesses in sectors which were not adversely affected by COVID-19. However, overall recovery remains fragile with risks tilted to the downside. Work from home arrangements became an established norm for a number of roles as organisations focused on creating safe work environments for employees while in other areas challenges remained as physical presence was a necessity requiring formation of bubbles and additional precautions to manage the contagion. Digitalisation of In summary, as noted by the IMF in its October 2021 World Economic Outlook report, global recovery continues but momentum has weakened and uncertainty has increased as the pandemic resurges. Additionally, policy options have become more difficult with limited choices. Overall, corporate earnings increased and stock exchanges across the world recorded growth in market capitalisation as well as the amount of capital raised through IPOs. Supply chain disruptions including port congestion were key concerns for manufacturers and retailers alike during the year, exacerbated locally by wide-ranging import restrictions. Climate action remains a key concern as we witnessed significant climate events across the globe which contributed to supply chain woes and increased regulation over climate disclosures across geographies as well as investor actions. Refer the Governance & Risk Report, for a more detailed review of how the Bank manages risk and capital. 118 HATTON NATIONAL BANK PLC MAJOR RISK MANAGEMENT ACHIEVEMENTS IN 2021 » Recorded the lowest Non-Performing Ratio among peers » Staff were supported on all health and safety matters thereby ensuring over 98% of the staff are fully vaccinated » Operational losses were an all-time low due to strengthened Operational Risk practices » The Bank was not exposed to any Cyber breaches during the year
  118. SOCIETAL EXPECTATIONS POLICY UNCERTAINTY Banks and financial Institutions are expected to play a key role in facilitating the post COVID-19 economic recovery of the country by providing essential financial relief to their customers across industries and geographies . Meanwhile with the rapid growth in digital platforms for banking services, higher customer expectations on convenience, reliability, availability and security are inevitable. Recalibration of socioeconomic policies gave rise to a slew of policy measures to curtail imports, inflation and interest rates and support systemic financial stability. TECHNOLOGY & CYBERSECURITY HEALTH & SAFETY Having in place the infrastructure and processes to implement health and safety protocols such as social distancing, tele-working arrangements are becoming a critical necessity as the country gradually opens up and adapts to the new normal post COVID-19. MONETARY POLICY Governments are assessing the accommodative monetary policies implemented to support economic recovery with a view of gradually tightening of monetary policy, including ending moratoria and higher interest rates which will impact people and businesses and countries in 2022. CLIMATE CHANGE Although Sri Lanka has been fortunate in 2021, natural disasters and climate change impacts can exacerbate our woes with supply side shocks, straining already stretched reserves. A GLOBAL PANDEMIC Recurring waves of the COVID-19 pandemic throughout 2021 continued to strain health care systems and economies around the world, with emerging economies in particular continuing to face the economic repercussions of capital outflows, business lockdowns and a breakdown on key industries such as tourism. Technology paved the way for customers to transition to digital platforms as society sought to minimise contact. Cyber threats escalated due to increased volumes of digital transactions and remain a concern, globally. PEOPLE & BEHAVIOURS Behaviours of customers and staff continue to evolve in response to the unprecedented pressures brought about by the COVID-19 pandemic. Working from home, performance pressures, customer behaviours, pandemic related fears and financial stress have all combined to bring about increased and complex challenges for our customers and staff. FOREIGN CURRENCY LIQUIDITY The Central Bank of Sri Lanka introduced several regulations for Banks including the suspension of purchase of Sri Lanka International Sovereign Bonds, restrictions on entering into forward contracts of foreign exchange, revoking of short term foreign currency borrowing limits and the imposition of maximum interest rates on foreign currency deposits. These capital controls together with import restrictions and exchange controls have had a significant impact on the foreign currency operations of the banking sector. 119 INTEGRATED REPORT 2021
  119. Risk Review 2021 The HNB Board and BIRMC maintained high levels of oversight , closely monitoring the risk profile of the Bank and review the effectiveness of its systems, processes and tools. The Bank continued to strengthen its risk management capabilities while refining the effectiveness of initiatives implemented in 2020 in response to elevated risks. Initiatives to strengthen the first line of defence through high levels of risk awareness gathered momentum in 2021 with activation of online training modules which enabled increased coverage and self paced learning. While licensed commercial banks have strengthened their capital adequacy, the strain on the advanced portfolio is evident in the increased Gross Non-performing Advances Ratio. The conservative approach adopted by the sector to navigate through the uncertainties is evinced by the higher liquid assets ratios and lower credit to deposits ratio. Efficiency ratios indicate the extent of business disruptions and the impact of import restrictions. NAVIGATING UNCERTAINTY COVID-19 added a new dimension to risk and the Bank established a COVID -19 Task Force to monitor developments and formulate coordinated responses across all aspects as deemed necessary. Health and safety risks remained elevated for most of 2021, necessitating closures of branches at times as the country experienced over 10 weeks of lockdown during the year. The Bank has now achieved a 98% coverage of employees who are double vaccinated reducing risks and continue to follow protocols set in place for social distancing. Licensed Commercial Banks Industry Indicators We worked proactively with customers to support in their business revival through positive cashflow management and to the effective transition and use of digital platforms for transactions. Adversely affected sectors continue to be supported with extended moratoria in accordance with CBSL guidelines. Dollar liquidity issues posed a significant challenge to customers and the Bank during the year necessitating careful management of foreign exchange portfolios. Cyber risk remained a key area of concern and increased safeguards against cyber attacks and hacking, upgrading of business continuity plans (BCP) and the IT infrastructure of the Bank supported the management of these risks. The appointment of a CISO has strengthened the Bank’s IT governance and a greater focus on cyber threat management. We continued to strengthen and harmonise risk management in Group companies. Quarterly submissions are reviewed by Group Risk and BIRMC to assess potential impacts at entity level and Group level. Particular areas of focus included management of credit risk, cyber risks and liquidity risk. RISK GOVERNANCE Ultimate responsibility for risk management lies with the Board of Directors who are assisted by the mandatory Board Integrated Risk Management Committee (BIRMC). CBSL Directions set out the duties of the BIRMC and the Bank supplements these where necessary to ensure that the rigour of oversight is aligned to the Bank’s risk appetite which is approved by the Board. A dedicated Risk Management unit comprising 39 staff supports BIRMC led by the Chief Risk Officer 2017 2018 2019 2020 Q3 2021 Core Capital (Tier 1 Capital) Adequacy Ratio 13.4 13.0 12.3 13.6 12.9 Total Capital Adequacy Ratio 16.4 16.2 15.6 17.1 16 2.3 3.3 5.5 7.0 4.8 Return on Equity (ROE) Gross Non-performing Advances Ratio 17.4 13.7 6.8 10.9 15.1 Efficiency Ratio 45.2 48.5 60.1 51.7 47.5 Interest Margin 3.5 3.7 3.4 3.1 3.4 Liquid Assets Ratio 27.2 25.7 27.8 33.8 34.4 Credit to Deposit Ratio 90.1 94.2 93.4 86.5 83.1 Source: CBSL 120 HATTON NATIONAL BANK PLC who reports independently to the BIRMC. Executive Committees comprising the CEO, CRO and other Key Management Personnel strengthen the first line of defence, fostering high levels of risk awareness throughout the Bank through vigilant risk monitoring and other related initiatives. The Bank’s risk management framework comprises a suite of Risk Management Policies and the Risk Appetite Statement supported by an organization structure based on the three lines of defence model.
  120. RISK CULTURE The risk culture of the Bank is shaped by a comprehensive Risk Management Policy Framework and robust corporate and risk governance . High levels of risk awareness is key to the financial stability of the Bank and supports business line growth strategies. A culture of risk awareness and compliance is nurtured both within the Bank and across all entities in the Group through regular training of employees as an integral part of the training calendar. Employees in specialised roles are required to gain specified levels of skills and experience relevant to their roles which encompass a thorough understanding of the risks relevant to these roles. This is vital to strengthen the first line of defence, facilitating process efficiencies and overall resilience of the Bank. Despite challenges in rolling out the training as planned in 2020, we have continued to reinforce risk awareness through increased rigour of processes, analytics and feedback. The Risk Management Department serves as the 2nd line of defence, implementing the Bank’s Risk Management Framework and policies. Internal audit functions as the 3rd line defence, reviewing the effective functioning of internal controls set in place and providing feedback independently to the Board Audit Committee. Board of Directors Board Audit Committee Board Credit Committee Board Integrated Risk Management Committee Board Strategic Investment Review Committee Board Recoveries Committee Chief Risk Officer Compliance Officer Risk Management Departments Cyber & Information Security Risk Credit Risk Market Risk Operational Risk Business Continuity Management CEO Executive Committees Executive Risk Management Committee Asset & Liability Committee Operational Risk Steering Committee Information Security Steering Committee Loan Review Mechanism RISK APPETITE STATEMENT The Risk Appetite Statement and the underlying thresholds are established with the objective of defining risk boundaries for managing the business or other performance parameters of the Bank. Thus the Risk Appetite Statement serves to establish boundaries to form integrated and robust links between strategy, target setting and risk management process. Portfolio Risk Management Integrated Risk Management 121 INTEGRATED REPORT 2021
  121. Risk isk Liqu idit Co yR mm isk od ity Pri ce Re Ris sid k ua lR isk ncy R Equ Mar ket R is k Curre ity P rice dit Cre k Ris ial nc No nF i k Ris k Ris Risk ion trat n e c Con arty Risk Counterp Default Ris y og nol Riak ial nc na h Tec l s ime l Cr ncia ce NON-FINANCIAL RISKS : Operational risks can have a significant financial impact on the performance and stability of the Bank. Reputation Risk is managed through improved regulatory compliance and stakeholder engagement. Strategic Risk is being addressed through Project Everest and the digitization of the Bank with significant headway made on both despite the challenges in 2021. Information and Cyber risk threats escalated since 2020 affirming our decision to segregate this key risk from other operational risks in 2020. Operational Risk is managed through sound governance, robust internal controls, dedicated compliance and legal functions and sound financial reporting processes. The three lines of defence model plays a key role in addressing this risk. Key risk indicators for operational risk are given alongside. 122 HATTON NATIONAL BANK PLC k n io k at is rm r R fo e In Cyb & Rep uta R tion Str ate isk gic Ris k Fina Lega Complian BCM »Recognised as the Best Managed Bank during the COVID-19 pandemic in Sri Lanka by The Asian Banker in 2020, Fin a y er v co Re nal ratio Ope Risk »Fitch Ratings Lanka Ltd., has affirmed a Long Term rating of AA-(lka) with a stable outlook reflecting its financial strength, superior domestic franchise and high levels of capitalisation relative to domestic peers which has balanced the risk appetite. It is noteworthy that the rating is influenced by the outlook for Sri Lankan banks and the country, which remains negative. Interest Rate Risk Risk Review 2021 Operational Losses & Recoveries Rs Mn Rs Mn 800 700 600 500 400 300 200 100 0 800 700 600 500 400 300 200 100 0 2017 2018 2019 Operational Losses Net Operational Losses 2020 2021 Recoveries
  122. MARKET RISK : Interest rate risk and exchange rate risk are the most significant components of market risk to the Bank as exposure to equity risk is minimal. 2021 AT A GLANCE Rs Mn Interest Rate Risk Equity Price Risk Exposure 2021 2020 2021 2020 2021 2020 Assets 1,060,349 979,456 26,834 22,705 527,192 539,085 Liabilities 1,043,638 914,335 - - 525,798 538,140 Rs Mn Yield Curve Exchange Rate 100 bps Sensitivity Currency Risk 50 bps Equity PBT Equity PBT Equity Increase/ Strengthening - 3,193,914 6,971 - 6,971 3,193,914 Decrease/ Weakening - 3,193,914 6,971 - 6,971 3,193,914 » Monitored and Reported Key Risks arising from group companies CREDIT RISK » Processed moratoriums for over 8,000 customers Liquidity Indicators This is carefully managed by the Assets & Liability Committee to maintain prudent capital buffers. Movement of trend-lines reflect the challenges during the year but remain well within the regulatory requirements. » Reviewed Risk Appetite statement and Risk Goals based on the new normal » Reviewed and strengthened Risk related policies Total PBT LIQUIDITY RISK: RISK GOVERNANCE » Rs 86 billion moratoriums as of end December 2021 % 20 MARKET RISK 15 » Recalibrated Counterparty limits to capture Covid – 19 impact 10 » Introduced Delta limits for investment in securities 5 0 2017 2018 2019 2020 2021 OPERATIONAL RISK LCB Core Capital Ratio LCB Total Capital Ratio Core Capital Ratio Bank Total Capital Ratio Bank » Introduced Business Disruption Containment – Public Health Contagion Plan » Established Work from Home Security arrangements for staff CREDIT RISK: » Conducted BCP drills and strengthened infrastructure at DR sites This is the largest exposure for the Bank and the following key risk indicators reflect the exposure and credit quality as at 31.12.2021. Rs Bn % 6 1,200 1,000 5 800 4 600 400 200 0 2017 INFORMATION & CYBER RISK Credit Exposure Credit Quality 2018 2019 2020 2021 Rs Bn 1,500 Rs Bn 1,500 1,200 1,200 900 900 600 600 3 300 300 2 0 2017 2018 2019 Neither Past due nor impaired Past due not impaired Max Exposure On BS Max Exposure Off BS Impaired Gross NPA Ratio % Net Exposure On BS Net Exposure Off BS 2020 2021 0 » Implemented Data Loss Prevention (DLP) solution across all users » Reviewed Privilege Activities on Database, Operating Systems and Applications » Engaged external cyber security consultants to carry out systemic functionality reviews, Vulnerability Assessments and Penetration Testing 123 INTEGRATED REPORT 2021
  123. Risk Review 2021 Loan book grew by 14 % and deposits growth also increased to 11%. Deposits of Rs 1,075Bn account for 89% of Total Liabilities. Bank liquidity indicators improved in line with industry as depicted in the Liquidity Indicators graph above. Key risks impacting our operations are summarised below as viewed through a prudent lens: Risk Assessment Trend Rationale/Description External Economic growth and trade cycles High While countries are recording economic growth, uncertainties remain elevated with risks tilted to the downside. While IMF forecasts global economic growth of 5.9 for 2021 and 4.9 for 2022, significant downside risks remain. Sri Lanka’s growth is forecast at 4% for 2022 by CBSL. However, the country’s debt repayment challenges, declining foreign exchange reserves, inflationary pressures and uncertainties on the tourism sector point to continued economic challenges for 2022. Fiscal and monetary policy Moderate The need to manage health, humanitarian and economic concerns continues to exacerbate challenges for policy makers. Accordingly, we expect the policy environment to remain dynamic in 2022 as well,. Regulation Moderate Regulation is likely to focus on the need to maintain financial stability in a recessionary environment in contrast to the focus on the evolution of the industry. Cyber threats High Cyber threats have increased due to increasing volumes of digital transactions and HNB continues to increase its vigilance in order to manage this rapidly evolving threat. Credit Risk Moderate While recoveries were strengthened, extensive moratoria were also extended to customers during the year through CBSL funded schemes and the Bank’s own COVID fund. These moratoria which were originally scheduled to end in September 2020 have now been extended until June 2022 and may prove a drag on credit risk through 2022. People & Operational Risk Moderate Operational risk remains elevated despite strengthening of operational risk management frameworks and high levels of staff vaccinations due to socioeconomic stresses and innate people factors. High levels of operational risk awareness and a focus on building a culture of compliance , including continuous on the job training and improvements in effectiveness of internal controls are key mitigants. Liquidity Risk Moderate Liquidity indicators are well above the regulatory requirements and the Bank’s risk appetite. Additionally, market liquidity has been comfortable due to lower credit demand. Internal The Bank has steered a steady course, shoring up its capital and liquidity while remaining active in supporting access to finance for large corporates, SME, microfinance and retail banking segments. We have remained responsive to stakeholder concerns, carefully balancing priorities as we navigate through a challenging economic landscape. The rigour of Board and BIRMC oversight coupled with enhanced capabilities of the Risk Management Team has supported strengthening of the Bank’s risk profile which remains comfortably above regulatory requirements. We expect 2022 to remain challenging with business disruptions, policy challenges and potential changes in capital flows. The moratoria scheduled to end will pose challenges for some customers and we expect credit risk to remain elevated until there are clear signs of sustainable recovery. Cyber threats are likely to remain at elevated levels too as the volume and value of transactions on 124 HATTON NATIONAL BANK PLC digital platforms continues to grow. Continued business disruptions and socioeconomic stresses are likely to exacerbate operational risk threat levels. Market risk factors are also expected to be volatile as policy makers recalibrate responses to emerging threats and tighten monetary to manage the countries economic challenges. A strong risk governance framework, culture, policies, systems and processes support Risk and Capital Management at the Bank, strengthening resilience as evinced by our rating and key stability indicators. Continued investments in risk management tools have enhanced insights and enabled early detection of threats. The Bank will continue to be vigilant while strengthening the rigour of processes to manage the uncertainties in the year ahead.
  124. SUSTAINING OUR PERFORMANCE FINANCIAL REPORTS Financial Calendars 126 Chief Executive Officer ’s and Chief Financial Officer’s Responsibility Statement 127 Directors’ Responsibility for Financial Reporting 128 Independent Auditor’s Report 130 Financial Highlights - Bank 135 Income Statement 136 Statement of Profit or Loss and Other Comprehensive Income 137 Statement of Financial Position 138 Statement of Changes in Equity 140 Statement of Cash Flows 144 Notes to the Financial Statements 146 125 INTEGRATED REPORT 2021
  125. Financial Calendars FINANCIAL CALENDAR - 2021 52nd Annual General Meeting held on 30th March 2021 Rs . 8.00 per share Final Dividend for 2020 paid on 12th April 2021 Audited Financial Statements signed on 18th February 2022 53rd Annual General Meeting to be held on 30th March 2022 Rs. 9.00 per share Final Dividend for 2021 payable in   (Cash Dividend Rs. 6.50 per share and Scrip Dividend Rs.2.50 per share)* April 2022 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 13th May 2021 2nd Quarter Interim Results released on 13th August 2021 3rd Quarter Interim Results released on 12th November 2021 FINANCIAL CALENDAR - 2022 Interim Dividend for 2022 to be payable in ** December 2022 54th Annual General Meeting to be held in March 2023 Final Dividend for 2022 payable in *** April 2023 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 to be released in May 2022 2nd Quarter Interim Results to be released in August 2022 3rd Quarter Interim Results to be released in November 2022 * Subject to confirmation by Shareholders ** Subject to confirmation by Directors *** Subject to confirmation by Directors and Shareholders 126 HATTON NATIONAL BANK PLC
  126. Chief Executive Officer ’s and Chief Financial Officer’s Responsibility Statement The financial statements of Hatton National Bank PLC (the “Bank”) and the consolidated financial statements of the Bank and its subsidiaries as at 31st December 2021 are prepared and presented in compliance with the requirements of the following: »» Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), »» Companies Act No 7 of 2007, »» Sri Lanka Accounting and Auditing Standards Act No 15 of 1995, »» Banking Act No 30 of 1988 (as amended), »» Listing Rules of the Colombo Stock Exchange, »» Banking Act Direction No 11 of 2007 on Corporate Governance for Licensed Commercial Banks in Sri Lanka (as amended from time to time) and »» Code of Best Practice on Corporate Governance 2017 issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) The formats used in the preparation of the financial statements and disclosures made comply with the formats prescribed by the Central Bank of Sri Lanka. 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 reclassified wherever necessary to comply with the current presentation. The significant accounting policies and estimates that involved a high degree of judgment and complexity were discussed with the Board Audit Committee and 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 reflect a true and fair view, the form and substance of transactions and the Bank’s state of affairs are reasonably presented. To ensure this, the Bank has taken proper and sufficient 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 are reviewed, evaluated and updated on an on going basis. The Board of Directors has carried out an assessment on the ability of the Bank to continue as a going concern taking into consideration the potential implications of COVID 19 pandemic on Bank’s operations and future financial performance. We confirm that the Bank has adequate resources to continue operations in the foreseeable future and have adopted the ‘going concern’ basis in preparing these financial statements. The Board has established a framework of internal control as set out in the Directors ‘Statement of Internal Control Over Financial Reporting ICOFR on page 111 to 112. The Bank’s internal auditor has conducted periodic audits to provide reasonable assurance that the established policies and procedures of the Bank are 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, the Board assessed the effectiveness of the Bank’s internal controls over financial reporting during the year ended 31st December 2021, as required by the Banking Act Direction No 11 of 2007, result of which is given on page 111 to 112 in IR, the ‘Directors’ Statement on Internal Control Over Financial Reporting - ICOFR’. External auditor’s Assurance Report on the ‘Directors’ Statement on Internal Control Over Financial Reporting’ is given in IR page 113. The financial statements of the Group for the year 2021 were audited by Messrs KPMG, Chartered Accountants, the independent external auditors. Their report is given in IR pages 130 to 134. The Board Audit Committee of the Bank meets periodically with the internal audit team and the independent external auditor to review their audit plans, assess the manner in which the auditors are performing their responsibilities and to discuss their reports on internal controls and financial reporting issues. To ensure complete independence, the external auditor and the internal auditor have access to the members of the Board Audit Committee to discuss any matter of substance, details of which are given in the ‘Board Audit Committee Report’ on page 106 to 108 in IR. The Board Audit Committee approves the audit and non-audit services provided by external auditor, Messrs KPMG, in order to ensure that the provision of such services does not impair KPMG’s independence. We confirm that, »» the Bank and its subsidiaries have complied with all applicable laws, regulations and prudential requirements; »» there are no material non compliances; »» there are no material litigations that are pending against the Group other than those disclosed in the Note 59 (c) to the financial statements in this Annual Report; and »» all taxes, duties, levies and all statutory payments payable by the Group and the Bank and all contributions, levies and taxes payable on behalf of and in respect of the employees of the Group and the Bank as at December 31, 2021 have been paid, or where relevant provided for. Jonathan Alles Managing Director/Chief Executive Officer Rajive Dissanayake Chief Financial Officer Colombo, Sri Lanka 18th February 2022 127 INTEGRATED REPORT 2021
  127. Directors ’ Responsibility for Financial Reporting The responsibility of the Directors in relation to the financial statements of the Bank, its subsidiaries and joint venture company prepared in accordance with the provisions of the Companies Act No 7 of 2007 is set out in the following statement. Accountants of Sri Lanka (CA Sri Lanka). In addition, these financial statements comply with the prescribed format issued by the Central Bank of Sri Lanka for the preparation of annual financial statements of Licensed Commercial Banks. The responsibility of the external auditor in relation to the financial statements are set out in the report of the auditors given in IR pages 130 to 134. The Directors have also instituted effective and comprehensive systems of internal control for identifying, recording, evaluating and managing the significant risks faced by the Bank throughout the year which are regularly reviewed by the Board. This comprises internal reviews, internal audit and the entire system of financial 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 2021 are given on pages 111 to 112 in IR, Directors’ Statement on Internal Control Over Financial Reporting. External Auditor’s Assurance Report on the Directors’ Statement on Internal Control is given in IR page 113. As per the provisions of sections 150 (1), 151, 152, and 153 (1) & (2) of the Companies Act No 7 of 2007, the Directors are required to prepare financial statements for each financial year and place them before a General Meeting. The financial statements comprise the Statement of Financial Position as at 31st December 2021, the Statement of Comprehensive Income, the Statement of Changes in Equity and the Statement of Cash Flow for the year then ended and notes thereto. The financial statements of the Bank, its subsidiaries and joint venture company give a true and fair view of: »» the state of affairs of the Bank, its subsidiaries and joint venture company as at 31st December 2021; and »» the profit or loss of the Bank, its subsidiaries and joint venture company or the financial year then ended. »» In preparing these financial statements, the Directors are required to ensure that: appropriate accounting policies have been selected and applied in a consistent manner and material departures, if any, have been disclosed and explained; »» judgements and estimates have been made which are reasonable and prudent; and »» all applicable accounting standards, as relevant, have been complied with; The Directors are also required to ensure that the Bank, its subsidiaries and joint venture company have adequate resources to continue in operation to justify applying the going concern basis in preparing these financial statements. The Directors are also required to take into consideration the potential implications of COVID-19 Pandemic on the Group’s business, operations and financial performance this year as well. Further, the Directors have a responsibility to ensure that the Companies within the Group maintain sufficient accounting records to disclose, with reasonable accuracy, the financial position of the Bank, its subsidiaries and joint venture company. Financial statements prepared and presented in this report have been prepared based on Sri Lanka Accounting Standards (commonly referred as “SLFRS”/“LKAS”) laid down by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) consistent with the underlying books of accounts and are in conformity with the requirements of 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 Listing Rules of the Colombo Stock Exchange and the Code of Best Practice on Corporate Governance 2017 issued by the Institute of Chartered 128 HATTON NATIONAL BANK PLC The Directors have taken appropriate steps to ensure that the Bank and Group maintain proper books of accounts and review the financial reporting system at their regular meetings and also through the Board Audit Committee. The report of the Board Audit Committee is given on pages 106 to 108 in IR. The Board of Directors also approves the interim and annual financial statements prior to their release based on review and recommendation by the Board Audit Committee. The Board of Directors accepts responsibility for the integrity and objectivity of the financial statements presented in this Integrated Report. Directors are required to prepare the financial statements and provide the Bank’s external auditor, Messrs. KPMG, with every opportunity to carry out whatever reviews and checks on the system of internal control they may consider appropriate and necessary for expressing their independent audit opinion on the financial statements. They have examined the financial statements made available to them by the Board of Directors of the Bank together with all the financial records, related data and minutes of shareholders’ and Directors’ meetings and expressed their opinion which appears as reported by them on pages 130 to 134 in IR. The financial statements of the Bank and the Group have been certified by the Chief Financial Officer of the Bank, the officer responsible for their preparation, as required by Sections 150 (1) (b) and 152 (1) (b) of the Companies Act. Also the financial statements of the Bank and the Group have been signed by two Directors and the Company Secretary of the Bank on 18th February 2022 as required by Sections 150 (1) (c) and 152 (1) (c) of the Companies Act. Further, as required by Section 56 (2) of the Companies Act No 7 of 2007, the Directors have confirmed that the Bank, based on the information available, satisfies 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 certificate from the auditors, prior to declaring a final dividend of Rs 9.00 per share (in the form of Rs 6.50 cash and Rs. 2.50 scrip) for the year 2021.
  128. As required by Sections 166 (1) and 167 (1) of the Companies Act, the Board of Directors has prepared this Annual Report in time and the Annual Report will be published/hosted in the Bank’s Website and Colombo Stock Exchange Website. The Link will be shared with the shareholders enabling them to access the Annual Report electronically. Bank will also ensure that a copy of the Annual Report is sent to every shareholder of the Bank, who expressed desire to receive a hard copy (or a copy in pdf form in a CD-ROM containing the Annual Report) within the stipulated period of time as required by the Rule No. 7.5 (a) and (b) on Continuing Listing Requirements of the Listing Rules of the CSE. Further, all shareholders in each category have been treated equitably in accordance with the original terms of issue. The Directors to the best of their knowledge and belief, are satisfied 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 Statement of Financial Position date have been paid or where relevant provided for, except as provided in Note 59 to the financial statements covering contingent liabilities. Accordingly, the Directors are of the view that they have discharged their responsibilities as set out in this statement. By order of the Board K A L Thushari Ranaweera (Mrs) Deputy General Manager (Legal)/ Board Secretary Colombo, Sri Lanka 18th February 2022 129 INTEGRATED REPORT 2021
  129. Independent Auditor ’s Report TO THE SHAREHOLDERS OF HATTON NATIONAL BANK PLC Basis for Opinion REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS We conducted our audit in accordance with Sri Lanka Auditing Standards (SLAuSs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Group in accordance with the Code of Ethics issued by CA Sri Lanka (“Code of Ethics”) that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion We have audited the financial statements of Hatton National Bank PLC (“the Bank”) and the consolidated financial statements of the Bank and its subsidiaries (“the Group”), which comprise the statement of financial position as at 31st December 2021, and the income statement, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies as set out on pages 136 to 330 of this Annual Report. In our opinion, the accompanying financial statements of the Bank and the Group give a true and fair view of the financial position of the Bank and the Group as at 31st December 2021, and of their financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Bank’s financial statements and the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the Bank’s financial statements and the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Allowances for Expected Credit Losses Refer to Note 2.2 (Accounting Judgement, Estimates and Assumptions), Note 15 (Impairment charge for loans and other losses ) and Note 31 (Financial assets measured at amortised cost - loans and advances to customers), to these financial statements Risk Description Our Responses As disclosed in Note 31 & 15 to these financial statements, the Bank and the Group has recorded financial assets measured at amortised cost against loans and advances to customers, of Rs 928,972 Mn and Rs 968,907 Mn respectively as at 31st December 2021. High degree of complexity and judgment are involved in estimating Expected Credit Loss (ECL) ( Bank Rs 52,717 Mn; Group Rs 57,654 Mn) as at the reporting date. Our audit procedures to assess the allowances for ECL included the following: Allowance for expected credit losses is a key audit matter due to the significance of the loans and receivables balance to the financial statements and the inherent complexity of the Bank and Group’s ECL models used to measure ECL allowances. These models are reliant on data and a number of estimates including the impact of multiple economic scenarios and other assumptions such as defining a significant increase in credit risk (SICR). Selecting a sample (based on quantitative thresholds) of larger customers where impairment indicators have been identified by management and assessed as higher risk or impaired, and a sample of other loans, focusing on larger exposures assessed by the Bank and Group as showing signs of deterioration, or in areas of emerging risk (assessed against external market conditions and in particular considering the impacts of COVID-19). 130 HATTON NATIONAL BANK PLC Testing key controls of the Bank and Group in relation to: • Reconciliation of the data used in the ECL calculation process to gross balances recorded within the general ledger as well as source systems; • IT system controls which record loans days past due, and non-performing loan classification. Assessing impairment for individually significant customers Obtaining management’s assessment of the recoverability of these exposures (including individual impairment calculations) and assessed whether individual impairment provisions, or lack of, were appropriate.
  130. SLFRS 9 Financial Instruments requires the Group to measure ECLs on a forward-looking basis reflecting a range of economic conditions . Post-model adjustments are made by the Bank and Group to address known ECL model limitations or emerging trends in the loan portfolios. We exercise significant judgements when evaluating the economic scenarios used and the judgmental post model adjustments the Bank and Group applies to the ECL results. The Bank and Group’s criteria selected to identify a SICR are key areas of judgement within the Bank and Group’s ECL methodology as these criteria determine if a forward-looking 12 month or lifetime allowance is recorded. The COVID-19 pandemic has meant that assumptions regarding the economic outlook are more uncertain which, combined with varying government responses, increases the level of judgement required by the Bank and Group in calculating the ECL, and the associated audit risk. Additionally, allowances for individually significant loans exceeding specific thresholds are individually assessed by the Bank. We exercise significant judgment in evaluating the assessment of specific allowances based on the expected future cash repayments and estimated proceeds from the value of the collateral held by the Bank and Group in respect of the loans. The disclosures regarding the Group’s application of SLFRS 9 are key to explaining the key judgements and material inputs to the SLFRS 9 ECL results. This included the following procedures • Evaluating management’s assessment of recoverability of the forecasted cash flows by comparing them to the historical performance of the customers, their financial position and the expected future performance where applicable; • Assessing external collateral valuer’s credentials and comparing external valuations to values used in management’s impairment assessments; • Exercising our judgment, our procedures included using our understanding of relevant industries and the macroeconomic environment and comparing with the data and assumptions used by the Bank and Group in recoverability assessment. Where relevant we assessed the forecast timing of future cash flows in the context of underlying valuations and business plans and evaluating the key assumptions in the valuations; • Testing the implementation of the Bank and Group’s SICR methodology by re-performing the staging calculation for a sample of loans; • For a sample of customer loans which were not identified as displaying indicators of impairment by management, we reassessed the conclusions made by the management by reviewing the historical performance of the customers and form our own view whether any impairment indicators were present. Assessing the adequacy of collectively assessed provisions We tested key controls of the Group in relation to: • The ECL model governance and validation processes which involved assessment of model performance; • The assessment and approval of the forward-looking macroeconomic assumptions and scenario weightings, trends in the credit risk concentration of specific portfolios and our understanding of economic conditions. As part of this work, we assessed the reasonableness of the Group’s considerations of the economic uncertainty relating to COVID-19. Our further audit procedures included; • Assessing the ongoing effectiveness of the SICR criteria and independently calculating the loans’ stage to determine whether a SICR event had occurred. In addition, we assessed the reasonableness of the Group’s treatment of COVID-19 payment relief customers (moratorium/ debt concessionary) from a SICR perspective; • Evaluating and challenging the key assumptions in the components of the Bank’s and Group’s post-model adjustments to the ECL allowance balance. This included assessing the requirement for additional allowances considering the Group’s ECL model and data limitations identified by the Group’s ECL model validation processes, particularly in light of the extreme volatility in economic scenarios caused by the current COVID-19 pandemic and government responses; • Working with our won risk consulting specialists, we assessed the reasonability of the adjustments made by the Group to the forward looking macro-economic factors and assumptions used in the ECL model; • Assessing the completeness of additional allowance overlays by checking the consistency of risks we identified in the loan portfolios against the Group’s assessment; 131 INTEGRATED REPORT 2021
  131. Independent Auditor ’s Report • Assessing the appropriateness of the Group’s disclosures in the financial statements using our understanding obtained from our testing and against the requirements of the Sri Lanka Accounting Standards; • Evaluating the approach taken by the management in identifying the risk elevated sectors and assessing the current market conditions and specific risks in the Bank and Group’s loan portfolios due to exposure to risk elevated sectors; • Assessing the impacts on the modelled ECL and the requirement for out of model adjustments to account for the expected increase in delinquencies; • Assessing the completeness of additional allowance overlays by checking the consistency of risks we identified in the loan portfolios against the Bank and Group’s assessment; • Reviewing the deliverables submitted by the component auditors (other KPMG audit teams) as per the Group Audit Instructions to assess any implications that could arise at the group level stemming from issues at subsidiary level including adequacy of allowances for ECL as at reporting date. IT systems and controls over financial reporting Risk Description Our Responses The Bank and Group’s businesses utilise many complex, interdependent Information Technology (IT) systems to process and record a high volume of transactions. Controls over access and changes to IT systems are critical to the recording of financial information and the preparation of financial statements which provides a true and fair view of the Bank and Group’s financial position and performance. We worked with our IT specialists to perform audit procedures to test the technology control environment for key IT applications (systems) used in processing significant transactions and recording balances in the general ledger. We also tested automated controls embedded within these systems which link the technology-enabled business processes. The IT systems and controls, as they impact the recording and reporting of financial transactions, is a key audit matter as our audit approach could significantly differ depending on the effective operation of the Bank and Group’s IT controls. Our further audit procedures included: General IT controls design, observation and operation • Assessing the governance and higher-level controls in place across the IT Environment, including those regarding policy design, review and awareness, and IT Risk Management practices; • Obtaining an understanding and testing operating effectiveness of the sample of key controls operating over the information technology in relation to financial accounting and reporting systems, including system access and system change management, monitor system integrity, program development and computer operations; • Data integrity of critical system reporting used by us in our audit to select samples and analyse data used by management to generate Financial statements. Application controls • On sample basis, re-performed selected automated computations and compared our results with those from the system and the general Ledger. User access controls operation 132 HATTON NATIONAL BANK PLC • Assessing the management’s evaluation of access rights granted to applications relevant to financial accounting and reporting systems and; • Assessing the operating effectiveness of controls over granting, removal and appropriateness of access rights.
  132. Other Information Management is responsible for the other information . The other information comprises the information included in the annual report, but does not include the financial statements and our auditor’s report thereon. As part of an audit in accordance with SLAuSs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank and the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation of financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank’s and the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SLAuSs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 133 INTEGRATED REPORT 2021
  133. Independent Auditor ’s Report We also provide those charged with governance with a statement that we have complied with ethical requirements in accordance with the Code of Ethics regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements As required by section 163 (2) of the Companies Act No. 07 of 2007, we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Bank. CA Sri Lanka membership number of the engagement partner responsible for signing this independent auditor’s report is FCA 2294. Chartered Accountants Colombo, Sri Lanka 18 February 2022 134 HATTON NATIONAL BANK PLC
  134. Financial Highlights - Bank Net Interest Income Net Fee and Commission Income Rs . Bn 60 Rs. Bn 10 2021 Rs. 50 Bn 11.11% 40 INCOME STATEMENT 2021 2020 2020 2 Rs. 45 Bn 0 Total Operating Income 2021 Rs. 66 Bn 60 17.86% 40 0 Rs. 56 Bn 0 2020 Earnings per Share - Basic 2021 50.92% 20 10 ASSETS AND LIABILITIES 2020 2021 2020 Rs. 10 Rs. 9.00 12.50% 5 2020 Rs. 21.8 2020 Financial Assets measured at Amortised Cost - Loans and Advances to Customers Rs.Bn 1,200 2021 Rs. 876 Bn 13.32% 800 400 2020 2021 Rs. 773 Bn 2020 Capital Adequacy Ratio 2020 0 2021 2020 Rs. 8.00 Financial Liabilities measured at Amortised Cost - Due to Depositors Rs.Bn 1,200 2021 Rs. 1,076 Bn 11.16% 800 400 0 2020 2021 2020 Rs. 968 Bn Non Performing Advances Ratio - Gross % 30 2021 20 Tier 1 14.53% Total 18.16% 10 Statutory Minimum Tier 1 8.5% Total 12.5% Tier 1 Ratio Rs. 11 Bn 2021 Rs. 32.9 30 RATIOS Rs. 17 Bn 54.55% Dividend per Share Rs. 40 2021 Rs. 7.5 Bn 2021 10 5 0 2020 15 2020 0 2021 Rs. Bn 20 20 2021 2020 Profit after Tax Rs. Bn 80 0 Rs. 9.6 Bn 28.00% 6 4 20 0 2021 8 Total Ratio Statutory Minimum % 5 2021 3.38% 4 -0.93% 3 2 2020 1 0 2021 2020 4.31% Bank 135 INTEGRATED REPORT 2021
  135. Income Statement Bank Group 2021 2020 2021 2020 Note Rs 000 Rs 000 Rs 000 Rs 000 7   115,047,325 115,813,618 135,710,455 134,436,232 Interest income 98,600,557 103,944,602 107,407,723 112,825,455 Less : Interest expenses 49,041,200 59,235,456 50,945,355 61,988,268 49,559,357 44,709,146 56,462,368 50,837,187 9,893,263 7,794,929 10,676,982 8,399,641 270,702 249,880 360,771 374,084 9,622,561 7,545,049 10,316,211 8,025,557 59,181,918 52,254,195 66,778,579 58,862,744 (383,772) (816,896) For the year ended 31st December Gross income Net interest income 8  Fee and commission income Less: Fee and commission expenses Net fee and commission income 9  Net interest, fee and commission income Net losses from trading  10  (522,039) (837,108) Net gain from financial investments at fair value through other comprehensive income 11  195,927 207,321 196,167 209,217 Net insurance premium income   12  - - 10,641,842 8,907,731 Net gains arising on de-recognition of financial assets 13  - 1,053,543 5,874 1,106,649 Net other operating income 14  6,879,617 3,650,331 7,165,639 3,804,435 65,735,423 56,328,282 84,404,329 72,073,880 18,778,047 15,258,468 19,534,309 16,046,578 46,957,376 41,069,814 64,870,020 56,027,302 10,757,563 11,459,352 13,676,004 13,903,432 Total operating income Less: Impairment charge for loans and other losses 15  Net operating income Less : Operating expenses Personnel expenses 16  Benefits, claims and underwriting expenditure 17  - Other expenses 18  11,875,964  -   10,659,633 8,955,217 7,374,868 14,718,170 13,527,427 Total operating expenses 22,633,527 22,118,985 37,349,391 34,805,727 Operating profit before taxes on financial services 24,323,849 18,950,829 27,520,629 21,221,575 4,498,822 3,869,649 4,759,882 4,048,466 19,825,027 15,081,180 22,760,747 17,173,109 Less: Taxes on financial services 19  Operating profit after taxes on financial services Share of profit of joint venture (net of income tax) 20  PROFIT BEFORE INCOME TAX Less: Income tax expense 21 PROFIT FOR THE YEAR - - 292,837 407,215 19,825,027 15,081,180 23,053,584 17,580,324 2,525,260 3,618,544 2,969,222 3,918,061 17,299,767 11,462,636 20,084,362 13,662,263 17,299,767 11,462,636 19,024,882 13,095,420 Profit attributable to:   Equity holders of the Bank -   Non-controlling interests PROFIT FOR THE YEAR Earnings per share 17,299,767 1,059,480 566,843 11,462,636 20,084,362 13,662,263  -   22 Basic earnings per ordinary share (Rs) 32.90 21.80 36.18 24.90 Diluted earnings per ordinary share (Rs) 32.90 21.80 36.18 24.90 9.00* 8.00 9.00* 8.00 Dividend per share 23 Dividend per share: Gross (Rs) The notes to the financial statements from pages 146 to 330 form an integral part of these financial statements. *Final dividend proposed, which is to be approved at the Annual General Meeting.  136 HATTON NATIONAL BANK PLC
  136. Statement of Profit or Loss and Other Comprehensive Income   Bank For the year ended 31st December Note PROFIT FOR THE YEAR Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 17,299,767 11,462,636 20,084,362 13,662,263 Other comprehensive income that will not be reclassified to profit or loss in subsequent periods Change in fair value of investments in equity instruments designated at fair value through other comprehensive income Remeasurement of post-employment benefit obligations 53(c)vi Revaluation gain on freehold land and buildings Share of other comprehensive income of joint venture that will not be reclassified to profit or loss 34 (b) Less: Tax expense relating to items that will not be reclassified to profit or loss including the effect of rate change on the opening balance Total other comprehensive income that will not be reclassified to profit or loss (257,524) (1,372,363) (257,524) (1,372,363) 1,030,928 (1,556,496) 1,100,788 (1,608,998) 4,878,773  -   8,547,116  -   -  -   1,108 483 (576,923)  -   (786,036) 2,102 5,075,254 (2,928,859) 8,605,452 (2,978,776) (2,972,433) 833,584 (3,916,786) 1,528,985 - (1,053,543) (5,874) (1,106,649) Other comprehensive income that will be reclassified to profit or loss in subsequent periods Debt instruments at fair value through other comprehensive income: Net gains/(losses) on investments in debt instruments measured at fair value through other comprehensive income Reclassification of net gains on de-recognition of debt instruments at fair value through other comprehensive income to income statement Net change in expected credit losses of debt securities measured at fair value through other comprehensive income Transfer to life policy holder reserve fund Share of other comprehensive income of joint venture that will be reclassified to profit or loss Less: Tax expense relating to items that will be reclassified to profit or loss including the effect of rate change on the opening balance 15 186,758 (150,378) 186,758 (150,378) 57(e) -  -   851,693 (576,094) 34 (b) -  -   61,665 26,448 754,541 61,588 763,270 54,565 (2,031,134) (308,749) (2,059,274) (223,123) OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 3,044,120 (3,237,608) 6,546,178 (3,201,899) TOTAL COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 20,343,887 8,225,028 26,630,540 10,460,364 20,343,887 8,225,028 25,574,417 9,892,718 - - 1,056,123 567,646 20,343,887 8,225,028 26,630,540 10,460,364 Total other comprehensive income that will be reclassified to profit or loss Total comprehensive income attributable to: Equity holders of the Bank Non-controlling interests TOTAL COMPREHENSIVE INCOME FOR THE YEAR The notes to the financial statements from pages 146 to 330 form an integral part of these financial statements. 137 INTEGRATED REPORT 2021
  137. Statement of Financial Position Bank Group 2021 2020 2021 2020 Note Rs 000 Rs 000 Rs 000 Rs 000 Cash and cash equivalents 25 38 ,185,254 34,123,562 40,900,372 34,898,957 Placements with banks 26 - - 6,371,273 12,126,434 Balances with Central Bank of Sri Lanka 27 25,820,489 7,212,395 25,820,489 7,212,395 Reverse repurchase agreements 28 - - 6,246,276 2,827,050 Derivative financial instruments 29 927,487 1,032,318 927,487 1,032,318 Financial assets measured at fair value through profit or loss  30 103,365 84,499 862,641 1,094,827 Financial assets measured at amortised cost - loans and advances to customers 31 876,254,693 772,580,720 911,253,345 800,815,971 Financial assets measured at amortised cost - debt and other financial instruments 32 160,677,520 186,605,516 171,930,640 193,349,496 Financial assets measured at fair value through other comprehensive income  33 203,426,433 249,271,658 210,804,487 256,394,644 Investment in joint venture 34 755,000 755,000 2,877,420 2,521,811 Investment in subsidiaries 35 3,017,285 3,017,285 - - Investment properties 36 469,774 475,109 964,854 1,028,956 Property, plant and equipment 37 24,953,738 20,705,056 49,724,473 41,827,384 Right-of-use assets 38 5,439,384 5,356,868 2,177,902 1,827,832 Intangible assets and goodwill   39 1,429,544 1,309,172 1,989,134 1,749,994 Deferred tax assets 40 4,461,561 806,539 4,941,105 1,728,958 Other assets 41 As at 31st December ASSETS Total assets 12,415,094 8,515,839 15,858,665 11,045,479 1,358,336,621 1,291,851,536 1,453,650,563 1,371,482,506 17,075,502 89,746,709 17,075,502 89,746,709 LIABILITIES Due to banks 42 Derivative financial instruments 29 353,356 337,014 353,356 337,014 Securities sold under repurchase agreements 43 33,524,226 10,361,383 33,524,226 10,361,383 Financial liabilities measured at amortised cost - due to depositors 44 1,075,709,287 967,821,404 1,107,065,820 994,948,912 Dividends payable 45 989,212 962,185 1,013,629 980,507 Financial liabilities measured at amortised cost - other borrowings 46 24,747,869 30,526,261 25,555,834 30,526,261 Debt securities issued 47 1,962,749 1,875,042 2,465,085 2,411,408 Current tax liabilities 48 10,051,689 7,725,731 10,518,569 8,093,584 Deferred tax liabilities 40 - - 5,157,978 5,371,390 Insurance provision - life 49 - - 20,378,015 17,073,033 Insurance provision - non-life 50 - - 3,735,921 3,309,150 3,928,598 3,917,784 4,550,802 4,266,262 Other liabilities 51 14,400,456 16,278,033 14,596,651 15,451,997 Subordinated term debts 52 Other provisions Total liabilities 138 HATTON NATIONAL BANK PLC 23,552,323 28,298,365 24,391,912 28,945,457 1,206,295,267 1,157,849,911 1,270,383,300 1,211,823,067
  138. Bank Group 2021 2020 2021 2020 Note Rs 000 Rs 000 Rs 000 Rs 000 Stated capital 54 37 ,364,244 35,572,329 37,364,244 35,572,329 Statutory reserve fund 55 8,560,000 7,660,000 8,560,000 7,660,000 Retained earnings 56 35,186,607 22,665,227 43,643,800 29,361,200 Other reserves 57 70,930,503 68,104,069 87,099,997 81,655,946 152,041,354 134,001,625 176,668,041 154,249,475 As at 31st December EQUITY Total shareholders’ equity Non-controlling interests 58 Total equity Total equity and liabilities  -  -   6,599,222 5,409,964 152,041,354 134,001,625 183,267,263 159,659,439 1,358,336,621 1,291,851,536 1,453,650,563 1,371,482,506 Contingent liabilities and commitments 59 676,242,350 631,948,229 676,242,350 631,948,229 Net assets value per ordinary share ( Rs.) 63 289.10 254.80 335.93 293.30 The notes to the financial statements from pages 146 to 330 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. Rajive Dissanayake Chief Financial Officer The Board of Directors is responsible for the preparation and presentation of these financial statements. Approved and signed for and on behalf of the Board. Jonathan Alles Managing Director/Chief Executive Officer Aruni Goonetilleke ( Mrs) Chairperson K A L Thushari Ranaweera (Mrs) Deputy General Manager (Legal)/Company Secretary 18th February 2022 Colombo 139 INTEGRATED REPORT 2021
  139. 140 HATTON NATIONAL BANK PLC - Total comprehensive income for the year Balance as at 31st December 2020 Transfers during the year 2020 Transfer of unclaimed dividends 56 - 6 ,327,857 29,244,472 - 346,720 346,720 - 1,404,704 23   Final dividend 2019 - Scrip Total contributions by and distributions to equity holders 1,404,704 23   Final dividend 2019 - Cash Dividends to equity holders Contributions by and distributions to equity holders - - Transactions with equity holders,  recognised directly in equity - - 5,981,137 Rs 000  Shares   - 27,839,768 Rs 000    Shares   Other comprehensive income, net of tax Note   Stated Capital   Voting      Non Voting Net profit for the year 2020 Total comprehensive income for the year Balance as at 1st January 2020 Bank 7,660,000 600,000 - - - - - - - 7,060,000 Rs 000   Reserve Fund   Statutory  Other Reserves  10,782,706 (8,288) - - - - - - - 10,790,994 Rs 000   Reserve   1,221,363 - - - - - (1,530,734) (1,530,734) - 2,752,097 Rs 000  Reserve     Capital       Fair value  56,100,000 1,000,000 - - - - - - - 55,100,000 Rs 000    Reserve    22,665,227 (1,600,000) 32,153 (3,502,848) (1,751,424) (1,751,424) 9,755,762 (1,706,874) 11,462,636 17,980,160 Rs 000   Earnings      General      Retained   134,001,625 (8,288) 32,153 (1,751,424) - (1,751,424) 8,225,028 (3,237,608) 11,462,636 127,504,156 Rs 000   Total  Statement of Changes in Equity
  140. INTEGRATED REPORT 2021 141 Balance as at 31st December 2021 Transfers during the year 2021 Transfer of /(subsequent settlement of) unclaimed dividends Total contributions by and distributions to equity holders   Final dividend 2020 - Scrip   Final dividend 2020 - Cash Dividends to equity holders Contributions by and distributions to equity holders 56 1,436,119 23 30,680,591 6,683,653 - - 355,796 355,796 - - 1,436,119 - 23 - Total comprehensive income for the year - - Transactions with equity holders,  recognised directly in equity - - 6,327,857 Rs 000  Shares   - 29,244,472 Rs 000    Shares   Other comprehensive income, net of tax Note   Stated Capital   Voting      Non Voting Net profit for the year 2021 Total comprehensive income for the year Balance as at 1st January 2021 Bank 8,560,000 900,000 - - - - - - - 7,660,000 Rs 000   Reserve Fund   Statutory  Other Reserves  15,084,556 - - - - 4,301,850 4,301,850 - 10,782,706 Rs 000   Reserve   (1,254,053) - - - - - (2,475,416) (2,475,416) - 1,221,363 Rs 000  Reserve     Capital       Fair value  57,100,000 1,000,000 - - - - - - - 56,100,000 Rs 000    Reserve    35,186,607 (1,900,000) (267) (4,095,806) (1,791,915) (2,303,891) 18,517,453 1,217,686 17,299,767 22,665,227 Rs 000   Earnings      General      Retained   152,041,354 - (267) (2,303,891) - (2,303,891) 20,343,887 3,044,120 17,299,767 134,001,625 Rs 000   Total 
  141. 142 HATTON NATIONAL BANK PLC - Total comprehensive income for the year   Balance as at 31st December 2020 Transfers during the year 2020 Transfer of unclaimed dividends Transfer to life policy holder reserve fund 56 29,244,472 6,327,857  -     -     -    -  -    -  346,720  - 1,404,704 346,720 1,404,704 - - - 5,981,137   Rs 000    Final dividend 2019 - Scrip Total contributions by and distributions to equity holders  Statutory  7,660,000 600,000  -    -  -    - - - - - 7,060,000  Rs 000    Shares   Reserve Fund   Final dividend 2019 - Cash  Dividends to equity holders Contributions by and distributions to equity holders Transactions with equity holders, recognised directly in equity - 27,839,768  Rs 000     Shares   Net profit for the year 2020 57 (e) Note  Stated Capital  Voting    Non-Voting  Other comprehensive income, net of tax  Total comprehensive income for the year  Balance as at 1st January 2020 Group 23,054,710 (8,288)  -    -  -    - - - - - 23,062,998   Rs 000    Reserve    Capital   56,100,000 1,000,000  -    -  -    - - - - - 55,100,000  Rs 000    Reserve    General   1,270,055  -     -    -  Holder   Life Policy  748,391  -     -    576,094  -    - - - - - 172,297  Rs 000   Reserve Fund   -    - - (1,489,808) (1,489,808) - 2,759,863   Rs 000    Reserve   Fair value    Other Reserves  Attributable to Equity Holders of the Bank   Restricted   Exchange   381,156  -     -    -  -    - - - - - 381,156   Rs 000    Reserve  (1,751,424) (1,751,424) 11,359,270 (1,736,150) 13,095,420 32,155 - 101,634 (8,288) 32,155 576,094  (1,751,424) (1,751,424)  -    9,892,718 (3,202,702) 13,095,420 29,361,200 154,249,475  -    (1,600,000)  -    -  Non    Rs 000    Total  (8,288) 32,155 576,094  (1,871,424) (1,871,424) - 10,460,364 (3,201,899) 13,662,263 5,409,964 159,659,439  -     -    -  (120,000) (120,000) - 567,646 803 566,843 4,962,318 150,470,538   Rs 000    Funds   Controlling  23,072,623 145,508,220   Rs 000    Earnings   Retained   Shareholders'   -     (3,502,848) - - 23,256 23,256 - 78,378   Rs 000    Reserve   Regulatory   Equalization  Statement of Changes in Equity
  142. INTEGRATED REPORT 2021 143 - Total comprehensive income for the year   Balance as at 31st December 2021 Transfers during the year 2021 Transfer of /(subsequent settlement of) unclaimed dividends Transfer from life policy holder  reserve fund  56 30,680,591 6,683,653 - - - - - 355,796 - 1,436,119 355,796 1,436,119 - - - - 6,327,857   Rs 000    Final dividend 2020 - Scrip Total contributions by and distributions to equity holders   Statutory  8,560,000 900,000 - - - - - - - - - 7,660,000  Rs 000    Shares   Reserve Fund   Final dividend 2020 - Cash  Dividends to equity holders Contributions by and distributions to equity holders Transactions with equity holders, recognised directly in equity - - 29,244,472  Rs 000   Net profit for the year 2021 57 (e) Note   Shares    Voting    Non-Voting   Stated Capital Other comprehensive income, net of tax  Total comprehensive income for the year  Acquisition of subsidiary through HNB Finance PLC Balance as at 1st January 2021 Group 30,816,980 - - - - - - 7,762,270 7,762,270 - - 23,054,710   Rs 000    Reserve    Capital   57,100,000 1,000,000 - - - - - - - - - 56,100,000  Rs 000    Reserve    General   (1,258,039) - - - - - - (2,528,094) (2,528,094) - - 1,270,055   Rs 000    Reserve   Fair value   (103,302) - - (851,693) - - - - - - - 748,391  Rs 000   Reserve Fund   Holder   Life Policy   Other Reserves  Attributable to Equity Holders of the Bank   Restricted   Exchange   381,156 - - - - - - - - - - 381,156   Rs 000    Reserve  163,202 - - - - - - 61,568 61,568 - - 101,634   Rs 000    Reserve   Regulatory   Equalization  - (267) (851,693) (2,303,891) (2,303,891) - 25,574,417 6,549,535 19,024,882 - 43,643,800 176,668,041 (1,900,000) (267) - (4,095,806) (2,303,891) (1,791,915) 20,278,673 1,253,791 19,024,882 -  Non    Rs 000    Total  - (267) (851,693) (2,471,891) (2,471,891) - 26,630,540 6,546,178 20,084,362 301,135 6,599,222 183,267,263 - - - (168,000) (168,000) - 1,056,123 (3,357) 1,059,480 301,135 5,409,964 159,659,439   Rs 000    Funds   Controlling  29,361,200 154,249,475   Rs 000    Earnings   Retained   Shareholders' 
  143. Statement of Cash Flows ACCOUNTING POLICY The statement of cash flows has been prepared using the direct method of preparing cash flows in accordance with Sri Lanka Accounting Standard - LKAS 7 on “Statement of Cash Flows” whereby gross cash receipts and gross cash payments of operating activities, financing activities and investing activities have been recognised. Cash and cash equivalents comprise of short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value. The cash and cash equivalents include cash in hand, balances with banks, placements with banks, money at call and short notice. Bank For the year ended 31st December Note Cash flows from operating activities Interest receipts Interest payments Net commission receipts Trading income Payments to employees Taxes on financial services Receipts from other operating activities Payments for other operating activities Operating profit before changes in operating assets and liabilities (Increase)/decrease in operating assets Balances with Central Bank of Sri Lanka Financial assets measured at amortised cost - loans and advances to customers Reverse repurchase agreements Other assets  Increase/(decrease) in operating liabilities Financial liabilities measured at amortised cost - due to depositors Financial liabilities measured at amortised cost - other borrowings Securities sold under repurchase agreements Other liabilities  Net cash (used in)/generated from operating activities before income tax Income tax paid Net cash (used in)/generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from the sale of property, plant and equipment Net proceeds from sale, maturity and purchase of financial investments Net purchase of intangible assets  Net cash effect on acquisition of subsidiary through HNB Finance PLC Dividend received from joint venture  Dividends received from investment in subsidiaries Dividends received from other investments 144 HATTON NATIONAL BANK PLC 37 39 39 (a) i 34 (b) Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 99,044,623 103,914,685 107,874,546 112,847,904 (50,890,505) 9,948,665 (600,577) (12,327,246) (4,824,723) 4,974,996 (10,978,088) 34,347,145 (59,963,150) 7,326,950 1,130,075 (11,531,908) (3,466,833) 1,886,621 (9,355,244) 29,941,196 (53,610,605) 10,727,319 (608,174) (15,803,751) (5,069,260) 16,396,591 (17,151,493) 42,755,173 (63,196,160) 7,823,066 1,130,075 (14,103,280) (3,683,378) 11,398,266 (15,584,316) 36,632,177 (18,608,094) 15,582,937 (18,608,094) 15,582,937 (114,928,093) (1,266,482) (134,802,669) (43,396,238) 2,396,134 (25,417,167) (117,923,219) (3,419,226) (1,215,835) (141,166,374) (44,707,864) (754,568) 2,247,607 (27,631,888) 108,560,558 (77,713,587) 23,193,118 1,100,303 55,140,392 158,515,740 5,763,038 (7,228,435) 1,034,401 158,084,744 109,856,977 (77,614,427) 23,193,118 1,365,904 56,801,572 160,540,508 4,946,372 (7,228,435) 1,180,094 159,438,539 (45,315,132) (3,545,047) (48,860,179) 162,608,773 (3,202,642) 159,406,131 (41,609,629) (3,946,039) (45,555,668) 168,438,828 (3,665,332) 164,773,496 (706,891) 12,801 60,084,178 (504,339) 251,941 60,778 (890,286) 6,188 (158,797,770) (507,094) 50,000 179,958 191,261 (1,063,001) 10,622 55,066,382 (661,046) (1,300,092) 70,809 (1,088,528) 31,596 (159,791,890) (550,861) 50,000 206,630
  144. Bank For the year ended 31st December Note Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Net cash (used in)/generated from investing activities Cash flows from financing activities Net proceeds from the issue of subordinated debt Repayment of subordinated debt/debt securities issued Dividend paid to non controlling interests  Dividend paid to shareholders of the parent company Net cash used in financing activities 59,198,468 (159,767,743) 52,123,674 (161,143,053) 7,000,000 (11,000,000) (2,276,597) (6,276,597) (2,206,558) (2,206,558) 7,000,000 (10,883,250) (161,905) (2,276,597) (6,321,752) (33,250) (119,164) (2,206,559) (2,358,973) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 4,061,692 34,123,562 38,185,254 (2,568,170) 36,691,732 34,123,562 246,254 47,025,391 47,271,645 1,271,470 45,753,921 47,025,391 19,825,027 383,967 744,142 730,245 (3,648,124) 516,166 (2,049,594) (228,755) 5,335 1,309,520 (449,591) (1,537,362) (12,661) 18,778,047 - 15,081,180 274,563 830,540 907,093 (1,904,371) (1,023,114) 610,333 741,023 5,335 1,248,888 (443,172) (575,575) (5,495) 15,258,468 (1,053,543) 23,053,584 481,038 660,093 192,856 (2,611,235) 543,245 (2,192,951) (197,038) 31,645 1,732,520 (207,681) (1,537,362) (13,199) 19,534,309 3,304,982 426,771 (5,874) 17,580,324 368,947 757,405 354,456 (416,917) (970,916) (244,554) 749,277 31,640 1,679,081 (218,900) (575,575) (9,326) 16,046,578 2,604,167 437,733 (1,106,649) (351) 18,345 (47,518) 18,004 (18,866) 34,347,145 (29,302) 29,941,196 (100,175) (292,837) 42,755,173 (45,383) (407,215) 36,632,177 38,185,254 38,185,254 34,123,562 34,123,562 40,900,372 6,371,273 47,271,645 34,898,957 12,126,434 47,025,391 Note [a] - Reconciliation of operating profit before changes in operating assets and liabilities Profit before income tax Amortisation of intangible assets Amortisation of right of use assets Accretion of interest on right of use assets Accrual for interest payable Accrual for interest receivable Accrual for other payables Accrual for other receivable Depreciation of investment property Depreciation of property, plant and equipment Dividend income Gain on FCBU revaluation Gain on disposal of property, plant and equipment Impairment charge for loans and other losses  Increase in insurance contract liabilities - life Movement in general insurance reserve fund Net gain arising on de-recognition of financial assets  Net capital gain/(loss) from financial assets measured at fair value through profit or loss Net gain from marked to market valuation on financial assets measured at fair value through profit or loss Share of profits of joint venture  Note [b] - Cash and cash equivalents at the end of the year Cash and cash equivalents Placements with banks 18 (b) 18 (b) 8 (b) 18 (b) 18 (b) 14 15 13 20 25 26 The notes to  the financial statements from page 146 to 330 form an integral part of these financial statements. 145 INTEGRATED REPORT 2021
  145. Notes to the Financial Statements 1 REPORTING ENTITY 1 .1 Corporate Information Hatton National Bank PLC (the “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 registered under the Banking Act No. 30 of 1988 and amendments thereto. The Bank was re-registered under the Companies Act No. 07 of 2007. The registered office 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. The unsecured subordinated debentures of the bank are also listed on the Colombo Stock Exchange. The Bank does not have an identifiable parent of its own. The Hatton National Bank PLC is the ultimate parent of the Group. The structure of the Group is given below. The staff strength of the Group and the Bank was as follows: As at 31st December 2021 2020 Bank 5,042 4,836 Group 8,294 7,869 HNB Finance PLC, a subsidiary of the Bank acquired 87.27% stake in Prime Finance PLC on 23rd December 2021 for a purchase consideration of Rs 2.1 Bn. 1.2 Consolidated Financial Statements The consolidated financial statements of the Group for the year ended 31st December 2021 include the Bank and its subsidiaries (together referred to as the “Group” and individually as “Group entities”) and the Group’s interest in its joint venture. The financial statements of all companies in the Group have a common financial year which ends on December 31st except for subsidiary, HNB Finance PLC, Prime Finance PLC, (subsidiary of HNB Finance PLC) and Lanka Ventures PLC, (a subsidiary of Acuity Partners (Pvt) Limited, the joint venture), whose financial year end on March 31st. 1.3 Principal Activities and Nature of Operations The principal activities of the group companies comprising of the subsidiaries and the joint venture company are summarised below. Corporate information is presented in page number 372 of this Annual Report. HATTON NATIONAL BANK PLC JOINT VENTURE SUBSIDIARIES Sithma Development PVT LTD HNB Assurance PLC HNB Finance PLC 100% 60% 42.16% Acuity Partners PVT LTD 50% 146 HATTON NATIONAL BANK PLC HNB General Insurance LTD Prime Finance PLC 100% 87.27%
  146. Entity Principal business activity Hatton National Banking and related activities such as deposit Bank PLC acceptance , corporate and retail banking, personal financial services, off shore banking, foreign currency operations, trade services, investment banking, development banking, rural finance, project finance, leasing, issuing of local and international debit and credit cards, internet banking, mobile banking, money remittance facilities, dealing in government securities and treasury-related products, export and domestic factoring, pawning, margin trading, digital banking services, bancassurance and islamic banking products and services etc. 2 BASIS OF ACCOUNTING 2.1 Basis of Preparation 2.1.1 Statement of Compliance The consolidated financial statements of the Group and the separate financial statements of the Bank have been prepared in accordance with Sri Lanka Accounting Standards (commonly referred as “SLFRS”/“LKAS”) laid down by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and comply with the requirements of Companies Act No 7 of 2007, Banking Act No 30 of 1988, Insurance Industry Act No 43 of 2000 and Finance Business Act No 42 of 2011 and amendment thereto and provide appropriate disclosures as required by the listing rules of the Colombo Stock Exchange (CSE) The Group did not adopt any inappropriate accounting treatments, which are not in compliance with the requirement of the SLFRSs and LKASs, regulations governing the preparation and presentation of financial statements. Details of the Group’s significant accounting policies followed during the year are given in notes 03 to 62 on pages 150 to 329. The formats used in the preparation and presentation of the Financial Statements and the disclosures made therein also complied with the specified formats prescribed by the Central Bank of Sri Lanka (CBSL) in circular No 2 of 2019 dated January,18, 2019, on “Publication of Annual and Quarterly Financial Statements and Other Disclosures by Licensed Banks” 2.1.2 Responsibility for Financial Statements The Board of Directors acknowledges their responsibility for financial statements as set out in the “Annual Report of the Board of Directors on the Affairs of the Company”,” Directors’ Responsibility for Financial Reporting” and the certification on the statement of financial position on pages 88, 129 and 139 respectively. 2.1.3 Approval of Financial Statements by Directors The financial statements of the Group and the Bank were authorised for issue by the Board of Directors in accordance with the resolution of the directors on 18th February 2022. These financial statements include the following components: Subsidiaries HNB Assurance PLC Provides life insurance solutions for both individual and corporate customers. Life insurance is a protection against financial losses that would result from an insured event adversely affecting the insured. In such situations, the nominated beneficiary receives the proceeds and is thereby safeguarded from financial impacts of the insured event. The benefit paid by a life insurer is consideration in exchange for premium payments made by the insured. HNB General Insurance Ltd (Fully owned subsidiary of HNB Assurance PLC) Provides general insurance solutions for both individual and corporate customers. Insurance other than ‘Life Insurance’ falls under the category of general insurance; Fire, motor, marine and miscellaneous insurance are the main categories under general insurance Sithma Development (Pvt) Ltd Construction and letting of premises for commercial purposes and related services HNB Finance PLC Provision of microfinance facilities, personal and business loans, leasing, housing loans, pawning etc. primarily focusing on the lower income segment of the community and mobilisation of public deposits Prime Finance PLC (Subsidiary of HNB Finance PLC) Provision of acceptance of deposits, granting lease facilities, hire purchase, mortgage loans and other credit facilities, real estate and related services. Joint Ventures Acuity Partners (Pvt) Ltd Investment banking and related activities such as corporate finance, debt structuring, and IPO’s and margin trading facilities. There were no significant changes in the nature of the principal activities of the Group during the financial year under review. The group companies are domiciled in Sri Lanka. • an income statement and statement of profit or loss and other comprehensive income providing the information on the financial performance of the Group and the Bank for the year under review. refer pages 136 and 137; • a Statement of Financial Position (SOFP) providing the information on the financial position of the Group and the Bank as at the year end. Refer pages 138 and 139; • a statement of changes in equity depicting all changes in shareholders’ funds during the year under review of the Group and the Bank. Refer pages 140 to 143; 147 INTEGRATED REPORT 2021
  147. Notes to the Financial Statements • • a statement of cash flows providing the information to the users, on the ability of the Group and the Bank to generate cash and cash equivalents and utilisation of those cash flows. Refer page 144 and 145; Going Concern The directors have made an assessment of the Group’s ability to continue as a going concern and are satisfied that it has the resources to continue in business for the foreseeable future. The assessment took into consideration the existing and potential implications of COVID 19 pandemic on the business operations, performance of the Group and the measures adopted by the government to support the recovery of the economy. The, Board is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. notes to the financial statements comprising significant accounting policies and other explanatory information. Refer pages 146 to 330. 2.1.4 Basis of Measurement The financial statements have been prepared on the historical cost basis and applied consistently except for the following items in the statement of financial position. Item Basis of measurement Derivative financial instruments Fair value 29 228 Financial assets Fair value measured at fair value through profit or loss 30 229 Financial assets Fair value measured at fair value through other comprehensive income 33 253 Freehold land and buildings Measured at cost at the time of acquisition and subsequently at revalued amounts which are the fair values at the date of revaluation 37 Actuarially determined value of life insurance liability estimated based on actuarial guidelines issued by Insurance Regulatory Commission of Sri Lanka (IRCSL) 49 Actuarially determined values based on internationally accepted actuarial policies and methodologies 50 299 53 304 Insurance contract liabilities Incurred but not reported/ incurred but not enough reported liability Defined benefit Liability for defined obligations benefit obligations is recognised as the present value of the defined benefit obligation less the fair value of the plan assets 148 2.1.5 HATTON NATIONAL BANK PLC Note Page Reference Reference 2.1.6 Functional and Presentation Currency The financial statements of the Group are presented in Sri Lankan Rupees (LKR), which is the currency of the primary economic environment in which the Group operates (Group’s functional currency). Each entity in the Group determines its own functional currency and items included in the financial statements of each individual entity are measured using that functional currency. There was no change in the Group’s presentation and functional currency during the year under review. 2.1.7 Presentation of Financial Statements The assets and liabilities of the Group presented in the statement of financial position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern. An analysis on recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in Note 61 to the financial statements. No adjustments have been made for the inflationary factors affecting the financial statements. 270 297 2.1.8 Rounding The amounts in the financial statements have been roundedoff to the nearest rupees thousands except where otherwise indicated, as permitted by the Sri Lanka Accounting Standard LKAS 1 on “Presentation of Financial Statements”. 2.1.9Offsetting Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the income statement unless required or permitted by an accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. 2.1.10 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 as permitted by
  148. the Sri Lanka Accounting Standard - LKAS 1 - “Presentation of Financial Statements”. 2.2.2 Judgements Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the consolidated financial statements is included in the following notes. 2.1.11 Comparative Information The comparative information has been reclassified where ever necessary to conform with the current year’s classification in order to provide a better presentation. 2.2 Accounting Judgements, Estimates and Assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets, liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. In the process of applying the Group’s accounting policies, management has made the following judgements and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments may change due to circumstances beyond the Group’s control and are reflected in the assumptions if and when they occur. Estimates and underlining assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively. Items with the most significant effect on the amounts recognised in the consolidated financial statements with substantial management judgement and/or estimates are collated below with respect to judgement/ estimates involved. 2.2.1 Corona virus (COVID-19) pandemic The COVID-19 pandemic and its effect on the global economy have impacted the customers, operations and Group performance. The outbreak necessitated the government to respond at unprecedented levels to protect the health of the population, local economy and livelihoods. Thus the pandemic has significantly increased the estimation uncertainty in the preparation of these financial statements including, the extent and duration of the disruption to businesses, expected economic downturn, and subsequent recovery. The significant accounting estimates impacted by these forecasts and associated uncertainties are predominantly related to expected credit losses, fair value measurement and the assessment of the recoverable amount of non-financial assets. The impact of the COVID-19 pandemic on each of these estimates is discussed further in the relevant notes of these financial statements. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. Significant Judgements Note Page Reference Reference Classification of financial assets and assessment of the business model within which the assets are held 3.4.3 154 Determination of fair value of financial instruments when there is no observable market data 6.2 198 31 (f) 240 34, 35 258, 261 36 264 Establishing the criteria for determination of whether credit risk on a financial asset has increased significantly since initial recognition, determining the methodology for incorporating forward-looking information into the measurement of Expected Credit Losses(ECL) and the selection and approval of models used to measure Expected Credit Loss (ECL). Determination of control over investees Classification of investment properties 2.2.3 Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the financial statements for the year ended 31st December 2021 is included in the following notes. Significant Assumptions and Estimation Uncertainties Note Page Reference Reference 3.5, 39 157, 285 Measurement of the fair value of financial instruments with significant unobservable inputs 6.2 198 Impairment of financial instruments: determination of inputs into the Expected Credit Loss (ECL) measurement model including key assumptions used in estimating recoverable cash flows and incorporation of forward-looking information 31 (b) 235 Impairment testing for Cash Generating Units (CGU) containing goodwill: key assumptions underlying recoverable amounts 149 INTEGRATED REPORT 2021
  149. Notes to the Financial Statements Significant Assumptions and Estimation Uncertainties Useful life time of property , plant and equipment, investment properties and intangible assets Determination of the fair value of freehold land and buildings on the basis of significant unobservable inputs Right-of-use assets and operating lease liability Fair value of consideration transferred and fair value of asset acquired and liabilities assumed measured on provisional basis Recognition of deferred tax assets: availability of future taxable profit against which carry-forward tax losses can be used Note Page Reference Reference 37, 36, 39 270, 264, 285 37 (d) 280 38 282 39 (a) i 287 40 (d) Valuation of life insurance contract liabilities of subsidiary, HNB Assurance PLC (HNBA) 49 Valuation of non-life insurance contract liabilities of subsidiary, HNB General Insurance Limited 50 Measurement of defined benefit obligations: key actuarial assumptions 53 (c) vii Recognition and measurement of contingencies: key assumptions about the likelihood and magnitude of an outflow of resources 59 291 297 299 309 316 3. SIGNIFICANT ACCOUNTING POLICIES Application of Accounting Policies The Group has consistently applied the accounting policies for all periods presented in the financial statements. The Group has not early adopted any other standard, interpretation or amendment that has been issued but not yet effective. 150 Apart from the general accounting policies set out below, the specific accounting policies pertaining to each item in the financial statements have been presented within the respective notes to the financial statements. These significant accounting policies have been applied consistently to all periods presented in the financial statements of the Group, unless otherwise indicated. The accounting policies have been consistently applied by the Group entities where applicable and deviations if any have been disclosed accordingly. Further the changes in accounting policies due to adoption of new standards and interpretations have been presented in Note 3.6 to the financial statements. HATTON NATIONAL BANK PLC Accounting policy Note Page Reference Reference Significant accounting policies – General Basis of consolidation 3.1 151 Foreign currency 3.2 151 Financial instruments – Initial recognition, classification and subsequent measurement 3.3 152 Investment in joint venture 34 258 Investment in subsidiaries 35 261 Investment properties 36 264 Property, plant and equipment 37 270 Right-of-use assets 38 282 Intangible assets and goodwill 39 285 Due to banks 42 293 Securities sold under repurchase agreements 43 294 Financial liabilities measured at amortised cost – Due to depositors 44 294 Financial liabilities at amortised cost – Other borrowings 46 295 Debt securities issued 47 296 Subordinated term debts 52 302 Insurance provision – Life 49 297 Insurance provision – Non-life 50 299 Employee benefit obligations 53 304 Contingent liabilities and commitments 59 316 Gross income 7 201 Net interest income 8 202 Significant accounting policies – Recognition of assets and liabilities Significant accounting policies – Recognition of income and expenses Net fee and commission income 9 204 Net losses from trading 10 207 Net gain from financial investments at fair value through other comprehensive income 11 208 Net insurance premium income 12 208 Net gains arising on de-recognition of financial assets 13 209 Net other operating income 14 210 Impairment charge for loans and other losses 15 211 Personnel expenses 16 212
  150. Accounting policy Note Page Reference Reference Benefits , claims and underwriting expenditure 17 213 Other expenses 18 215 Income tax expenses 21 217 3.1 Basis of Consolidation The Bank’s financial statements comprise the amalgamation of the financial statements of the Domestic Banking Unit (DBU) and the Foreign Currency Banking Unit (FCBU). The Group’s financial statements comprise the consolidation of the financial statements of the Bank, its subsidiaries in terms of the Sri Lanka Accounting Standard - SLFRS 10 on “Consolidated Financial Statements” and the proportionate share of the profit or loss and net assets of its joint venture (equity method) in terms of the Sri Lanka Accounting Standard - SLFRS 11 on “Joint Arrangements”. 3.1.1 Business Combinations and Goodwill The Group accounts for business combinations using the acquisition method when the acquired set of activities and assets meets the definition of a business and control is transferred to the Group. From 1st January 2020, in determining whether a particular set of activities and assets is a business, the Group assesses whether the set of assets and activities acquired includes, at a minimum, an input and substantive process and whether the acquired set has the ability to produce outputs. The Group has an option to apply a ‘concentration test’ that permits a simplified assessment of whether an acquired set of activities and assets is not a business. The optional concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in income statement. Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in income statement. 3.1.2 Non-Controlling Interests (NCI) The Details of non-controlling interest are given in Note 58 to the financial statements. 3.1.3 Subsidiaries The details of the Bank’s subsidiaries, how they are accounted in the financial statements of the Bank and their contingencies are set out in Notes 35 and 59 on pages 261 and 316 to the financial statements. 3.1.4 Joint Venture The details of joint venture, the method of accounting for same in the financial statements of the Bank, together with summarized financial position and the Group’s share of contingent liabilities of such joint venture are set out in Notes 34 and 59 on pages 258 and 316 to the financial statements. 3.1.5 Loss of Control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non-controlling interests and other components of equity. Any resulting gain or loss is recognised in income statement. Any interest retained in the former subsidiary is measured at fair value when control is lost. Subsequently, it is accounted for as an associate or in accordance with the Group’s accounting policy for financial instruments. 3.1.6 Transactions Eliminated on Consolidation Intra-group balances, transactions and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Un-realised gains arising from transactions with equity accounted investees are eliminated to the extent of the Group’s interest in the investee. Un-realised losses are eliminated in the same way as un-realised gains, except that those are only eliminated to the extent that there is no evidence of impairment. 3.1.7 Material Gains or Losses, Provisional Values or Error Corrections There were no material gains or losses, provisional values or error corrections recognised during the year in respect of business combinations that took place in previous periods. 3.2 Foreign Currency Transactions in foreign currencies are translated into the functional currency, which is Sri Lankan Rupees (LKR), using the middle rates of exchange prevailing at the dates on which the transactions were affected. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to Sri Lankan Rupees using the middle rates of exchange prevailing at that date. All differences arising on non-trading activities are taken to” other operating income” in the income statement as foreign exchange gain/(loss). 3.2.1 Foreign Currency Transactions and Balances 151 INTEGRATED REPORT 2021
  151. Notes to the Financial Statements The foreign currency gains or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period , adjusted for effective interest and payments during the period and the amortised cost in foreign currency translated at the middle rates of exchange prevailing at the end of the reporting period. Foreign currency differences arising on retranslation are recognised in the income statement, except for differences arising on the retranslation of financial investments measured at fair value through other comprehensive income, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognised in other comprehensive income. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to Sri Lankan Rupees at the exchange rates on the date that the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the date of the transaction. Foreign currency differences arising on translation are generally recognised in income statement. However, foreign currency differences arising from the translation of following items are recognised in Other Comprehensive Income (OCI): • Equity investments in respect of which an election has been made to present subsequent changes in fair value in OCI; • A financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; and • Qualifying cash flow hedges to the extent that the hedges are effective. 3.2.2 Foreign Currency Translations The Group’s consolidated financial statements are presented in Sri Lankan Rupees, which is also the Bank’s functional currency. The financial statements of the foreign currency banking unit is translated into the Group’s presentation currency as explained below. 3.2.3 Transactions of the Foreign Currency Banking Unit These are recorded in accordance with above, except the application of the closing exchange rate for translation of the income statement and the statement of profit or loss and other comprehensive income. 3.3 3.3.1 152 Financial Instruments – Initial Recognition, Classification and Subsequent Measurement trades mean purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Loans and advances to customers are recognised when funds are transferred to the customers’ accounts. The Group recognises balances due to customers when funds are transferred to the Group. 3.3.2 Recognition and Initial Measurement of Financial Instruments The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing instruments as described in Note 3.4 to the financial statements. All financial instruments are measured initially at their fair value plus or minus the transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability, except in the case of financial assets and financial liabilities measured at fair value through profit or loss. Trade receivables are measured at transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the bank accounts for the ‘Day 1’ profit or loss, as described below. 3.3.2 (a)“Day 1” Profit or Loss The “Day 1 loss” arising in the case of loans granted to employees at concessionary rates under uniformly applicable schemes is deferred and amortised using Effective Interest Rate (EIR) in “interest Income” and “Personal Expenses” over the remaining service period of employee or tenure of the loan whichever is shorter. 3.4 Classification and Subsequent Measurement of Financial Instruments The Group classifies all of its financial assets based on the business model for managing the asset and the asset’s contractual terms. These assets are measured at either: • Amortised cost, as explained in Note 31 and Note 32 to the financial statements. • Fair Value through Other Comprehensive Income (FVOCI), as explained in Note 33 to the financial statements. • Fair Value through Profit or Loss (FVTPL) as explained in Note 30 to the financial statements. The Group classifies and measures its derivative and trading portfolio at FVTPL as explained in Notes 29 and 30 to the financial statements. The Group may designate financial instruments at FVTPL, if doing so eliminates or significantly reduces measurement or recognition inconsistencies, as explained in Note 30 to the financial statements. Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at FVTPL. Date of Recognition All financial assets and liabilities with the exception of loans and advances to customers and balances due to customers are initially recognised on the trade date, i.e., the date that the Group becomes a party to the contractual provisions of the instrument. This includes “regular way trades”. Regular way HATTON NATIONAL BANK PLC
  152. The financial liabilities are measured at FVTPL when they are either derivative instruments , held for trading or the fair value designation is applied, as explained in Note 29 to the financial statements. “Interest” is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during the particular period of time and for other basic lending risks and costs, as well as profit margin. The subsequent measurement of financial instruments depends on their classification. 3.4.1 Business Model Assessment When carrying out the SPPI assessment, the Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set. The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The Group’s business model is not assessed on an instrumentby-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as: In contrast, contractual terms that introduce a more than “de minimis” exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVTPL. • How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel • The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed • How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected) • The expected frequency, value and timing of sales are also important aspects of the Group’s assessment The business model assessment is based on reasonably expected scenarios without taking into account “worse case” or “stress case” scenarios. If cash flows after initial recognition are realised in a way that is different from the Group’s original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. 3.4.2 Assessment of whether contractual cash flows are Solely Payments of Principal and Interest (SPPI test) As a second step of its classification process, the Group assesses the contractual terms of the financial assets to identify whether they meet the SPPI test. For the purpose of this assessment, “principal” is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/ discount). 153 INTEGRATED REPORT 2021
  153. Notes to the Financial Statements 3 .4.3 Classification and Subsequent Measurement of Financial Assets A summary of the recognition and measurement criteria pertaining to different types of financial assets recognised within the statement of financial position are as follows. Financial Asset Classification Criteria Type of Assets Measured as per the Specified Asset Classification Note Reference Financial assets measured at amortised cost A financial asset is measured at amortised cost if both of the following conditions are met and is not designated as at FVTPL: Cash and cash equivalents Note 25 Placements with banks Note 26 - The financial asset is held within a business Balances with Central Bank of Sri Lanka model with the objective to hold financial assets in order to collect contractual cash Reverse repurchase agreements flows; and - The contractual terms of the financial asset Financial assets measured at amortised give rise on specified dates to cash flows cost - loans and advances to customers that are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding. Financial assets measured at fair value through other comprehensive income Note 27 Note 28 Note 31 Financial assets measured at amortised cost - debt and other instruments Note 32 Financial assets measured at fair value through other comprehensive income Note 33 Derivative financial instruments A financial asset is measured at fair value through profit or loss unless it is measured Financial assets measured at fair value at amortised cost or at fair value though other comprehensive income. However, the through profit or loss Group may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) that would otherwise arise from measuring the assets and liabilities or recognising gains or losses on them on different basis. Note 29 • A debt instrument is measured at Fair Value through Other Comprehensive Income (FVOCI) when both of the following conditions are met: - The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets - The contractual terms of the financial asset meet the SPPI test • Upon initial recognition, the Group may elect to classify irrecoverably some of its equity investments held for strategic and statutory purposes as equity instruments measured at fair value through other comprehensive income. Financial assets measured at fair value through profit or loss 154 HATTON NATIONAL BANK PLC Note 30
  154. 3 .4.4 Classification and Subsequent Measurement of Financial Liabilities A summary of the recognition and measurement criteria pertaining to the different types of financial liabilities recognised within the statement of financial position are as follows Financial Liability Classification Criteria Type of Liabilities Measured as per the Specified Liability Classification Note Reference Financial liabilities measured at amortised cost Financial liabilities issued by the Due to banks Note 42 Group that are not designated at FVTPL are classified as financial liabilities measured at amortised cost Securities sold under repurchase agreements Note 43 Financial liabilities measured at amortised cost - due to depositors Note 44 Financial liabilities measured at amortised cost - other borrowings Note 46 Debt securities issued Note 47 Subordinated term debts Note 52 Derivative financial instruments Note 29 Financial liabilities measured at fair value Financial liabilities measured at fair through profit or loss value through profit or loss include; - Financial liabilities held for trading and - Financial liabilities designated at fair value through profit or loss Financial liabilities designated at fair value through profit or loss • • • at FVTPL due to changes in the Bank’s own credit risk. Such changes in fair value are recorded in the own credit reserve through other comprehensive income and do not get recycled to the income statement. Interest earned or incurred on instruments designated at FVTPL is accrued in interest income or interest expense, respectively, using the effective interest rate, taking into account any discount/premium and qualifying transaction costs being an integral part of the instrument. Financial liabilities in this category are those that are not held for trading and have been either designated by the Group upon initial recognition or are mandatorily required to be measured at fair value under SLFRS 9. Group only designates a financial liability at FVTPL upon initial recognition when one of the following criteria are met. Such designation is determined on an instrument-by-instrument basis: The designation eliminates, or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognising gains or losses on them on a different basis or The liabilities are part of a group of financial liabilities, which are managed and their performances are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy The liabilities containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited 3.4.5 Reclassifications of Financial Instruments As per the requirement of SLFRS 9, the Group reclassifies its financial assets subsequent to the initial recognition when and only when the business model for managing such financial assets is changed. Such reclassifications are applied prospectively from the reclassification date. Financial liabilities are not reclassified as such reclassifications are not permitted by SLFRS 9. • If a financial asset is reclassified out of the amortised cost measurement category and into the fair value through profit or loss measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in income statement. Changes in fair value are recorded in income statement with the exception of movements in fair value of liabilities designated 155 INTEGRATED REPORT 2021
  155. Notes to the Financial Statements • • • 3.4.6 If the reclassification takes place out of the fair value through profit or loss category into the amortised cost measurement category, its fair value at the reclassification date becomes the new gross carrying amount. • If the reclassification takes place out of the amortised cost measurement category and into the fair value through other comprehensive income measurement category, fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in other comprehensive income. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification. • It retains the rights to the cash flows, but has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement Pass-through arrangements are transactions whereby the Group retains the contractual rights to receive the cash flows of a financial asset (the ‘original asset’), but assumes a contractual obligation to pay those cash flows to one or more entities (the ‘eventual recipients’), when all of the following three conditions are met: The details of reclassification related to previous year disclosed in Note 33 to the financial statements. • The Group has no obligation to pay amounts to the eventual recipients unless it has collected equivalent amounts from the original asset, excluding short-term advances with the right to full recovery of the amount lent plus accrued interest at market rates De-recognition of Financial Instruments The Group derecognises a financial asset, such as a loan to a customer, when the terms and conditions have been renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognised as a derecognition gain or loss, to the extent that an impairment loss has not already been recorded. The newly recognised loans are classified as Stage 1 for ECL measurement purposes, unless the new loan is deemed to be a Purchased or Originated Credit Impaired (POCI) asset. • The Group cannot sell or pledge the original asset other than as security to the eventual recipients • The Group has to remit any cash flows it collects on behalf of the eventual recipients without material delay. When assessing whether or not to derecognise a loan to a customer, amongst others, the Group considers the following factors: • Change in currency of the loan • Change in counterparty 3.4.6 (b)Derecognition other than for substantial modification 3.4.6 (b)(i) Financial assets 156 A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when the rights to receive cash flows from the financial asset have expired. The Bank also derecognises the financial asset if it has both transferred the financial asset and the transfer qualifies for derecognition. HATTON NATIONAL BANK PLC In addition, the Group is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents including interest earned, during the period between the collection date and the date of required remittance to the eventual recipients. A transfer only qualifies for derecognition if either: • If the modification is such that the instrument would no longer meet the SPPI criterion If the modification does not result in cash flows that are substantially different, the modification does not result in derecognition. Based on the change in cash flows discounted at the original effective interest rate, the Group records a modification gain or loss, to the extent that an impairment loss has not already been recorded. • The Group has transferred substantially all the risks and rewards of the asset • Introduction of an equity feature The Group has transferred its contractual rights to receive cash flows from the financial asset or 3.4.6(a) Derecognition due to substantial modification of terms and conditions The Group has transferred the financial asset if, and only if, either: or • The Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset The Group considers control to be transferred if and only if, the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without imposing additional restrictions on the transfer. When the Group has neither transferred nor retained substantially all the risks and rewards and has retained control of the asset, the asset continues to be recognised only to the extent of the Group’s continuing involvement, in which case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original
  156. carrying amount of the asset and the maximum amount of consideration the Group could be required to pay . If continuing involvement takes the form of a written or purchased option (or both) on the transferred asset, the continuing involvement is measured at the value the Group would be required to pay upon repurchase. In the case of a written put option on an asset that is measured at fair value, the extent of the entity’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. Impairment losses are recognised in the income statement and disclosed in Note 15 to the financial statement, except for property previously revalued where the gain or loss on revaluation was taken to equity. In this case, the impairment is also recognised in equity up to the extent of any previously recognised revaluation gains. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (group of CGUs) on a pro rata basis. 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 reporting 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 the 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. 3.6 Changes in Accounting Policies and Disclosures Interest Rate Benchmark Reform (IBOR) (Amendments to SLFRS 9, LKAS 39 and SLFRS 7) A fundamental reform of major interest rate benchmarks is being undertaken globally, replacing certain interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as “IBOR reform”). Bank has exposure to certain IBORs on its financial instruments that are being reformed as part of these market-wide initiatives. The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) issued amendments to SLFRS 9, LKAS 39 and SLFRS 7 due to Interest Rate Benchmark Reform Phase 1 and Phase 2. The effective date of both IBOR reform Phase 1 and Phase 2 amendments is for annual reporting periods beginning on or after 1 January 2021 in the Sri Lankan context and the requirements under phase 2 amendments have to be applied retrospectively. The main risks to which the Bank has been exposed as a result of IBOR reform are operational. For example, the renegotiation of loan contracts through bilateral negotiation with customers, updating of contractual terms and revision of operational controls related to the reform and regulatory risks. Financial risk is predominantly limited to interest rate risk. Bank has commenced a process to evaluate the impact from this reform on its financial instruments. This process will 3.4.6 (b)(ii)Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in income statement. 3.5 Impairment of Non-Financial Assets The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. For goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. An impairment loss is recognised if the carrying amount of an asset or its Cash Generating Unit (CGU) exceeds its estimated recoverable amount. The recoverable amount of an asset or 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 flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. 157 INTEGRATED REPORT 2021
  157. Notes to the Financial Statements involve evaluating the extent to which loans advanced , loan commitments, liabilities and derivatives reference IBOR cash flows, whether such contracts need to be amended as a result of IBOR reform, how to manage communication about IBOR reform with counterparties and the changes required for the existing credit policies. As at 31st December 2021, the IBORs for certain key currencies to which the Bank has exposure to are in the process of reforming. 4. NEW AND AMENDED STANDARDS AND INTERPRETATIONS The following new accounting standards and amendments/ improvements to the existing standards were issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). A number of new standards are effective for annual periods beginning after 1st January 2022 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these financial statements. 4.1 Onerous contracts – Cost of Fulfilling a Contract (Amendments to Sri Lanka Accounting Standard LKAS 37 – “Provisions, Contingent Liabilities and Contingent Assets”) These amendments specify which costs an entity includes in determining the cost of fulfilling a contract for the purpose of assessing whether the contract is onerous. The amendments apply for annual reporting periods beginning on or after 1st January 2022 to contracts existing at the date when the amendments are first applied. At the date of initial application, the cumulative effect of applying the amendments is recognised as an opening balance adjustment to retained earnings or other components of equity, as appropriate. The comparatives are not restated. 4.2 Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to Sri Lanka Accounting Standard LKAS 12 – “Income Taxes”) The amendments narrow the scope of the initial recognition exemption to exclude transactions that give rise to equal and offsetting temporary differences – e.g. leases and decommissioning liabilities. The amendments apply for annual reporting periods beginning on or after 1st January 2023. For leases and decommissioning liabilities, the associated deferred tax asset and liabilities will need to be recognised from the beginning of the earliest comparative period presented, with any cumulative effect recognised as an adjustment to retained earnings or other components of equity at that date. For all other types of transactions, the amendments apply to transactions that occur after the beginning of the earliest period presented. There will be no impact on retained earnings on adoption of the amendments 158 HATTON NATIONAL BANK PLC 4.3 Sri Lanka Accounting Standard - SLFRS 17 “Insurance Contracts” effective from 1st January 2023 - Applicable for Subsidiary, HNB Assurance PLC (HNBA) and HNB General Insurance Ltd (HNBG) SLFRS 17 requires liabilities for insurance contracts to be recognised as the present value of future cash flows, incorporating an explicit risk adjustment, which is updated at each reporting date to reflect current conditions, and a Contractual Service Margin (CSM) that is equal and opposite to any “Day 1” gain arising on initial recognition. Losses are recognised directly into the income statement. For measurement purposes, contracts are grouped together into contracts of similar risk, profitability profile and issue year, with further divisions for contracts that are managed separately. SLFRS 17 introduces a new measure of insurance revenue, based on the delivery of services to policyholders and excluding any premiums related to the investment elements of policies, which will be significantly different from existing premium revenue measures, currently reported in the income statement. In order to transition to SLFRS 17, the amount of deferred profit, being the CSM at transition date, needs to be determined. SLFRS 17 is expected to have a significant impact on HNBA and HNBG, as the requirements of the new standard are complex and requires a fundamental change to accounting for insurance contracts as well as the application of significant judgement and new estimation techniques. HNBA and HNBG have assessment and an implementation programme underway to implement SLFRS 17 and SLFRS 9. 4.4 Sri Lanka Accounting Standard - SLFRS 9 “Financial Instruments” Temporary Exemption from SLFRS 9 for Subsidiary, HNB Assurance PLC SLFRS 9 addresses the accounting for financial instruments and is effective for annual periods beginning on or after 1st January 2018. However, for an insurer that meets the criteria in paragraph 20B of SLFRS 9, it provides a temporary exemption that permits, but does not require, the insurer to apply LKAS 39 rather than SLFRS 9 for annual periods beginning before 1st January 2023. An insurer may apply the temporary exemption from SLFRS 9 if, and only if: (a) it has not previously applied any version of SLFRS 9, other than only the requirements for the presentation of gains and losses on financial liabilities designated at fair value through profit or loss in paragraphs 5.7.1(c), 5.7.7 – 5.7.9, 7.2.14 and B5.7.5 – B5.7.20 of SLFRS 9; and (b) its activities are predominantly connected with insurance, as described in paragraph 20D, at its annual reporting date that immediately precedes 1st April 2016, or at a subsequent annual reporting date as specified in paragraph 20G of SLFRS 9.
  158. Since HNB Assurance PLC and HNB General Insurance Limited are predominantly connected with Insurance activities , having considering the above criteria, both the companies may continue to apply LKAS 39 rather than SLFRS 9 for annual periods beginning before 1st January 2023. However, the financial statements of HNB Assurance PLC has been prepared in line with SLFRS 9 when preparing the consolidated financial statements. 4.5 Other New Accounting Pronouncements The following new and amended standards are not expected to have a significant impact on the Group’s consolidated financial statements. • COVID-19 related rent concessions beyond 30th June 2021 (Amendment to SLFRS 16) – effective for annual reporting periods beginning on or after 1st April 2021. • Annual improvements to SLFRS Standards 2018 – 2020 effective for annual reporting periods beginning on or after 1st January 2022. • Property, plant and equipment: Proceeds before intended use (Amendments to LKAS 16) - effective for annual reporting periods beginning on or after 1st January 2022. • Reference to conceptual framework (Amendments to SLFRS 3) - effective for annual periods beginning on or after 1st January 2022. • Classification of liabilities as current or non-current (Amendments to LKAS 1) - effective for annual periods beginning on or after 1st January 2023. • Disclosure of accounting policies (Amendments to LKAS 1 and SLFRS Practice Statement 2) - effective for annual periods beginning on or after 1st January 2023. • Definition of accounting estimates (Amendments to LKAS 8) - effective for annual periods beginning on or after 1st January 2023. 159 INTEGRATED REPORT 2021
  159. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT This note presents information about the Bank /Group exposure to financial risks and the Bank/Group’s management of capital. 5.1 Introduction and Overview Bank/Group has exposure to the following key risks from financial instruments: Investment Review Committee (BSIRC), Board Digital Banking Committee (BDBC), Board Procurement and Asset Disposal Committee and Board Recoveries Committee (BRC). The BIRMC provides the Board, the assurance that risk management strategies, policies and processes are in place to manage events/outcomes that have the potential to impact significantly on earnings performance, reputation and capital. The approach entails active monitoring of the level of risk exposure against the parameters set in the risk appetite and risk goals. The BCC and BRC also assists the Board by assessing significant credit and other transactions beyond the discretion of executive management. Executive management committees, each with specialised focus, have been established to support the BIRMC and are responsible for the co-ordination of risk matters for each of the areas pertaining to risk management. Those are Executive Risk Management and Credit Policy Committee (ERMCP), Operational Risk Steering Committee, Asset and Liability Committee and IT Steering Committee. The BAC provides its assessment on the effectiveness of internal audit and external disclosure of accounting policies and financial reporting, to the Board. Internal Audit Department undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the BAC. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. - credit risk; - liquidity risk; - market risk and - operational risks The following chart provides a link between the Bank/Group business units and the principal risks that they are exposed to. The significance of risk is assessed within the context of the Bank/Group as a whole and is measured based on allocation of the regulatory capital within the Bank/Group. This note presents information about the Bank/Group exposure to each of the above risks, the objectives, policies and processes for measuring and managing such risk. 5.2 Risk Management Framework The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board discharges its governance responsibility through seven board sub committees with oversight responsibility for risk management viz. Board Integrated Risk Management Committee (BIRMC), Board Audit Committee (BAC), Board Credit Committee (BCC), Board Strategic and HATTON NATIONAL BANK PLC CORPORATE SME RETAIL MICRO TREASURY Credit Risk Credit Risk Credit Risk Credit Risk Market Risk Operational Risk Operational Risk Operational Risk Operational Risk Liquidity Risk Market Risk Market Risk Market Risk Market Risk Credit Risk Operational Risk High 160 Medium HATTON NATIONAL BANK PLC Low
  160. Page Reference 5 .3 Credit Risk Credit risk is the risk of financial loss to the Bank if a customer or a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Bank’s loans and advances to customers and investments in debt securities. In addition to loans, the Bank makes available to its customers, guarantees which may require that the Bank makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Such commitments expose the Bank to risks similar to loans and are mitigated by the same control processes and policies. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, industry risk and geographical risk etc.). The methodology adopted by the Bank in determining the expected credit losses is detailed in Note 31 to the financial statements. 5.3 Credit Risk 5.3.1 Settlement risk 161 5.3.2 Management of credit risk 162 5.3.3 Credit quality analysis 162 5.3.4 Credit exposure and expected credit loss (ECL) provision movement - Stage wise 169 5.3.5 Collateral held and other credit enhancements 175 5.3.6 Concentrations of credit risk 176 5.3.7 Offsetting financial assets and financial liabilities 180 5.4 Liquidity risk 5.4.1 Management of liquidity risk 180 5.4.2 Exposure to liquidity risk 181 5.4.3 Analysis for financial liabilities and financial assets by remaining contractual maturities 182 5.4.4 Liquidity reserves 184 COVID-19 consideration on credit risk 5.4.5 Financial assets available to support future funding 185 5.5 Market risk 5.5.1 Management of market risk 186 5.5.2 Exposure to equity price risk - Trading portfolios 187 5.5.3 Exposure to interest rate risk - Non-trading portfolios 188 5.5.4 Exposure to currency risks - Non-trading portfolios 190 Bank continued to conduct in-depth analysis on the industries which has been affected and the scale of impact on Bank’s lending portfolio, through various stress testing techniques including stage shifting assessment of elevated risk industries. The spread of COVID – 19 in Sri Lanka stressed the importance of diversification of the Bank’s loan book across a wide range of industries which in turn would ensure the resilience of the Bank in an economic shock of this nature. The Bank is comfortable with the existing composition of its loan book and continuous monitoring activities are being carried out to avoid accumulation of exposures to risky economic segments. 5.3.1 Settlement Risk 5.6 Operational Risk 190 5.7 Capital Management 5.7.1 Regulatory capital 192 The Bank’s activities may give rise to risk at the time of settlement of transactions and trades. “Settlement risk” is the risk of loss due to the failure of a customer or a counterparty to honour its obligations to deliver cash, securities or other assets as contractually agreed. 5.7.2 Capital allocation 193 161 INTEGRATED REPORT 2021
  161. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.2 Management of Credit Risk Board Credit Committee has oversight responsibility for the management of credit. Risk Management Division (RMD) is a separate vertical independent of business units, established to assess the credit risk of credit proposals and submit independent observations to all approving authorities. Other responsibilities of RMD are as follows: - Formulating credit policies and guidelines in consultation with business units covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements. Formalize approval of such policies and guidelines from the Board of Directors upon clearance by relevant Board Subcommittees. - Establishing the credit approval structure with delegated authority limits for the approval and renewal of credit facilities. The delegated authority limits are assigned to identified individuals. Larger credit facilities require approval by the Board Credit Committee or the Board of Directors as appropriate. - - 162 responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios. Regular audits of business units and credit processes are undertaken by Internal Audit Division. 5.3.3 Credit Quality Analysis 5.3.3 (a) Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are in place covering the acceptability and valuation of each type of collateral. The general creditworthiness of customers tends to be the most relevant indicator of credit quality of a loan. However, collateral provides additional security and the Bank generally requests large borrowers to provide same. The Bank may take collateral in the form of a first charge over real estate and residential properties, floating charges over all corporate assets and other liens and guarantees. The main types of collateral obtained are, as follows: • For securities lending and reverse repurchase transactions; cash or securities Reviewing and assessing credit risk: credit risk unit of RMD assesses all credit exposures in excess of designated limits, before facilities are approved. Renewals of facilities are subject to the same review process. Setting the risk appetite for exposures to counterparties, geographies and industries (for loans and advances, financial guarantees and similar exposures), and by issuer, credit rating band, market liquidity and country (for investment securities). • For corporate and small business lending; charges over real estate properties, inventory and trade receivables and in special circumstances, government guarantees • For retail lending; mortgages over residential properties The Bank also obtains guarantees from parent companies for loans to their subsidiaries. - Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk. Management monitors the market value of collateral and will request additional collateral in accordance with the underlying agreement. - Identification of elevated risk industries and the adequacy of any overlay adjustment made out side the ECL model to address the potential implication of COVID-19 pandemic and resultant moratorium schemes introduced by Government. The Bank’s policy is to pursue timely realisation of the collateral in an orderly manner. The proceeds are used to reduce or repay the outstanding claim. The Bank generally does not use non-cash collateral for its own operations. Each business unit is required to implement Bank’s credit policies and guidelines, with credit approval authorities delegated from the Board of Directors. Each business unit is HATTON NATIONAL BANK PLC
  162. 5 .3.3 (b)Maximum Exposure to Credit Risk The following table shows the maximum exposure to credit risk and net exposure to credit risk by class of financial assets. Bank As at 31st December Balances with banks Placements with banks Derivative financial instruments Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost - loans and advances to customers (gross) Financial assets measured at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income Other financial assets Guarantees, letters of credit and acceptances 2021 Maximum Net exposure exposure to to credit risk credit risk Rs 000 Rs 000 7,316,562 927,487 103,365 7,316,562 927,487 103,365 928,971,730 172,020,524 203,426,433 6,123,181 1,318,889,282 155,679,119 380,445,266 169,980,111 7,354,788 1,718,031 567,845,610 153,445,897 2020 Maximum Net exposure exposure to to credit risk credit risk Rs 000 Rs 000 7,775,703  -   1,032,318 84,499 814,543,456 191,161,883 249,271,658 2,279,834  1,266,149,351 159,018,522 7,775,703  -   1,032,318 84,499 328,972,999 191,161,883 8,390,563 413,501 537,831,466 157,346,701 Group As at 31st December Balances with banks Placements with banks Reverse repurchase agreement Derivative financial instruments Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost - loans and advances to customers (gross) Financial assets measured at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income Other financial assets Guarantees, letters of credit and acceptances 2021 Maximum Net exposure exposure to to credit risk credit risk Rs 000 Rs 000 2020 Maximum Net exposure exposure to to credit risk credit risk Rs 000 Rs 000 7,316,562 6,371,624 6,246,276 927,487 862,641 7,316,562 6,371,624 927,487 515,416  8,418,731   12,126,910   2,827,050   1,032,318   1,094,827   8,418,731   12,126,910   -    1,032,318   1,078,603  968,907,254 184,047,137 210,804,487 8,034,880 1,393,518,348 155,679,119 405,491,802 181,051,425 213,513,885 3,629,730 181,817,931 153,445,897  846,720,969   198,679,345   256,404,418   3,851,392   1,331,155,960   159,018,522   344,642,943   197,023,587   8,393,218   413,501   573,129,811   157,346,701  163 INTEGRATED REPORT 2021
  163. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.3 (c) Maximum exposure to credit risk by risk rating The following table sets out information about the credit quality of financial assets measured at amortised cost, measured at fair value through profit or loss, measured at fair value through other comprehensive income and contingent liabilities and commitments. Bank  High Grade  Standard Grade  Sub-Standard Grade  Stage 1   Stage 2   Stage 3   Exposures not subject to ECL   Stage 1   Stage 2   Stage 3   Exposures not subject to ECL   Stage 1   Stage 2   Stage 3   Exposures not subject to ECL  Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 As at 31st December 2021 Financial Assets 1,464,931 - - 31,124,322 5,014,799 - - - 590,081 - - - 25,820,489 - - - - - - - - - - - - - - - - - - 660,675 - - - 36,235 - - - - - - - - - - - 3,124 71,352,488 22,691,242 4,583,438 - 178,759,493 13,558,640 3,011,971 - 92,669,508 44,833,754 11,790,220 - 168,314,125 - - - 3,095,601 - - - - - 72,466 - 199,100,863 - - - - - - 3,762,986 - - - - - - - - - - - - - - - - 466,052,896 22,691,242 4,583,438 31,124,322 186,869,893 13,558,640 3,011,971 4,423,661 93,259,589 44,833,754 11,862,686 39,359 54,619,896 343,473 120,833 - 151,735,757 3,268,005 265,778 - 39,847,893 8,251,109 2,252,491 - Cash and cash equivalents  2,251,619   -    -    26,611,235   4,859,453  - - -  418,831  - - - Balances with Central Bank of Sri Lanka  7,212,395   -    -    -    -    -    -    -    -    -    -    -    -    -    -    -    -    -    -    686,979   -    -    -    313,511   -    -    -    3,539   -    -    -    -    -    -    -    -    55,737,818   36,781,153   5,709,305   -    153,226,239   36,910,188   9,227,376   -    65,529,534   54,833,234   13,183,625   -    189,207,757   -    -    -    1,343,100   -    -    -    -    -    72,694   -    245,059,017   -    -    3,742,102   -    -    -    -    -    -    -    -   - - - - - - - - - - - - 499,468,606   36,781,153   5,709,305   30,356,876  159,428,792   36,910,188   9,227,376   686,979   65,948,365   54,833,234   13,256,319   313,511   48,192,942   631,675   12,109   -   112,339,607   6,940,254   632,263   -    51,085,561   15,796,231   3,780,870   -   Cash and cash equivalents  Balances with Central Bank of Sri Lanka Derivative financial instruments Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost loans and advances to customers (gross)* Financial assets measured at amortised cost debt and other financial instruments Financial assets measured at fair value through other comprehensive income Other financial assets  Off balance sheet exposures Contingent liabilities and commitments* As at 31st December 2020 Financial Assets Derivative financial instruments Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost loans and advances to customers (gross)* Financial assets measured at amortised cost debt and other financial instruments Financial assets measured at fair value through other comprehensive income Other financial assets  Off balance sheet exposures Contingent liabilities and commitments* *Categorisation based on Bank’s internal risk rating. Accordingly, AAA to AA- considered as “High grade”, A+ to BBB- as “Standard grade”, BB+ to B- as “Sub Standard grade”, CCC+ and below as “Low grade”. 164 HATTON NATIONAL BANK PLC
  164. Low Grade  Unrated   Exposures not Subject to Rating  Stage 1   Stage 2   Stage 3   Exposures not subject to ECL   Stage 1   Stage 2   Stage 3   Exposures not subject to ECL   Stage 1   Stage 2   Stage 3   Exposures not subject to ECL   Total Note Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 - - - - - - - - - - - - - - - - - - - - - - - 38,194,133 25 - 25,820,489 - - - 124,833 - - - 105,744 - - 27 - - 927,487 29 - - - - - - - 100,241 - - - - 103,365 30 24,715,471 10,160,762 18,557,055 - 289,995,172 58,552,125 24,668,823 - 57,618,100 429,892 1,023,576 - 928,971,730 31 - - 538,332 - - - - - - - - - 172,020,526 32 - - - - - - - - - - - - - - 562,584 - - - - 203,426,433 33 - 6,123,181 - - - 6,123,181 24,715,471 10,160,762 19,095,387 124,833 289,995,172 58,552,125 41 24,668,823 768,569 63,741,281 429,892 1,023,576 - 1,375,587,344 11,387,762 1,186,808 318,088 - 318,644,841 1,959,664 613,597 - - - - - 594,815,994 5.3.6 (c) - - - - - - - - - - - -  34,141,138  25  -    -    -    -    -    -    -    -    -    -    -    -    7,212,395 27  -    -    -    -    -    -    -    31,828   -    -    -    -    1,032,318  29  -    -    -    -    -    -    -    80,960   -    -    -    -    84,499  30  22,166,952   20,523,746   19,257,403   -    222,757,122   54,913,221   14,973,097   -    27,461,644   666,710   685,089   -    814,543,456  31  -    -    538,332   -    -    -    -    -    -    -    -    -    191,161,883  32  -    -    -    -    -    -    -    470,539   -    -    -    -    249,271,658  33 - - - -  2,279,834  - - -  2,279,834  41 - -  22,166,952   20,523,746   19,795,735   -    222,757,122   54,913,221   14,973,097   583,327   29,741,478   666,710   685,089   -   1,299,727,181  9,731,516   1,568,445   1,307,690   -    246,105,502   966,456   199,650   -   20,625,166  -    -   -  519,915,937  5.3.6 (c) 165 INTEGRATED REPORT 2021
  165. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.3 (d)Financial assets measured at amortised cost - loans and advances to customers - Analysis of Stage 2 and Stage 3 loans The tables below summarises the ageing of stage 2 and stage 3 loans, as follows: Stage 2-Loans less than 30 Days Past Due (DPD) and loans greater than 30 DPD irrespective of the criteria that triggered their classification into Stage 2. Stage 3 - Loans less than 90 DPD and loans greater than 90 DPD, thus segregating the loans classified as stage 3 due to ageing and those identified at an earlier stage due to other criteria (eg: customer facilities which are classified as non performing advances in accordance with CBSL directions). Bank As at 31st December 2021  Stage 2   Stage 3   Total   Gross   Expected   Gross   Expected   Gross   Expected   carrying   credit losses   carrying   credit losses   carrying   credit losses  amount amount Rs 000 Rs 000   30 DPD 116,010,199 3,481,729   90 DPD - -   30 DPD 34,216,215 6,706,911   90 DPD - - 150,226,414 10,188,640 63,635,083 amount Rs 000 Rs 000 Rs 000 Rs 000 - - 116,010,199 3,481,729 30,807,389 15,459,411 30,807,389 15,459,411 - - 34,216,215 6,706,911 32,827,694 20,574,027 32,827,694 20,574,027 36,033,438 213,861,497 46,222,078 Less than : More than : Bank As at 31st December 2020  Stage 2   Stage 3   Total   Gross   Expected   Gross   Expected   Gross   Expected   carrying   credit losses   carrying   credit losses   carrying   credit losses  amount amount Rs 000 Rs 000 Rs 000   30 DPD  165,975,601   4,303,425    90 DPD  -   -    30 DPD  38,652,651   3,755,355    90 DPD  -   -   204,628,252   8,058,780   63,035,895  amount Rs 000 Rs 000 Rs 000  -   -   165,975,601   4,303,425   28,204,992   10,298,735   28,204,992   10,298,735   -   -   38,652,651   3,755,355   34,830,903   20,513,497   34,830,903   20,513,497   30,812,232   267,664,147   38,871,012 Less than : More than : 166 HATTON NATIONAL BANK PLC
  166. 5 .3.3 (e)Derivative financial instruments Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded on the statement of financial position. With gross–settled derivatives, the Bank is also exposed to a settlement risk, being the risk that the Bank honours its obligation, but the counterparty fails to deliver the counter value. The following table shows an analysis of counterparty credit exposures arising from derivative transactions. Derivative transactions of the Bank are generally collateralised.  Derivative Type As at 31st December 2021 Forward SWAP Spot Total Notional Fair Notional Fair Notional Fair Notional Fair amount value amount value amount value amount value Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Derivative financial assets By counterparty ; 471,250 40,433 37,919,048 780,190 621,506 1,120 39,011,804 821,743   - with other customers 1,150,250 105,744 - - - - 1,150,250 105,744 Total derivative financial assets 1,621,500 146,177 37,919,048 780,190 621,506 1,120 40,162,054 927,487   - with banks Derivative financial liabilities By counterparty ; - - 15,603,655 352,092 598,446 1,251 16,202,101 353,343   - with other customers 111,650 14 - - - - 111,650 14 Total derivative financial liabilities 111,650 14 15,603,655 352,092 598,446 1,251 16,313,751 353,357   - with banks Derivative Type As at 31st December 2020 Forward SWAP Spot Total Notional Fair Notional Fair Notional Fair Notional Fair amount value amount value amount value amount value Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000   - with banks 2,126,609 24,829 42,117,637 974,806 813,385 855 45,057,631 1,000,490   - with other customers 2,253,648 31,828 - - - - 2,253,648 31,828 Total derivative financial assets 4,380,257 56,657 42,117,637 974,806 813,385 855  47,311,279   1,032,318    - with banks 3,228,072 27,660 35,652,498 260,942 862,010 555 39,742,580 289,157   - with other customers 4,999,206 47,857 - - - - 4,999,206 47,857 Total derivative financial liabilities 8,227,278 75,517 35,652,498 260,942 862,010 555  44,741,786   337,014  Derivative financial assets By counterparty ; Derivative financial liabilities By counterparty ; 167 INTEGRATED REPORT 2021
  167. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.3 (f) Modified financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value in accordance with the accounting policy set out in 31 (c) iii. When the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset’s credit risk has increased significantly reflects comparison of: - its remaining lifetime PD at the reporting date based on the modified terms; with - the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms. When modification results in derecognition, a new loan is recognised and allocated to Stage 1 (assuming it is not credit-impaired at that time). The Group renegotiates loans to customers in financial difficulties to maximise collection opportunities and minimise the risk of default. Under the forbearance policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. Both retail and corporate loans are subject to the forbearance policy. The management regularly reviews reports on forbearance activities. Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired. A customer needs to demonstrate consistently good payment behaviour over a period of time before the exposure is no longer considered to be credit-impaired/in default or the PD is considered to have decreased such that it falls within the 12 month PD ranges for the asset to be considered Stage 1. The following table provides information on financial assets that were modified while they had a loss allowance measured at an amount equal to lifetime ECL. As at 31st December 2021 2020 Rs 000 Rs 000 1,123,145 776,599 121,188 232,308 - - Financial assets modified during the year   Amortised cost before modification   Net modification loss Financial assets modified since initial recognition Gross carrying amount of financial assets previously modified for which loss allowance has changed during the period to an amount equal to 12month ECL from lifetime 168 HATTON NATIONAL BANK PLC
  168. 5 .3.4 Credit exposure and expected credit loss (ECL) provision movement - Stage wise Bank - 2021  Stage 1   Gross  Stage 2   ECL   carrying  Gross   Stage 3   ECL   carrying amount  Rs 000 Rs 000 amount  Rs 000  Gross   Exposures not  subject to ECL  ECL Gross   Gross    carrying   carrying Rs 000 amount   Rs 000 amount   Rs 000   Rs 000  17,576   carrying Rs 000 amount  Rs 000  Total   ECL Cash and cash equivalents 7,775,703 17,576 - - - - 26,365,435 34,141,138   Transfer to stage 1 - - - - - - - - -   Transfer to stage 2 - - - - - - - - -   Transfer to stage 3 As at 1st January 2021 - - - - - - - - - New assets originated or purchased and effect of remeasurement 1,305,619 2,246 - - - - 4,512,136 5,817,755 2,246 Financial assets derecognised or repaid (excluding write offs) (1,764,760) (10,943) (10,943)   Write offs As at 31st December 2021 - - - - - (1,764,760) - - - - - - - 7,316,562 8,879 - - - - 30,877,571 38,194,133 8,879 190,550,857 3,945,340 - - 611,027 611,027 - 191,161,884 4,556,367 Financial assets measured at amortised cost - debt and other financial instruments As at 31st December 2021   Transfer to stage 1 - - - - - - - - -   Transfer to stage 2 - - - - - - - - -   Transfer to stage 3 - - - - - - - - - New assets originated or purchased and effect of remeasurement 6,852,020 6,787,026 - - - - - 6,852,020 6,787,026 Financial assets derecognised or repaid (excluding write offs) (25,993,150) (161) - - (228) (228) - (25,993,378) (389)   Write offs As at 31st December 2021 - - - - - - - - - 171,409,727 10,732,205 - - 610,799 610,799 - 172,020,526 11,343,004 41,962,736  Financial assets measured at amortised cost - Loans and advances 546,879,310 3,091,724 204,628,252 8,058,780 63,035,895 30,812,232 - 814,543,456   Transfer to stage 1 39,437,433 1,867,086 (38,650,913) (1,561,431) (786,520) (305,655) - - -   Transfer to stage 2 (24,563,063) (231,210) 33,485,603 2,799,302 (8,922,540) (2,568,093) - - -   Transfer to stage 3  As at 1st January 2021 (3,244,904) (33,055) (10,291,117) (478,176) 13,536,021 511,231 - - -  New assets originated or purchased and effect of remeasurement 429,647,042 4,462,178 34,556,814 6,973,891 12,280,977 15,104,414 - 476,484,833 26,540,483  Financial assets derecognised or repaid (excluding write offs) (273,045,585) (2,661,765) (73,502,225) (5,603,725) (14,267,919) (6,279,860) - (360,815,729) (14,545,350) - - - - (1,240,831) (1,240,831) - (1,240,831) (1,240,831) 715,110,233 6,494,958 150,226,414 10,188,641 63,635,083 36,033,438 - 928,971,730 52,717,037    Write offs*    As at 31st December 2021 * The contractual amount outstanding on financial assets that were written off during the year ended 31st December 2021 and that are still subject to enforcement activity is Rs 729 Mn (2020 - Rs 25 Mn) 169 INTEGRATED REPORT 2021
  169. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.4 Credit exposure and expected credit loss (ECL) provision movement - Stage wise (Contd.) Bank - 2021  Stage 1   Gross  Stage 2   ECL   carrying  Gross   Stage 3   ECL   carrying amount  Rs 000 Rs 000 amount  Rs 000  Gross   Exposures not  subject to ECL  ECL Gross   Gross    carrying   carrying Rs 000 amount   Rs 000 amount   Rs 000   Rs 000  108,687   carrying Rs 000 amount  Rs 000  Total   ECL Financial assets measured at fair value through other comprehensive income 245,086,855 108,687 - - - - 4,184,803 249,271,658   Transfer to stage 1 - - - - - - - - -   Transfer to stage 2 - - - - - - - - -   Transfer to stage 3 - - - - - - - - - 2,724,856 186,758 - - - - 244,206 2,969,062 186,758 As at 1st January 2021 New assets originated/purchased or increase in fair value Financial assets derecognised/repaid (excluding write offs) and reductions in fair value   Write offs As at 31st December 2021 (48,683,010) - - - - - (131,277) (48,814,287) - - - - - - - - - - 199,128,701 295,445 - - - - 4,297,732 203,426,433 295,445 Financial assets recognised through profit or loss measured at fair value 170 As at 1st January 2021 - - - - - - 84,499 84,499  -   Transfer to stage 1 - - - - - - - - -   Transfer to stage 2 - - - - - - - - -   Transfer to stage 3 - - - - - - - - - New assets originated/purchased or increase in fair value - - - - - - 18,866 18,866 - Financial assets derecognised/repaid (excluding write offs) and reductions in fair value - - - - - - - - -   Write offs - - - - - - - - - As at 31st December 2021 - - - - - - 103,365 103,365 - HATTON NATIONAL BANK PLC
  170. Bank - 2020  Stage 1   Gross   Stage 2   ECL  Gross   Stage 3   ECL  Gross   Exposures not  subject to ECL  ECL  Total  Gross   Gross   ECL   carrying   carrying   carrying   carrying   carrying amount  Rs 000 Rs 000 amount  Rs 000 amount  Rs 000 Rs 000 amount   Rs 000 amount   Rs 000   Rs 000   4,796  Rs 000 Cash and cash equivalents  1,198,942   4,796   -    -    -    -    27,895,043   29,093,985    Transfer to stage 1 As at 1st January 2020  -    -    -    -    -    -    -    -   -   Transfer to stage 2  -    -    -    -    -    -    -    -   -   Transfer to stage 3  -    -    -    -    -    -    -    -   - New assets originated or purchased and effect of remeasurement  7,542,130   12,844    -    -    -    -    -    7,542,130   12,844   Financial assets derecognised or repaid (excluding write offs)  (965,369)  (64)    -    -    -    -    (1,529,608)  (2,494,977)  (64)    -    -    -    -    -    -    -    -     Write offs As at 31st December 2020  -    7,775,703   17,576  -    -    -    -    26,365,435   34,141,138   17,576  7,651,612   49,069  Placements with banks  7,651,612   49,069   -    -    -    -    -     Transfer to stage 1 As at 1st January 2020  -   - - - - - -  -   -   Transfer to stage 2  -   - - - - - -  -   -   Transfer to stage 3  -   - - - - - -  -   - New assets originated or purchased and effect of remeasurement  -   - - - - - -  -   - Financial assets derecognised or repaid (excluding write offs)  (7,651,612)  (49,069)  (7,651,612)  (49,069)  -    -    -    -    -     Write offs  -   - - - - - - - - As at 31st December 2020  -    -    -    -    -    -    -    -    -   - - Financial assets measured at amortised cost debt and other financial instruments As at 1st January 2020 150,903,782 1,182,947 602,398 602,398 - 151,506,179 1,785,345   Transfer to stage 1 - - - - - - - - -   Transfer to stage 2 - - - - - - - - -   Transfer to stage 3 - - - - - - - - - New assets originated or purchased and effect of remeasurement 107,317,304 3,346,779 - - 8,628 8,628 - 107,325,932 3,355,406 Financial assets derecognised or repaid (excluding write offs) (67,670,229) (584,387) - - - - - (67,670,229) (584,387)   Write offs As at 31st December 2020 - - - - - - - - - 190,550,857 3,945,340 - - 611,027 611,027 - 191,161,883 4,556,367 171 INTEGRATED REPORT 2021
  171. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) Bank - 2020  Stage 1   Gross   Stage 2   ECL  Gross   Stage 3   ECL  Gross   Exposures not  subject to ECL  ECL  Total  Gross   Gross   ECL   carrying   carrying   carrying   carrying   carrying amount  Rs 000 amount  Rs 000 amount  Rs 000 Rs 000 amount   Rs 000 amount   Rs 000   Rs 000  Rs 000 Rs 000  Financial assets measured at amortised cost Loans and advances  588,956,909  3,343,679  123,985,432  4,827,329  58,996,845  21,998,921  -    771,939,186   30,169,929    Transfer to stage 1  As at 1st January 2020   14,656,548   737,122   (13,980,919)  (563,838)  (675,629)  (173,284)  -    -    -     Transfer to stage 2  (93,679,341)  (560,231)  106,200,936   1,013,318   (12,521,595)  (453,087)  -    -    -     Transfer to stage 3  (7,613,344)  (52,352)  (18,352,584)  (871,005)  25,965,928   923,357   -    -    -    New assets originated or purchased and effect of remeasurement  322,442,220   1,679,760   54,456,789   5,705,964   16,927,157   19,158,418   -    393,826,166   26,544,142   Financial assets derecognised or repaid (excluding write offs)  (277,883,683)  (2,056,254)  (47,681,402)  (2,052,988)  (24,964,157)  (9,949,438)  -    (350,529,242)  (14,058,680)  -    -    -    -    (692,654)  (692,654)  -    (692,654)  (692,654)  546,879,309   3,091,724   204,628,252   8,058,780   63,035,895   30,812,232   -    814,543,456   41,962,736  122,170,308  259,065 - - - - 5,524,674  127,694,982  259,065    Write offs   As at 31st December 2020  Financial assets measured at fair value through other comprehensive income As at 1st January 2020   Transfer to stage 1 -  - - - - - - - -   Transfer to stage 2 -  - - - - - - - -   Transfer to stage 3 -  - - - - - - - - New assets originated/purchased or increase in fair value 150,011,642  - - - - - 71,419  150,083,061  - Financial assets derecognised/repaid (excluding write offs) and reductions in fair value (27,122,934)   Write offs As at 31st December 2020 - - - - (1,383,451) (28,506,385) - (150,378)  - - - - - - - (150,378)  - 245,059,016  108,687  - - - - 4,212,642  249,271,658  108,687  Financial assets recognised through profit or loss measured at fair value 172 As at 1st January 2020 - -  - - - - 1,013,374  1,013,374  -    Transfer to stage 1 -  -  - - - - - - -   Transfer to stage 2 -  -  - - - - - - -   Transfer to stage 3 -  -  - - - - - - - New assets originated/purchased or increase in fair value -  -  - - - - - - - Financial assets derecognised/repaid (excluding write offs) and reductions in fair value - - - - - - (928,875) (928,875) -   Write offs -  - - - - - - - - As at 31st December 2020 -  - - - - - 84,499  84,499  - HATTON NATIONAL BANK PLC
  172. 5 .3.4 (a)Sensitivity of factors used to determine impairment provisions COVID-19 introduced significant estimation uncertainty in relation to measurement of Bank’s allowance for expected credit losses. Given current economic uncertainties and the judgment applied to factors used in determining the expected default of borrowers in future periods, expected credit losses reported by the Bank should be considered as a best estimate within a range of possible estimates. As at 31st December 2021 Sensitivity effect on Statement of Financial Position Sensitivity effect on [Increase/(Decrease) in impairment provision] Income Statement Stage 1 Stage 2 Stage 3 Total [Increase/(Decrease) in impairment charge Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Change in Property realisation period of individually significant impaired customers   - Advanced by one year - - (479,637) (479,637) (479,637)   - Deferred by one year - - 436,773 436,773 436,773 - Increase existing PD by 10% across   all age buckets 452,989 589,130 - 1,042,119 1,042,119 - Decrease existing PD by 10% across   all age buckets (452,989) (675,627) - (1,128,616) (1,128,616) Change in Probability of Default (PD)     Change in Loss Given Default (LGD)   - 1% increase 45,299 58,913 86,353 190,565 190,565   - 1% decrease (45,299) (58,913) (86,353) (190,565) (190,565) Change in deemed loss period   - Deemed loss period increase by 1 year (117,610) (172,598) (283,676) (573,884) (573,884)   - Deemed loss period decrease by 1 year 216,436 334,088 520,018 1,070,542 1,070,542 - worse case 5% increase, best case   % decrease, base case constant 53,420,454 69,939,906 - 123,360,360 123,360,360   - worse case 5% decrease, best case   % increase, base case constant (53,420,454) (69,939,906) - (123,360,360) (123,360,360) Change in Economic Factor Adjustment (EFA) 173 INTEGRATED REPORT 2021
  173. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) As at 31st December 2020 Sensitivity effect on Statement of Financial Position Sensitivity effect on [Increase/(Decrease) in impairment provision] Income Statement Stage 1 Stage 2 Stage 3 Total [Increase/(Decrease) in impairment charge Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Change in Property realisation period of individually significant impaired customers   - Advanced by one year  -    -   (677,202) (677,202) (677,202)   - Deferred by one year  -    -   737,166 737,166 737,166 Change in Probability of Default (PD)   - Increase existing PD by 10% across   all age buckets 378,233 675,627 - 1,053,860 1,053,860   - Decrease existing PD by 10% across    all age buckets (378,233) (675,627) - (1,053,860) (1,053,860) Change in Loss Given Default (LGD)   - 1% increase 116,992 222,089 358,805 697,887 697,887   - 1% decrease (116,992) (222,089) (358,805) (697,887) (697,887) Change in deemed loss period   - Deemed loss period increase by 1 year (163,824) (162,011) (313,913) (639,749) (639,749)   - Deemed loss period decrease by 1 year 200,598 215,993 403,365 819,956 819,956   - worse case 5% increase, best case   % decrease, base case constant (38,390) (65,604) - (103,994) (103,994)   - worse case 5% decrease, best case   % increase, base case constant 38,390 65,367 - 103,757 103,757 Change in Economic Factor Adjustment (EFA) 174 HATTON NATIONAL BANK PLC
  174. 5 .3.5 Collateral held and other credit enhancement The bank holds collateral and other credit enhancements against certain types of its credit exposures. The following table sets out the principal types of collateral held against different types of financial assets. As at 31st December 2021 Gross loan balance Security value Rs 000 Rs 000 57,074,771 60,686,223 273,461,607 365,262,675 Stage 1 Cash Collateral Property, plant and machinery 14,856,985 14,856,985 Others 217,713,742 256,397,143 Unsecured 152,003,125 - 715,110,232 697,203,028 Treasury Guarantee Stage 2 3,029,614 3,711,953 102,800,741 138,795,606 Treasury Guarantee 20,988,958 20,988,958 Others 18,766,094 24,190,746 4,641,004 - 150,226,414 187,687,265 1,161,055 1,482,702 37,747,180 47,324,887 - - 14,846,451 18,112,774 Cash collateral Property, plant and machinery Unsecured Stage 3 Cash collateral Property, plant and machinery Treasury Guarantee Others Unsecured 9,880,391 - 63,635,078 66,920,365 Assets obtained by taking possession of collateral Details of financial and non-financial assets obtained by the Bank during the year by taking possession of collateral held as security against loans and advances and held at the year end are shown below. 2021 Rs 000 Property 1,165,000 Debt securities - Other - The Bank’s policy is to pursue timely realisation of the collateral in an orderly manner. The Bank does not generally use the non-cash collateral for its own operations. 175 INTEGRATED REPORT 2021
  175. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.6 Concentration of Credit Risk The Bank monitors concentration of credit risk by sector. 5.3.6 (a) Concentration by Sector Bank Agriculture Transport Construction Wholesale  and Manufacturing Tourism and  and and fishing Storage Infrastructure Retail Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000 Cash and cash equivalents - - - - - - Balances with Central Bank of Sri Lanka - - - - - - Derivative financial instruments - - - - - - Financial assets measured at fair value through profit or loss - - 33,485 3,108 6 - Financial assets measured at amortised cost - loans and advances to customers (gross) 63,850,296 101,518,565 49,170,201 13,262,719 135,880,409 153,153,301 Financial assets measured at amortised cost - debt and other financial instruments - - - - - - Financial assets measured at fair value through other comprehensive income - - - - - - Other financial assets - - - - - - 63,850,296 101,518,565 49,203,686 13,265,827 135,880,415 153,153,301 As at 31st December 2021 Financial Assets As at 31st December 2020 Financial Assets Cash and cash equivalents  -    -    -    -   Balances with Central Bank of Sri Lanka  -   - -  -    -    -   Derivative financial instruments  -    -    -    -    -    -   Financial assets measured at fair value through profit or loss  -    -    27,483   2,638   4   -   Financial assets measured at amortised cost - loans and advances to customers (gross)  57,393,821   81,604,140   41,465,929   13,529,468   118,427,899   134,944,021  Financial assets measured at amortised cost - debt and other financial instruments  -    -    -    -    -    -   Financial assets measured at fair value through other comprehensive income  -    -    -    -    -    -   Other financial assets  -    -    -    -    -    -    57,393,821   81,604,140   41,493,412   13,532,106   118,427,903   134,944,021  176 HATTON NATIONAL BANK PLC
  176. Information Financial   Professional, Art, Technology Services Scientific Entertainment Education Health care, Other Lending to Overseas Entities and and Technical and  Services Communication Services Recreation and Support Services Consumption Social Total Services  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000 - 38,194,133 - - - - - - - 38,194,133 - 25,820,489 - - - - - - - 25,820,489 - 927,487 - - - - - - - 927,487 - 43,816 - - - - - 22,950 - 103,365 7,240,456 123,046,609 11,187,113 368,144 3,073,415 7,313,087 9,728,805 235,528,029 14,650,581 928,971,730 - 171,501,003 - - - - - 519,521 - 172,020,526 - 203,426,433 - - - - - - - 203,426,433 - 6,123,181 - - - - - - - 6,123,181 7,240,456 569,083,151 11,187,113 368,144 3,073,415 7,313,087 9,728,805 236,070,500 14,650,581 1,357,587,344  -    34,141,138   -    -    -    -    -    -    -    34,141,138   -    7,212,395   -    -    -    -    -    -    -    7,212,395   -    1,032,318   -    -    -    -    -    -    -    1,032,318   -    38,276   -    -    -    -    -    16,098   -    84,499   4,945,554   92,483,415   6,683,693   242,267   2,007,442   3,087,780   6,330,410   233,204,098   18,193,520   814,543,456   -    191,161,883   -    -    -    -    -    -    -    191,161,883   -    249,271,658   -    -    -    -    -    -    -    249,271,658   -    2,279,834   -    -    -    -    -    -    -    2,279,834   4,945,554   577,620,917   6,683,693   242,267   2,007,442   3,087,780   6,330,410   233,220,195   18,193,520   1,299,727,181  177 INTEGRATED REPORT 2021
  177. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.6 (a) Concentration by Sector (Contd.) Group Agriculture Manufacturing Tourism Transport Construction Wholesale  and and  and and fishing Storage Infrastructure Retail Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000 Cash and cash equivalents - - - - - - Placements with banks - - - - - - Balances with Central Bank of Sri Lanka - - - - - - Reverse repurchase agreements - - - - - - Derivative financial instruments - - - - - - Financial assets measured at fair value through profit or loss As at 31st December 2021 Financial Assets - 113,140 33,485 3,108 9,350 - Financial assets measured at amortised cost - loans and advances to customers (gross) 74,219,461 108,487,899 49,503,861 13,899,710 137,001,254 159,106,763 Financial assets measured at amortised cost - debt and other financial instruments - - - - - - Financial assets measured at fair value through other comprehensive income - - - - - - Other financial assets - - - - - - 74,219,461 108,601,039 49,537,346 13,902,818 137,010,604 159,106,763 Cash and cash equivalents - - - - - - Placements with banks - - - - - - Balances with Central Bank of Sri Lanka - - - - - - Reverse repurchase agreements - - - - - - Derivative financial instruments - - - - - - Financial assets measured at fair value through profit or loss - - 27,483 2,638 4 - Financial assets measured at amortised cost - loans and advances to customers (gross) 67,646,910 87,457,274 41,531,714 13,686,538 118,756,492 139,525,229 Financial assets measured at amortised cost - debt and other financial instruments - 376,870 - - - 82,499 Financial assets measured at fair value through other comprehensive income - - - - - - As at 31st December 2020 Financial Assets Other financial assets 178 HATTON NATIONAL BANK PLC - - - - - - 67,646,910 87,834,144 41,559,197 13,689,176 118,756,496 139,607,728
  178. Information Financial   Technology Services Professional, Art, Education Health care, Consumption Other Lending to Scientific Entertainment Social Overseas and and Technical and  Services Entities Communication Services Recreation and Support Services Total Services  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000  Rs 000 - 40,909,251 - - - - - - - 40,909,251 - 6,371,624 - - - - - - - 6,371,624 - 25,820,489 - - - - - - - 25,820,489 - 6,246,276 - - - - - - - 6,246,276 - 927,487 - - - - - - - 927,487 - 647,938 - - - - - 55,620 - 862,641 7,240,456 123,688,456 11,634,506 449,525 3,256,362 20,280,165 9,735,798 235,752,458 14,650,581 968,907,255 148,112 183,002,583 - - - - - 896,443 - 184,047,138 - 210,804,487 - - - - - - - 210,804,487 - 8,034,880 - - - - - - - 8,034,880 7,388,568 606,453,471 11,634,506 449,525 3,256,362 20,280,165 9,735,798 236,704,521 14,650,581 1,452,931,528 - 34,916,558 - - - - - - - 34,916,558 - 12,126,911 - - - - - - - 12,126,911 - 7,212,395 - - - - - - - 7,212,395 - 2,827,050 - - - - - - - 2,827,050 - 1,032,318 - - - - - - - 1,032,318 - 1,048,604 - - - - - 16,098 - 1,094,827 4,945,554 93,390,256 6,772,038 242,267 2,007,442 13,030,825 6,330,410 233,204,500 18,193,520 846,720,969 148,112 196,188,493 - - - - - 1,883,371 - 198,679,345 - 256,394,644 - - - - - - - 256,394,644 - 3,851,392 - - - - - - - 3,851,392 5,093,666 608,988,621 6,772,038 242,267 2,007,442 13,030,825 6,330,410 235,103,969 18,193,520 1,364,856,409 179 INTEGRATED REPORT 2021
  179. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.3.6 (b) Significant foreign lending exposures Gross and net carrying values of significant foreign lending are given below. All these loans have been considered as significant loans and analysed individually. When the Bank has identified objective evidence of impairment of these loans, future cash flows have been estimated giving due consideration for specific industry, country risk factors etc. and availability of collateral. Maldives As at 31st December Gross carrying value Impairment allowance Net carrying value Uganda Cambodia 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 19,736,889  18,780,545  2,305,286 2,499,655 1,831,281  3,378,754  (353,443)  (921,726) (41,701) (7,500) (3,741)  (8,155) 19,383,446  17,858,819  2,263,585 2,492,155 1,827,540  3,370,599  Total unutilised overdrafts approved to above customers as at 31st December 2021 amounts to Rs 544.55 Mn (2020 : Rs 407.72 Mn). 5.3.6 (c) Commitments and Guarantees The Bank enters into various irrevocable commitments and assumes contingent liabilities in order to meet the financial needs of the customer. These obligations contain credit risk and form part of the overall risk of the Bank even though those are not recognised on the statement of financial position. 2021 2020 Rs 000 Rs 000 32,567,799 28,334,449 Guarantees 100,774,436 104,470,363 Acceptances 22,336,884 26,213,711 Commitment for unutilised facilities - Direct 193,057,343 152,404,973 Commitment for unutilised facilities - Indirect 246,079,532 208,492,441 594,815,994 519,915,937 As at 31st December  Documentary credit 5.3.7 Offsetting financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. 5.4 Liquidity Risk Liquidity risk is the risk that the Bank is unable to meet its debt obligations associated with its financial liabilities due to lack of funds or having to meet these obligations at excessive cost. 5.4.1 Management of Liquidity Risk The Bank manages liquidity risk, in accordance with regulatory guidelines and international best practices. The objective of the Bank’s liquidity and funding framework is to ensure that funding commitments and deposit withdrawals can be met when due and market access remains cost effective. A board approved liquidity policy to manage liquidity on a day-to-day basis along with a contingency funding plan to deal with crisis situations are in place. Contractual and behavioural maturity of assets and liabilities, key liquidity ratios and monthly liquidity forecasts and gaps are reviewed at Assets and Liability Committee (ALCO) meetings. The main sources of the Bank’s funding are capital, core deposits from retail and commercial clients, wholesale deposits and access to borrowed funds from the interbank money market. The Bank also maintains a portfolio of readily marketable securities to further strengthen its liquidity position. Liquidity risk exposure is managed by treasury with limits and triggers set to ensure that sufficient liquidity surplus and reserves are available to meet daily business requirements and also to deal with a sudden liquidity shock. Treasury reports the Bank’s overall liquidity position to management on a daily basis.  Management has evaluated the impact from COVID – 19 on the Bank’s operations and forecast cash flows and is of the view that the negative impacts from same would not pose any additional stress on the Bank’s ability to maintain its regulatory capital margins which is well above the regulatory requirements. Further, the Bank has increased its liquidity buffers on a prudent basis and maintained a strong excess liquidity position. 180 HATTON NATIONAL BANK PLC
  180. 5 .4.2 Exposure to Liquidity Risk The Bank monitors the following key liquidity ratios to assess funding requirements. 2021 2020 % % Domestic Banking Unit 27.51 38.94 Off shore Banking Unit 24.95 35.92 191.38 285.50 207.99 290.29 117.57 112.61 As at 31st December Liquid Assets ratio (LAR) LAR is the percentage of liquid assets to total liabilities excluding shareholders’ funds. For this purpose, ”liquid assets” include cash and cash equivalents, Placements with banks and Government securities (net). Liquidity Coverage Ratio (LCR) Rupee Liquidity Requirement This ratio determines the ability of the Bank to withstand adverse shocks (i.e. sudden withdrawal of a significant portion of deposits) by holding high quality liquid assets in a 30 day time span. All Currency Liquidity Requirement Net Stable Funding Ratio (NSFR) This ratio measures the availability of stable funds against the required funds of the Bank. NSFR, requires banks to maintain stable funding profile by creating additional incentives to fund their activities with more stable sources of funding on an ongoing basis, over a longer time horizon. DBU As at 31st December FCBU 2021 2020 2021 2020 % % % % 27.51 38.95 24.95 35.92 Liquid Asset Ratio (LAR)        As at 31st December         Average for the year 35.98 34.83 29.05 39.56        Maximum for the year 40.58 41.09 32.91 52.39        Minimum for the year 27.51 27.27 24.95 33.18 Liquidity Ratios % 100 80 60 40 20 Q1 Q2 Q3 Q4 Q1 2020 Q2 Q3 Q4 2021 Gross loans to customer deposits Net loans to total assets Liquid assets ratio - DBU Liquid assets ratio - FCBU 181 INTEGRATED REPORT 2021
  181. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.4.3 Analysis of Financial Assets and Liabilities by Remaining Contractual Maturities The table below summarises the maturity profile of undiscounted cash flows of the Bank’s financial assets and liabilities as at 31st December. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Bank expects that many customers will not request repayment on the earliest date it could be required to pay and the table does not reflect the expected cash flows indicated by its deposit retention history.  Contractual maturities of undiscounted cash flows of financial assets and financial liabilities Bank As at 31st December 2021 Financial Assets Derivative assets    Derivative financial instruments held for risk management Non- derivative assets  Cash and cash equivalents  Balances with Central Bank of Sri Lanka Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost - loans and advances to customers (gross) Financial assets measured at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income Other financial assets  Total undiscounted financial assets  Up to  3 - 12 3 months  months  Rs 000 Rs 000 918,019 9,468 38,194,133 -  3 - 5  More than years  years  5 years  Rs 000 Rs 000 Rs 000 Rs 000 - - - 927,487 - - - 25,820,489 38,194,133 25,820,489 103,365 - - - - 103,365 340,301,920 259,567,528 254,691,262 130,746,016 48,677,782 23,881,525 72,254,604 42,375,262 169,603,705 6,123,181 603,922,105 6,382,678 289,841,199 21,108,788 348,054,654 7,996,230 181,117,508 94,479 - - - 353,357 6,262,755 223,535 3,041,281 - 2,084,682 - 83,252 - 17,522,959 33,573,744 363,827,496 - 37,101,967 - 8,113,501 - 29,186 1,096,579,056 989,212 2,903,335 6,900,771 7,424,656 167,000 3,282,408 376,761,008 2,257,715 11,676,144 60,977,878 11,475,252 29,098,090 (86,919,809) 287,076,776 152,019,417 Financial Liabilities Derivative liabilities  Derivative financial instruments held for risk management 258,878 Non-derivative liabilities  Due to banks 6,050,989 Securities sold under repurchase agreements 33,350,209 Financial liabilities measured at amortised cost - due to depositors 687,506,906 Dividends payable   989,212 Financial liabilities measured at amortised cost - other borrowings 5,889,972 Financial liabilities at amortised cost - debt securities issued Other financial liabilities  9,346 Subordinated term debts Total undiscounted financial liabilities 734,055,512 Net undiscounted financial assets/(liabilities) (130,133,407) 182 HATTON NATIONAL BANK PLC  1 - 3 Total 136,289,942 1,121,596,668 17,697,469 204,886,642 10,993,173 216,084,574 6,123,181 190,801,073 1,613,736,539 1,941,680 25,060,414 2,424,715 9,346 10,325,000 36,758,804 12,379,118 1,213,271,607 178,421,955 400,464,932
  182. The table below shows the contractual expiry by maturity of the Bank ’s contingent liabilities and commitments. Bank As at 31st December 2021 Documentary credit Guarantees Acceptances Commitment for unutilised facilities - Direct Commitment for unutilised facilities - Indirect  Up to  3 - 12  1 - 3  3 - 5  More than 3 months  months  Rs 000 Rs 000 24,149,348 25,718,038 16,286,190 193,057,343 246,079,532 505,290,451 5,843,906 46,601,604 6,050,694 58,496,204 2,574,545 22,795,051 25,369,596 Total years  years  5 years  Rs 000 Rs 000 Rs 000 Rs 000 2,674,113 2,674,113 2,985,630 2,985,630 32,567,799 100,774,436 22,336,884 193,057,343 246,079,532 594,815,994 Total Contractual maturities of undiscounted cash flows of financial assets and financial liabilities Bank As at 31st December 2020 Financial Assets Derivative assets    Derivative financial instruments held for risk management Non- derivative assets  Cash and cash equivalents  Balances with Central Bank of Sri Lanka Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost - loans and advances to customers (gross) Financial assets measured at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income Other financial assets  Total undiscounted financial assets Financial Liabilities Derivative liabilities  Derivative financial instruments held for risk management Non-derivative liabilities  Due to banks Securities sold under repurchase agreements Financial liabilities measured at amortised cost - due to depositors Dividends payable   Financial liabilities measured at amortised cost - other borrowings Financial liabilities at amortised cost - debt securities issued Other financial liabilities  Subordinated term debts Total undiscounted financial liabilities Net undiscounted financial assets/(liabilities)  Up to  3 - 12  1 - 3  3 - 5  More than 3 months  months  years  years  5 years  Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000  789,470   242,848  - - -  1,032,318   -     -     -     7,212,395   34,141,138   7,212,395   -     -     -     34,141,138   -     84,499   306,531,646   214,132,231   241,463,432   119,669,721   13,394,885   47,563,565   92,919,891   50,684,256   -     84,499   82,906,545   964,703,575   28,312,817   232,875,414   66,160,747   159,486,010   17,151,647   9,824,014   9,729,032   262,351,450   2,279,834   2,279,834   423,382,219   421,424,654   351,534,970   180,177,991   128,160,789   1,504,680,623   203,210   133,804   27,829,267   10,176,790   56,469,670   192,797  - - -  337,014   3,918,357   -     3,160,729   -     187,450   91,565,473   -    10,369,587  607,295,210   339,313,894   32,824,675   962,185   -     -     9,477,508   -     -     988,911,287   -    962,185  3,418,492   9,677,957   7,906,857   8,459,916   -     167,000   2,371,854   8,295,371   6,298,280   660,552,379   412,253,402   2,334,001   8,407,795   55,391,685   90,715   5,589,668   26,778,536   (239,036,493)  3,716,027   33,179,249   -     2,591,716   2,371,854   9,111,341   37,702,455   13,014,818   1,167,990,820   9,171,252   296,143,285   153,399,455   115,145,971   334,823,470  183 INTEGRATED REPORT 2021
  183. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) The table below shows the contractual expiry by maturity of the Bank’s contingent liabilities and commitments. Bank As at 31st December 2020 Documentary credit Guarantees Acceptances Commitment for unutilised facilities - Direct Commitment for unutilised facilities - Indirect  Up to  3 - 12  1 - 3  3 - 5  More than 3 months  months  years  years  5 years  Rs 000 Rs 000 Rs 000 Rs 000 Rs 000  24,914,222   33,929,726   20,215,002   152,404,972   208,492,440   439,956,363   3,388,167   32,059   48,206,862   17,393,203   5,986,304   12,405   -     -     -     -     57,581,333   17,437,667   -     1,284,748   -     -     -     1,284,748  Total Rs 000  -     28,334,449   3,655,824   104,470,363   -     26,213,711   -    152,404,973   -    208,492,441   3,655,824   519,915,937 The amounts in the table above have been compiled as follows. Type of financial instrument Basis on which amounts are compiled Non-derivative financial liabilities and financial assets Undiscounted cash flows, which include estimated interest payments. Issued financial guarantee contracts and unrecognised loan commitments In respect of issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called. The Bank’s expected cash flows on some financial assets and financial liabilities vary significantly from the contractual cash flows. The principal differences are as follows: - demand deposits from customers are expected to remain stable or increase; - unrecognised loan commitments are not all expected to be drawn down immediately; 5.4.4 Liquidity reserves Components of the Bank’s liquid assets portfolio used for the purpose of calculating statutory liquid asset ratio in December 2020 and December 2021 (average balance for the month) is given below.  December Cash Balances with licensed commercial banks Money at call in Sri Lanka Treasury bills and securities issued or guaranteed by the Government of Sri Lanka which have a maturity not exceeding one year Goods Receipts/Liquid assets permitted under extraordinary policy measures due to COVID-19 Import bills Export bills Cash items in the process of collection Balances with banks abroad Total average liquid assets for the month of December  2021 2020 Rs 000 Rs 000 29,606,448 1,036,786 2,318,065  22,991,556   210,389   10,990,548  285,152,968 3,028 1,199,973 303,139 6,459,173 326,079,580  379,992,038   10,985,808   1,645,313   342,191   8,995,271   436,153,114  Monthly liquidity gap is reported to ALCO by Treasury for each currency, together with the overall gap position. Liquidity gap is based on the expected realisation of assets and liabilities which have been determined based on historical behaviour. Net liquidity position reported for the month is monitored against the pre-set limits which have been approved by the ALCO. The Bank also holds debt and equity securities which are not considered as liquid assets but for which there is an active and liquid market. These assets can be readily sold to meet any unexpected liquidity requirements. Detailed analysis of the debt and equity securities held by the Bank as at 31st December 2021 is presented in Note 32 and 33 to the financial statements. 184 HATTON NATIONAL BANK PLC
  184. 5 .4.5 Financial assets available to support future funding Financial assets are pledged as collateral as part of sales and repurchases, securities borrowing and securitisation transactions under terms that are usual and customary for such activities. In addition, as part of these transactions, the Bank has received collaterals that it is permitted to sell or repledge in the absence of default. The total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities as at 31st December 2021 and 2020 is shown in the following tables. As at 31st December 2021 Encumbered Pledged as Unencumbered Other collateral Available as Other Total collateral Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Cash and cash equivalents - - 38,194,133 - 38,194,133 Balances with Central Banks - 25,820,489 - - 25,820,489 Derivative financial assets - - - 927,487 927,487 Financial assets recognised through profit or loss measured at fair value  - - 103,365 - 103,365 Financial assets measured at amortised cost - Loans and advances to customers - - 928,971,730 - 928,971,730 Financial assets measured at amortised cost - Debt and other financial instruments - - 172,020,526 - 172,020,526 34,873,733 - 168,552,700 - 203,426,433 Financial assets measured at fair value through other comprehensive income Other assets - - - 6,123,181 6,123,181 34,873,733 25,820,489 1,307,842,454 7,050,688 1,375,587,344 As at 31st December 2020 Encumbered Pledged as Unencumbered Other collateral Rs 000 Available as Other Total Rs 000 Rs 000 collateral Rs 000 Rs 000 Cash and cash equivalents  -    -    34,141,138   -    -    34,141,138  Balances with Central Banks  -    7,212,395   -    7,212,395  Derivative financial assets  -    -   -   1,032,318     1,032,318  Financial assets recognised through profit or loss measured at fair value   -    -    84,499   -    84,499  Financial assets measured at amortised cost - Loans and advances to customers  -    -    814,543,456   -    814,543,456  Financial assets measured at amortised cost - Debt and other financial instruments  -    -    191,161,883   -    191,161,883   12,134,269   -    237,137,389   -    249,271,658   -    -    2,279,834   2,279,834  Financial assets measured at fair value through other comprehensive income Other assets  -    12,134,269   7,212,395    1,277,068,365   3,312,152   1,299,730,181  185 INTEGRATED REPORT 2021
  185. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.5 Market Risk Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s or issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of the Bank’s market risk management is to manage and control market risk exposures within acceptable parameters in order to ensure the Bank’s solvency while optimising the return on risk. 5.5.1 Management of Market Risk The Bank separates its exposure to market risk between trading and non-trading portfolios. Trading portfolio includes financial assets and liabilities that are managed on a fair value basis. All foreign exchange positions within the Bank are treated as part of the Bank’s trading portfolios for risk management purposes. Non trading portfolio is managed in accordance with the purpose and strategic benefits of such investments, rather than purely on fair value basis. The Bank has a board approved treasury policy. Treasury middle office monitors the Bank’s compliance with the above policy and ensures that the Bank’s market risk limits are in line with the level of risk acceptable to the Board. The Bank employs a range of tools to monitor and limit market risk exposures which are discussed below. The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios. As at 31st December 2021 Market Risk Measurement Note Carrying Trading Non-Trading amount Portfolio Portfolio Rs 000 Rs 000 Rs 000 Assets subject to market risk Cash and cash equivalents 25 38,194,133 - 38,194,133 Derivatives financial assets 29 927,487 927,487 - Financial assets measured at fair value through profit or loss 30 103,365 103,365 - Financial assets  measured at amortised cost - Loans and advances to customers 31 928,971,730 - 928,971,730 Financial assets measured at amortised cost - Debt and other financial instruments  32 172,020,526 - 172,020,526 Financial assets measured at fair value through other comprehensive income 33 203,426,433 - 203,426,433 1,343,643,674 1,030,852 1,342,612,822 Liabilities subject to market risk 186 Due to banks 42 17,075,502 - 17,075,502 Derivatives financial liabilities 29 353,357 353,357 - Financial liabilities measured at amortised cost - due to depositors 44 1,075,709,287 - 1,075,709,287 Financial liabilities measured at amortised cost - other borrowings 46 24,747,869 - 24,747,869 Debt securities issued 47 1,962,749 - 1,962,749 Subordinated term debt 52 HATTON NATIONAL BANK PLC 23,552,323 - 23,552,323 1,143,401,087 353,357 1,143,047,730
  186. Market Risk Measurement As at 31st December 2020 Note Carrying Trading Non-Trading amount Portfolio Portfolio Rs 000 Rs 000 Rs 000 Assets subject to market risk Cash and cash equivalents 25  34,141,138   -    34,141,138  Placements with banks 26  -    -    -   Derivatives financial assets 29  1,032,318   1,032,318   -   Financial assets measured at fair value through profit or loss 30  84,499   84,499   -   Financial assets  measured at amortised cost - Loans and advances to customers 31  814,543,456   -    814,543,456  Financial assets measured at amortised cost - Debt and other financial instruments  32  191,161,883   -    191,161,883  Financial assets measured at fair value through other comprehensive income 33  249,271,658  1,290,234,952  -   1,116,817  249,271,658  1,289,118,135 Liabilities subject to market risk Due to banks 42  89,746,709   -    89,746,709  Derivatives financial liabilities 29  337,014   337,014   -   Financial liabilities measured at amortised cost - due to depositors 44  967,821,404   -    967,821,404  Financial liabilities measured at amortised cost - other borrowings 46  30,526,261   -    30,526,261  Debt securities issued 47  1,875,042   -    1,875,042  Subordinated term debt 52  28,298,365   -    28,298,365  1,118,604,795  337,014 1,118,267,781 5.5.2 Exposure to equity price risk - Trading portfolio The principal tool used to measure and control market risk exposure within the Bank is Value at Risk (VaR). The VaR of a portfolio is the estimated loss that will arise on the portfolio over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model is used mainly based on historical simulation by the Bank upon a 99 percent confidence level and assumes 1-day and a 10-day holding period. Taking account of market data from the previous two years and observed relationships between different markets and prices, the model generates a wide range of plausible future scenarios for market price movements. Although VaR is an important tool for measuring market risk, the assumptions on which the model is based give rise to some limitations, including the following: • The 1-day and 10-day holding periods assumes that it is possible to hedge or dispose of positions within those periods. This may not be the case for illiquid assets or in situations in which there is severe general market liquidity. • A 99 percent confidence level does not reflect losses that may occur beyond this level. Even within the model used, there is a one percent probability that losses could exceed the VaR. • VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day. • The use of historical data as a basis for determining the possible range of future outcomes, may not always cover all possible scenarios, especially those of an exceptional nature. • The VaR measure is dependent upon the Bank’s position and the volatility of market prices. The VaR of an unchanged position reduces if market price volatility declines and vice versa. • The Bank uses VaR limits for foreign exchange and equity risks. The overall structure of VaR limits is subject to review and approval by ALCO. VaR limits are allocated to portfolios. VaR is measured at least monthly and reported to the Asset and Liability Committee (ALCO) and Board Integrated Risk Management Committee (BIRMC). 187 INTEGRATED REPORT 2021
  187. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) The Bank’s VaR models are subject to regular validation by Treasury Mid Office (TMO) to ensure that they continue to perform as expected and that assumptions used in model development are still appropriate. A summary of the VaR position of the Bank as at 31st December and during the period is as follows: As at 31st December 2021 2020 Marked-to-market value of the trading equity portfolio - Rs 000 103,365  84,499  Value-at-Risk (under 99% confidence level for 10 day period) 11.55% 10.10% Maximum possible loss of value in the marked-to-market value of the portfolio is indicated by the VaR over a 10 day period - Rs 000 11,939  8,534  The limitations of the VaR model are mitigated by supplementing VaR limits with other risk measures. The Bank uses a wide range of stress tests to model the financial impact of various exceptional market scenarios such as changes in exchange rates, interest rates and prices of financial instruments such as equities and bonds. The results of the stress tests are reviewed periodically by the Asset and Liability Committee (ALCO) and Board Integrated Risk Management Committee (BIRMC). Exposure to Equity price Risk - Non Trading Portfolio Equity price risk is subject to regular monitoring by Market Risk, but is not currently significant in relation to the Bank’s overall results and financial position. 5.5.3 Exposure to interest rate risk - Non-trading portfolios The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments due to changes in market interest rates. The Bank manages the interest rate risk against interest rate gap limits, which is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to various rate scenarios. Net interest yields are also calculated for each product, to ensure that adequate margins are maintained. The Bank holds treasury bills and bonds with shorter maturities, thus the impact of interest rate changes in prices of treasury bills and bonds are very insignificant. Modified duration of non-trading portfolios as at 31st December is given below. As at 31st December Non trading 188 2021 2020 1.0794 2.6623 The following is a summary of the Bank’s interest rate gap position on non-trading portfolios. The interest rate repricing gap table analyses the full-term structure of interest rate mismatches within the Bank’s balance sheet based on either the next repricing date or the maturity date if floating rate or the maturity date if fixed rate HATTON NATIONAL BANK PLC
  188. As at 31st December 2021 Financial assets measured at amortised cost - Loans and advances to customers Financial assets measured at amortised cost - debt and other instruments Financial assets measured at fair value through other comprehensive income Financial liabilities measured at amortised cost - due to depositors Debt securities issued Subordinated term debts Borrowings Carrying Less than 3 –6 6–12 1–5 More than amount 3 months months months years 5 years Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 928,971,730 181,197,225 110,299,878 149,728,078 337,454,341 150,292,208 172,020,524 41,373,160 4,111,089 17,254,334 94,131,577 15,150,364 199,100,863 171,863,287 - 2,163,920 16,904,590 8,169,066 1,300,093,117 394,433,672 114,410,967 169,146,332 448,490,508 173,611,638 1,075,709,287 1,962,749 23,552,323 75,347,597 1,176,571,956 123,521,161 330,181,633 40,853,126 371,034,759 23,398,913 174,423,878 7,026,069 181,449,947 (67,038,980) 238,705,131 758,625 2,790,437 242,254,193 (73,107,861) 221,065,229 1,962,749 15,507,656 19,894,269 258,429,903 190,060,605 111,333,416 7,286,042 4,783,696 123,403,154 50,208,484 Modified duration follows the concept that the interest rates and bond prices move in opposite directions. This determines the effect that a 100 basis point (1%) change in interest rates will have on the price of a bond. An analysis of the Bank’s sensitivity to an increase or decrease in market interest rates based on rate sensitive assets and rate sensitive liabilities as at 31st December 2021 is as follows. As at 31st December LKR Portfolio (Rs 000) USD Portfolio (USD 000) Increase of Decrease of Increase of Decrease of 100 bps 100 bps 200 bps 200 bps 5,171,597 (5,478,992) 10,055,767 (11,286,755) (7,674) 8,209 (14,856) 16,999 Interest rate movements affect reported equity in the following ways: • Retained earnings: Increases/(decreases) in net interest income and in fair values of derivatives and other non-trading financial assets mandatorily measured at FVTPL reported in profit or loss; • Fair value reserve: Increases/(decreases) in the fair values of financial assets at FVOCI reported directly in equity; and Aggregate non-trading interest rate risk positions are managed by Treasury, which uses investment securities, placements with banks, deposits from banks and derivative instruments to manage the positions. The use of derivatives to manage interest rate risk is described in Note 29 to the financial statements. 189 INTEGRATED REPORT 2021
  189. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.5.4 Exposure to currency risks - Non-trading portfolios Foreign exchange risk in Net Open Position (NOP)/unhedged position of Bank The following table indicates the Bank’s exchange rate risk exposure based on its size of the NOP/unhedged positions in the foreign currency assets/liabilities. By 31st December 2021, Bank carried a USD equivalent NOP/unhedged “Overbought” position of LKR 1.39 Bn. The impact of exchange rate risk is given below: 2021 2020 Net exposure – USD equivalent 6,869,644  5,029,995  Value of position in Rs 000 1,394,366  945,387  202.98  187.95  As at 31st December Exchange rate (USD/LKR) as at 31 December Possible potential gain to Bank  13,944  9,454    - If exchange rate depreciates by 10% – Rs 000 139,437  94,539    - If exchange rate depreciates by 15% – Rs 000 209,155  141,808    - If exchange rate (USD/LKR) depreciates by 1% – Rs 000 5.6 Operational Risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank’s processes, personnel, technology and infrastructure and from external factors other than credit, market and liquidity risks. Operational risks arise from all of the Bank’s operations. The Bank’s  objective is to manage operational risk in order to avoid financial losses and damage to the Bank’s  reputation with overall cost effectiveness and innovation. Bank’s  policy requires compliance with all applicable legal and regulatory requirements. The following are included in the operational risk management process within the Bank. • Monitoring of Key Risk Indicators (KRIs) for the departments/functions under the defined threshold limits. Development of Risk and Control Self-Assessments (RCSA) to identify the risk exposure of all processes. • Operational risk incident reporting system and the independent analysis of the incidents by the integrated Risk Management Division (IRMD) and recognise necessary improvements in the systems, processes and procedures. • Analyse downtime of the critical systems, attrition information, exit interview comments and complaints to identify operational risks and recommend mitigating controls. The key findings of the analysis are evaluated at the Operational Risk Steering Committee (ORSC) and the Board Integrated Risk Management Committee (BIRMC) meetings in an operational risk perspective. • Ensuring Business Continuity Management and Operational Resilience by Business continuity planning (BCP) and testing Banks Disaster Recovery Drills and strengthening perceived areas for improvement. • Risk Reviewing of New products and processes 190 HATTON NATIONAL BANK PLC
  190. The primary responsibility for the development of operational risk management framework and controls to address operational risk lies with IRMD whilst implementation is assigned to senior management within each business unit . This responsibility is supported by the development of overall standards for management of operational risk in the following areas • Requirements for appropriate segregation of duties, including independent authorisation of transactions.  • Requirements for reconciliation and monitoring of transactions. • Compliance with regulatory and other legal requirements. • Documentation of controls and procedures. • Requirements for periodic assessment of operational risks faced and the adequacy of controls and procedures to address the identified risks.  • Requirements for reporting of operational losses and propose remedial action.  • Development of contingency plans. • Training and professional development to establish ethics and business standards. • Insurance covering risk due to threats arising from external and other events. • Risk based reviews on critical outsourced activities Compliance with the Bank’s standards is supported by a program of periodic reviews undertaken by internal audit. The results of internal audit reviews are discussed with the business unit to which they relate, with summaries submitted to the Board Audit Committee and senior management.   191 INTEGRATED REPORT 2021
  191. Notes to the Financial Statements 5 FINANCIAL RISK MANAGEMENT (Contd.) 5.7 Capital Management The Bank is required to manage its capital taking in to account the need to meet the regulatory requirements as well as the current and future business needs, stakeholder expectation and available options for raising capital. 5.7.1 Regulatory capital The Bank manages its capital considering regulatory capital requirements. The Central Bank of Sri Lanka (CBSL) sets and monitors capital requirements for licensed banks in Sri Lanka based on the Basel Framework. Thus the Bank’s operations are directly supervised by CBSL. The Bank is required to comply with the provisions of the Basel III framework  in respect of regulatory capital and capital to cover any additional risk. All banks in Sri Lanka need to maintain a minimum Common Equity Tier 1 ratio of 7%, Tier 1 ratio of 8.5% and a total capital ratio of 12.5%. In addition, the licensed banks which are determined as Domestic Systemically Important Banks (D-SIBs) shall maintain additional Higher Loss Absorbency (HLA) requirements as specified by the Monetary Board in the form of Common Equity Tier 1. As per this requirement, the Bank should maintain a Common Equity Tier 1 ratio of 8% together with a Tier 1 ratio of 9.5% and a total capital ratio of 13.5% with effect from 31st December 2019. However, subsequent to the extraordinary regulatory measures approved by the Monetary Board to assist affected parties due to COVID-19 outbreak, Domestic Systemically Important Banks (D-SIBs) are allowed to draw down Capital Conservation Buffers by 100 bps. Accordingly, the revised minimum Common Equity Tier 1 ratio of 7%, Tier 1 ratio of 8.5% and a total capital ratio of 12.5% is required to be maintained as at 31st December 2021. 2021 2020 Common equity Tier 1 (CET1) capital after adjustments 122,797,863  117,243,040  Total common equity Tier 1 (CET1) capital 132,774,260  121,925,658  38,679,005  37,364,244  As at 31st December Equity capital (stated capital)/assigned capital Reserve fund Published retained earnings/(accumulated retained losses)  7,660,000  30,266,696  19,730,429  Published accumulated other comprehensive income (OCI) (1,831,441)  (150,378) General and other disclosed reserves 57,100,000  57,321,363  -  -   Unpublished current year’s profit/(losses) and gains reflected in OCI Ordinary shares issued by consolidated banking and financial subsidiaries of the Bank and held by third parties Total adjustments to CET1 capital Goodwill (net) Other intangible assets (net) Revaluation losses of property, plant and equipment Defined benefit pension fund assets Investments in the capital of banking and financial institutions where the bank does not own more than 10% of the issued ordinary share capital of the entity 192 8,560,000 -  -   9,976,396  4,682,618  - - 1,307,880  1,189,715  -  -   1,248,708 - 377,538  194,159  Significant investments in the capital of financial institutions where the Bank owns more than 10% of the issued ordinary share capital of the entity 2,580,709  2,492,204  Deferred tax assets (net) 4,461,561  806,539  HATTON NATIONAL BANK PLC
  192. 2021 As at 31st December 2020 Additional Tier 1 (AT1) capital after adjustments -  -   Total additional Tier 1 (ATI) capital -  -    -   Qualifying additional Tier 1 capital instruments - Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties -  -   Total adjustments to AT1 capital -  -   Investment in own shares -  -   Others (Specify) -  -   Tier 2 Capital after adjustments 30,685,749  25,928,773  Total Tier 2 Capital 30,685,749  25,928,773  Qualifying Tier 2 capital instruments 18,963,673  15,835,122  Revaluation gains 2,090,479  2,090,479  General provisions/Eligible impairment 9,631,598  8,003,173  Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties -  -   Total adjustments to Tier 2 capital -  -   Investment in own shares -  -   Others (specify) -  -   CET1 capital 132,774,260  121,925,658  Total Tier 1 capital 122,797,863  117,243,040  Total capital 153,483,612  143,171,814  Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Total Risk Weighted Assets (RWA) 845,057,594  796,090,230  931,653,271 872,777,199 RWAs for credit risk 770,527,810  724,293,579  836,250,291 781,917,200 As at 31st December 1,495,688  832,706  1,770,833 974,642 73,034,096  70,963,945  93,632,147 89,885,357 Common equity Tier 1 Capital ratio 14.53% 14.73% 14.45% 14.99% Tier 1 capital ratio 14.53% 14.73% 14.45% 14.99% Total capital ratio 18.16% 17.98% 17.80% 18.02% RWAs for market risk RWAs for operational risk Regulatory capital ratios (%) 5.7.2 Capital allocation Management monitors the capital adequacy ratio on a regular basis to ensure that it operates well above the internal limit set by the Bank. The allocation of capital between specific operations and activities, to a large extent is driven by optimisation of return on capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements, but in some cases, the regulatory requirements do not fully reflect the varying degree of risks associated with different activities. In such cases, the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required level by the regulator. 193 INTEGRATED REPORT 2021
  193. Notes to the Financial Statements 6 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES ACCOUNTING POLICY Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market or , in its absence of which, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument on initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Group determines that the fair value on initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique for which any unobservable inputs are judged to be insignificant in relation to the difference, then the financial instrument is initially measured at fair value adjusted to defer the difference between the fair value on initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. Group measures the fair value of an asset or a liability carried at fair value at bid price or ask price respectively. The long positions and short positions are measured using mid rates. Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for the particular risk exposure. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Valuation models Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist, and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums used in estimating discount rates, bond and equity prices, foreign currency exchange rates, expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The Group uses widely recognised valuation models to determine the fair value of common and simple financial instruments, such as interest rate and currency swaps, that use only observable market data and require little management judgement and estimation. Observable prices or model inputs are usually available in the market for government securities such as treasury bills, treasury bonds and Sri Lanka sovereign bonds, listed equity securities and forward contracts. The availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determining fair values. The availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. Fair Value Hierarchy The Group measures the fair values of financial instruments using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. • Level 1  : Fair value measurement using unadjusted quoted market prices  When available, the fair values of financial instruments are determined using quoted market prices (unadjusted) in active markets for identical instruments. A market is regarded as active, if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. Accordingly, the fair values of treasury bills and bonds have been derived using the market yields and market prices published by Central Bank of Sri Lanka while fair value of quoted equity securities and Sri Lanka Sovereign Bonds have been valued using the quoted market prices as at the reporting date. 194 HATTON NATIONAL BANK PLC
  194. • Level 2 : Fair value measurement using significant observable inputs In the absence of an active market for a financial instrument, the fair value is determined using quoted market prices in active markets for similar instruments or quoted prices for identical or similar instruments in markets that are considered less than active or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.  The spot and forward premiums available as at the reporting date have been used to estimate the fair value of derivative financial instruments while the fair value of unquoted units have been measured using manager’s selling prices. The fair values of financial assets and financial liabilities carried at amortised cost have been estimated by comparing the interest rates when they were first recognised with the current market rates of similar instruments. • Level 3 : Fair value measurement using significant unobservable inputs Financial instruments for which the valuation technique includes inputs that are not observable and the unobservable inputs have a significant effect on the instrument’s valuation. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes that a third party market participant would take them into account in pricing a transaction. Assets and Liabilities Recorded at Fair Value A description of how fair values are determined for assets and liabilities that are recorded at fair value using valuation techniques is summarised below, which incorporates the bank’s estimate of assumptions that a market participant would make when valuing the instruments. • Derivative financial instruments Derivative financial instruments such as forward foreign exchange contracts and currency swaps are valued using a valuation technique with market observable inputs (Level 2). The most frequently applied valuation technique is forward pricing model which incorporates various inputs, including foreign exchange spot and forward premiums. • Financial assets measured at fair value through other comprehensive income (FVOCI) Government debt securities classified as financial assets measured at fair value through other comprehensive income  are valued using current yield rates or market rates published by the Central Bank of Sri Lanka. Quoted equities and units classified as FVOCI are valued using quoted market prices in the active markets as at the reporting date (Level 1). Unquoted units classified as FVOCI  are valued using manager’s selling price. Unquoted shares classified as FVOCI  are valued at cost. • Financial assets measured at fair value through profit or loss (FVTPL) Government debt securities classified as financial assets measured at fair value through profit or loss are valued using current yield rates or market rates published by the Central Bank of Sri Lanka, while quoted equities classified as financial investments recognised through profit or loss are valued using quoted market prices in active markets as at the reporting date (Level 1). Unquoted units classified as financial assets measured at fair value through profit or loss are valued using manager’s selling price. Valuation framework Control framework has been established for the measurement of fair values. The determination of fair value is carried out independently from front office management and reports to the Chief Financial officer, with the overall responsibility for independently verifying the results of trading and investment operations and all significant fair value measurements. Specific controls include verification of observable pricing and analysis and investigation of significant daily valuation movements for government securities. When the assistance of third party experts is obtained to determine the fair values, the reasonability of such valuation results are validated and significant valuation issues are reported to the Board Audit Committee. 195 INTEGRATED REPORT 2021
  195. Notes to the Financial Statements 6 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Contd.) ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, those are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but if this is not available, judgement is exercised to establish fair values. COVID 19 Considerations The Group evaluates the material accuracy of the valuations incorporated in the financial statements as they can involve a high degree of judgement and estimation in determining the carrying values of financial assets and financial liabilities at the reporting date. The majority of valuation models the Group uses only observable market data as inputs. This has not changed as a result of COVID-19, however the Group has considered the impact of related economic and market disruptions on fair value measurement assumptions and the appropriateness of valuation inputs, notably valuation adjustments, as well as the impact of COVID-19 on the classification of exposures in the fair value hierarchy. For certain financial instruments, data that is not readily observable in current markets may be used. If unobservable market data is used, a higher degree of judgement is used to determine fair value depending on the significance of the unobservable input to the overall valuation. Generally, unobservable inputs are derived from other relevant market data and compared with the observed transaction prices where available. 6.1 Financial instruments measured at fair value and fair value hierarchy The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised.  The amounts are based on the values recognised in the statement of financial position. Bank As at 31st December 2021 Financial assets measured at fair value derivative financial instruments Currency swaps Forward foreign exchange contracts Financial assets measured at fair value through profit or loss Quoted shares Government Securities Unquoted units Financial assets measured at fair value through other comprehensive income Quoted shares  Unquoted shares Unquoted units Government Securities Financial liabilities measured at fair value derivative financial instruments Currency swaps Forward foreign exchange contracts 196 HATTON NATIONAL BANK PLC Group Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 - 357,549 569,938 927,487  -    -   - 357,549 569,938 927,487 103,365 103,365 -  -    -    -   - 103,365 103,365 3,762,986 199,100,863 202,863,849 534,745 534,745 - 189,159 164,197 353,356 357,549 569,938 927,487  -    -   - 357,549 569,938 927,487 321,831 347,225 669,056 193,585 193,585 - 321,831 347,225 193,585 862,641 3,762,986 3,762,986 27,839 27,839 534,745 - 199,100,863 206,476,205 27,839 203,426,433 210,239,191 534,745 534,745 - 189,159 164,197 353,356  -    -   - - 189,159 164,197 353,356 - 3,762,986 30,551 30,551 534,745 - 206,476,205 30,551 210,804,487 - 189,159 164,197 353,356
  196. Bank As at 31st December 2020 Group Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Currency swaps - 974 ,806 - 974,806 - 974,806 - 974,806 Forward foreign exchange contracts - 57,512 - 57,512 - 57,512 - 57,512 - 1,032,318 - 1,032,318 - 1,032,318 - 1,032,318 84,499 - - 84,499 235,909 -  -   235,909 - - - - 16,224 -  -   16,224 Financial assets measured at fair value derivative financial instruments Financial assets measured at fair value through profit or loss Quoted shares Government Securities Unquoted units - - - -  -   842,694  -   842,694 84,499 - - 84,499 252,133 842,694  -   1,094,827 3,742,102 - - 3,742,102 3,742,102 - - 3,742,102 - - 27,839 27,839 - - 30,494 30,494 - 442,700 - 442,700 Financial assets measured at fair value through other comprehensive income Quoted shares  Unquoted shares Unquoted units - 442,700 - 442,700 245,059,017 - - 245,059,017 252,179,348 - - 252,179,348 248,801,119 442,700 27,839 249,271,658 255,921,450 442,700 30,494 256,394,644 Currency swaps - 131,957  -   131,957  -   131,957 - 131,957 Forward foreign exchange contracts - 205,057  -   205,057  -   205,057 - 205,057 - 337,014  -   337,014  -   337,014 - 337,014 Government Securities Financial liabilities measured at fair value derivative financial instruments 197 INTEGRATED REPORT 2021
  197. Notes to the Financial Statements 6 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Contd.) 6.2 Fair Value Measurement of Assets Classified as Level 3 and Level 2 The following tables show the valuation techniques used in measuring Level 2 and Level 3 fair values for financial instruments in the statement of financial position, as well as the significant unobservable inputs used. Type  Valuation technique Unquoted equity shares  The majority of unquoted equity investments of the  Group include share investments that have been made primarily for regulatory purposes. Such investments have been recorded at cost which is comparable to computed fair value. Forward exchange contracts/Currency swaps Forward pricing: The fair value is determined using quoted forward exchange rates at the reporting date and present value calculations based on high credit quality yield curves in the respective currencies. Unquoted units Manager’s selling prices [Rs 27.49 (2020 - Rs 22.75)] Further there are no material changes in the fair value of financial assets categorised under Level 3 compared to the values reported as at 31st December 2020. The Group has not changed the valuation models and assumptions used to measure the fair values of Level 3 financial instruments during the year ended 31st December 2021. Further, there were no transfers from Level 1 to Level 2 or Level 2 to Level 1 in 2021 and no transfers in either direction in 2020. There were no transfers out of Level 3 in 2021 or 2020. 6.2.1 Sensitivity of Significant unobservable inputs used to measure fair value of fixed rate financial instruments A Significant increase / ( decrease ) in the market interest rate would result in lower/( higher) fair value being disclosed. 6.3 Level 3 recurring fair values Reconciliation of Level 3 fair values The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values. Equity securities Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Balance as at 1st January 27,839 22,530 30,494 34,960 Addition during the year - 5,309 57 5,309 Net change in fair value (unrealised) - - (9,775) 30,551 30,494 Balance as at 31st  December 198 Group HATTON NATIONAL BANK PLC 27,839  -   27,839
  198. 6 .4 Fair value of assets and liabilities not measured at fair value The following table summarises the carrying amounts and the Group’s estimate of fair values of those assets and liabilities not presented in the statement of financial position at fair value. The fair values in the table below may be different from the actual amounts that will be received/ paid on the settlement or maturity of the asset or liability. For certain instruments, the fair value may be determined, using assumptions which are not observable in the market. As at 31st December 2021 Bank Group Fair Value Fair Value Carrying  Carrying  Value Level 1 Level 2 Level 3 Total Value Level 1 Level 2 Level 3 Total Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 38,185,254 - 38,185,254 - 38,185,254 40,900,372 - 40,900,372 - 40,900,372 - - - - - 6,371,273 - 6,371,273 - 6,371,273 25,820,489 - 25,820,489 - 25,820,489 25,820,489 - 25,820,489 - 25,820,489 Financial Assets  Cash and cash equivalents  [Note 25] Placements with banks [Note 26] Balances with Central Bank of Sri Lanka [Note 27] - - - - - 6,246,276 - 6,246,276 - 6,246,276 Financial assets at amortised cost - Loans and advances to customers [Note 31] 876,254,693 - 876,098,776 - 876,098,776 911,253,345 - 911,197,915 - 911,197,915 Financial assets at amortised cost - Debt and other financial instruments [Note 32] 160,677,520 70,059,563 48,960,905 - 119,020,468 171,930,640 74,513,315 54,992,275 814,264 130,319,854 6,123,181 - 6,123,181 - 6,123,181 8,034,880 - 8,034,880 - 8,034,880 1,107,061,137 70,059,563 995,188,605 Reverse repurchase agreement [Note 28] Other financial assets [Note 41] Total financial assets measured at amortised cost   -  1,065,248,168 1,170,557,275 74,513,315 1,053,563,480 814,264 1,128,891,059 Financial Liabilities Due to banks [Note 42] 17,075,502 - 17,075,502 - 17,075,502 17,075,502 - 17,075,502 - 17,075,502 Securities sold under repurchase agreements [Note 43] 33,524,226 - 33,524,226 - 33,524,226 33,524,226 - 33,524,226 - 33,524,226 Financial liabilities at amortised cost due to depositors [Note 44] Dividends payable [Note 45] Financial liabilities at amortised cost Other borrowings [Note 46] Debt securities issued [Note 47] Subordinated term debts [Note 52] Other financial liabilities [Note 51]  Total financial liabilities measured at amortised cost  1,075,709,287 - 1,076,410,109 - 1,076,410,109 1,107,065,820 - 1,107,178,468 - 1,107,178,468 - 989,212 - 989,212 1,013,629 - 1,013,629 - 1,013,629 24,747,869 - 24,747,869 - 24,747,869 25,555,834 - 25,555,834 - 25,555,834 1,962,749 - 2,067,803 - 2,067,803 2,465,085 - 2,565,609 - 2,565,609 23,552,323 - 24,436,735 - 24,436,735 24,391,912 - 25,362,475 - 25,362,475 - 9,346 - 9,346 2,329,388 - 2,329,388 - 2,329,388 989,212 9,346 1,177,570,514 - 1,179,260,802 - 1,179,260,802 1,213,421,396 - 1,214,605,131 - 1,214,605,131 199 INTEGRATED REPORT 2021
  199. Notes to the Financial Statements 6 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Contd.) As at 31st December 2020 Bank Group Fair Value Fair Value Carrying  Carrying  Value Level 1 Level 2 Level 3 Total Value Level 1 Level 2 Level 3 Total Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 34,123,562 - 34,123,562 34,123,562 34,898,957  -   34,898,957 - 34,898,957 12,126,434 Financial Assets  Cash and cash equivalents  [Note 25] Placements with banks [Note 26] - -  -   - 12,126,434  -   12,126,434 - 7,212,395 - 7,212,395  -   7,212,395 7,212,395  -   7,212,395 - 7,212,395 - - -  -   - 2,827,050  -   2,827,050 - 2,827,050 Financial assets at amortised cost - Loans and advances to customers [Note 31] 772,580,720 - 779,658,245  -   779,658,245 800,815,971  -   809,129,736 - 809,129,736 Financial assets at amortised cost - Debt and other financial instruments [Note 32] 186,605,516 85,006,457 71,807,181 - 156,813,638 193,349,496 77,564,609 - 164,242,135 2,279,834 - 2,279,834  -   2,279,834 3,851,392 3,851,392 - 3,851,392 85,006,457 895,081,217 Balances with Central Bank of Sri Lanka [Note 27] Reverse repurchase agreement [Note 28] Other financial assets Total financial assets measured at amortised cost   -    -   1,002,802,027  -   980,087,674 1,055,081,695 86,677,526  -   86,677,526 947,610,574 - 1,034,288,099 Financial Liabilities Due to banks [Note 42] 89,746,709 - 89,746,709  -   89,746,709 89,746,709 - 89,746,709 - 89,746,709 Securities sold under repurchase agreements [Note 43] 10,361,383 - 10,361,383  -   10,361,383 10,361,383 - 10,361,383 - 10,361,383 Financial liabilities at amortised cost due to depositors [Note 44] 967,821,404 - 969,378,444  -   969,378,444 962,185 - 962,185 30,526,261 - 1,875,042 - Subordinated term debts [Note 52] 28,298,365 Other financial liabilities [Note 51] 2,377,854 Dividends payable [Note 45] Financial liabilities at amortised cost other borrowings [Note 46] Debt securities issued [Note 47]  Total financial liabilities measured at amortised cost  1,131,969,203 994,948,912 - 997,913,620 - 997,913,620  -   962,185 980,507 - 980,507 - 980,507 30,526,261  -   30,526,261 30,526,261 - 30,526,261 - 30,526,261 2,158,836  -   2,158,836 2,411,408 - 2,690,447 - 2,690,447 - 30,422,356  -   30,422,356 28,945,457 - 31,186,685 - 31,186,685 - 2,377,854  -   2,377,854 4,652,548 - 4,652,548 - 4,652,548 - 1,135,934,028  -   1,135,934,028 1,162,573,185 - 1,168,058,160 - 1,168,058,160 Fair values of the following assets and liabilities are estimated for the purpose of disclosure as described below: Financial assets measured at amortised cost - loans and advances to customers The loans and receivables to customers comprise of both fixed rate loans and floating rate loans. Majority of the floating rate loans can be re-priced either quarterly or semi-annually while for fixed rate loans, the loan contract allows the Bank to change the contracted rate if there is a material difference between the contracted rate and the market rate. The carrying value of floating rate loans generally approximates the fair value due to the effect of re-pricing while the fair value of loans and receivables to customers with a residual maturity of less than one year generally approximates the carrying value, subject to any significant movement in credit spreads. The estimated fair value of loans and receivables with a residual maturity of more than one year, is the present value of future cash flows expected to be received from such loans and receivables calculated based on interest rates at the reporting date for similar types of loans and receivables. Financial assets measured at amortised cost - debt and other instruments These comprise of investments in Sri Lanka development bonds, Sri Lanka sovereign bonds, quoted and unquoted debentures. Sri Lanka development bonds are variable rate instruments where the re-pricing happens semi-annually. Thus the carrying value of these bonds approximates their fair value as at the reporting date. The fair values of Sri Lanka sovereign bonds are valued using quoted market 200 HATTON NATIONAL BANK PLC
  200. prices while the fair value of unquoted debentures are estimated at the present value of future cash flows expected to be received from such investments calculated based on interest rates at the reporting date for similar instruments . Financial liabilities measured at amortised cost - due to depositors The fair value of customer deposits which are repayable on demand or have a remaining contractual maturity of less than one year, approximates to the carrying value of such deposits. The fair value of customer deposits with a contractual maturity of more than one year, is estimated as the present value of future cash flows expected from such deposits calculated based on interest rates at the reporting date for similar types of deposits. Debt securities issued The fair value of debt securities issued has been determined by discounting the future cash flows by the interest rates prevailing as at the reporting date for similar instruments. Subordinated term debts The fair value of fixed rate subordinated debentures has been determined by discounting the future cash flows by the interest rates prevailing as at the reporting date for similar instruments. The carrying values of assets and liabilities listed below are reasonable approximation of their fair values since, those are short term in nature or re-priced to current market rates frequently: Assets Liabilities Cash and cash equivalents Due to banks Balances with Central Bank of Sri Lanka Securities sold under repurchase agreements Placements with banks Other borrowings Securities purchased under resale agreements Dividends payable Other financial assets Other financial liabilities 7 GROSS INCOME ACCOUNTING POLICY Gross revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The specific recognition criteria, for each type of gross income, are given under the respective income notes. Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 98,600,557 103,944,602 107,407,723 112,825,455 9,893,263 7,794,929 10,676,982 8,399,641 Net losses from trading (Note 10) (522,039) (837,108) (383,772) (816,896) Net gain from financial investments at fair value through other comprehensive income (Note 11) 195,927 207,321 For the year ended 31st December Interest income [Note 8 (a)] Fee and commission income [Note 9(b)] Net insurance premium income (Note 12) Net gains arising on de-recognition of financial assets (Note 13) Net other operating income (Note 14) -  -   196,167 209,217 10,641,842 8,907,731 - 1,053,543 5,874 1,106,649 6,879,617 3,650,331 7,165,639 3,804,435 115,047,325 115,813,618 135,710,455 134,436,232 201 INTEGRATED REPORT 2021
  201. Notes to the Financial Statements 8 NET INTEREST INCOME ACCOUNTING POLICY Interest income and expenses under SLFRS 9 is recorded using the effective interest rate method for all financial instruments measured at amortised cost and financial instruments designated at FVTPL and FVOCI . The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset. The effective interest rate (and therefore, the amortised cost of the asset) is calculated by taking into account any discount or premium on acquisition, fees and costs that are an integral part of the effective interest rate. The Group recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the expected life of the loan. The calculation includes all fees and points received or paid between parties to the contract, that are an integral part of effective interest rate.  Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised, using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Interest income [Note 8 (a)] 98,600,557 103,944,602 107,407,723 112,825,455 Interest expense [Note 8 (b)] 49,041,200 59,235,456 50,945,355 61,988,268 Net interest income 49,559,357 44,709,146 56,462,368 50,837,187 For the year ended 31st December 8 (a) Interest income ACCOUNTING POLICY The Group calculates interest income by applying the effective interest rate to the gross carrying amount of financial assets other than credit-impaired assets. When a financial asset becomes credit-impaired (as set out in Note 31(c) ii to the financial statements) and is, therefore, regarded as Stage 3, the Group calculates interest income by applying the effective interest rate to the net amortised cost of the financial asset. If the financial asset cures (as outlined in Note 31 (c) ii to the financial statements) and is no longer credit-impaired, the Bank reverts to calculating interest income on a gross amortised cost basis. Group ceases the recognition of interest income on assets which are collectively impaired, (over 90 days past due) when it is probable that the economic benefits associated will not continue to flow to the Bank. For Purchased or Originated Credit-Impaired (POCI) financial assets (as set out in Note 31 (b) ii to the financial statements), the Group calculates interest income by calculating the credit-adjusted effective interest rate and applying that rate to the amortised cost of the asset. The credit-adjusted effective interest rate is the interest rate that, at original recognition, discounts the estimated future cash flows (including credit losses) to the amortised cost of the POCI assets. Interest income on all trading assets and financial assets mandatorily required to be measured at FVTPL is recognised using the contractual interest rate. 202 HATTON NATIONAL BANK PLC
  202. Bank For the year ended 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 1 ,584 7,995 22,384 34,553 Securities purchased under resale agreements 433,370 979,152 665,591 1,093,581 Placements with banks 280,475 215,867 994,835 1,099,644 Interest income accrued on impaired financials assets 171,414 807,836 171,414 807,836 3,913 212,130 4,289 213,570   - Loans and advances to customers 68,095,835 77,212,300 74,259,970 83,555,191   - Debt and other instruments 15,784,213 12,451,233 16,906,089 13,346,396 Financial assets measured at fair value through other comprehensive income 13,773,930 12,008,906 14,383,151 12,674,685 55,823 49,183 - 98,600,557 103,944,602 107,407,723 Cash and cash equivalents Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost Other interest income   -   112,825,455 Interest Income from loans and advances to customers includes modifications made to loans due to moratorium/debt concessionary schemes implemented by the Government/Bank as a measure to support the recovery of businesses/customers affected by COVID 19 pandemic. 8 (b)  Interest Expenses Bank For the year ended 31st December Securities sold under repurchase agreements Due to banks Due to depositors (deposits from customers) Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 770,336 306,624 767,454 306,624 2,636,152 3,969,205 2,636,152 3,969,205 40,978,957 49,393,285 43,255,354 52,471,093 Debt securities issued 254,708 244,418 292,046 281,883 Other borrowings 809,625 960,834 832,209 1,039,494 2,854,083 3,453,334 2,962,190 3,564,850 730,245 907,093 192,856 354,456 7,094 663 7,094 663 49,041,200 59,235,456 50,945,355 61,988,268 Subordinated term debts Interest expense on lease liabilities [Note 38 (b)] Other interest expenses 203 INTEGRATED REPORT 2021
  203. Notes to the Financial Statements 8 NET INTEREST INCOME (Contd.) 8 (c) Net Interest Income from Sri Lanka Government Securities Interest income and interest expenses on investment in government securities are summarised below. Bank For the year ended 31st December Interest income Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost - Debt and other financial instruments Financial assets measured at fair value through other comprehensive income Securities purchased under resale agreements Less : Interest expenses Securities sold under repurchase agreements Net interest income from Sri Lanka Government Securities 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 3,913 212,130 3,913 212,130 15,256,995 11,639,488 15,987,815 11,771,341 13,773,930 433,370 12,008,906 979,152 13,841,557 668,473 12,674,685 1,093,242 (770,336) 28,697,872 (306,624) 24,533,051 (767,454) 29,734,304 (306,624) 25,444,774 Analysis of Interest Income - Bank Analysis of Interest Income - Group Rs.Bn Rs.Bn 120 120 100 100 80 80 60 60 40 40 20 20 0 2021 Interest Income Interest Expenses Net Interest Income 9 Group 2020 0 2021 2020 Interest Income Interest Expenses Net Interest Income NET FEE AND COMMISSION INCOME ACCOUNTING POLICY Fee and commission income and expense that are integral to the effective interest rate of a  financial asset or liability are included in the measurement of the effective interest rate. If a loan commitment is not expected to result in the draw down of a loan, then the related loan commitment fee is recognised on a  straight line basis over the commitment period.  Other fees and commission income are recognised as follows; • Fee and commission income earned from services that are provided over a certain period of time are accrued over that period. Fees for guarantees and trade related commissions are recognised on a straight line basis over the period of contract. • Fee and commission income from providing transaction services are recognised as and when the services are performed. Other fees and commission expenses are mainly related to transaction and service fees that are expensed as and when the services are received. A contract with a customer that results in a recognising a  financial instrument in the Group’s financial statements may be partially in the scope of Sri Lanka Accounting Standard SLFRS 9 “Financial Instruments” and partially within the scope of Sri Lanka Accounting Standard SLFRS 15 “Revenue from Contracts with Customers”. In such a scenario, the Group first applies SLFRS 9 to such  separate contract and measure the part of the contract that is in the scope of SLFRS 9 and then applies SLFRS 15 to the residual. 204 HATTON NATIONAL BANK PLC
  204. Bank For the year ended 31st December Fee and commission income [Note 9 (b)] Less: Fee and commission expenses Net fee and commission income Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 9,893,263 7,794,929 10,676,982 8,399,641 270,702 249,880 360,771 374,084 9,622,561 7,545,049 10,316,211 8,025,557 9 (a) Performance Obligations and Revenue Recognition Policies Fee and commission income from contracts with customers is measured based on the consideration specified in the contract with a customer. The Group recognises revenue when it transfers control over a service to a customer. The following table provides information about the nature and timing of satisfaction of performance obligations in contracts with customers, including significant payment terms, and the related revenue recognition policies. Type of service Retail and corporate banking services  Nature and timing of satisfaction of performance obligations, including significant payment terms Revenue recognition under SLFRS 15 The Bank provides banking services to retail and corporate customers, including account management, provision of overdraft facilities, foreign currency transactions, credit card and servicing fees. Revenue from account service and servicing fees is recognised over time as the services are provided. Fees for ongoing account management are charged to the customer’s account on a monthly basis. The Bank sets the rates on a periodic basis. Revenue related to transactions is recognised at the point in time when the transaction takes place. Fees for guarantees and trade related commissions are recognised on a straight-line basis over the period of contract. Transaction-based fees for interchange, foreign Revenue related to transactions is recognised at the point in time when the transaction takes place. currency transactions and overdrafts are charged to the customer’s account when the transaction takes place. Servicing fees are charged on a monthly basis. 205 INTEGRATED REPORT 2021
  205. Notes to the Financial Statements 9 NET FEE AND COMMISSION INCOME (Contd.) 9 (b) Disaggregation of fee and commission income In the following table, fee and commission income from contracts with customers in the scope of SLFRS 15 is disaggregated by major types of services. Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 1,450,264 1,200,580 2,008,243 1,664,449 For the year ended 31st December Loans and advances related services Group Credit and debit cards related services 3,676,301 2,615,691 3,676,301 2,615,691 Trade and remittances related services 2,197,844 1,662,107 2,197,844 1,662,107 Deposits related services 562,309 595,560 562,309 595,560 Guarantees related services 911,749 914,874 911,749 914,874 Other financial services 1,094,796 806,117 1,320,536 946,960 Gross fee and commission income 9,893,263 7,794,929 10,676,982 8,399,641 Analysis of Net Fee and Commission Income - Bank 15% 11% 9% 6% 15% 10% 12% 2021 37% 8% 2020 34% 22% Loans Cards Trade and remittances 10 Deposits Guarantees Others 21% NET LOSSES FROM TRADING ACCOUNTING POLICY Results arising from trading activities include all gains and losses from unrealised fair value changes, related capital gains and losses, dividend income from financial assets held for trading and gains/(losses) from revaluation of derivative financial instruments. Dividend income is recognised when the Group’s right to receive the dividend is established. Derivative financial instruments are fair valued at each reporting date. Gains and losses arising from changes in fair value are included in the income statement in the period in which they arise. 206 HATTON NATIONAL BANK PLC
  206. Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 - 2 ,479 485 2,479 351 (19,582) 471 (19,582) 18,866 26,823 99,690 42,904 - 1,237 47,047 1,578 1,723 5,893 11,514 9,683    - With banks (648,709) (837,929) (648,709) (837,929)    - With customers 105,730 (16,029) 105,730 (16,029) (522,039) (837,108) (383,772) (816,896) For the year ended 31st December Financial assets - Held for trading Fixed income   Net marked to market gain/(loss)   Net capital gain/(loss) Equities   Net marked to market gain   Net capital gain   Dividend income Derivative financial instruments   Gain/(loss) on revaluation of foreign currency derivatives 11 NET GAIN FROM FINANCIAL INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME ACCOUNTING POLICY Net gain from financial investments includes  dividend income from  financial investments measured at fair value through other comprehensive income.  Dividend income is recognised when the Group’s right to receive the dividend is established. Bank For the year ended 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 195,927 207,321 196,167 209,217 195,927 207,321 196,167 209,217 Equities   Dividend income 207 INTEGRATED REPORT 2021
  207. Notes to the Financial Statements 12 NET INSURANCE PREMIUM INCOME ACCOUNTING POLICY • Life insurance business   Gross written premium on life insurance contracts are recognised as revenue when a premium is due from a policyholder (policies within the 30-day grace period are considered as due). Premiums received in advance are not recorded as revenue but recorded as liability until the premium is due unless otherwise the relevant policy conditions require such premiums to be recognised as revenue. Benefits and expenses are provided against such revenue to recognise profits over the estimated life of the policies. For single premium business, revenue is recognised on the date on which the policy is effective. • Non-life insurance business  Gross written premium on non-life insurance comprise the total premiums received/receivable for the whole period of cover provided by contracts entered into during the accounting period. Premium is generally recognised upon the inception of the policy as written and are earned primarily on a pro-rata basis over the term of the related policy coverage. • Reinsurance premiums   Gross reinsurance premiums on insurance contracts are recognised as an expense on the earlier of the date when premiums are payable or when the policy becomes effective. Value of the reinsurance premiums are decided based on rates agreed with reinsurers. • Net change in reserve for unearned premium  Gross Written Premium (GWP) of general business is deferred over the term of the underlying policies’ risk attached period according to the Regulation of Insurance Industry Act No. 43 of 2000 and subsequent amendments there to, Unearned premiums are the proportion of premiums that relate to the period of risk after the respective reporting period. Group uses 1/24th basis to defer the GWP of all policies except for the marine insurance policies and title insurance policies, where marine insurance premiums are deferred based on 60 : 40 basis and total premiums on title insurance are transferred to reserve for title insurance for the reporting period. Similarly reinsurance premiums attached to those policies are also deferred over the policies risk attached period using the same basis as mentioned above. Further, title insurance reserve is maintained based on the net transfer of net written premium after deducting acquisition cost and profit recognised during that period. Group 2021 2020 Rs 000 Rs 000 12,532,955 10,379,966 Premium ceded to reinsurers (1,648,861) (1,307,978) Net written premium 10,884,094 9,071,988 For the year ended 31st December Gross insurance premium income 208 Net change in reserve for unearned premium (242,252) (164,257) Net insurance premium income [Note 12 (a)] 10,641,842 8,907,731 HATTON NATIONAL BANK PLC
  208. 12 (a) Net Insurance Premium income Gross insurance premium income Premium ceded to insurers Net insurance premium income 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000   Individual policies 6,962,284 5,422,151 192,520 139,368 6,769,764 5,282,783   Corporate policies 74,417 16,692 140,832 118,225 (66,415) (101,533) - - 22,185 7,571 (22,185) (7,571) 7,036,701 5,438,843 355,537 265,164 6,681,164 5,173,679 For the year ended 31st December Life Insurance   Single premium Gross written premium - life insurance  General Insurance  Fire  758,242 647,789 732,462 632,873 25,780 14,916   Motor 3,865,133 3,583,061 175,612 152,229 3,689,521 3,430,832   Marine    Miscellaneous Gross written premium - general insurance  Net change in reserves for unearned premium   13 81,874 54,682 76,423 52,840 5,451 1,842 791,005 655,591 308,827 204,872 482,178 450,719 5,496,254 4,941,123 1,293,324 1,042,814 4,202,930 3,898,309 - - - - (242,252) (164,257) 12,532,955 10,379,966 1,648,861 1,307,978 10,641,842 8,907,731 NET GAINS ARISING ON DE-RECOGNITION OF FINANCIAL ASSETS ACCOUNTING POLICY As per SLFRS 9 “Net gains arising on de-recognition of financial assets” comprises of all realised gains and losses relating to debt instruments measured at fair value through other comprehensive income and financial assets measured at amortised cost. Bank For the year ended 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 - 1,053,543 5,874 1,106,649 - 1,053,543 5,874 1,106,649 Financial assets measured at fair value through other comprehensive income - Government Securities Net  capital gain 209 INTEGRATED REPORT 2021
  209. Notes to the Financial Statements 14 NET OTHER OPERATING INCOME ACCOUNTING POLICY Other operating income includes rental income , dividend income from group entities, gains on disposal of property, plant and equipment and foreign exchange gains and losses. • Rental income Rental income is recognised on an accrual basis. • Dividend income from subsidiaries and joint venture Dividend income from subsidiaries and joint venture is recognised when the Bank’s right to receive the dividend is established. • Gains and losses on disposal of assets Net gains and losses arising from the disposal of property, plant and equipment and other non-current assets including investments in subsidiaries, joint ventures and associates are recognised in the income statement after deducting from the proceeds on disposal, the carrying amount of such assets and the related selling expenses. • Foreign exchange gain Foreign currency positions are revalued at each reporting date. Gains and losses arising from changes in fair value are included in the income statement in the period in which they arise. Bank For the year ended 31st December Auditorium hire income Dividend income from subsidiaries and joint venture Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 138 686 138 686 251,941 229,958 - - 5,510,992 2,397,401 5,535,611 2,403,839 810,876 856,109 810,876 856,109 12,661 5,495 13,199 9,326 Foreign exchange gain * - With banks - With customers Gain on disposal of property, plant and equipment (net) Rental income 11,709 12,235 226,222 178,241 Rental income from investment properties 66,834 63,455 162,907 158,372 Recovery of loans written off in prior years 172,162 69,821 186,619 76,040 7,895 6,795 7,895 6,795 34,409 8,376 222,172 115,027 6,879,617 3,650,331 7,165,639 3,804,435 Recovery of operational losses provided for in prior years Miscellaneous 210 * Foreign exchange gain/(loss) represents both revaluation gain/(loss) on the Bank’s net open position and gain/(loss) on foreign exchange contracts. Losses on revaluation of foreign currency derivatives amounting to Rs 543 Mn (2020 : 854 Mn ) is reported under Note 10, ’Net gain/ (loss) from trading’ as required by the Sri Lanka Accounting Standard SLFRS 9 “Financial Instruments”. Accordingly total exchange income of the Bank and the Group for the year ended 31st December 2021 amounted to Rs 5,779 Mn and Rs 5,804 Mn respectively (2020 : Bank Rs 2,399 Mn and Group Rs 2,406 Mn). HATTON NATIONAL BANK PLC
  210. 15 IMPAIRMENT CHARGE FOR LOANS AND OTHER LOSSES   ACCOUNTING POLICY The Group recognises impairment provisions for financial assets in accordance with Sri Lanka Accounting Standard SLFRS 9 - “Financial Instruments”. The  accounting policy adopted in determining same is given in Note 31 (b) to the financial statements. These financial assets include cash and cash equivalents, placements with banks, financial assets measured at amortised cost - loans and advances to customers, debt and other financial assets carried at amortised cost, debt instruments and other financial assets carried at fair value through other comprehensive income and loan commitments and financial guarantee contracts. The methodology adopted for impairment assessment is explained in Note 31 (b) ii to the financial statements. Further, Group recognises an impairment loss when the carrying amount of a non-financial asset exceeds the estimated recoverable amount from that asset. No impairment loss is recognised on equity investments. The table below shows the expected credit loss charges on financial assets and impairment charges on non financial assets recorded in the income statement: Bank For the year ended 31st December 2021 2020 Stage 1 Stage 2 Stage 3 Other Total Stage 1 Stage 2 Stage 3 Other Total Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Impairment charge/(reversal) on financial assets measured at amortised cost (8,697) - - - (8,697) 12,780  -    -    -   12,780 - - - - - (49,069)  -    -    -   (49,069)    Loans and advances* 3,403,234 2,129,861 6,149,015 - 11,682,110 (251,954) 9,381,709  -   12,361,206    Debt instruments 6,786,867 - (228) - 6,786,639 2,762,393 8,628  -   2,771,021  -   (150,378)  -   74,532    Cash and cash equivalents    Placements with banks 3,231,451  -   Impairment charge/(reversal) on other financial assets measured at fair value through other comprehensive income    Debt instruments Loan commitments and financial guarantee contracts 186,758 - - - 186,758 (150,378) 53,352 (101,494) 30,870 - (17,272) (74,708)  -   54,939  -   94,301 Impairment charge on property plant and equipment, intangible assets and prepayments - - - 27,321 27,321  -    -   -  6,067 6,067 Other impairment charges - - - 121,188 121,188  -    -   -  232,309 232,309 10,421,514 2,028,367 6,179,657 148,509 18,778,047 9,484,638 238,376 15,258,468 2,249,064 3,286,390 * Impairment charges recognised against loans and advances include the overlay adjustments made outside ECL model using various stress testing techniques in order to address the potential implications of COVID 19 outbreak and the resultant moratorium schemes introduced by the government / Bank. 211 INTEGRATED REPORT 2021
  211. Notes to the Financial Statements 15 IMPAIRMENT CHARGE FOR LOANS AND OTHER LOSSES (Contd.) Group For the year ended 31st December 2021 2020 Stage 1 Stage 2 Stage 3 Other Total Stage 1 Stage 2 Stage 3 Other Total Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Impairment charge/(reversal) on financial assets measured at amortised cost (8,697) - - - (8,697) 12,755 - - - 12,755 (126) - - - (126) (49,085) - - - (49,085)    Loans and advances 3,784,649 2,425,593 6,224,164 - 12,434,406 (264,196) 3,074,259 10,348,410 - 13,158,473    Debt instruments 6,786,877 - (228) - 6,786,649 2,762,151 8,628 - 2,770,779 - 186,758 (150,378) - - - (150,378) (17,272) (74,708) 54,939 94,301 - 74,532    Cash and cash equivalents    Placements with banks  -   Impairment charge/(reversal) on other financial assets measured at fair value through other comprehensive income    Debt instruments Loan commitments and financial guarantee contracts 186,758 - - 53,352 (101,494) 30,870 Impairment charge on property plant and equipment, - - - 27,321 27,321 - - 6,067 6,067 - - - 125,270 125,270 11,381 - - 212,054 223,435 10,802,813 2,324,099 6,254,806 152,591 19,534,309 2,247,920 3,129,198 10,451,339 218,121 16,046,578 intangible assets  and prepayments Other impairment charges 16  -   PERSONNEL EXPENSES ACCOUNTING POLICY Personnel expenses include salaries and bonus, terminal benefit charges and other related expenses. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short term cash bonus or profit-sharing plans, if the Group has a present legal or constructive obligation to pay this amount, as a result of past service provided by the employee and the obligation can be estimated reliably. Employees are eligible for Employees’ Provident Fund (EPF) contributions and Employees’ Trust Fund (ETF) contributions in accordance with the respective statutes and regulations. Defined benefit plan contributions and changes in the liabilities for EPF interest guarantee and accumulated leave are recognised in the income statement based on actuarial valuations carried out in accordance with Sri Lanka Accounting Standard - LKAS 19 on “Employee Benefits”. The Group’s net obligation to the pension fund, gratuity, EPF interest guarantee and unutilized accumulated annual leave are disclosed under Note 53 to the financial statements.  Bank For the year ended 31st December Salaries and bonus 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 10,807,458 9,129,024 13,330,885 11,176,379 Contributions to Employees’ Provident Fund (EPF) 808,412 759,160 1,039,462 978,115 Contributions to Employees’ Trust Fund (ETF) 202,103 189,790 259,880 244,316 (1,398,710) 920,879 (1,398,710) 920,879 1,975 2,347 1,975 2,347 27,621 (10,369) 27,621 (10,369) Provision for defined benefit plan (reversal)/charge - funded [Note 16 (a)] Increase in liability for EPF interest guarantee [Note 53 (d)] Increase/(decrease) in liability for accumulated leave [Note 53 (e)] Provision for defined benefit plan - unfunded [Note 53 (g)] Others 212 Group 2021 HATTON NATIONAL BANK PLC 106,187 97,597 308,704 - 468,521 308,704 494,168 10,757,563 11,459,352 13,676,004 13,903,432  -  
  212. 16 (a) Provision for Defined Benefit Plan - Funded Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 680,370 844,754 680,370 844,754 For the year ended 31st December Current service cost [Note 53 (c) iii] Net interest on defined benefit liability [ Note 53 (c) v] Past service benefit [Note 53 (c) iii] Group 212,429 76,125 212,429 76,125 (2,291,509) - (2,291,509) - (1,398,710) 920,879 (1,398,710) 920,879 16 (b) Past Service Benefit With the implementation of the provisions of Minimum Age of Workers Act No 28 of 2021, Bank revised the minimum retirement age of its employees as follows. Age of employee (As at 17th November 2021) Minimum Retirement Age 54 or above and below 55 years 57 Years 53 or above and below 54 years 58 Years 52 or above and below 53 years 59 Years Below 52 years 60 Years The above revision was captured as planned amendment in accordance with LKAS-19 in the actuarial valuation as at 31st December 2021 and resulted in a past service benefit of Rs.2,292 Mn which is recognised in the income statement during the year. 17 BENEFITS, CLAIMS AND UNDERWRITING EXPENDITURE ACCOUNTING POLICY Benefits and claims for insurance contracts include the cost of all claims arising during the year including internal and external claims handling costs that are directly related to the processing and settlement of claims and are recorded net of recoveries from reinsurance on claims. • Benefits and claims paid - Life insurance  Claims on accident, hospitalisation, death and maturity are charged  on notification of death or on expiry of the term. The interim payments and surrenders are accounted for only at the time of settlement. • Benefits and claims paid - Non life insurance   General insurance claims include all claims occurred during the year, whether reported or not together with claims handling costs that are directly related to the processing and settlement of claims, reductions for the value of salvage and other recoveries. • Reinsurance claims   Reinsurance claims are recognised when the related gross insurance claims are recognised according to the terms of the relevant contract. • Underwriting and net acquisition cost  Expenses for acquisition and maintenance of life and general insurance business are accounted for net of reinsurance commission on accrual basis. Reinsurance commission income is accrued according to the agreed terms with the reinsurers. 213 INTEGRATED REPORT 2021
  213. Notes to the Financial Statements 17 BENEFITS , CLAIMS AND UNDERWRITING EXPENDITURE (Contd.) ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Deferred acquisition expenses Acquisition expenses, representing commissions, which vary with and are 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 with deferred acquisition costs. Group 2021 2020 Rs 000 Rs 000 4,095,720 3,398,239 127,570 160,402 Change in contract liabilities - life fund 3,275,670 2,580,781 Underwriting and net acquisition costs 1,456,257 1,235,446 8,955,217 7,374,868 For the year ended 31st December Net insurance benefits and claims paid [Note 17(a)] Net change in insurance claims outstanding 17 (a) Net insurance benefits and claims paid Group 2021 For the year ended 31st December   Gross 2020 Recovery Net   Gross Claims from Claims Paid  Reinsurers Paid Rs 000 Recovery Net Claims from Claims Paid  Reinsurers Paid Rs 000 Life Insurance   Claims - deaths, disability and hospitalisation 374,574 (163,159) 211,415 233,547 (92,500) 141,047   Surrenders 392,077 - 392,077 290,293  -   290,293 13,621 - 13,621 13,574  -   13,574   Policy maturities 1,021,791 - 1,021,791 983,435  -   983,435 Net life insurance claims 1,802,063 (163,159) 1,638,904 1,520,849 (92,500) 1,428,349   Annuity payments Non-life Insurance  Fire   Motor   Marine (151,934) 23,892 282,914 (246,467) 36,447 (16,389) 1,841,078 1,694,429 (27,123) 1,667,306 12,575 (10,219) 2,356 15,361 (13,179) 2,182 622,537 (33,047) 589,490 290,778 (26,823) 263,955 Net non-life insurance claims  2,668,405 (211,589) 2,456,816 2,283,482 (313,592) 1,969,890 Total net insurance benefits and claims paid 4,470,468 (374,748) 4,095,720 3,804,331 (406,092) 3,398,239   Miscellaneous 214 175,826 1,857,467 HATTON NATIONAL BANK PLC
  214. 18 OTHER EXPENSES ACCOUNTING POLICY Other operating expenses are recognised in the income statement on the basis of a direct association between the cost incurred and the earning of specific items of income . All expenditure incurred in the running of the business and maintaining the property, plant and equipment in a state of efficiency has been charged to the income statement in arriving at the profit for the year. Provisions in respect of other expenses are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Bank For the year ended 31st December Directors’ emoluments Advertising and related expenses Auditors’ remuneration [Note 18 (a)] Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 94,675 92,234 142,574 140,948 276,412 180,631 393,728 294,675 24,563 20,723 36,363 33,795 Business promotion and product expenses 569,668 516,258 569,668 516,258 Crop insurance levy 165,000 134,255 181,010 141,365 Debenture issue expenses 22,994 Deposit insurance premium 987,001 823,771 1,027,132 864,815 2,442,964 2,359,326 2,905,296 2,837,073 11,238 Depreciation and amortisation [Note 18 (b)] Direct operating expenses on investment property Donations Legal expenses and professional fees Office administration and establishment expenses Operational risk event losses Other overhead expenses  -   22,994  -   763 84 15,562 12,352 25,069 13,102 25,574 191,041 133,166 202,548 150,849 6,062,797 5,514,157 7,128,817 6,278,771 36,056 30,899 36,056 30,899 989,678 829,060 2,043,320 2,201,167 11,875,964 10,659,633 14,718,170 13,527,427 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 15,493 14,616 23,774 22,484 5,817 18 (a) Auditors’ Remuneration Bank For the year ended 31st December Audit fees and expenses Group Audit related fee and expenses 2,994 3,661 5,085 Non-audit expenses 6,076 2,446 7,504 5,494 24,563 20,723 36,363 33,795 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 18 (b) Depreciation and amortisation expenses Bank For the year ended 31st December Depreciation of investment property (Note 36) Depreciation of property, plant and equipment (Note 37) Group 5,335 5,335 31,645 31,640 1,309,520 1,248,888 1,732,520 1,679,081 Amortisation of right-of-use assets (Note 38) 744,142 830,540 660,093 757,405 Amortisation of intangible assets (Note 39) 383,967 274,563 481,038 368,947 2,442,964 2,359,326 2,905,296 2,837,073 215 INTEGRATED REPORT 2021
  215. Notes to the Financial Statements 19 TAXES ON FINANCIAL SERVICES Value Added Tax (VAT) ) on Financial Services The base of the calculation of Value Added Tax (VAT) on financial services is the value addition attributable to financial services which includes operating profit before VAT on financial services adjusted for emoluments of employees and economic depreciation. VAT rate applied during 2021 was 15% (2020 - 15%). Bank Value Added Tax on financial services 20 SHARE OF PROFIT OF JOINT VENTURE (NET OF INCOME TAX)  Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 4,498,822 3,869,649 4,759,882 4,048,466 4,498,822 3,869,649 4,759,882 4,048,466 For the year ended 31st December ACCOUNTING POLICY The policy adopted in accounting for joint venture investments is given in Note 34 to the financial statements. The aggregate of the Group’s share of profit or loss of the joint venture is shown on the face of the income statement outside operating profit and represents Group’s share of profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture. Group For the year ended 31st December Share of profit of joint venture before income tax 216 2021 2020 Rs 000 Rs 000 376,288 376,851 Income tax on share of operating results of joint venture [(charge)/reversal] (83,451) 30,364 Share of profit of joint venture (net of income tax) [Note 34 (b)] 292,837 407,215 HATTON NATIONAL BANK PLC
  216. 21 INCOME TAX EXPENSE   ACCOUNTING POLICY Income tax expense comprises of current and deferred tax. Income tax expense is recognised in the income statement, except to the extent it relates to items recognised directly in Other Comprehensive Income (OCI), in which case it is recognised in OCI. The Group applied IFRIC 23 “Uncertainty Over Income Tax Treatment” (IFRIC 23) in determination of taxable profit, tax bases, unused tax losses, unused tax credits and tax rates when there is uncertainty over the income tax treatment. However, the application of IFRIC 23 did not have any significant impact on the financial statements of the Group to provide additional disclosures in the financial statements. Current Tax Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the taxation authorities in respect of the current year as well as any adjustment to the tax payable or receivable in respect of previous years. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted on the reporting date.  Current income tax relating to items recognised directly in equity, is recognised in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns, with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.  Management has used its judgement on the application of tax law including transfer pricing regulation involving identification of associated undertaking, estimation of respective arm’s length prices and selection of appropriate pricing mechanism. Deferred Tax   Deferred tax is recognised on temporary differences at the reporting date between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except: • When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither the accounting profit nor taxable profit or loss • In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.  • Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses (if any), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the unused tax credits and unused tax losses carried forward can be utilised except; • When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction, that is not a business combination and at the time of the transaction, affects neither the accounting profit nor taxable profit or loss • In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax asset is reviewed at each reporting date, and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.   Deferred tax assets and liabilities are measured at the tax rates, that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognised directly in equity are also recognised in equity, through other comprehensive income and not in the income statement. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Temporary differences in relation to a right- of- use assets and lease liability for leases are regarded as net package (operating lease rights) for the purpose of recognising deferred tax. Accordingly, provision for taxation is made on the basis of the accounting profit for the year as adjusted for taxation purposes in accordance with the provisions of the applicable Inland Revenue Act. In estimating the provision for taxation, the Group had applied the provisions of Inland Revenue Act No. 24 of 2017 and the amendments thereto. 217 INTEGRATED REPORT 2021
  217. Notes to the Financial Statements 21 INCOME TAX EXPENSE (Contd.) ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Current Taxation The Group is subject to income tax and judgement is required to determine the total provision for current, deferred and other taxes due to the uncertainties that exist with respect to interpretation of the applicability of tax laws, at the time of preparation of these financial statements. Uncertainties also exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of business relationships and the long term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense amounts that were initially recorded and deferred tax amounts in the period in which the determination is made. Group has evaluated these uncertainties in terms of IFRIC 23 ‘’Uncertainty Over Income Tax Treatment’’. The deferred tax liabilities/assets are disclosed under Note 40 to the financial statements. 21 (a) Current Income Tax Expense Bank For the year ended 31st December Current tax on profit for the year Effect of changes in tax rate Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 7,374,515 5,745,249 7,932,077 6,307,827 (820,750) - (869,702) - (551,100) - (611,984) (4,439) 6,002,665 5,745,249 6,450,391 6,303,388 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Origination / (reversal) of temporary difference during the year (411,070) 106,468 (835,158) (415,571) Effect of changes in tax rate (310,327) - (367,407) - (721,397) 106,468 (1,202,565) (415,571) Reversal / (origination) of temporary difference during the year (3,801,401) (2,233,173) (3,522,815) (1,969,756) Effect of changes in tax rate 1,045,393 - 1,244,211 - (2,756,008) (2,233,173) (2,278,604) (1,969,756) (3,477,405) (2,126,705) (3,481,169) (2,385,327) Over provision in previous years 21 (b) Deferred Tax Expense Bank For the year ended 31st December Group Deferred Tax Liability Deferred Tax Asset Total income tax expense [Note 21 (e)] 218 2,525,260 3,618,544 2,969,222 3,918,061 Effective tax rate 12.74% 23.99% 12.88% 22.29% Effective tax rate (excluding deferred tax) 30.28% 38.10% 27.98% 35.85% HATTON NATIONAL BANK PLC
  218. 21 (c) Current Tax on Profit for the year - Subsidiaries Group 2021 2020 Rs 000 Rs 000 188,247 219,072 For the year ended 31st December Sithma Development (Pvt)Ltd 99,902 191,155 269,414 152,351 557,563 562,578 HNB Assurance PLC HNB Finance PLC 21 (d) Applicable Tax Rates Ministry of Finance proposed changes to the current tax rate as noted below on 31st January 2020, pending formal amendments being made to the Act and to be implemented with effect from 1st January 2020. The Inland Revenue (Amendment) Act No. 10 of 2021 was passed in Parliament and certified by the Speaker on 13th May 2021. Both income tax and deferred tax provisions for the year ended 31st December 2020 were calculated at the rate of 28% on the basis that the said amendment was not considered to be ‘’substantively enacted’’ as per LKAS 12 as at 31st December 2020. The new tax rates disclosed below have been considered to be substantively enacted as at the reporting date for the computation of current and deferred tax for the year ended 31st December 2021. Further, the Group reassessed the current tax liability for 2020 and the net deferred tax asset outstanding as at 31st December 2020 at 24% during the year 2021. The said reassessment resulted in a reversal of Rs 820 Mn from the income tax provision for the year 2020. Further, the reversal of net deferred tax asset as at 31st December 2020 resulted in a charge of Rs 735 Mn to the income statement and a reversal of Rs 620 Mn to the other comprehensive income. Company New tax rate Previous tax rate Hatton National Bank PLC 24% 28% HNB Assurance PLC and its subsidiary HNB General Insurance Limited 24% 28% HNB Finance PLC 24% 28% Sithma Development (Pvt) Ltd 24% 28% 21 (e) Reconciliation of Effective Tax Rate  Bank 2021 For the year ended 31st December % Profit before income tax Group - 2021 2020 Rs 000 % 19,825,027 Rs 000 15,081,180 % 2020 Rs 000 - 23,053,584 % - Rs 000 17,580,324 Tax using the corporate tax rate 24.00 4,758,006 28.00 4,222,729 24.00 5,532,861 28.00 4,922,491 Disallowable expenses 14.55 2,885,102 20.56 3,101,145 14.06 3,242,440 21.64 3,804,686   Allowable expenses (0.02) (4,510) (0.04) (6,333) (0.14) (31,854) (0.10) (17,858)     Tax exempt income (22.58) (4,744,297) (23.88) (4,198,781) Tax effects on: Effect of change in tax rate Undistributable profits of subsidiaries    and joint venture 3.71 (4,476,554) (24.53) 735,066 - (3,698,997) (20.58) - 3.80 876,804 - - - - - - (1.84) (425,046) (3.34) (588,038) 19.66 3,897,110 23.99 3,618,544 19.31 4,450,908 22.31 3,922,500 Over provision in previous years and effect of change in tax rate (6.92) (1,371,850) - - (6.43) (1,481,686) (0.03) (4,439) Income tax expense [Note 21 (b)] 12.74 2,525,260 23.99 3,618,544 12.88 2,969,222 22.29 3,918,061 219 INTEGRATED REPORT 2021
  219. Notes to the Financial Statements 21 INCOME TAX EXPENSE (Contd.) 21 (f) Amounts Recognised in Other Comprehensive Income Bank For the year ended 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 2,102 - - (10,213) Revaluation of freehold land and buildings  (576,923) - (775,823) - Net gains/(losses) on investments in government securities  754,541 61,588 763,270 54,565 177,618 61,588 (22,766) 56,667 Remeasurement of post-employment benefit obligations 21 (g) Tax Losses Brought Forward and Utilised during the Year  Group Balance as at 1st January Adjustment for brought forward tax losses 2021 2020 Rs 000 Rs 000 2,590,197 3,573,832 (891) 693 Tax losses utilised during the year (1,449,543) (984,328) Balance as at 31st December 1,139,763 2,590,197 The details on tax losses utilized by subsidiaries have been given in Note 40 (d) to the financial statements. 22 EARNINGS PER SHARE    ACCOUNTING POLICY The Bank/Group presents basic and diluted Earnings per Share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss for the year attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to the ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees as per Sri Lanka Accounting Standard - LKAS 33 on “Earnings per Share”.  22 (a) Basic Earnings per Share  Bank For the year ended 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 17,299,767 11,462,636 19,024,882 13,095,420 525,905 525,905 525,905 525,905 32.90 21.80 36.18 24.90 Amount used as the numerator Profit attributable to equity holders of the Bank (Rs 000) Number of ordinary shares used as the denominator  Weighted average number of ordinary shares outstanding during the year used as the denominator for basic EPS (Rs ‘000) [Note 22 (c)] Basic earnings per ordinary share (Rs) 220 HATTON NATIONAL BANK PLC
  220. 22 (b) Diluted Earnings per Share    Bank For the year ended 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 17,299,767 11,462,636 19,024,882 13,095,420 525,905 525,905 525,905 525,905 32.90 21.80 36.18 24.90 Amount used as the numerator Profit attributable to equity holders of the Bank (Rs 000) Number of ordinary shares used as the denominator Weighted average number of ordinary shares outstanding during the year used as the denominator for diluted EPS (Rs ‘000) [Note 22 (c)] Diluted earnings per ordinary share (Rs) 22 (c) Weighted Average Number of Ordinary Shares Outstanding During the Year, Used as the Denominator for Basic and Diluted Earnings Per Share     Bank/Group 2021 Rs 000 511,976 Number of shares in issue as at 1st January 13,929 Number of shares satisfied in the form of issue and allotment of new shares for final dividend 2020 Weighted average number of ordinary shares as at 31st December  23 525,905 DIVIDENDS PAID AND PROPOSED For the year ended 31st December 2021 2020 Gross Dividend Net Gross Dividend Net Dividend Tax Dividend Dividend Tax Dividend Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 3.50 scrip dividend per share  declared in 2019 and paid in 2020 - - -  1,751,424   -    1,751,424  Rs 3.50 cash dividend per share declared in 2019 and paid in 2020  -    1,751,424  - - -  1,751,424  Rs 3.50 scrip dividend per share  declared in 2020 and paid in 2021 1,791,915 - 1,791,915 - - - Rs 4.50 cash dividend per share declared in 2020 and paid in 2021 2,303,891 - 2,303,891 - - - 23 (a) Proposed Dividends The Directors recommend that a final dividend of Rs. 9.00 per share by way of Rs. 6.50 per share, cash and Rs. 2.50 per share, scrip dividend (2020: Rs. 4.50 per share, cash and Rs. 3.50 per share, scrip) on both voting and non-voting shares of the Bank, be paid for the financial year ended 31st December 2021.  The final dividend is to be approved at the Annual General Meeting to be held on 30th March 2022. In accordance with Sri Lanka Accounting Standard – LKAS 10 on “Events after the reporting period”, this final dividend has not been recognised as a liability as at 31st December 2021. Final dividend proposed amounts to Rs 4,733 Mn (2020 final dividend : Rs 4,096 Mn). 23 (b) Compliance with Sections 56 and 57 of Companies Act No. 07 of 2007 As required by the Section 56 of the Companies Act No. 07 of 2007, the Board of Directors of the Bank satisfied the solvency test in accordance with the Section 57, prior to recommending the final dividend. A statement of solvency completed and duly signed by the Directors on February 18th, 2022 has been audited by external auditor, Messrs. KPMG. 221 INTEGRATED REPORT 2021
  221. Notes to the Financial Statements 24 ANALYSIS OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS The accounting policies adopted in measurement of financial instruments are given in Notes 3 .3, 3.4 to the financial statements The carrying amounts of financial instruments by category as defined in Sri Lanka Accounting Standard - SLFRS 9 “Financial Instruments” under headings of the statement of financial position are summarised below. 24 (a) Analysis of Financial Instruments by Measurement Basis - Bank As at 31st December 2021 Fair Value Fair Value Total through Amortised Cost through Other Carrying Profit or Loss Comprehensive Amount Income Rs 000 Rs 000 Rs 000 Rs 000 Cash and cash equivalents - 38,185,254 - 38,185,254 Balances with Central Bank of Sri Lanka - 25,820,489 - 25,820,489 Derivative financial instruments 927,487 - - 927,487 Financial assets measured at fair value through profit or loss  103,365 - - 103,365 Financial assets measured at amortised cost - loans and advances to customers - 876,254,693 - 876,254,693 Financial assets measured at amortised cost - debt and other financial instruments - 160,677,520 - 160,677,520 Financial assets measured at fair value through other comprehensive income - - 203,426,433 203,426,433 Assets Other financial assets Total financial assets - 6,123,181 - 6,123,181 1,030,852 1,107,061,137 203,426,433 1,311,518,422 - 17,075,502 - 17,075,502 Liabilities Due to banks 353,356 - - 353,356 Securities sold under repurchase agreements - 33,524,226 - 33,524,226 Financial liabilities measured at amortised cost - due to depositors - 1,075,709,287 - 1,075,709,287 Dividends payable - 989,212 - 989,212 Financial liabilities measured at amortised cost - other borrowings - 24,747,869 - 24,747,869 Debt securities issued - 1,962,749 - 1,962,749 Other financial liabilities - 9,346 - 9,346 - 23,552,323 - 23,552,323 353,356 1,177,570,514 - 1,177,923,870 Derivative financial instruments Subordinated term debts Total financial liabilities 222 HATTON NATIONAL BANK PLC
  222. 24 (a) Analysis of Financial Instruments by Measurement Basis - Bank As at 31st December 2020 Fair Value Amortised through Cost Profit or Loss Fair Value Total through Other Carrying Comprehensive Amount Income Rs 000 Rs 000 Rs 000 Rs 000 Cash and cash equivalents - Balances with Central Bank of Sri Lanka - 34,123,562 - 34,123,562 7,212,395 - 7,212,395 1,032,318 - - 1,032,318 - 84,499 Assets Derivative financial instruments 84,499 - Financial assets measured at amortised cost - loans and advances to customers Financial assets measured at fair value through profit or loss  - 772,580,720 Financial assets measured at amortised cost - debt and other financial instruments - 186,605,516 - 186,605,516 Financial assets measured at fair value through other comprehensive income - - 249,271,658 249,271,658 Other financial assets - 2,279,834 - 2,279,834 1,116,817 1,002,802,027 249,271,658 1,253,190,502 - 89,746,709 - 89,746,709 337,014 - - 337,014 Total financial assets 772,580,720 Liabilities Due to banks Derivative financial instruments Securities sold under repurchase agreements - 10,361,383 - 10,361,383 Financial liabilities measured at amortised cost - due to depositors - 967,821,404 - 967,821,404 Dividends payable - 962,185 - 962,185 Financial liabilities measured at amortised cost - other borrowings - 30,526,261 - 30,526,261 Debt securities issued - 1,875,042 - 1,875,042 Other financial liabilities - 2,377,854 - 2,377,854 Subordinated term debts - 28,298,365 - 28,298,365 337,014 1,131,969,203 - 1,132,306,217 Total financial liabilities 223 INTEGRATED REPORT 2021
  223. Notes to the Financial Statements 24 ANALYSIS OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS (Contd.) 24 (b) Analysis of Financial Instruments by Measurement Basis - Group  As at 31st December 2021 Fair Value Fair Value Total through Amortised Cost through Other Carrying Profit or Loss Comprehensive Amount Income Rs 000 Rs 000 Rs 000 Rs 000 Cash and cash equivalents - 40,900,372 - 40,900,372 Placements with banks - 6,371,273 - 6,371,273 Balances with Central Bank of Sri Lanka - 25,820,489 - 25,820,489 Assets - 6,246,276 - 6,246,276 Derivative financial instruments 927,487 - - 927,487 Financial assets measured at fair value through profit or loss  862,641 - - 862,641 Financial assets measured at amortised cost - loans and advances to customers - 911,253,345 - 911,253,345 Financial assets measured at amortised cost - debt and other financial instruments - 171,930,640 - 171,930,640 Financial assets measured at fair value through other comprehensive income - - 210,804,487 210,804,487 Reverse repurchase agreements Other financial assets Total financial assets - 8,034,880 - 8,034,880 1,790,128 1,170,557,275 210,804,487 1,383,151,890 - 17,075,502 - 17,075,502 Liabilities Due to banks 353,356 - - 353,356 Securities sold under repurchase agreements - 33,524,226 - 33,524,226 Financial liabilities measured at amortised cost - due to depositors - 1,107,065,820 - 1,107,065,820 Dividends payable - 1,013,629 - 1,013,629 Financial liabilities measured at amortised cost - other borrowings - 25,555,834 - 25,555,834 Debt securities issued - 2,465,085 - 2,465,085 Other financial liabilities - 2,329,388 - 2,329,388 - 24,391,912 - 24,391,912 353,356 1,213,421,396 - 1,213,774,752 Derivative financial instruments Subordinated term debts Total financial liabilities 224 HATTON NATIONAL BANK PLC
  224. 24 (b) Analysis of Financial Instruments by Measurement Basis - Group  As at 31st December 2020 Fair Value Amortised through Cost Profit or Loss Fair Value Total through Other Carrying Comprehensive Amount Income Rs 000 Rs 000 Rs 000 Rs 000 Assets Cash and cash equivalents - 34,898,957 - 34,898,957 Placements with banks - 12,126,434 - 12,126,434 Balances with Central Bank of Sri Lanka - 7,212,395 - 7,212,395 - 2,827,050 - 2,827,050 Derivative financial instruments Reverse repurchase agreements 1,032,318 - - 1,032,318 Financial assets measured at fair value through profit or loss  1,094,827 - - 1,094,827 Financial assets measured at amortised cost - loans and advances to customers - 800,815,971 - 800,815,971 Financial assets measured at amortised cost - debt and other financial instruments - 193,349,496 - 193,349,496 Financial assets measured at fair value through other comprehensive income - - 256,394,644 256,394,644 Other financial assets - 3,851,392 - 3,851,392 2,127,145 1,055,081,695 256,394,644 1,313,603,484 89,746,709 Total financial assets Liabilities Due to banks - 89,746,709 - 337,014 - - 337,014 - 10,361,383 - 10,361,383 Financial liabilities measured at amortised cost - due to depositors - 994,948,912 - 994,948,912 Dividends payable - 980,507 - 980,507 Derivative financial instruments Securities sold under repurchase agreements Financial liabilities measured at amortised cost - other borrowings - 30,526,261 - 30,526,261 Debt securities issued - 2,411,408 - 2,411,408 Other financial liabilities - 4,652,548 - 4,652,548 - 28,945,457 - 28,945,457 337,014 1,162,573,185 - 1,162,910,199 Subordinated term debts Total financial liabilities 225 INTEGRATED REPORT 2021
  225. Notes to the Financial Statements 25 CASH AND CASH EQUIVALENTS      ACCOUNTING POLICY Cash and cash equivalents include cash in hand and balances with banks. These are subject to an insignificant risk of changes in fair value and are used by the Group in the management of its short term commitments. These are brought to the financial statements at the face values or gross values. Cash and cash equivalents are carried at amortised cost in the statement of financial position. Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 30,252,225 25,849,903 32,396,901 25,982,296 As at 31st December Local currency in hand Foreign currency in hand Balances with banks 625,346 515,532 669,677 515,532 7,316,562 7,775,703 7,842,673 8,418,705 38,194,133 34,141,138 40,909,251 34,916,533 (8,879) (17,576) (8,879) (17,576) 38,185,254 34,123,562 40,900,372 34,898,957 Less : Allowance for impairment losses [Note 25 (a)] Group All cash and cash equivalent balances held by the group entities were available for use by the Group. 25 (a) Movement in Impairment during the year Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Balance as at 1st January 17,576 4,796 17,576 4,821 Net impairment (reversal)/charge during the year (8,697) 12,780 (8,697) 12,755 Balance as at 31st December 8,879 17,576 8,879 17,576 As at 31st December Stage 1 25 (b) Credit and Market risk Information about the Group’s credit and market risks for financial assets are included in Note 5 to the financial statements. 26 PLACEMENTS WITH BANKS      ACCOUNTING POLICY Placements with banks include money at call and short notice and fixed deposits that are subject to an insignificant risk of changes in the fair value, and are used by the Group in the management of its short term commitments. These are brought to the financial statements at the face values or gross values. Placements with banks are carried at amortised cost in the statement of financial position. Group As at 31st December Placements - within Sri Lanka Less : Allowance for impairment losses [Note 26 (a)] 226 HATTON NATIONAL BANK PLC 2021 2020 Rs 000 Rs 000 6,371,624 12,126,911 (351) (477) 6,371,273 12,126,434
  226. 26 (a) Movement in Impairment during the year  Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 As at 31st December Stage 1 Balance as at 1st January - 49,069 477 49,562 Net impairment reversal during the year - (49,069) (126) (49,085) Balance as at 31st December - - 351 477 26 (b) Credit and Market risk Information about the Group’s credit and market risks for financial assets are included in Note 5 to the financial statements. 27 BALANCES WITH CENTRAL BANK OF SRI LANKA Balances with Central Bank of Sri Lanka represent the cash balance that is required to be maintained as per the provisions of Section 93 of the Monetary Law Act. The minimum cash reserve requirement on rupee deposit liabilities was 4% as at 31st December 2021 (2020 : 2%). There is no reserve requirement for deposit liabilities of the Foreign Currency Banking Unit (FCBU) and foreign currency deposit liabilities in the Domestic Banking Unit (DBU).   Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 25,820,489 7,212,395 25,820,489 7,212,395 25,820,489 7,212,395 25,820,489 7,212,395 As at 31st December Statutory balance with Central Bank of Sri Lanka 28 REVERSE REPURCHASE AGREEMENTS         Group ACCOUNTING POLICY Securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, within “reverse repurchase agreements”, reflecting the transaction’s economic substance as a loan by the Group. The difference between the purchase and resale prices is recorded in net interest income and is accrued over the life of the agreement using the Effective Interest Rate (EIR). Group 2021 2020 Rs 000 Rs 000   with banks 3,527,823 -   with customers 2,718,453 2,827,050 6,246,276 2,827,050 As at 31st December Securities purchased under reverse repurchase agreements 227 INTEGRATED REPORT 2021
  227. Notes to the Financial Statements 29 DERIVATIVE FINANCIAL INSTRUMENTS            ACCOUNTING POLICY The accounting policy pertaining to derivative financial instruments has been given in Note 3.3 and 3.4 to the financial statements. A derivative is a financial instrument or other contract with all three of the following characteristics: • Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract (i.e. the ‘underlying’).  • It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts expected to have a similar response to changes in market factors. • It is settled at a future date.  The Bank uses derivatives such as forward foreign exchange contracts and currency swaps. Bank has not designated any derivative as a hedging instrument and has not followed hedge accounting as at the reporting date. All derivatives are initially recognised and subsequently measured at fair value, with revaluation gains or losses recognised in the income statement under “Net gain/(loss) from trading” (Note 10). Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. Fair value is determined using the forward market rates ruling on the reporting date. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS  Judgement is required when the Bank/Group  selects the valuation techniques used to determine the fair value of derivatives, particularly the selection of valuation inputs that are not readily observable, and the application of valuation adjustments to certain derivatives.  The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities. Bank/Group As at 31st December 2021 2020 Assets Liabilities Assets Liabilities Rs 000 Rs 000 Rs 000 Rs 000 Currency swaps    Sales 263,490 81,645 31,217 139,927    Purchases 516,700 270,447 943,589 121,015 780,190 352,092 974,806 260,942 105,773 1,227 29,893 69,115 Forward foreign exchange contracts    Sales    Purchases 228 HATTON NATIONAL BANK PLC 41,524 37 27,619 6,957 147,297 1,264 57,512 76,072 927,487 353,356 1,032,318 337,014
  228. 30 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS       ACCOUNTING POLICY The accounting policy pertaining to financial assets measured at fair value through profit or loss has been given in Note 3.3 and 3.4 to the financial statements. A financial asset is classified as measured at fair value through profit or loss if it is held for trading or is designated at fair value through profit or loss. Financial assets held for trading The Group classifies financial assets as held for trading in the following circumstances. • Those have been purchased or acquired primarily for short-term profit making through trading activities; or • Those form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking Financial assets held for trading are measured and recorded at fair value in the statement of financial position. Changes in fair value are recognised in “net gain/(loss) from trading” (Note 10). Interest income from financial assets held for trading is recorded in “Interest income” and dividend income is recorded in “net gain/(loss) from trading” (Note 10) according to the terms of the contract, or when the right to receive the payment has been established.  Financial assets held for trading include instruments such as government securities, equity instruments etc. that have been acquired principally for the purpose of selling or repurchasing in the near term.  Further as per SLFRS 9, financial assets measured at fair value through profit or loss include all financial assets other than those classified as fair value through other comprehensive income and financial assets measured at amortised cost. Financial assets designated at fair value through profit or loss The Group has not designated any financial asset at fair value through profit or loss. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS  Judgement is required when applying the valuation techniques used to determine the fair value of trading securities not valued using quoted market prices.  2021 2020 Fair Value Fair Value Rs 000 Rs 000 Quoted shares - Bank  [Note 30 (a)] 103,365 84,499 Total financial assets measured at fair value through profit or loss - Bank [Note 30 (e)] 103,365 84,499 Quoted shares - Subsidiaries [Note 30 (b)] 218,466 151,410 Government of Sri Lanka treasury bonds - Subsidiaries [Note 30 (c)] 347,225 16,224 As at 31st December Unquoted units in unit trusts - Subsidiaries [Note 30 (d)] 193,585 842,694 Total financial assets measured at fair value through profit or loss - Subsidiaries 759,276 1,010,328 Total financial assets measured at fair value through profit or loss - Group [Note 30 (e)] 862,641 1,094,827 229 INTEGRATED REPORT 2021
  229. Notes to the Financial Statements 30 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS (Contd.) 30 (a) Quoted Shares Held by the Bank      As at 31st December 2021 No of 2020 Cost of % of Fair Ordinary Investment Total Value Shares No of Cost of % of Fair Ordinary Investment Total Value Shares Rs 000 Rs 000 Rs 000 Rs 000 Banks, Finance and Insurance Ceylinco Insurance PLC 34,000 National Development Bank PLC 45,254 Sector Total 23,035 18 10,903 8 33,938 40,698 34,000 3,118 45,254 43,816 23,035  18  10,903  8  33,938 34,741 3,535 38,276 Construction and Engineering Access Engineering PLC  175  Sector Total 6 - 6 6  175  6 6  -   6 4 4 Diversified Holdings Aitken Spence PLC  278,515  Sector Total 30,625 24 30,625 22,950  278,515  22,950 30,625  24  30,625 16,098 16,098 Hotels and Travels Aitken Spence Hotel Holdings PLC  575,301  45,999 36 24,335  575,301  45,999  36  18,582 Asian Hotels and Properties PLC  207,476  14,918 12 9,150  207,476  14,918  12  8,901 Sector Total 60,917 33,485 60,917 27,483 Motors United Motors Lanka PLC Sector Total 230  33,385  3,522 3,108  33,385  3,522  2  2,638 3,108 3,522 2,638 129,008 103,365 129,008 84,499 Unrealised loss from marked to market valuation (25,643) Total quoted shares - Bank 103,365 HATTON NATIONAL BANK PLC 2 3,522 (44,509) 103,365 84,499 84,499
  230. 30 (b) Quoted shares Held by Subsidiaries       As at 31st December 2021 No of 2020 Cost of % of Fair Ordinary Investment Total Value Shares Cost of % of Fair Ordinary Investment No of Total Value Shares Rs 000 Rs 000 Rs 000 Rs 000 Banks, Finance and Insurance Central Finance Company PLC Nations Trust Bank PLC Peoples Leasing & Finance PLC 142,285 17,088 12 13,233 140,201 16,921 12 91,471 6,258 4 5,031 91,471 6,258 4 5,488 543,212 9,452 7 5,812 513,583 9,067 6 6,368 11,637 Sampath Bank PLC 318,048 19,747 14 16,570 106,016 19,747 14 14,376 Seylan Bank PLC - (Non-Voting) 680,652 24,806 17 22,666 656,402 23,821 17 22,318 Sector Total 77,352 63,312 75,814 60,187 Diversified Holdings John Keells Holdings PLC 29,670 3,679 3 4,450 29,670 3,679 3 4,439 Melstacorp PLC 94,532 5,603 4 5,303 94,532 5,603 4 4,916 Richard Peiris and Company PLC 312,851 4,351 3 7,696 312,851 4,351 3 4,661 Vallibel One PLC 209,638 4,000 3 15,220 200,000 3,600 3 5,200 Sector Total 17,633 32,669 17,233 19,216 Beverage Food and Tobacco Distilleries Company of Sri Lanka PLC 33,935 Sector Total - - - 577 33,935 577  -    -   - 696 696 Land and Property Overseas Realty (Ceylon) PLC 486,679 Sector Total 12,454 9 12,454 9,344 486,679 9,344 12,454 9 12,454 7,008 7,008 Manufacturing ACL Cables PLC 190,400 3,016 2 19,088 95,200 3,016 2 7,292 Dipped Products PLC 334,000 10,354 7 16,934 38,400 11,903 8 13,336 Royal Ceramic Lanka PLC 680,000 9,172 6 53,108 78,000 10,385 7 13,814 Tokyo Cement Company (Lanka) PLC 391,871 12,824 9 23,434 391,871 12,824 9 29,861 Sector Total Unrealised gain from marked to market valuation Total quoted shares - Subsidiaries 35,366 112,564 38,128 64,303 142,805 218,466 143,629 151,410 75,661 - 7,781 - 218,466 218,466 151,410 151,410 231 INTEGRATED REPORT 2021
  231. Notes to the Financial Statements 30 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS (Contd.) 30 (c) Government of Sri Lanka Treasury Bonds Held by Subsidiaries As at 31st December 2021 2020 Cost of Fair Cost of Fair Investment Value Investment Value Rs 000 Rs 000 Rs 000 Rs 000 346,740 347,225 16,490 16,224 Year of maturity   2022 485 - (266) - 347,225 347,225 16,224 16,224 Fair No of Cost of Units Investment Value Rs 000 Rs 000 9,026,249 210,000 211,674 Unrealised gain/(loss) from marked to market valuation Total Government of Sri Lanka treasury bonds - Subsidiaries 30 (d) Unquoted Units in Unit Trusts Held by Subsidiaries As at 31st December 2021 2020 No of Cost of Units Investment Value Rs 000 Rs 000 - - - JB Vantage Money Market Fund 2,189,530 60,000 64,339 7,665,171 210,000 210,303 Capital Alliance Investment Grade Fund 3,043,832 60,000 64,453 10,665,914 210,000 210,347 Capital Alliance Income Fund 2,934,718 60,000 64,793 10,274,098 210,000 210,370 NDB Wealth Money Plus Fund Unrealised gain from marked to market valuation Total unquoted units - Subsidiaries Fair 13,585 - 2,694 - 193,585 193,585 842,694 842,694 30 (e) Analysis Bank As at 31st December Group 2021 2020 2021 2020 Fair Value Fair Value Fair Value Fair Value Rs 000 Rs 000 Rs 000 Rs 000 103,365 84,499 862,641 1,094,827 103,365 84,499 862,641 1,094,827 By currency   Sri Lankan Rupee 30 (f) Credit and Market risk 232 Information about the Group’s credit and market risks for financial assets are included in Note 5 to the financial statements. HATTON NATIONAL BANK PLC
  232. 31 FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS AND ADVANCES TO CUSTOMERS     ACCOUNTING POLICY The accounting policy pertaining to financial assets measured at amortised cost - loans and advances to customers has been given in Note 3.3 and 3.4 to the financial statements. Financial assets measured at amortised cost - loans and advances to customers include loans and advances and lease receivables of the Group. As per SLFRS 9, loans and advances to customers are assets that are; • Held within a business model with the objective to hold financial assets in order to collect contractual cash flows • The contractual terms of the financial asset give rise on specified dates to cash flows, that are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding. After initial measurement, loans and receivables are subsequently measured at amortised cost using the Effective Interest Rate (EIR), less allowance for impairment except when the Group designates loans and receivables at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘interest income’ in the income statement. The losses arising from impairment are recognised in ‘impairment charge for loans and other losses’ in the income statement. Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Gross loans and advances 928,971,730 814,543,456 968,907,254 846,720,969   stage 1 715,110,233 546,879,309 741,920,173 569,201,364   stage 2 150,226,414 204,628,252 155,690,342 206,770,819 As at 31st December   stage 3 63,635,083 63,035,895 71,296,739 70,748,786 Less : Accumulated impairment under: 52,717,037 41,962,736 57,653,909 45,904,998   stage 1 [Note 31 (g)] 6,494,958 3,091,724 7,653,405 3,799,786   stage 2 [Note 31 (g)] 10,188,641 8,058,780 10,754,926 8,284,622   stage 3 [Note 31 (g)] Net loans and advances 36,033,438 30,812,232 39,245,578 33,820,590 876,254,693 772,580,720 911,253,345 800,815,971 233 INTEGRATED REPORT 2021
  233. Notes to the Financial Statements 31 FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS AND ADVANCES TO CUSTOMERS (Contd.) 31 (a) Analysis of Loans and Advances 31 (a) i By Product Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 116,026,873 93,647,903 115,907,874 93,521,697 As at 31st December Overdrafts 1,328,855 Bills of exchange 153,705 Commercial papers Short term loans Pawning advances Packing credit loans 28,085,905 22,947,790 Term loans 472,506,074 425,097,900 50,360,273 Housing loans 1,351,560 Lease backed securities Total gross loans and advances [Note 31 (a) ii] 23,768,121 17,518,298 67,835,623 Lease and hire purchase receivable 9,155,433 21,082,668 18,504,857 Staff loans 153,821 98,398,178 23,576,849 Trust receipts 2,045,728 116,022,030 12,136,458 Credit cards Group 928,971,730 17,208,143 60,481,528 41,973,936 2,146,677 814,543,456 1,328,855 2,045,728 116,425,532 98,781,876 30,146,476 24,407,738 153,705 12,136,458 23,576,849 153,821 9,155,433 23,768,121 21,082,668 17,518,298 496,472,196 443,773,306 19,087,913 80,876,895 18,065,918 71,408,420 50,360,273 41,973,936 968,907,254 846,720,969 1,351,560 2,146,677 Analysis of Loans and Advances - Bank 5% 7% 5% 7% 12% 11% 12% 12% 2021 1% 3% 3% 2% 2% 2020 12% 1% 3% 3% 2% 2% 51% Overdrafts Bills of exchange Commercial papers Short term loans Credit cards Pawning advances Trust receipts Packing credit loans Staff loans Term loans 31 (a) ii By Currency Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 827,386,958 718,701,733 867,322,482 750,879,246 United States Dollars 99,642,964 93,535,727 99,642,964 93,535,727 Great Britain Pounds 619,700 683,106 619,700 683,106 1,166,282 1,436,630 1,166,282 1,436,630 155,826 186,260 155,826 186,260 928,971,730 814,543,456 968,907,254 846,720,969 As at 31st December Sri Lankan Rupees Euros Other currencies Total gross loans and advances [Note 31 (a) i] 234 Group HATTON NATIONAL BANK PLC
  234. COVID-19 Repayment Deferral Packages Offered to Customers The Group has offered various forms of assistance to customers since March 2020 , to counteract the impact of COVID-19 on the ability of customers to meet their loan obligations based on the guidelines given by Central Bank of Sri Lanka and as part of Bank’s own initiatives. The details of the impact of deferrals when determining whether there has been a Significant Increase in Credit Risk (SICR) has been discussed in key judgements and assumptions section in Note 31 (f) to the financial statements . The loan repayment deferral package/moratorium is considered to be a loan modification under SLFRS 9.  In addition, the Bank offered working capital loan arrangements under concessionary rates as per the circulars issued by Central Bank of Sri Lanka (CBSL). Identification and Measurment of Impairment of Financial Assets Overview of the Expected Credit Loss (ECL) Principles ACCOUNTING POLICY The Group records an Expected Credit Loss (ECL) allowance for all loans and other debt securities not measured at fair value through profit or loss (FVTPL), together with loan commitments and financial guarantee contracts which are commonly referred to as “financial instruments” in accordance with SLFRS 9. The Group recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL: - Cash and cash equivalents - Placements with banks - Financial assets measured at amortised cost - loans and advances to customers - Financial assets measured at amortised cost - debt and other financial instruments - Financial assets measured at fair value through other comprehensive income - Loan commitments and financial guarantee contracts Equity instruments are not subject to impairment losses under SLFRS 9. 31 (b) Overview of the Expected Credit Loss Principles The Group measures, Expected Credit Loss (ECL) allowances based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months expected credit loss (12mECL). The 12mECL is the portion of LTECLs that represent the ECLs resulting from default events of a financial instrument that are possible within the 12 months after the reporting date. The Group’s policies for determining whether there has been a significant increase in credit risk are set out in Note 31 (c) i to the financial statements. LTECLs and 12mECLs are calculated either on an individual basis or on collective basis, depending on the nature of the underlying portfolio of financial instruments. 235 INTEGRATED REPORT 2021
  235. Notes to the Financial Statements 31 31 ( b) i FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS AND ADVANCES TO CUSTOMERS (Contd.) Grouping of Financial Assets for Impairment Assessment The Group’s policy for grouping financial assets for impairment assessment are as follows. • Individually assessed loans and advances and debt instruments  These are exposures that are individually significant meriting individual assessment for objective evidence of impairment and computation of impairment allowance. The Group calculates ECL on an individual basis for corporate and SME exposures identified as individually significant loans and investments in debt instruments. In respect of all loans that are considered individually significant, Bank assesses on a case by case basis, whether there is any objective evidence of impairment. The criteria used by the Bank to determine that there is such objective evidence include the following inter alia; - significant financial difficulty of the borrower or issuer; - a breach of contract such as a default or past due event; - the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise; - it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or - the absence of an active market for a security • Collective Impairment assessment Loans and advances that have been assessed individually and not attracting individual impairment provisions and all individually insignificant loans and advances are then assessed collectively, by categorising those into groups of assets with similar credit risk characteristics, to determine whether a provision should be made due to expected loss events. These exposures are grouped into smaller homogeneous portfolios, based on product type and customer segment etc. 31 (b) ii The Group measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: - debt investment securities that are determined to have a low credit risk at the reporting date; and - other financial instruments of which credit risk has not increased significantly since their initial recognition The Group has an established policy in place to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in risk of default occurring over the remaining life of the financial instrument. As per SLFRS 9, a three stage model is adopted for impairment measurement based on changes in credit quality since initial recognition. 236 Stage Classification Criteria ECL measurement Stage 1 Financial assets that are not originally credit impaired on initial recognition 12 months expected credit loss Stage 2 Financial assets where a significant increase in credit risk is observed since origination Life time expected credit loss Stage 3 Financial assets which are credit impaired Life time expected credit loss with probability of default at 100% POCI Purchased or Originated Credit Impaired assets (POCI) are financial assets which are credit impaired on initial recognition. These assets are categorised within stage 3 and expected credit loss is only recognised or released to the extent that there is a subsequent change in expected credit loss HATTON NATIONAL BANK PLC
  236. 31 (c) Factors considered in the Assessment of Expected Credit Losses 31 (c) i Significant Increase in Credit Risk (SICR) The Group considers an exposure to have a significantly increased credit risk when contractual payments of a customer are more than 30 days past due in accordance with rebuttable presumption in SLFRS 9. The Group individually reviews at each reporting date, loans and advances above a predefined threshold to identify whether the credit risk has increased significantly since origination, before an exposure is in default. Such indicators include the following inter alia: • When reasonable and supportable forecasts of future economic conditions directly affect the performance of a customer/group of customers, portfolios or instruments. • When there is a significant change in the geographical locations or natural catastrophes that directly impact the performance of a customer/group of customers or an instrument; • When the value of collateral is significantly reduced and/or realisability of collateral is doubtful. • When a customer is subject to litigation, that significantly affects the performance of the credit facility. • Frequent changes in the senior management of an institutional customer. • Delay in the commencement of business operations/projects by more than two years from the originally agreed date. • Modification of terms resulting in concessions, including extensions, deferment of payments, waiver of covenants. • When the customer is deceased/insolvent. • When the bank is unable to contact or find the customer. • A fall of 50% or more in the turnover and/or profit before tax of the customer when compared to the previous year • Erosion in net-worth by more than 25% when compared to the previous year Credit facilities/exposures which have one or more of the above indicators are treated as facilities with significant increase in credit risk and assessed accordingly in ECL computations. The Group regularly monitors, the effectiveness of the criteria used to identify significant increase in credit risk to confirm that the criteria is capable of identifying significant increase in credit risk before an exposure is in default. • COVID-19 initiatives In respect of facilities subject to the COVID-19 repayment deferral arrangements, an assessment of SICR has been carried out based on various factors such as the customer’s current financial position, future earnings capacity, whether the customer has availed the COVID-19 repayment deferral arrangements over an extended period of time and the sectors in which the customers operate based on which the facilities are categorised into risk categories. SICR is then determined based on the resulting risk categorisation. Based on the risk categorisation, facilities have been stress tested and required overlays have been made. 31 (c) ii Definition of Default and Credit Impaired Assets The Group generally considers financial assets as defaulted and therefore assessed in Stage 3 (as credit-impaired) for ECL calculations when: • The borrower is unlikely to pay its obligations to the Group in full, without recourse by the Group to actions such as realizing security (if any is held); or The borrower becomes 90 days past due on its contractual payments. In addition, the Group classifies the financial investments under Stage 3 when the external credit rating assigned to the particular investment is “default”. In assessing whether a borrower is in default, Group reviews its individually significant loans and advances above a predefined threshold at each reporting date. The Group considers customers with one or more of the indicators set out in Note 31 (c) i as credit impaired. Further as per Guidelines to Licensed Banks on the Adoption of Sri Lanka Accounting Standard - SLFRS 9 : “Financial Instruments” issued by Central Bank of Sri lanka, all the credit facilities/customers classified as non-performing as per Central Bank of Sri Lanka Directions are assessed as Stage 3 exposures. 237 INTEGRATED REPORT 2021
  237. Notes to the Financial Statements 31 31 (c) iii FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS AND ADVANCES TO CUSTOMERS (Contd.) Modified Financial Assets The Group sometimes makes concessions or modifications to the original terms of loans as response to the borrower’s financial difficulties, rather than taking possession or to otherwise enforce collection of collateral. The Group considers a loan to be rescheduled when such concessions or modifications are provided as a result of the borrower’s present or expected financial difficulties and the Group would not have agreed to them if the borrower had been financially healthy. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms. De-recognition decisions and classification between Stage 2 and Stage 3 are determined on a case-by-case basis. If these procedures identify a loss in relation to a loan, it is disclosed and managed as an impaired Stage 3 asset until it is collected or written off. When the loan has been renegotiated or modified but not de-recognised, a reassessment is made whether there has been a significant increase in credit risk, as set out in Note 31 (d) i to the financial statements. Accordingly, all rescheduled loans are classified as Stage 3 unless upgraded due to satisfactory performing period as specified in the Banking Act Directions. Further loans which have been restructured up to two times unless upgraded due to satisfactory performing period as specified in “Guidelines to Licensed Banks on the Adoption of Sri Lanka Accounting Standard - SLFRS 9 : Financial Instruments” issued by Central Bank of Sri Lanka are classified as Stage 2 while such loans which have been restructured more than two times are classified as Stage 3. 31 (d) Movement between the Stages Financial assets can be transferred between the different categories (other than POCI) depending on their relative change in credit risk since initial recognition. Financial instruments are transferred out of Stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessment described above. Financial instruments are transferred out of Stage 3 when they no longer exhibit any evidence of credit impairment as described above. Further restructured facilities are considered as “cured” once a satisfactory performing period of a minimum 90 days subsequent to the first capital and/or interest instalment post-restructure is in place, while upgrading of rescheduled facilities are carried out in accordance with the Banking Act Directions No 3/4 of 2008 on “Classification of Loans and Advances, Income Recognition and Provisioning”. 31 (e) Assessment of Expected Credit Losses on Financial Assets The Group calculates ECLs based on probability-weighted scenarios to measure the expected cash shortfalls, discounted at an approximation to the EIR. A cash shortfall is the difference between the cash flows that are due to the Group in accordance with the contract and the cash flows that the Group expects to receive. The key elements of ECL computations are, as follows: Probability of Default (PD): The probability of default is an estimate of the likelihood of a borrower defaulting on its financial obligations. A default may only happen at a certain time over the assessed period, if the facility has not been previously de-recognised and is still in the portfolio. The Group estimates the Probability of Default (PD) based on historical information with regard to delinquency of loans and advances. In this process historical information pertaining to 3-6 years have been used depending on the nature of the product. Exposure at Default (EAD): The exposure at default represents the expected exposure in the event of a default. The Group estimates EAD, taking into account the repayment of principal and interest from the reporting date to the default event together with any expected drawdowns of committed facilities. To calculate the EAD for a Stage 1 loan, the Group assesses the possible default events within 12 months. For Stage 2, Stage 3 and POCI financial assets, the exposure at default is considered for events over the lifetime of the instruments. Loss Given Default (LGD): The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Group would expect to receive, including from the realisation of any collateral. It is usually expressed as a percentage of the EAD. The Group segments its lending portfolio into homogeneous portfolios, based on key characteristics that are relevant to the estimation of future cash flows. The loss given default is estimated based on historically collected loss data and is usually expressed as a percentage of the EAD. The calculation of ECLs, including the estimation of the expected period of exposure and discount rate is made on an individual basis for individually significant loans and on a collective basis for other loans. The collective assessments are made separately for portfolios of facilities with similar credit risk characteristics. 238 HATTON NATIONAL BANK PLC
  238. • Revolving facilities The Group’s product offering includes a variety of corporate, SME and retail overdraft and credit card facilities. The Group reviews the sanction limits at least annually and therefore has the right to cancel and/or reduce the limits. Group calculates only the 12 month ECL (12mECL) allowance on these facilities to reflect the Group’s expectations of the customer behaviour, likelihood of default and the Bank’s future risk mitigation procedures, which could include reducing or cancelling the facilities. The EAD is arrived by taking the maximum of either sanctioned limit adjusted for Credit Conversion Factor (CCF) and the gross carrying amount of the loan (utilised amount). The ongoing assessment of whether a significant increase in credit risk has occurred for revolving facilities is similar to other lending products. This is based on shifts in the customer’s delinquency • Undrawn loan commitments When estimating life time ECL (LTECLs) for undrawn loan commitments, the Group estimates the expected portion of the loan commitment that will be drawn down over its expected life. The ECL is then assessed based on the present value of the expected shortfalls in cash flows if the loan is drawn down. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan. The ECL component for loan commitments, letters of credit and acceptances is recognised within “other liabilities”. • Financial guarantee contracts The Group estimates ECLs for financial guarantee contracts based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The shortfalls are discounted by the risk adjusted interest rate relevant to the exposure. The ECL component related to the financial guarantee contracts are recognised within “other liabilities”. • Recognition of expected credit loss provisions on government securities Bank does not recognise impairment provisions in respect of Rupee denominated government securities while recognition of impairment on foreign currency denominated government securities is determined based on the applicable exposure at default, probability of default and loss given default. • Debt instruments measured at fair value through OCI The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment charge, with a corresponding charge to profit or loss. The accumulated loss recognised in OCI is recycled to the profit or loss upon de-recognition of the assets. Forward looking information • Forward Looking Information The Group incorporates forward looking information into both its assessment as to whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. When estimating the ECLs, the Group considers three economic scenarios (base case, best case and worse case). Quantitative economic factors are based on economic data and forecasts published by Central Bank of Sri Lanka. In its ECL models, the Group relies on a broad range of forward looking information as economic inputs, such as: Quantitative factors Qualitative factors GDP growth Government policies Inflation Status of industry/business Interest rate Regulatory impact Unemployment rates Exchange rate 239 INTEGRATED REPORT 2021
  239. Notes to the Financial Statements 31 FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS AND ADVANCES TO CUSTOMERS (Contd.) • Reversal of Impairment If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back to the profit or loss by reducing the impairment allowance accordingly. • Write-off of financial assets Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at individual asset level. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due. • Regulation issued by the Central Bank of Sri Lanka (CBSL) Since the outbreak of COVID – 19, CBSL issued various circulars relating to moratorium/debt relief credit support to customers and industries through schemes offered by the Government to support recovery of the economy. Bank has taken into account these circulars in the recognition of interest income, stage wise classification of facilities and computation of expected credit loss. 31 (f) ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The measurement of impairment losses under Sri Lanka Accounting Standard SLFRS 9 - “Financial Instruments” (SLFRS 9) requires judgement across all categories of financial assets, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes of which can result in different levels of impairment allowances. The Group’s Expected Credit Loss (ECL) calculations are the outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered for accounting judgements and estimates include: • the Group’s criteria for assessing whether there has been a significant increase in credit risk as a result of which allowances for financial assets should be measured on a Life Time Expected Credit Loss (LTECL) basis • the segmentation of financial assets when their ECL is assessed on a collective basis. • the selection of an estimation technique or modelling methodology, noting that the modelling of the Group’s ECL estimates are complex; and • the selection of inputs for those models, and the interdependencies between those inputs. The judgements and associated assumptions have been made within the context of the impact of COVID-19 and reflect historical experience and other factors that are considered to be relevant, including expectations of future events that are believed to be reasonable under the circumstances. Accordingly, the Group’s ECL estimates are inherently uncertain and, as a result, actual results may differ from these estimates. The following table summarises the key judgements and assumptions used by the Bank in relation to the ECL model inputs, and the interdependencies between those inputs. 240 HATTON NATIONAL BANK PLC
  240. Judgement / Assumption Description Considerations for the year ended 31st December 2021 Determining when a Significant Increase in Credit Risk (SICR) has occurred In the measurement of ECL, judgement is involved in setting the rules and trigger points to determine whether there has been a SICR since initial recognition of a loan, which would result in the financial asset moving from Stage 1 to Stage 2. This is a key area of judgement since transition from Stage 1 to Stage 2 increases the ECL from 12 month ECL to life time ECL. In response to the impacts of COVID-19, various moratorium/debt concessionary schemes have been offered to eligible customers. When a customer is first provided with assistance the Group does not consider that it automatically results in a SICR and a consequent impact on ECL when assessing provisions. Subsequent to take-up, assessments have been carried out based on the discussions with the customers on the future business cash flows, financial position, the sectors in which the businesses operate and ability to recommence loan repayments at the end of the moratorium/debt concessionary period to conclude whether there is a SICR. Measuring 12 month expected credit losses and lifetime expected credit losses The Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) credit risk parameters used in determining ECL are point-in-time measures reflecting the relevant forward looking information determined by management. Judgement is involved in determining which forward-looking information variables are relevant for particular lending portfolios and for determining each portfolio’s point-in-time sensitivity. The PD, EAD and LGD models are subject to the Group’s policy on impairment assessment. In addition, judgement is required where behavioural characteristics are applied in estimating the lifetime of a facility to be used in measuring ECL. There were no material changes to behavioural lifetime estimates during the year ended 31st December 2021. Base case economic forecast The Group derives a forward-looking base case economic scenario which reflects the Bank’s view of the most likely future macro-economic conditions. As at 31 December 2021, the base case assumptions have been updated to reflect the evolving situation with respect to COVID-19 and economic forecasts provided by the Central Bank of Sri Lanka. Probability weighting of each economic scenario (base case, best case and worse case scenarios) Probability weighting of each economic scenario is determined by management considering the risks and uncertainties surrounding the base case economic scenario at each measurement date. The key consideration for probability weightings in the current period is the continuing impact of COVID-19. There were no material changes to the policies during the year ended 31st December 2021. Due to the implications of moratorium/debt concessionary schemes on PDs and LGDs (due to limited movements to Stage 2 and Stage 3), adjustments have been made as overlays based on stress testing and historic patterns to better reflect the adequacy of ECL. In addition to the base case forecast which reflects the negative economic consequences of COVID-19, greater weightage has been applied to the worse case scenario given the Group’s assessment of downside risks. The assigned probability weightages are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. 241 INTEGRATED REPORT 2021
  241. Notes to the Financial Statements 31 FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS AND ADVANCES TO CUSTOMERS (Contd.) Management overlay Temporary adjustments to the ECL allowance are used in circumstances where it is judged that the existing inputs, assumptions and model techniques do not capture all the risk factors relevant to Group’s lending portfolios. Emerging local or global macroeconomic, microeconomic or political events, and natural disasters that are not incorporated into the current parameters, risk ratings, or forward-looking information are examples of such circumstances. The use of management overlay may impact the amount of ECL recognised. The uncertainty associated with COVID-19 pandemic, and the extent to which the actions of governments, businesses and consumers mitigate the potentially adverse credit outcomes are not fully incorporated into existing ECL models. Accordingly, management overlays have been applied to ensure credit provisions are appropriate. Management has applied a number of adjustments to the modelled ECL primarily due to the uncertainty associated with COVID-19 and the debt concessions that have been provided. Management overlays which were add to the modelled ECL provision have been made for risks particular for risk elevated sectors identified by the Group 31 (g) Movement in Impairment during the year Bank As at 31st December Stage 1 Balance as at 1st January Acquisition of subsidiary through HNB Finance PLC Net impairment (reversal)/charge for the year Balance as at 31st December [Note 31] Stage 2 Balance as at 1st January Acquisition of subsidiary through HNB Finance PLC Net impairment charge for the year Balance as at 31st December [Note 31] Stage 3 Balance as at 1st January Acquisition of subsidiary through HNB Finance PLC Net impairment charge for the year Write-offs during the year Other movements Balance as at 31st December [Note 31] Total impairment allowance for financial assets measured at amortised cost 242 Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 3,091,724 3,343,678 3,799,786 4,063,982 3,784,649 (264,196) - 3,403,234 (251,954) 68,970 - 6,494,958 3,091,724 7,653,405 3,799,786 8,058,780 4,827,329 8,284,622 5,210,363 2,425,593 3,074,259 - 2,129,861 3,231,451 44,711 - 10,188,641 8,058,780 10,754,926 8,284,622 30,812,232 21,998,921 33,820,590 24,040,578 6,224,164 10,348,410 - 6,149,015 (1,240,831) 313,022 9,381,709 (692,654) 124,256 675,812 (1,788,010) (692,654) 313,022 124,256 36,033,438 30,812,232 39,245,578 33,820,590 52,717,037 41,962,736 57,653,909 45,904,998 Although the credit quality of the loans and advances portfolio of the Bank demonstrated a steady improvement during the year, the Bank continued to apply a number of adjustments to the modelled ECL, primarily due to the uncertainty associated with COVID-19 and the debt concessions that have been provided and the exposures to risk elevated sectors identified by the Bank. HATTON NATIONAL BANK PLC
  242. 31 (g) i Product wise Movement in Allowance for Impairment Losses - Bank 2021 Lease and Loans and Hire Purchases Receivables Rs 000 Rs 000 1,956,268 Balance as at 1st January Net impairment charge for the year Total Rs 000 Rs 000 Rs 000 46,556 41,962,736 12,061,494 23,441 11,682,110 - 313,022 - 313,022 Other movement Balance as at 31st December Total (402,825) (39,318) Write-offs during the year 39,959,912 2020 Pawning 1,514,125 (1,201,514) 51,132,916 - 69,997 30,169,928 12,361,206 (1,240,831) (692,654) 52,717,037 41,962,736 124,256 31 (g) ii Product wise Movement in Allowance for Impairment Losses - Group 2021 Lease and Loans and Hire Purchases Receivables Rs 000 Balance as at 1st January Pawning Total Total Rs 000 Rs 000 Rs 000 Rs 000 2,871,183 42,995,396 38,417 45,904,996 33,314,922 (436,371) 12,847,336 23,441 12,434,406 13,158,473 - 313,022 - 313,022 129,156 Acquisition of subsidiary through HNB Finance PLC Net impairment charge for the year (39,318) Write-offs during the year Other movement Balance as at 31st December 31 (h) Lease and Hire Purchase Receivables           2,524,650 2020 660,339 (1,748,693) 55,067,460 - - 61,858 789,495 - (1,788,010) (692,654) 57,653,909 45,904,998 124,256 ACCOUNTING POLICY Assets leased to customers which transfer substantially all the risks and rewards associated with ownership other than legal title, are classified as finance leases. Amounts receivable under finance leases are classified as lease and hire purchase receivables and presented within loans and receivables to customers in the statement of financial position after deduction of unearned lease income and the impairment for rentals doubtful of recovery. Lease receivables are collectively assessed for impairment in accordance with the policy for allowance for impairment losses as given in Note 31 (b) to the financial statements. Bank As at 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Total lease and hire purchase rentals receivable 78,226,295 71,509,790 95,082,134 86,018,229 Unearned lease income (10,390,672) (11,028,262) (14,205,239) (14,609,809) 71,408,420 Gross lease and hire purchase receivable 67,835,623 60,481,528 80,876,895 Impairment allowance for lease and hire purchase receivable (1,514,125) (2,012,485) (2,524,650) (2,799,480) Net lease and hire purchase receivable 66,321,498 58,469,043 78,352,245 68,608,940 Net lease and hire purchase receivables within one year [Note 31 (h) (i)] 23,815,909 20,110,219 28,724,359 23,923,080 Net lease and hire purchase receivables from one to five years [Note 31 (h) ii]  42,093,165 37,944,805 49,215,462 44,269,294 412,424 414,019 412,424 416,566 66,321,498 58,469,043 78,352,245 68,608,940 Net lease and hire purchase receivables after five years [Note 30 (h) (iii)] 243 INTEGRATED REPORT 2021
  243. Notes to the Financial Statements 31 FINANCIAL ASSETS MEASURED AT AMORTISED COST - LOANS AND ADVANCES TO CUSTOMERS (Contd.) 31 (h) i Net Lease and Hire Purchase Receivables within one year    Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Total lease and hire purchase rentals receivable within one year from the reporting date 29,481,316 26,120,290 35,795,442 31,954,425 Unearned lease and hire purchase income (5,121,687) (5,317,884) (6,404,337) (7,013,338) (543,720) (692,187) (666,746) (1,018,007) 23,815,909 20,110,219 28,724,359 23,923,080 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Total lease and hire purchase rentals receivables from one to five years from the reporting date 48,297,027 44,929,721 58,838,740 53,600,429 Unearned lease and hire purchase income (5,242,872) (5,678,868) (7,774,788) (7,564,824) (960,990) (1,306,048) (1,848,490) (1,766,311) 42,093,165 37,944,805 49,215,462 44,269,294 As at 31st December Less: Impairment allowance for lease and hire purchase receivables 31 (h) ii Net Lease and Hire Purchase Receivables from one to five years        Bank As at 31st December Less: Impairment allowance for lease and hire purchase receivables Group 31 (h) iii Net Lease and Hire Purchase Receivables after five years            Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Total lease and hire purchase rentals receivable after five years from the reporting date 447,953 459,779 447,953 463,375 Unearned lease and hire purchase income (26,113) (31,510) (26,113) (31,647) As at 31st December Less: Impairment allowance for lease and hire purchase receivables Group (9,416) (14,250) (9,416) (15,162) 412,424 414,019 412,424 416,566 Impairment allowance for lease and hire purchase receivables are included in the stage wise movement for impairment presented in Note 31 (g) to the financial statements. 31 (i) Credit and Market risk Information about the Group’s credit and market risks for financial assets are included in Note 5 to the financial statements. 31 (j) Banking Act Direction No 13 of 2021 on “Classification, Recognition and Measurement of Credit Facilities in Licensed Banks”, Banking Act Direction No 14 of 2021 on “Classification, Recognition and Measurement of Financial Assets other than Credit Facilities in Licensed Banks” and Banking Act Direction No 11 of 2021 on “Supplementary Circular to Banking Act Direction On Classification, Recognition and Measurement of Credit Facilities and Other Financial Assets in Licensed Banks” 244 Central Bank of Sri Lanka on 14th and 30th September 2021 issued the above Directions with a view to further strengthening and harmonising the regulatory framework on classification, recognition and measurement of credit facilities and other financial assets with the Sri Lanka Accounting Standard SLFRS 9 – “Financial Instruments” and establishing consistent and prudent practices in the banking industry. These Directions became effective from 1st January 2022 and the previous Directions issued by Central Bank of Sri Lanka pertaining to classification, income recognition and provisioning on of loans and advances and investment portfolios were revoked from such date. HATTON NATIONAL BANK PLC
  244. 32 FINANCIAL ASSETS MEASURED AT AMORTISED COST - DEBT AND OTHER FINANCIAL INSTRUMENTS   ACCOUNTING POLICY The accounting policy pertaining to financial assets measured at amortised cost - debt and other financial instruments has been given in Note 3.3 and 3.4 to the financial statements The Group measures financial assets at amortised cost if both of the following conditions are met: • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows • The contractual terms of the financial asset give rise on specified dates to cash flows that are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding. These conditions are explained in detail in Note 3.4.1 and 3.4.2 to the financial statements. After initial measurement, financial assets measured at amortised cost - debt and other financial instruments are subsequently measured at amortised cost using the Effective Interest Rate (EIR), less allowance for impairment except when the Group designates a financial asset as measured  at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘interest income’ in the income statement. The losses arising from impairment are recognised in ‘impairment charge for loans and other losses’ in the income statement. These assets are tested for impairment in accordance with the criteria given in Note 31 (b) to the financial statements. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Impairment of financial assets measured at amortised cost - debt and other financial instruments The Group assesses impairment for financial assets measured at amortised cost - debt and other financial instruments in line with the same principles used for assessment of impairment of loans and receivables. The impairment loss on financial assets measured at amortised cost - debt and other financial instruments is disclosed in Note 32 (b) to the financial statements. As at 31st December Government of Sri Lanka treasury bonds - Bank [Note 32 (c)] Sri Lanka development bonds - Bank [Note 32 (d)] Sri Lanka sovereign bonds - Bank [Note 32 (e)] Foreign government bonds - Bank [Note 32 (f)] Quoted debentures - Bank [Note 32 (g)] Total financial assets at amortised cost – debt and other financial instruments - Bank [Note 32 (a)] 2021 2020 Rs 000 Rs 000 2,040,413 - 51,546,518 72,285,996 109,636,330 114,890,002 72,466 72,694 8,724,799 3,913,191 172,020,526 191,161,883 Allowance for impairment on financial assets at amortised cost – debt and other financial instruments - Bank [Note 32 (b)] (11,343,006) (4,556,367)   Stage 1 (10,732,207) (3,945,340)   Stage 2 - -   Stage 3 Net financial assets at amortised cost - debt and other financial instruments - Bank  (610,799) (611,027) 160,677,520 186,605,516 245 INTEGRATED REPORT 2021
  245. Notes to the Financial Statements 32 FINANCIAL ASSETS MEASURED AT AMORTISED COST - DEBT AND OTHER FINANCIAL INSTRUMENTS (Contd.) As at 31st December Government of Sri Lanka treasury bonds - Subsidiaries [Note 32 (h)] Government of Sri Lanka treasury bills - Subsidiaries [Note 32 (i)] Sri Lanka development bonds - Subsidiaries [Note 32 (j)] Quoted debentures - Subsidiaries [Note 32 (k)] 2021 2020 Rs 000 Rs 000 313,465 - 3,918,251 1,655,758 182,209 33,470 5,978,846 4,638,038 Unquoted debentures - Subsidiaries [Note 32 (l)] 860,750 417,105 Other loans and receivables held by subsidiaries [Note 32 (m)] 773,091 773,091 12,026,612 7,517,462 Total financial assets at amortised cost - debt and other financial instruments - Group [Note 32 (a)] 184,047,138 198,679,345 Allowance for impairment on financial assets at amortised cost  debt and other financial instruments - Group [Note 32 (b)] (12,116,498) (5,329,849)   Stage 1 (10,732,609) (3,945,732)   Stage 2 - - Total financial assets at amortised cost - debt and other financial instruments - Subsidiaries    Stage 3 Net financial assets at amortised cost – debt and other financial instruments - Group  (1,383,889) (1,384,117) 171,930,640 193,349,496 32 (a) Analysis               Bank As at 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 172,020,526 191,161,883 184,047,138 198,679,345 172,020,526 191,161,883 184,047,138 198,679,345 10,765,212 3,913,191 22,609,615 11,430,653 161,182,848 187,175,998 161,365,057 187,175,998 72,466 72,694 72,466 72,694 172,020,526 191,161,883 184,047,138 198,679,345 By Collateralisation   Unencumbered By Currency   Sri Lankan Rupee   United States Dollar   Euros 246 HATTON NATIONAL BANK PLC
  246. 32 (b) Movement in Impairment during the year                  Bank As at 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Stage 1   Balance as at 1st January 3,945,340 1,182,947 3,945,732 1,183,581   Net impairment charge for the year 6,786,867 2,762,393 6,786,877 2,762,151 10,732,207 3,945,340 10,732,609 3,945,732   Balance as at 1st January - - - -   Transfer to Stage 3 - - - -   Balance as at 31st December - - - - 611,027 602,399 1,384,117 1,375,489 (228) 8,628 (228) 8,628   Balance as at 31st December Stage 2 Stage 3   Balance as at 1st January   Net impairment charge for the year   Transfer from Stage 2   Balance as at 31st December - - - - 610,799 611,027 1,383,889 1,384,117 11,343,006 4,556,367 12,116,498 5,329,849 Total impairment allowance for financial assets   measured at amortised cost  32 (c) Government of Sri Lanka treasury bonds Held by the Bank As at 31st December 2021 2020 Rs 000 Rs 000 Year of Maturity   2022 45,194 -   2027 1,995,219 - Total Government of Sri Lanka treasury bonds - Bank 2,040,413 - 2021 2020 Rs 000 Rs 000 - 30,936,996 32 (d) Sri Lanka Development Bonds Held by the Bank  As at 31st December Year of Maturity   2021   2022 39,368,033 30,072,000   2023 12,178,485 11,277,000 Total Sri Lanka development bonds - Bank 51,546,518 72,285,996 247 INTEGRATED REPORT 2021
  247. Notes to the Financial Statements 32 FINANCIAL ASSETS MEASURED AT AMORTISED COST - DEBT AND OTHER FINANCIAL INSTRUMENTS (Contd.) 32 (e) Sri Lanka Sovereign Bonds Held by the Bank   As at 31st December Year of Maturity   2021   2022   2023   2024   2025   2026   2027   2028   2029 Total Sri Lanka sovereign bonds - Bank 2021 2020 Rs 000 Rs 000 24,923,701 16,082,945 27,589,981 16,073,147 12,624,291 7,507,767 4,454,876 379,622 109,636,330 18,943,650 19,197,878 14,166,367 25,181,159 14,599,135 11,598,484 6,791,786 4,062,321 349,222 114,890,002 2021 2020 Rs 000 Rs 000 32 (f) Foreign Government Bonds Held by the Bank     As at 31st December Year of Maturity 72,466   2042* Total foreign government bonds - Bank 72,466 72,694 72,694 *These bonds were issued by the Government of Greece and have been classified as stage 3 for Expect Credit Loss (ECL) computation. Bank has recognised an ECL provision amounting to Rs.72.46 Mn (2020 - Rs. 72.69 Mn) in respect of this investment. 32 (g) Quoted Debentures Held by the Bank  As at 31st December 2021 No of Debentures 2020 Amortised  No of Cost Debentures Rs 000 Commercial Leasing & Finance PLC (6 months T bill rate + 4.25% debentures redeemable on 24th September 2025) Lanka Orix Leasing Company PLC (15% debentures redeemable on 27th September 2024) MTD Walkers PLC (10.25% debentures redeemed on 30th September 2020) * People’s Leasing and Finance PLC (12.60% debentures redeemed on 16th November 2021) (8% debentures redeemable on 29th July 2024) Siyapatha Finance PLC (13.5% debentures redeemed on 20th September 2021) National Savings Bank (6 months AWPLR + 1% debentures redeemable on 24th September 2026) Quoted Debentures - Bank 248 Amortised  Cost Rs 000 - - 5,000,000 511,207 5,000,000 512,057 5,000,000 519,521 5,000,000 519,726 5,000,000 538,332 5,000,000 538,332 20,000,000 2,064,877 20,000,000 - 2,031,758 - - - 3,000,000 311,318 50,000,000 5,090,862 8,724,799 - 3,913,191 * This investment has been categorised as stage 3 for Expected Credit Loss (ECL) computation. ECL provision has been recognised in full for this exposure. HATTON NATIONAL BANK PLC
  248. 32 (h) Government of Sri Lanka Treasury Bonds Held by Subsidiaries     2021 2020 Rs 000 Rs 000   2027 106,397 -   2028 207,068 - Total Government of Sri Lanka treasury bonds - subsidiaries 313,465 - As at 31st December Year of Maturity 32 (i) Government of Sri Lanka Treasury Bills Held by Subsidiaries       As at 31st December 2021 2020 Rs 000 Rs 000 Year of Maturity   2021 - 1,655,758   2022 3,918,251 - Total Government of Sri Lanka treasury bills - subsidiaries 3,918,251 1,655,758 32 (j) Sri Lanka development bonds Held by Subsidiaries           As at 31st December 2021 2020 Rs 000 Rs 000 Year of Maturity   2021 - 3,776   2022 182,209 29,694 Total Government of Sri Lanka development bonds - subsidiaries 182,209 33,470 249 INTEGRATED REPORT 2021
  249. Notes to the Financial Statements 32 FINANCIAL ASSETS MEASURED AT AMORTISED COST - DEBT AND OTHER FINANCIAL INSTRUMENTS (Contd.) 32 (k) Quoted Debentures Held by Subsidiaries     As at 31st December 2021 2020 No of Amortised No of Amortised Debentures Cost Debentures Cost Rs 000 Rs 000 Bank of Ceylon (13.25% debentures redeemed on 29th December 2021) - - 400,000 - 40,044 40,044 Commercial Bank of Ceylon PLC (12.00%  debentures redeemed on 27th October 2021) (12.00%  debentures redeemable on 22nd July 2023) (12.25%  debentures redeemable on 27th October 2026) (12.50%  debentures redeemable on 22nd July 2028) - - 289,500 29,559 577,800 60,838 577,800 60,838 135,700 13,861 135,700 13,861 1,192,800 125,857 1,192,800 125,857 200,556 230,115 Commercial Leasing and Finance PLC (10.50% debentures redeemable on 23rd September 2025) 2,700,000 277,612 2,700,000 277,612 277,612 277,612 DFCC Bank PLC - - 100,000 10,176 1,400,000 153,435 1,400,000 153,435 700,000 71,296 700,000 71,296 (13.50% debentures redeemable on 28th March 2024) 1,000,000 110,282 1,000,000 110,282 (13.00% debentures redeemable on 29th March 2025) 500,000 54,951 500,000 54,951 (12.15%  debentures redeemed on 09th June 2021) (12.60% debentures redeemable on 29th March 2023) (12.75%  debentures redeemable on 09th June2023) (9.00% debentures redeemable on 23rd October 2025) 2,700,000 274,594 2,700,000 274,594 (13.75% debentures redeemable on 28th March 2026) 1,298,100 143,404 1,298,100 143,404 (13.90% debentures redeemable on 28th March 2029) 3,532,100 390,604 3,532,100 390,604 1,198,566 1,208,742 First Capital Holdings PLC (10.00% debentures redeemable on 07th February 2026) 2,903,200 316,250 - 316,250 - Hayleys PLC (12.50% debentures redeemable on 31st July 2023) (13.00% debentures redeemable on 26th August 2024) 3,300,000 347,404 3,300,000 347,357 282,300 29,517 282,300 29,513 376,921 376,870 LB Finance PLC (12.75% debentures redeemable on 11th December 2022) 170,000 17,125 170,000 17,125 17,124 17,124 LOLC Holdings PLC (15.00% debentures redeemable on 27th September 2024) 2,800,000 290,932 2,800,000 290,932 (10.25% debentures redeemable on 24th February 2026) 4,050,000 440,257 - - 731,189 250 HATTON NATIONAL BANK PLC 290,932
  250. As at 31st December 2021 2020 No of Amortised No of Amortised Debentures Cost Debentures Cost Rs 000 Rs 000 National Development Bank PLC (13.90% debentures redeemable on 19th December 2023) 187,500 21,416 187,500 21,416 (13.95% debentures redeemable on 30th March 2024) 1,700,000 188,431 1,600,000 176,878 (09.50% debentures redeemable on 24th September 2025) 1,114,600 114,274 1,114,600 114,274 (11.90% debentures redeemable on 23rd November 2026) 5,000,000 506,031 - 830,152 312,568 Nations Trust Bank PLC (12.65% debentures redeemed on 08th December 2021) - - 357,400 36,409 (12.80%  debentures redeemed on 08th December 2021) - - 210,200 21,418 (13.00% debentures redeemable on 20th April 2023) 1,550,000 169,133 1,550,000 169,133 (12.80% debentures redeemable on 23rd December 2024) 3,000,000 300,947 3,000,000 300,947 (12.90% debentures redeemable on 23rd December 2026) 800,000 80,254 800,000 550,334 80,254 608,161 People’s Leasing and Finance PLC (12.60% debentures redeemed on 16th November 2021) (12.80% debentures redeemable on 18th April 2023) - - 500,000 50,794 653,600 71,274 653,600 71,274 (8.00% debentures redeemable on 05th August 2024) 815,000 84,144 - - (9.00% debentures redeemable on 05th August 2026) 1,205,600 124,960 - - (9.00% debentures redeemable on 05th August 2026) 1,076,967 72,546 - 352,924 122,068 Sampath Bank PLC 800,000 80,348 800,000 80,348 (12.50% debentures redeemable on 20th March 2023) 2,000,000 207,055 2,000,000 207,055 (13.90% debentures redeemable on 28th February 2024) 2,800,000 312,735 2,800,000 312,735 (12.50% debentures redeemable on 21st December 2022) 600,138 600,138 Seylan Bank PLC (13.00%  debentures redeemed on 15th July 2021) (12.85%  debentures redeemable on 29th March 2023) (9.75% debentures redeemable on 12th April 2026) - - 215,800 22,883 2,500,000 258,273 2,500,000 258,272 973,100 104,146 - 362,419 281,155 Singer (Sri Lanka) PLC (12.00% debentures redeemed on 28th September 2021) - - 800,000 - 82,499 82,499 Siyapatha Finance PLC (13.50%  debentures redeemed on 20th September 2021) (13.33% debentures redeemable on 08th August 2024) - - 244,200 25,350 157,100 16,548 157,100 16,548 16,548 41,898 Sri Lanka Telecom PLC (12.75% debentures redeemable on 19th April 2028) Total quoted Debentures - Subsidiaries 1,443,800 148,112 1,443,800 148,112 148,112 148,112 5,978,846 4,638,038 251 INTEGRATED REPORT 2021
  251. Notes to the Financial Statements 32 FINANCIAL ASSETS MEASURED AT AMORTISED COST - DEBT AND OTHER FINANCIAL INSTRUMENTS (Contd.) 32 (l) Unquoted Debentures Held by Subsidiaries      2021 2020 No of Amortised  No of Amortised  Debentures Cost Debentures Cost Rs 000 Rs 000 DFCC Bank PLC  (11.00%  debentures redeemable on 12th June 2025) 2,460,000 260,976 2,460,000 260,976 260,976 260,976 Peoples Bank (9.50% debentures redeemable on 27th July 2025) 1,500,000 156,129 1,500,000 156,129 156,129 156,129 Nations Trust Bank PLC (09.15% debentures redeemable on 9th July 2026) Total unquoted Debentures - Subsidiaries 4,250,000 443,645 - - 443,645 - 860,750 417,105 32 (m) Other loans and receivables held by subsidiaries           As at 31st December Other loans and receivables** 2021 2020 Amortised Amortised Cost Cost Rs 000 Rs 000 773,091 773,091 773,091 773,091 **These investments have been categorised as stage 3 for Expected Credit Loss (ECL) computation. ECL provisions have been recognised in full for this exposure. 32 (n) Credit and Market risk 252 Information about the Group’s credit and market risks for financial assets are included in Note 5 to the financial statements. HATTON NATIONAL BANK PLC
  252. 33 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME    ACCOUNTING POLICY The accounting policy pertaining to financial assets measured at fair value through other comprehensive income has been given in Note 3.3 and 3.4 to the financial statements Financial assets are classified as Fair Value through Other Comprehensive Income (FVOCI) when both of the following conditions are met:  • The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets  • The contractual terms of the financial asset give rise on specified dates  to cash flows that are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding.  Debt instruments measured at FVOCI Debt instruments measured at FVOCI are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI. Interest income and foreign exchange gains and losses on account of such investments are recognised in profit or loss. Where the Group holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. On de-recognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss. The Expected Credit Loss for debt instruments measured at fair value through other comprehensive income do not reduce the carrying amount of the these assets in the statement of financial position, which remains at fair value. Instead an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in other comprehensive income as an accumulated impairment amount with a corresponding charge to income statement. The accumulated loss recognised in other comprehensive income is recycled to the profit upon derecognition of the assets. Equity instruments measured at FVOCI  Upon initial recognition, the Group occasionally makes an irrevocable election to classify some of its equity investments as equity instruments measured  at FVOCI when those meet the definition of equity under Sri Lanka Accounting Standard - LKAS 32 “Financial Instruments - Presentation’’ and are not held for trading. Such classification is determined on an instrument by instrument basis. The FVOCI designation was made because the investments are expected to be held for long term strategic purposes and regulatory nature of investments. None of these investments were disposed during the year. Gains and losses on these equity instruments are never recycled to profit or loss. Dividends are recognised in profit or loss as other operating income when the right of the payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments measured at FVOCI are not subject to an impairment assessment. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Impairment of financial assets measured at fair value through other comprehensive income The group assesses impairment for financial assets measured at fair value through other comprehensive income in line with the same principal used for assessment of impairment of loans and receivables. 253 INTEGRATED REPORT 2021
  253. Notes to the Financial Statements 33 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (Contd.) Fair Value As at 31st December Quoted shares - Bank [Note 33 (b)] 2021 2020 Rs 000 Rs 000 3,762,986 3,742,102 Unquoted shares - Bank [Note 33 (c)] 27,839 27,839 Unquoted units - Bank [Note 33 (d)] 534,745 442,700 Government of Sri Lanka treasury bonds - Bank [Note 33 (e)] Government of Sri Lanka treasury bills - Bank [Note 33 (f)] Government of Sri Lanka sovereign bonds - Bank [Note 33 (g)] Total financial assets at fair value through other comprehensive income - Bank [Note 33 (a)] Government of Sri Lanka treasury bonds - Subsidiaries [Note 33 (h)] Unquoted shares - Subsidiaries [Note 33 (i)] Total financial assets at fair value through other comprehensive income - Subsidiaries Total financial assets at fair value through other comprehensive income - Group [Note 33 (a)] 27,951,852 48,269,855 168,119,793 192,611,240 3,029,218 4,177,922 203,426,433 249,271,658 7,375,342 7,120,331 2,712 2,655 7,378,054 7,122,986 210,804,487 256,394,644 Reclassification of financial instruments The Bank re-classified its International Sovereign Bond Portfolio consequent to the changes in the business model of managing such assets with effect from 1st April 2020 as per the Guidance Notes issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) on Accounting Consideration of the Covid 19 Outbreak (updated on May 11, 2020). Accordingly, International Sovereign Bond investments amounting to Rs 47 Bn which were previously classified as financial assets measured at Fair Value Through Other Comprehensive Income (FVOCI) were re-classified as financial assets measured at amortised cost. There was no change to the effective interest rate used and interest revenue recognised in respect of the reclassified assets for the year ended 31st December 2020. 33 (a) Analysis            Bank As at 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 34,873,733 12,134,269 34,873,733 12,134,269 168,552,700 237,137,389 175,930,754 244,260,375 203,426,433 249,271,658 210,804,487 256,394,644 200,397,215 245,093,736 207,775,269 252,216,722 3,029,218 4,177,922 3,029,218 4,177,922 203,426,433 249,271,658 210,804,487 256,394,644 By collateralisation   Pledged as collateral   Unencumbered By Currency   Sri Lankan Rupee   United States Dollar 33 (a) (i) Disclosure as per Registered Stock and Securities Ordinance and Local Treasury Bills Ordinance Direction No 01 of 2019 on Repurchase and Reverse Repurchase transactions of Dealer Direct Participants in Scripless Treasury Bonds and Scripless Treasury Bills Bank has allocated government securities amounting to Rs 34.8 Bn (2020 - Rs 12.13 Bn) in respect of securities sold under repurchase agreements. Banks policy on haircuts for repurchase and reverse repurchase transactions are explained below. Board approved policy guideline outlines the allocation of securities and haircut rules for repurchase and reverse repurchase agreements and valuation process. The policy has been formulated in line with the Direction No.01 of 2019 on Registered Stock and Securities Ordinance and Local Treasury Bills Ordinance issued by the Monetary Board of the Central Bank of Sri Lanka taking in to consideration the market practices. Securities are allocated/obtained as per the set guidelines. No penalties were levied on the Bank during the year, for any non-compliance with the said Direction. 254 HATTON NATIONAL BANK PLC
  254. 33 (b) Quoted Shares Held by the Bank As at 31st December 2021 2020 No of Cost of Fair No of Cost of Fair Ordinary Investment Value Ordinary Investment Value Shares Rs 000 Rs 000 Shares Rs 000 Rs 000 47,789,949 2,035,210 2,867,397 45,624,242 1,898,337 2,979,263 National Development Bank PLC 9,899,341 1,202,892 682,065 6,784,942 969,312 529,904 Nations Trust Bank PLC 3,882,252 398,269 213,524 3,882,252 398,269 232,935 3,636,371 3,762,986 3,265,918 3,742,102 DFCC Bank Total quoted shares - Bank 33 (c) Unquoted Shares Held by the Bank As at 31st December 2021 No of Cost of Fair No of Cost of Fair Ordinary Investment Value Ordinary Investment Value Shares Rs 000 Rs 000 Shares Rs 000 Rs 000 5,300 530 530 5,300 530 530 2,214,521 24,559 24,559 2,214,521 24,559 24,559 500,000 5,000 2,750 500,000 5,000 2,750 1,379,182 16,550  -    1,379,182 16,550 359,000 14,360  -    359,000 14,360  -   27 5,196  -    27 5,196  -   Credit Information Bureau of Sri Lanka Lanka Clear (Pvt) Ltd Lanka Financial Services Bureau Lanka Rating Agency Limited Magpek Exports Ltd 2020 S.W.I.F.T Total unquoted shares - Bank 66,195 27,839 66,195  -   27,839 33 (d) Unquoted Units in Unit Trusts Held by the Bank As at 31st December JB Vantage Value Equity Fund 2021 2020 No of Cost of Fair No of Cost of Fair Units Investment Value Units Investment Value Rs 000 Rs 000 Rs 000 Rs 000 400,000 534,745 400,000 442,700 400,000 534,745 400,000 442,700 19,455,327 Total unquoted units in unit trusts - Bank 19,455,327 33 (e) Government of Sri Lanka Treasury Bonds As at 31st December 2021 Cost of 2020 Fair Cost of Investment Value Investment Value Rs 000 Rs 000 Rs 000 Rs 000   2021 - - 25,659,667 25,663,297   2022 2,494,325 1,518,990 1,078,073 1,080,391   2023 8,374,310 8,485,532 8,422,856 9,100,935   2024 5,995,731 6,177,717 5,991,348 6,759,731   2025 6,768,828 6,766,913 1,734,820 2,000,068   2028 1,156,974 1,177,387 - -   2032 3,668,096 3,825,313 3,670,792 3,665,433 28,458,264 27,951,852 46,557,556 48,269,855 Fair Year of Maturity Total government of Sri Lanka treasury bonds - Bank 255 INTEGRATED REPORT 2021
  255. Notes to the Financial Statements 33 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (Contd.) 33 (f) Government of Sri Lanka Treasury Bills Held by the Bank As at 31st December 2021 2020 Cost of Fair Cost of Fair Investment Value Investment Value Rs 000 Rs 000 Rs 000 Rs 000 Year of Maturity   2021 - - 192,303,670 192,611,240   2022 168,144,851 168,119,793 - - Total government of Sri Lanka treasury bills - Bank 168,144,851 168,119,793 192,303,670 192,611,240 Fair Cost of Investment Value Investment Value Rs 000 Rs 000 Rs 000 Rs 000   2021 - - 1,404,871 1,275,545   2022 2,045,680 1,566,119 1,684,487 1,342,873   2023 1,682,658 1,035,661 1,464,263 1,097,358   2024 712,906 427,438 629,359 462,146 4,441,244 3,029,218 5,182,980 4,177,922 33 (g) Government of Sri Lanka Sovereign Bonds Held by the Bank As at 31st December 2021 Cost of 2020 Fair Year of Maturity Total government of Sri Lanka sovereign bonds - Bank 33 (h) Government of Sri Lanka Treasury Bonds Held by Subsidiaries As at 31st December 2021 2020 Cost of Fair Cost of Fair Investment Value Investment Value Rs 000 Rs 000 Rs 000 Rs 000 907,496 Year of Maturity   2021 - - 874,161   2022 869,875 883,426 607,398 661,122   2023 618,051 627,956 453,213 514,672   2024 861,922 885,196 861,921 964,988   2025 359,096 358,919 163,190 177,965   2026 211,966 214,980 211,966 250,770 432,634   2027 1,026,677 1,012,076 385,157   2028 482,455 486,910 208,053 256,673   2029 960,331 908,866 775,822 892,967   2030 1,189,129 1,141,340 1,044,036 1,237,544   2031 235,251 238,483 - -   2033 102,404 102,857 102,404 130,939   2034 192,025 185,899 192,025 244,724   2044 143,435 114,609 143,435 157,151   2045 Total government of Sri Lanka treasury bonds - Subsidiaries 256 HATTON NATIONAL BANK PLC 222,303 213,825 222,302 290,686 7,474,920 7,375,342 6,245,083 7,120,331
  256. 33 (i) Unquoted Shares Held by Subsidiaries As at 31st December Credit Information Bureau of Sri Lanka UB Finance Standard Credit Lanka (Formerly Ceylinco investment and Reality Ltd) Total unquoted shares - Subsidiaries 2021 2020 No of Cost of Fair No of Cost of Fair Ordinary Investment Value Ordinary Investment Value Shares Rs 000 Rs 000 Shares Rs 000 Rs 000 200 234 2,154  100  234 2,098 1,742,326 12,196 558 1,742,326 12,196 557 38,458,474 38,692 - 38,458,474 38,692 - 51,122 2,712 51,122 2,655 33 (j) Movement in Impairment during the year - Government of Sri Lanka sovereign bonds Fair Value 2021 2020 Rs 000 Rs 000   Balance as at 1st January 108,687 259,065   Impairment charge for the year 186,758 108,687 - (259,065) 295,445 108,687 As at 31st December Stage 1   Transfers related to reclassification adjustments Balance as at 31st December 33 (k) Credit and Market risk Information about the Group’s credit and market risks for financial assets are included in Note 5 to the financial statements. 257 INTEGRATED REPORT 2021
  257. Notes to the Financial Statements 34 INVESTMENT IN JOINT VENTURE      ACCOUNTING POLICY Joint venture is a type of joint arrangement, whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Group determines joint control, by taking into account similar considerations necessary, to determine control over subsidiaries. The Group’s investment in a joint venture is accounted for, using the equity method and is recognised initially at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the joint venture since the acquisition date. Goodwill relating to a joint venture is included in the carrying amount of the investment and is not tested for impairment individually. The income statement reflects Group’s share of the results of operations of the joint venture. Any change in “other comprehensive income” of the joint venture is presented as part of the Group’s “other comprehensive income”. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any such change, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The aggregate of the Group’s share of profit or loss of a joint venture is shown on the face of the income statement outside operating profit. The financial statements of the joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. At each reporting date, the Group determines whether there is an objective evidence that the investment in joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, and then recognises the loss in impairment for loans and other losses in the income statement. The Group discontinues the use of equity method from the date that it ceases to have joint control over the joint venture and accounts for the investment in accordance with the Group’s accounting policy for financial instruments. Any difference between the carrying amount of the joint venture upon loss of joint control and the fair value of the retained investment and proceeds from disposal, is recognised in income statement. The Bank’s investment in joint venture is carried at cost. 34 (a) Investment in unquoted joint venture - Bank As at 31st December 2021 Cost of Fair Value/ % Cost of Fair Value/ Holding Investment Directors’  Holding Investment Directors’  valuation Value Value Acuity Partners (Pvt) Ltd 50 Rs 000 Rs 000 755,000 2,989,600 755,000 258 2020 %  50  valuation Rs 000 Rs 000 755,000 2,634,000 755,000 Bank did not receive any dividend income from Acuity Partners (Pvt) Ltd for the year ended 31st December 2021 (2020 : Rs 50 Mn). HATTON NATIONAL BANK PLC
  258. 34 (b)  Investment in Unquoted Joint Venture - Group             As at 31st December 2021 2020 Rs 000 Rs 000 Investment in joint venture (at cost) as at 1st January 755,000 755,000 Group’s share of joint venture profit as at 1st January 1,878,949 1,494,803 Group’s share of net assets of joint venture company as at 1st January 2,633,949 2,249,803 (112,138) (112,138) 2,521,811 2,137,665 292,837 407,215 62,773 26,931 Share of unrealised profit on disposal of investments Group’s share of net assets of joint venture company as at 1st January (net of unrealised profit) Share of profit of joint venture (net of income tax) (Note 20) Share of other comprehensive income of equity accounted joint venture Dividend received during the year Group’s share of net assets of joint venture company as at 31st December - (50,000) 2,877,420 2,521,811 34 (c) Summarised Financial Position of Joint Venture - Acuity Partners (Pvt) Ltd and its Subsidiaries             As at 31st December 2021 2020 Rs 000 Rs 000 399,528 317,478 Trade and other receivables 3,436,204 1,508,272 Other current assets 4,807,418 5,845,574 13,770,951 19,132,445 (613,335) (483,195) Cash and cash equivalents Non-current assets Trade and other payables Other current liabilities (9,561,384) (15,398,148) Non-current liabilities (3,100,309) (2,854,630) Non controlling interest (3,159,957) (2,799,899) Share holder's equity of Joint Venture 5,979,116 5,267,897 Group's carrying amount of the investment 2,989,558 2,633,949 Share of unrealised profit on disposal of investments Group's carrying amount of the investment - Net (112,138) (112,138) 2,877,420 2,521,811 259 INTEGRATED REPORT 2021
  259. Notes to the Financial Statements 34 INVESTMENT IN JOINT VENTURE (Contd.) 34 (d) Summarised Statement of Profit or Loss of Joint Venture - Acuity Partners (Pvt) Ltd and its Subsidiaries             For the year ended 31st December Interest income 2021 2020 Rs 000 Rs 000 902,841 1,166,947 Other Income 1,121,869 718,574 Revenue 2,024,710 1,885,521 (102,555) (96,429) Depreciation and amortisation expenses Administration and distribution expenses (553,930) (427,696) Finance cost (303,896) (309,673) 1,166,884 1,148,152 46,923 (37,887) 1,213,807 1,110,265 Profit from operations VAT on financial services Profit before tax Income tax expenses (269,193) 91,968 Profit for the year 944,614 1,202,233 270,437 107,547 1,215,051 1,309,780 Non controlling interest (503,833) (441,488) Total comprehensive income for the year 711,218 868,292 292,837 407,215 62,772 26,931 355,609 434,146 Other comprehensive income Total comprehensive income for the year Group's share of :   Profit or loss for the year   Other comprehensive income for the year   Comprehensive income for the year There are no restrictions on the ability of the joint venture company to transfer funds to the investor in the form of cash dividends, or repayment of loans or advances.  The Bank has neither contingent liabilities nor capital and other commitments towards its joint venture company. 260 HATTON NATIONAL BANK PLC
  260. 35 INVESTMENT IN SUBSIDIARIES         ACCOUNTING POLICY Subsidiaries are entities that are controlled by the Group. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect the returns of those investees through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has: • power over the investee • exposure or rights to variable returns from its involvement with the investee • the ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • the contractual arrangement with other vote holders of the investee • rights arising from other contractual arrangements • the Group’s voting rights and potential voting rights The Group reassesses whether or not it controls an investee, if facts and circumstances indicate that there are changes to one or more of the above. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences, until the date that control ceases. Where subsidiaries have been sold or acquired during the year, assets, liabilities, income and expenses of the said subsidiary are included in the consolidated financial statements, from the date the Group gains control until the date the Group ceases to control the subsidiary.  When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of Group are eliminated in full on consolidation.  Non-controlling interests represent the portion of profit or loss and net assets of the subsidiaries, not owned directly or indirectly by the Bank. The non-controlling interest is presented in the consolidated statement of financial position within equity, separately from the equity attributable to the equity holders of the Bank. Non-controlling interests in the profit or loss of the Group, is disclosed separately in the consolidated income statement.  A change in the ownership interest of a subsidiary without a loss of control, is accounted for as an equity transaction. Upon the loss of control, the Group de-recognises the assets (including goodwill) and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control, is recognised in the statement of changes in equity. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently, it is accounted for as an equity-accounted investee or in accordance with the Group’s accounting policy for financial instruments depending on the level of influence retained. There are no significant restrictions on the ability of the subsidiaries to transfer funds to the Bank in the form of cash dividends or repayment of loans and advances. All subsidiaries of the Bank as at the reporting date, have been incorporated in Sri Lanka. The Bank’s investments in subsidiaries are carried at cost. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Impairment of Investments in Subsidiaries The Bank follows the guidance of Sri Lanka Accounting Standard - LKAS 36 - “Impairment of Assets” in determining whether an investment in subsidiary is impaired. This determination requires significant judgement. The Bank evaluates, among other factors, the duration and extent to which the fair value of a subsidiary is less than its cost and the financial health of the near-term business outlook of the investment or the financial asset, including factors such as industry and sector performance, changes in technology and operational and financing cash flows. 261 INTEGRATED REPORT 2021
  261. Notes to the Financial Statements 35 INVESTMENT IN SUBSIDIARIES   (Contd.) 35 (a) Investment in Subsidiaries - Quoted As at 31st December 2021 2020 % Cost of Fair Value/ % Cost of Fair Value/ Holding Investment Directors’  Holding Investment Directors’  valuation Value Value Rs 000 Rs 000 valuation Rs 000 Rs 000 HNB Assurance PLC (29,993,000 ordinary shares) 60.00 384,285 4,354,984 60.00 384,285 5,236,778 HNB Finance PLC [Note 35 (b) i (724,904,118 ordinary shares) 42.16 660,000 7,539,003 42.16 660,000 7,249,041 Total quoted subsidiaries 1,044,285 1,044,285 2021 2020 35 (b)  Investment in Subsidiary - Unquoted As at 31st December % Cost of Fair Value/ % Cost of Fair Value/ Holding Investment Directors’  Holding Investment Directors’  valuation Value Value Sithma Development (Pvt) Ltd (206,000,000 ordinary shares) 100 Rs 000 Rs 000 1,973,000 8,517,536 100 valuation Rs 000 Rs 000 1,973,000 7,811,000 Total unquoted subsidiaries 1,973,000 1,973,000 Total for the Bank [35 (a) and 35 (b)] 3,017,285 3,017,285 35 (b) i HNB Finance PLC Bank holds a stake of 51% in the voting rights of HNB Finance PLC. Accordingly, the said investment is accounted for as an investment in subsidiary. Since the Bank does not hold non-voting shares of HNB Finance PLC, Bank’s holding in the said company is 42.16%. 35 (c)  Subsidiary Held through HNB Assurance PLC  As at 31st December 2021 2020 % Cost of % Cost of Holding Investment Holding Investment Rs 000 HNB General Insurance PLC (115,000,000 ordinary shares) 100 1,150,000 1,150,000 262 HATTON NATIONAL BANK PLC Rs 000 100 1,150,000 1,150,000
  262. 35 (d)  Subsidiary Held through HNB Finance PLC  As at 31st December 2021 % Cost of Fair Holding Investment Value Rs 000 Rs 000 2,122,605 2,122,605 2,122,605 2,122,605 87.27 Prime Finance PLC (105,602,251 ordinary shares) HNB Finance PLC, subsidiary of the Bank, acquired 87.27% of the ordinary shares of Prime Finance PLC on 23rd December 2021, by way of a crossing transaction on the Colombo Stock Exchange consequent thereto, a mandatory offer at a price of LKR 20.10 per share will be made by the company to the remaining shareholders of Prime Finance PLC in terms of Rule 31(1)(a) of the company Takeovers and Mergers code 1995 as amended in 2003 to acquire the ordinary shares held by such shareholders in Prime Finance PLC. The above noted mandatory offer was closed on 8th February 2022 and the holding of HNB Finance PLC on Prime Finance PLC amounted to 96.64% as at that date. When preparing the consolidated financial statements effective date of acquisition of Prime Finance PLC has been considered as 31st December 2021. 35 (e) Summarised Financial Information of Subsidiaries HNB Assurance PLC Sithma Development (Pvt) Ltd  HNB Finance PLC 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Assets 35,851,889 31,725,478 10,954,224 10,461,958 44,386,340 37,414,117 Liabilities 27,781,434 23,555,379 2,439,120 2,683,873 39,003,774 32,900,189 8,070,456 8,170,099 8,515,104 7,778,085 5,382,566 4,513,928 As at 31st December Equity 35 (f)  Summarised Financial Information of Subsidiaries  HNB Assurance PLC Sithma Development (Pvt) Ltd  HNB Finance PLC 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 13,657,458 11,598,725 1,001,951 1,035,520 3,775,179 7,389,810 Profit after tax 1,221,758 1,164,457 464,293 410,345 513,584 (273,165) Total comprehensive income 1,172,052 1,188,414 723,860 410,345 542,156 (288,344) For the year ended 31st December Revenue HNB Assurance PLC Sithma Development (Pvt) Ltd  HNB Finance PLC 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Cash flows from Operating activities 3,141,494 2,371,954 647,987 550,225 507,632 2,047,581 Cash flows from Investing activities (1,176,386) (2,058,169) (900,454) (505) (3,379,328) 423,492 Cash flows from financing activities (550,835) (461,317) - (258,020) (311,253) (195,960) For the year ended 31st December Assessment of Impairment  The Board of Directors has assessed the potential impairment loss on investments in subsidiaries as at 31st December 2021. Based on the assessment, no impairment provision is required to be made in the financial statements as at the reporting date. 263 INTEGRATED REPORT 2021
  263. Notes to the Financial Statements 36 INVESTMENT PROPERTIES       ACCOUNTING POLICY Basis of Recognition An investment property is recognised, if it is probable that future economic benefits that are associated with the investment property will flow to the Group and cost of the investment property can be reliably measured.  When a portion of the property is held to earn rentals or for capital appreciation and another portion is held for use in the production or supply of goods or services or for administrative purposes, the Group accounts for the portions separately if these portions could be sold separately (or leased out separately under a finance lease). If the portions could not be sold separately, the property is treated as investment property, only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Where the Group provides ancillary services to the occupants of a property it holds, the Group treats such a property as investment property if the services are insignificant to the arrangement as a whole. 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 completed. The Group applies the cost model for investment properties in accordance with Sri Lanka Accounting Standard - LKAS 40 on “Investment Property”. Accordingly, land classified as investment properties are stated at cost less any accumulated impairment losses and buildings classified as investment properties are stated at cost, less any accumulated depreciation and any accumulated impairment loss. The Group obtains the services of independent valuers who are not connected with the Bank, in order to determine the fair value of its investment properties annually for disclosure purposes and such fair values have been disclosed as required by Sri Lanka Accounting Standard - LKAS 40 on “Investment Property”. 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. Classes of Assets  % per annum Hatton National Bank PLC   Freehold buildings (Refer Note 36 (a)) 2.50 Sithma Development (Pvt) Ltd   Freehold buildings   - HNB Tower   - Others Plant, Machinery and equipment integral to freehold buildings referred to above 1.00 2.50 20.00 De-recognition Investment properties are de-recognised when disposed of, or permanently withdrawn from use since no future economic benefits are expected. Gains or losses arising from de-recognition of an investment property are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement. Transfers are made to and from investment properties only when there is a change in use. Investment Property Leased within the Group    Any property leased out to the parent or a subsidiary in full or where the parent or subsidiary occupies a significant portion of such a property, it is considered as owner-occupied from the perspective of the Group and adjustments are made for consolidation purposes. 264 HATTON NATIONAL BANK PLC
  264. ACCOUNTING JUDGEMENTS , ESTIMATES AND ASSUMPTIONS Classification of Investment Properties Management uses its judgment to determine whether a property qualifies as an investment property. The Group has developed criteria so it can exercise its judgement consistently. A property that is held to earn rentals or for capital appreciation or both, and which generates cash flows largely independent of the other assets held by the Group are accounted for as investment properties. On the other hand, a property that is used for operations or in the process of providing services or for administrative purposes and which do not directly generate cash flows as a standalone asset, are accounted for as property, plant and equipment. The Group assesses on an annual basis, the accounting classification of its properties, taking into consideration the current use of such properties. Useful Life Time of Investment Properties The Group reviews the residual values, useful lives and methods of depreciation of investment properties at each reporting date. Management exercises judgement in the estimation of these values, rates, methods and hence those are subject to uncertainty. Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 507,684 507,684 1,241,516 1,241,516 Transferred to property, plant and equipment - - (32,800) - Additions and improvements - - 343 - Balance as at 31st December 507,684 507,684 1,209,059 1,241,516 32,575 27,240 212,560 215,466 Cost Balance as at 1st January Accumulated depreciation Balance as at 1st January Adjustment made by subsidiary Charge for the year [Note 18 (b)] Balance as at 31st December Carrying value as at 31st December - - - (34,546) 5,335 5,335 31,645 31,640 37,910 32,575 244,205 212,560 469,774 475,109 964,854 1,028,956 265 INTEGRATED REPORT 2021
  265. Notes to the Financial Statements 36 INVESTMENT PROPERTIES   (Contd.) 36 (a) Valuation of Investment Properties - Bank   Cost/Carrying Amount As at 31st December 2021 Building Land sq.ft Perches Land Fair Value As at 31st December 2021 Building Total Land Building Total December (Cost) (Net Book 2020 Value) 23 & 23 1/1, Independence Avenue, Colombo 7 [Note 36 (b) i] Fair Value As at 31st Total Rs 000 Rs 000 Rs 000 Rs 000 76,111 - Rs 000 Rs 000 Rs 000 - 1,015,000 942,000 10,645 105.10 37,081 39,030 479, T B Jayah Mawatha,Colombo 10 [Note 36 (b) ii] Land 112.96 126,480 - 21, 21A, 23 & 25, Janadhipathi Mawatha,Colombo 1 [Note 36 (b) ii] Land 26.62 34,889 - 34,889 718,700 - 718,700 665,500 451, Kandy Road, Kegalle [Note 36 (b)ii] Land 61.70 83,400 - 83,400 202,680 - 202,680 178,750 11,096 16.50 82,500 66,394 148,894 189,800 95,500 285,300 188,874 364,350 105,424 181, High Level Road,Nugegoda. 126,480 2,485,100 469,774 3,596,280 - 2,485,100 2,428,640 95,500 4,706,780 4,403,764 36 (b) Valuation of Investment Properties - Group   Cost/Carrying Amount As at 31st December 2021 Building Land sq.ft Perches Land Fair Value As at 31st December 2021 Building Total Land Building Fair Value As at 31st Total December (Cost) (Net Book 2020 Value) Total Rs 000 Rs 000 Rs 000 Rs 000 76,111 1,015,000 Rs 000 Rs 000 Rs 000 - 1,015,000 942,000 Through the Bank 23 & 23 1/1, Independence Avenue, Colombo 7 [Note 36 (b) i] 10,645 105.10 37,081 39,030 181,High level Road, Nugegoda 11,096 16.50 82,500 66,394 21, 21A, 23 & 25, Janadhipathi Mawatha,Colombo 1 [Note 36 (b) ii] 41,688 - - 451, Kandy Road, Kegalle [Note 36 (b) ii] 16,000 - - 249, Stanley Thilekaratne Mawatha,Pagoda, Nugegoda - 39.60 151,063 Vihara Road, Rankewatte, Matale - 15.00 465/1, Old Police Station Road,Kahathuduwa, Polgasowita - 182.59 Adampodaivayal, Adampodaimalaikadu,Trincomalee - 724.00 148,894 189,800 95,500 285,300 188,874 58,140 58,140 468,900 - 468,900 463,590 100,301 100,301 197,111 - 197,111 153,316 302,740 453,803 296,503 543,497 840,000 840,000 9,000 - 9,000 10,500 - 10,500 10,500 49,008 55,597 104,605 69,689 85,311 155,000 155,000 - 18,000 18,000 Through the Subsidiary  -Sithma Development (Pvt) Ltd Through the Subsidiary -HNB Finance PLC [Note 36 (b) iii] 266 HATTON NATIONAL BANK PLC 14,000 - 14,000 18,000 342,652 622,202 964,854 584,492 724,308 2,989,811 2,771,280
  266. 36 (b) i Valued as a condominium property 36 (b) ii Lands situated at No 479, T B Jayah Mw, Colombo 10 on which HNB Towers is built, No 21, 21A, 23 and 25, Janadhipathi Mawatha, Colombo 01 and No. 451, Kandy Road, Kegalle are leased out to Sithma Development (Pvt) Ltd by the Bank and the Bank receives ground rent and substantial portion of the building is occupied by the third party tenants. Accordingly, these lands have been classified as investment properties in the statement of financial position of the Bank. 36 (b) iii These properties are held by the subsidiary of the Bank, HNB Finance PLC and valuations of the said properties were carried out by Messer’s R.S.Wijesuriya, DIV, FIV (Sri Lanka) a professional independent valuer. All these properties other than the property situated  in Trincomalee have been mortgaged to Seylan Bank PLC by HNB Finance PLC for the financial facilities obtained by the company. The aggregate mortgage value amounts to Rs 665 Mn. There are no restrictions on the realisability of investment properties of the Group other than as specified in Note 36 (b) iii to the financial statements. 36 (b) ivLands situated at No 44/1, Service Road, Puttalam and No 6, Abaya Place , 7Th Lane , Anuradhapura held by HNB Finance PLC have been transferred from Investment property to Property Plant and Equipment during the year ended 31st December 2021 since the building constructed in the said location are being used by Company. 36 (c) Valuation details of Investment Properties In determining fair value, the current condition of the properties, future usability and associated development requirements have been considered. Further, the valuers have made reference to market evidence of transaction prices for similar properties with appropriate adjustments for size and locations. 36 (c) i Bank Property Name of professional Valuer Method of valuation and significant unobservable inputs Range of estimates for unobservable inputs 23 &23 1/1, Independence Avenue, Colombo 07  Mr. G. W. G. Abeygunawardene Income approach - Estimated rent per month - Years since purchase - Outgoing expenses as a percentage of gross annual rent Rs 5,076,449 22.22 25% 479, T.B. Jayah Mawatha, Colombo 10 Mr. G. W. G. Abeygunawardene Market comparable method - Rate per perch for land 21, 21A, 23 & 25, Janadhipathi Mawatha, Colombo 01 Mr. G. W. G. Abeygunawardene 451, Kandy Road, Kegalle Mr. W.M. S.K. Walisundara 181, High Level Road, Nugegoda Mr.G.W.G.Abeygunawardene Rs 22,000,000 Market comparable method - Rate per perch for land Rs 27,000,000 Market comparable method - Rate per perch for land Rs. 3,600,000 Market comparable method and income approach - Rate per perch for land - Rate per Sq.ft. Rs. 11,500,000 Rs. 6,250 to Rs.8,000 267 INTEGRATED REPORT 2021
  267. Notes to the Financial Statements 36 INVESTMENT PROPERTIES   (Contd.) 36 (c) ii Group Property Name of professional Valuer Method of valuation and significant unobservable inputs Range of estimates for unobservable inputs Mr. G.W.G. Abeyagunawardene Income approach - Estimated rent per month - Years since purchase - Outgoing expenses as a percentage of gross annual rent Rs 5,076,449 22.22 25% Through the Bank 23 &23 1/1, Independence Avenue, Colombo 07 Through the subsidiary Sithma Development (Pvt) Ltd 21, 21A, 23 & 25, Janadhipathi Mawatha, Colombo 01 Mr. G.W.G. Abeyagunawardene 451, Kandy Road, Kegalle Mr. W.M.S.K. Walisundara Depreciated replacement cost basis - Rate per Sq.ft for building Rs. 75,000 - Rs 10,250 Depreciated replacement cost basis - Rate per Sq.ft for building Rs. 10,000 - Rs 12,500 Through the subsidiary -   HNB Finance PLC No.249, Stanley Thilekerathna Mawatha, Pagoda, Nugegoda Mr. R.S. Wijesuriya Income approach - Estimated rent per month - Discount Rate Vihara Road, Rakewatta, Matale Mr. R.S. Wijesuriya No.465/1, Old Police Station Road, Kahathduwa, Polgasowita Mr. R.S. Wijesuriya Adampodaivayal, Adampodaimlaikadu, Trincomalee Mr. R.S. Wijesuriya Market comparable method - Rate per perch for land 268 HATTON NATIONAL BANK PLC Rs. 2,922,250 20% Rs. 700,000 Income approach - Estimated rent per month - Discount rate Rs. 576,875 20% Market comparable method - Rate per perch for land Rs. 25,000
  268. 36 (c) iii Fair Valuation of Investment properties Fair valuation of investment properties held through the Bank and through the subsidiary, Sithma Development (Pvt) Ltd was carried out in 2021 while the fair valuation of investment properties held through the subsidiary, HNB Finance PLC was carried out in 2021. Fair value of the investment properties is determined using the income approach, market comparable method and depreciated replacement cost basis. Unobservable inputs used in measuring fair value - Depreciated replacement cost basis/Market comparable method Significant increase/(decrease) in estimated price per perch, price per sq.ft and depreciation rate would result in a significantly higher/(lower) fair value. - Income approach Significant increase/(decrease) in rent per sq.ft, outgoing expenses and number of years since purchase would result in a significantly higher/ (lower) fair value.   36 (d) Statement of Income and Expenditure of investment properties               Bank For the year ended 31st December Rental income derived from the investment properties Direct operating expenses (including repair and maintenance generating rental income Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 66,834 63,455 162,907 158,372 6,097 5,419 20,896 42,878 269 INTEGRATED REPORT 2021
  269. Notes to the Financial Statements 37 PROPERTY , PLANT AND EQUIPMENT   ACCOUNTING POLICY Basis of Recognition Property, plant and equipment are recognised if it is probable that future economic benefits associated with the assets will flow to the Group and cost of the asset can be reliably measured. Measurement An item of property, plant and equipment that qualifies 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 those are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of computer equipment. When parts of an item of property or equipment have different useful lives, those are accounted for as separate items (major components) of property, plant and equipment. 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. 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 loss. Freehold land and buildings of the Group are revalued at least once in every three years on a roll over basis, to ensure that the carrying amounts do not differ materially from the fair values at the reporting date. On revaluation of an asset, any increase in the carrying amount is recognised in other comprehensive income and accumulated in 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 in the other comprehensive income to the extent of any credit balance existing in the capital reserve in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under capital reserves. Any balance remaining in the revaluation reserve in respect of an asset, is transferred directly to retained earnings on retirement or disposal of the asset. Reclassification as Investment Property  When the use of a property changes from owner-occupied to investment property, the property is re-measured to fair value and reclassified as an investment property. Any gain arising on re-measurement, is recognised in the income statement to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in other comprehensive income and presented in revaluation reserve in equity. Any loss is recognised immediately in the income statement. Subsequent Costs    The subsequent cost of replacing a component 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 benefits embodied within that part will flow 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, is not included under carrying amount of an item. De-recognition The carrying amount of an item of property, plant and equipment is de-recognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the de-recognition of an item of property, plant and equipment which is calculated as the difference between the carrying amount and the net disposal proceeds, is included in the income statement when the item is de-recognised.   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 de-recognised. Major inspection costs are capitalised. At each such capitalisation, the remaining carrying amount of the previous cost of inspections is de-recognised. 270 HATTON NATIONAL BANK PLC
  270. Depreciation     The Group provides depreciation from the date the assets are available for use up to the date of disposal. The assets are depreciated 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 benefits are expected to be consumed by the Group other than disclosed separately. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale or the date that the asset is de-recognised. 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) Class of Asset  Freehold buildings  % per annum  2.50 Motor vehicles  25.00 Computer equipment  16.67 Office equipment  20.00 Furniture and fittings  10.00 Fixtures  10.00 Sithma Development (Pvt) Ltd Class of Asset  % per annum  Generators, generator panels and associated power cables  2.00 Chillers, cooling towers and associated equipment  4.00 Lifts and escalators 4.00 Building management systems  4.00 Plant and machinery  20.00 Equipment  20.00 Furniture and fittings 10.00 Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate. Capital Work-in-Progress   These are expenses of a capital nature directly incurred in the construction of buildings and major plant and machinery 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. 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 - LKAS 23 on “Borrowing Costs”. A qualifying asset is an asset which takes substantial period of time to get ready for its intended use or sale. Capitalisation of borrowing costs ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use are completed. Other borrowing costs are recognised in the income statement in the period in which they incur. 271 INTEGRATED REPORT 2021
  271. Notes to the Financial Statements 37 PROPERTY , PLANT AND EQUIPMENT  (Contd.) ASSUMPTIONS AND ESTIMATION UNCERTAINTIES Fair value of freehold land and buildings The freehold land and buildings of the Group are reflected at fair value. The Group engages independent valuers to determine the fair value of freehold land and buildings in terms of Sri Lanka Accounting Standard - SLFRS 13 on “Fair Value Measurement”. The methods used to determine the fair value of the freehold land and buildings, are further explained in Note 37 (d) to the financial statements. Useful Life Time of Property, Plant and Equipment The Group reviews the residual values, useful lives and methods of depreciation of property, plant and equipment at each reporting date. Management exercises judgement in the estimation of these values, rates, methods and hence those are subject to uncertainty. Bank Improvements to Leasehold Freehold Computer Equipment Land and Equipment Buildings 2021 2020 Total Total Rs 000 Rs 000 Progress Fixtures Note 37 (b) Note 37 (a) Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 1,915,774 17,559,049 5,696,854 6,253,512 151,827 7,820 31,584,836 30,824,126 - (570,494) - - - - (570,494) Revaluation surplus - 4,878,773 - - - - 4,878,773 - Additions and improvements 49,659 15,445 365,692 272,390 - 3,705 706,891 890,286 Disposals during the year (1,535) - (27,604) (69,641) (7,205) - (105,985) (117,166) - (27,321) - - - - (27,321) (12,410) 6,821 - - 953 - (7,774) - - Cost/valuation as at 31st December 1,970,719 21,855,450 6,034,942 6,457,214 144,622 3,751 Accumulated depreciation as at 1st January 1,657,427 382,501 3,948,074 4,773,311 118,467 - 10,879,780 - (570,494) - - - - (570,494) Charge for the year [Note 18 (b)] 93,239 190,753 541,185 467,823 16,520 - 1,309,520 1,248,888 Disposals during the year (1,535) - (27,603) (69,501) (7,207) - (105,846) (116,473) 1,749,131 2,760 4,461,656 5,171,633 127,780 - Carrying value as at 31st December 2021 221,588 21,852,690 1,573,286 1,285,581 16,842 3,751 24,953,738 - Carrying value as at 31st December 2020 258,347 17,176,548 1,748,780 1,480,201 33,360 7,820 - 20,705,056 Transferred from capital work-in-progress Accumulated depreciation adjustment on revaluation Accumulated depreciation as at 31st December 272 Capital Work-in Accumulated depreciation adjustment on revaluation Net impairment charge Motor Vehicles and Buildings Cost/valuation as at 1st January Furniture - 36,466,698 31,584,836 9,747,365 11,512,960 10,879,780 The Bank / Group revalued its freehold land and buildings during 2021. The details relating to revaluation of freehold land and buildings are given in Note 37 (c) to the financial statements. HATTON NATIONAL BANK PLC
  272. Group Improvements to Leasehold Freehold Computer Equipment Land and Equipment Buildings Vehicles and Buildings Cost /valuation as at 1st January Furniture Motor Capital 2021 2020 Work-in Total Total Rs 000 Rs 000 164,936 55,241,387 54,326,085 Progress Fixtures Note 37 (b) Note 37 (a) Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 1,915,774 37,632,004 6,185,611 9,167,191 175,871 Rs 000 Accumulated depreciation adjustment on revaluation - (799,139) - - - - (799,139) - Revaluation surplus - 8,547,117 - - - - 8,547,117 - Acquisition of subsidiary through HNB Finance PLC Additions and improvements - - - 89,971 11,940 - 101,911 - 49,659 84,084 533,275 380,681 4,000 11,302 1,063,001 1,088,528 Net Impairment charge  Disposals during the year (1,535) (27,322) - - - - (27,322) (12,410) - (29,192) (86,490) (7,378) - (124,595) (160,816) - 32,800 - - - - 32,800 - 6,821 140,768 - 953 - (148,542) - - Cost/valuation as at 31st December 1,970,719 45,610,312 6,689,694 9,552,306 184,433 27,696 64,035,160 55,241,387 Accumulated depreciation as at 1st January 1,657,427 1,108,006 4,292,813 6,221,260 134,497 - 13,414,003 11,873,468 - (799,139) - - - - (799,139) - Transferred from investment properties Transferred from capital work-in-progress Accumulated depreciation adjustment on revaluation Acquisition of subsidiary through HNB Finance PLC Charge for the year [Note 18 (b)] - - - 74,942 10,377 - 85,319 - 93,239 394,989 653,554 571,009 19,729 - 1,732,520 1,679,081 - (1,535) - (29,169) (83,934) (7,380) (122,018) (138,546) 1,749,131 703,858 4,917,198 6,783,277 157,223 - 14,310,687 13,414,003 Carrying value as at 31st December 2021 221,588 44,906,454 1,772,496 2,769,029 27,210 27,696 49,724,473 - Carrying value as at 31st December 2020 258,347 36,523,998 1,892,798 2,945,931 41,374 Disposals during the year Accumulated depreciation as at 31st December 164,936 - 41,827,384 273 INTEGRATED REPORT 2021
  273. Notes to the Financial Statements 37 PROPERTY , PLANT AND EQUIPMENT  (Contd.) 37 (a) Information on Freehold Land and Buildings of the Bank - Extents and Locations As required by Rule 7.6 (viii) of the Listing Rules of Colombo Stock Exchange.    Bank Land Buildings Cost/ Cost/ Perches Sq.ft. Valuation Valuation Total Accumulated As at 31st As at 31st Value December December Depreciation of of 2021 2020 Land Buildings Carrying Carrying Value Value Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Akkaraipattu Branch 14, Main Street, Akkaraipattu. 19.32 9,142 135,000 37,700 172,700 22 172,678 136,327 29.90 4,959 150,000 26,000 176,000 15 175,985 148,429 57.01 9,440 143,647 73,353 217,000 44 216,956 143,322 28.44 5,715 127,890 20,110 148,000 12 147,988 144,862 20.00 19,018 450,000 102,800 552,800 61 552,739 459,443 30.34 6,250 176,000 38,500 214,500 23 214,477 155,703 28.00 10,950 392,000 123,000 515,000 73 514,927 412,124 249.00 10,270 4,233,000 86,000 4,319,000 19 4,318,981 3,403,463 40.00 70,240 1,080,000 578,000 1,658,000 345 1,657,655 1,288,858 84.00 48,350 2,184,000 286,700 2,470,700 171 2,470,529 1,940,076 35.31 5,387 49,500 22,800 72,300 7 72,293 59,087 87.00 7,486 224,600 53,400 278,000 32 277,968 240,209 53.08 4,530 26,900 20,100 47,000 12 46,988 38,103 13.28 7,920 117,300 52,200 169,500 31 169,469 126,763 25.00 16,626 121,250 160,750 282,000 96 281,904 245,935 17.05 13,340 76,725 136,275 213,000 46 212,954 161,296 24.00 11,240 216,000 125,200 341,200 75 341,125 260,509 Ambalangoda Branch 94/1, New Galle Road, Ambalangoda. Anuradhapura Branch 30, Maithripala Senanayake Mawatha, Anuradhapura. Badulla Branch 15, 15 1/1, Udayaraja Mawatha,Badulla. Bambalapitiya Branch 285, Galle Road, Colombo 04. Boralesgamuwa Branch 24, Maharagama Road, Boralesgamuwa. Borella Branch 53/1, D S Senanayake Mawatha,Colombo 08. Centre of Aspirations 90, Vinayalankara Mawatha, Colombo 10. Centralised Operations 10, Sri Uttarananda Mawatha, Colombo 3 City Office 16, Janadhipathi Mawatha, Colombo 1. Chavakachcheri Branch 170, Kandy Road, Chavakachcheri . Dambulla Branch 700B, Anuradhapura Road, Dambulla. Fruithill Bungalow No 295/6, Dimbula Road, Hatton. Galle Branch 3, Wakwella Road, Galle. Gampaha Branch 148, Colombo Road, Gampaha. Gampola Branch 142, Kandy Road, Gampola. Grandpass Branch 182, St Joseph Street, Colombo 14. 274 HATTON NATIONAL BANK PLC
  274. Bank Total Accumulated As at 31st As at 31st Value December December of 2021 2020 Buildings Carrying Carrying Land Buildings Cost / Cost/ Perches Sq.ft. Valuation Valuation of Land Rs 000 Rs 000 Rs 000 Depreciation Rs 000 Value Value Rs 000 Rs 000 Gunasinghapura Stores 11, Mohandiram’s Road, Colombo 12. 48.30 6,030 458,900 32,000 490,900 51 490,849 325,416 62,000 30,400 Ja-Ela Branch 73,Old Negombo Road, Kanuwana, Ja-Ela. 19.00 62,000 62,000 Jaffna Metro Branch 177 & 179, Ponnampalam Road, Jaffna. 62.09 30,988 372,500 296,500 669,000 97 668,903 669,525 16.14 15,139 36,315 49,685 86,000 30 85,970 55,518 25.10 6,396 113,000 30,000 143,000 10 142,990 122,823 57.65 27,705 1,153,000 263,000 1,416,000 157 1,415,843 919,421 25.30 4,500 41,745 31,255 73,000 19 72,981 40,641 26.00 17,970 150,800 164,200 315,000 98 314,902 263,833 160.09 4,728 48,027 20,973 69,000 13 68,987 65,310 23.00 6,490 40,000 22,700 62,700 14 62,686 30,905 42.00 7,217 58,800 52,200 111,000 31 110,969 58,523 20.32 8,231 44,704 51,296 96,000 31 95,969 84,563 22.50 10,377 90,000 59,000 149,000 35 148,965 119,362 20.51 5,155 51,275 33,725 85,000 20 84,980 72,847 42.20 2,060 20,045 7,355 27,400 4 27,396 25,026 22.60 14,730 192,100 97,100 289,200 58 289,142 203,626 8.88 5,490 32,000 30,000 62,000 18 61,982 38,632 51.98 21,495 170,000 240,000 410,000 143 409,857 331,524 55.69 11,603 155,932 172,068 328,000 103 327,897 266,456 - 8,280 - 50,500 50,500 30 50,470 23,375 Kahawatte Branch 772 A, Main Street,Kahawatte. Kalmunai Branch 30A, Batticaloa Road, Kalmunai. Kandy Branch 1, Dalada Veediya, Kandy.  Kuliyapitiya Branch 225, Main Street, Kuliyapitiya. Kurunegala Branch 6, St. Anne’s Street, Kurunegala. Mount Bungalow 16, Mount Road, Hatton. Mannar Branch 68, Main Street, Mannar. Marawila Branch 534, Colombo Road, Marawila. Maskeliya Branch 7/11, New Town, Maskeliya. Matara Branch 58D, Esplanade Road, Matara. Minuwangoda Branch 41, Samarakkody Road, Minuwangoda. Managers’ Bungalow 295, Dimbula Road, Hatton. Mount Lavinia Branch 605, Galle Road, Mount Lavinia. Negombo Branch 18, Rajapakse Broadway, Negombo. Negombo Metro 201, Colombo Road, Negombo. Nittambuwa Branch 22, Kandy Road, Nittambuwa. Nochchiyagama Branch * 10, Puttalam Road, Nochchiyagama. 275 INTEGRATED REPORT 2021
  275. Notes to the Financial Statements 37 PROPERTY , PLANT AND EQUIPMENT  (Contd.) Bank Total Accumulated As at 31st As at 31st Value December December Land Buildings Cost/ Cost/ Perches Sq.ft. Valuation Valuation of of 2021 2020 Land Buildings Carrying Carrying Rs 000 Rs 000 Rs 000 Depreciation Rs 000 Value Value Rs 000 Rs 000 Nuwara Eliya Branch/Bungalow 42, Queen Elizabeth Drive, Nuwara Eliya. 149.03 13,815 865,150 51,850 917,000 31 916,969 750,543 39.70 20,160 416,300 226,300 642,600 66 642,534 466,424 22.55 16,030 281,800 136,500 418,300 81 418,219 335,881 13.03 12,480 390,900 120,200 511,100 72 511,028 383,956 - 3,708 - 127,700 127,700 76 127,624 96,431 - 9,882 - 80,000 80,000 48 79,952 52,058 14.30 6,590 39,325 59,175 98,500 35 98,465 63,644 43.40 18,970 206,150 78,850 285,000 23 284,977 312,144 6.90 9,625 191,500 65,800 257,300 39 257,261 181,367 31.75 9,103 111,000 38,000 149,000 23 148,977 131,139 - 9,571 - 36,850 36,850 22 36,828 30,548 53.00 8,770 318,000 57,000 375,000 34 374,966 324,475 14.37 12,832 71,850 48,150 120,000 29 119,971 122,580 25.50 10,525 31,560 41,440 73,000 25 72,975 43,767 36.10 16,280 Nugegoda Branch 190, 190/1, Highlevel Road (New), Nugegoda. Panchikawatte Branch 168, Panchikawatta Road, Colombo 10. Pettah Branch 149-151, Main Street, Colombo 11. Pettah Metro ** 88, Main Street, Colombo 11. Polonnaruwa Branch * 467, Main Street, Kaduruwela,Polonnaruwa. Pussellawa Branch 510, Nuwara Eliya Road, Pussellawa. Ratnapura Branch 21 & 23, Senanayake Mawatha, Ratnapura. Sea Street Branch 60, Sea Street, Colombo 11. Trincomalee Branch 59, Ehamparam Road, Trincomalee. Vavuniya Branch* 43, Inner Circular Road, Vavuniya. Wattala Branch 270, 270/1, Negombo Road, Wattala. Welimada Branch 35, Nuwara Eliya Road, Welimada. Wellawaya Branch 70, Kumaradasa Mawatha, Wellawaya. Wellawatte Branch 100 & 102, Galle Road, Colombo 06. Total freehold land and buildings - Bank * Buildings constructed on state land given on lease ** Condominium property Bank has 52 freehold buildings as at 31st December 2021. 276 HATTON NATIONAL BANK PLC 739,000 183,700 922,700 110 922,590 769,356 16,857,490 4,997,960 21,855,450 2,760 21,852,690 17,176,548
  276. 37 (a) Information on Freehold Land and Buildings of the Group  - Extents and Locations Land Buildings Cost/ Cost/ Total Accumulated As at 31st As at 31st Perches Sq.ft. Valuation Valuation Value Depreciation December December Group of of 2021 2020 Land Buildings Net Book Net Book Rs 000 Rs 000 Rs 000 Rs 000 Value Value Rs 000 Rs 000 Through the subisdiary - Sithma Development (Pvt) Ltd. 479 T B Jayah Mawatha, Colombo 10 113.00 549,890 2,485,100 18,868,114 21,353,214 640,753 20,712,461 17,309,400 26.62 - 718,700 - 718,700 - 718,700 665,500 Janadhipathi Mawatha,Colombo 1 Through the subsidiary - HNB Finance PLC 61.70 - 202,680 - 202,680 - 202,680 154,250 94 96/1, Kandy Rd, Kurunagela 7.05 5,755 24,187 65,813 90,000 4,524 85,476 87,121 46/A, Tangalle Rd, Hambanthota 9.26 2,113 11,667 13,333 25,000 917 24,083 24,417 677, William Gopallawa Mw, Kandy 9.26 5,400 24,305 56,695 81,000 3,898 77,102 78,520 25.90 30,887 193,785 678,215 872,000 46,627 825,373 842,328 451, Kandy Road, Kegalle 168, Nawala Rd, Nugegoda No 67/1, Mahinda Place,Kirulapone, Colombo 5 8.00 5,786 40,777 103,223 144,000 4,086 139,914 139,914 23.00 - 46,000 - 46,000 - 46,000 46,000 No.44/1, Service Road, Puttlam - - 31,500 54,290 85,790 113 85,677 - No.06 , Abaya Place,7th Lane , Anuradapura. - - No 10/11, Galle Road, Katubedda, Moratuwa 50,000 86,478 136,478 180 136,298 - Total freehold land and buildings - Subsidiaries 3,828,701 19,926,161 23,754,862 701,098 23,053,764 19,347,450 Total freehold land and buildings - Group  20,686,191 24,924,121 45,610,312 703,858 44,906,454 36,523,998 37 (b) Improvements to Leasehold Buildings Bank As at 31st December Group 2021 2020 2021 2020 Cost of Accumulated Net Net Cost of Accumulated Net Net Buildings Depreciation Book Value Book Value Buildings Depreciation Book Value Book Value Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 01 - 05 years 973,871 893,299 80,572 167,791 973,871 893,299 80,572 167,791 06 - 10 years 932,188 812,627 119,561 84,453 932,188 812,627 119,561 84,453 11 - 15 years 38,901 30,004 8,897 433 38,901 30,004 8,897 433 16 - 20 years 25,759 13,201 12,558 5,670 25,759 13,201 12,558 5,670 1,970,719 1,749,131 221,588 258,347 1,970,719 1,749,131 221,588 258,347 277 INTEGRATED REPORT 2021
  277. Notes to the Financial Statements 37 PROPERTY , PLANT AND EQUIPMENT  (Contd.) 37 (c)  The Details of Freehold Land and Buildings Which are Stated at Valuation As required by Rule 7.6 (viii) of Listing Rules of Colombo Stock Exchange. Bank Name of Professional Valuer Carrying Value before Revaluation of Revalued Amount of Revaluation Gain/ (Loss) recognised on Land Buildings Land Buildings Land Buildings Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Akkaraipattu Branch  Mr. S. Suresh Rs.7,000,000 p.p/Rs.4,125 p. sq.ft 72,450 60,568 135,000 37,700 62,550 (22,868) Ambalangoda Branch Mr. G.K.D.K. Abayathunga Rs.5,000,000 p.p/Rs.9,000 p. sq.ft 119,500 27,887 150,000 26,000 30,500 (1,887) Anuradhapura Branch Mr. W. M. S. K.Walisundara Rs.1,650,000 to Rs.3,750,000 p.p/ Rs.10,000 to Rs.11,000 p. sq.ft 112,000 29,780 143,648 73,352 31,648 43,572 Badulla Branch Mr. E.P.P. Jayaratne Rs.4,500,000 p.p/Rs.4,000 to Rs. 6,000 p.sq.ft 106,837 36,058 127,890 20,110 21,053 (15,948) Bambalapitiya Branch  Mr. G.W.G. Abeygunawardene Rs.22,500,000 p.p/Rs.3,000 p. sq.ft to Rs. 6,200 p.sq.ft 380,000 75,413 450,000 102,800 70,000 27,387 Boralesgamuwa Branch Mr. G.W.G. Abeygunawardene Rs.5,800,000 p.p/Rs.6,000 to Rs.6,250 p. sq.ft 125,587 28,557 176,000 38,500 50,413 9,943 Rs.14,000,000 p.p/Rs.3,000 to Rs.12,500 p. sq.ft 315,000 94,865 392,000 123,000 77,000 28,135 Rs.17,000,000 p.p/Rs.8,000 to Rs.8,750 p. sq.ft 3,311,700 87,844 4,233,000 86,000 921,300 (1,844) 31,670 27,049 49,500 22,800 17,830 (4,249) 1,848,000 89,583 2,184,000 286,700 336,000 197,117 200,000 38,315 224,600 53,400 24,600 15,085 Borella Branch  Centre of Aspiration Mr. G.W.G. Abeygunawardene Mr. G.W.G. Abeygunawardene Chavakachcheri Branch Mr. S. Suresh Rs.1,400,000 p.p/Rs.4,235 p. sq.ft City Office  Mr. G.W.G. Abeygunawardene Rs.26,000,000 p.p/Rs.3,500 to Rs.6,500 p. sq.ft Dambulla Branch Mr. W.M. S.K.Walisundara Rs.1,800,000 to Rs.3,500,000 p.p/ Rs.9,000 to Rs.10,000 p. sq.ft Fruithill Bungalow Mr. A. Senevirathne Rs.500,000 p.p/Rs.4,400 p. sq.ft 20,175 16,999 26,900 20,100 6,725 3,101 Galle Branch Mr. G.K.D.K. Abayathunga Rs.8,500,000 p.p/Rs.11,000 p. sq.ft 95,000 30,207 117,300 52,200 22,300 21,993 Gampaha Branch Mr. D.C. Sosa Rs.4,850,000 p.p/Rs.6,500 to Rs.14,000 p. sq.ft 93,750 144,315 121,250 160,750 27,500 16,435 Gampola Branch  Mr. A. Senevirathne Rs.4,500,000 p.p/Rs. 10,200 p. sq.ft 65,642 93,502 76,725 136,275 11,083 42,773 Grandpass Branch  Mr. G.W.G. Abeygunawardene Rs.9,000,000 p.p/Rs.9,000 to Rs. 12,500 p. sq.ft 168,000 87,719 216,000 125,200 48,000 37,481 Rs.9,500,000 p.p/Rs.5,000 to Rs.5,750 p. sq.ft 301,000 23,151 458,900 32,000 157,900 8,849 Gunasinghepura Stores  Mr. G.W.G. Abeygunawardene 278 Range of Estimates for Unobservable Inputs Ja-Ela Branch Mr. D.C. Sosa Rs.3,300,000 p.p Jaffna Metro Branch Mr. S. Suresh Rs.6,000,000 p.p/Rs.9,570 p. sq.ft Kahawatte Branch Mr. E.P.P.Jayaratne Rs.2,250,000 p.p/Rs.2,000 to Rs.6,000 p. sq.ft 32,000 22,609 36,315 49,685 4,315 27,076 Kalmunai Branch Mr. S. Suresh Rs.4,500,000 p.p/Rs.4,715 p. sq.ft 80,320 41,234 113,000 30,000 32,680 (11,234) Kandy Branch Mr. A. Senevirathne Rs.20,000,000 p.p/Rs.4,000 to Rs.12,750 p.sq.ft 720,625 189,753 1,153,000 263,000 432,375 73,247 Kuliyapitiya Branch Mr. W.M. S.K.Walisundara Rs.1,650,000 /Rs.8,500 p. sq.ft to Rs.9,000 p. sq.ft 25,560 14,525 41,745 31,255 16,185 16,730 HATTON NATIONAL BANK PLC 30,400 - 62,000 - 31,600 - 276,000 382,209 372,500 296,500 96,500 (85,709)
  278. Bank Kurunegala Branch Name of Professional Valuer Mr . W.M. S.K.Walisundara Range of Estimates for Unobservable Inputs Rs.5,800,000 p.p/Rs.10,000 to Rs.13,000 p. sq.ft Carrying Value before Revaluation of Revalued Amount of Revaluation Gain/ (Loss) recognised on Land Buildings Land Buildings Land Buildings Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 163,125 95,557 150,800 164,200 (12,325) 68,643 Mount Bungalow Mr. A. Senevirathne Rs.300,000 p.p/Rs.3,450 p. sq.ft 44,025 20,198 48,027 20,973 4,002 775 Mannar Branch Mr. S. Suresh Rs.1,750,000 p.p/Rs.3,500 to p. sq.ft 12,650 19,661 40,000 22,700 27,350 3,039 Marawila Branch Mr. W.M. S.K.Walisundara Rs.1,400,000 p.p/Rs.9,500 to Rs.10,000 p. sq.ft 34,800 22,530 58,800 52,200 24,000 29,670 Rs.2,200,000 p.p/Rs.2,700 to Rs.8,250 p. sq.ft 32,512 49,356 44,704 51,296 12,192 1,940 19,300 Maskeliya Branch Mr. A. Senevirathne Matara Branch Mr. G.K.D.K. Abayathunga Rs.4,000,000 p.p/Rs.9,500 p. sq.ft 78,000 39,700 90,000 59,000 12,000 Minuwangoda Branch Mr. D.C. Sosa Rs.2,500,000 p.p/Rs.8,000 p. sq.ft 45,000 26,408 51,275 33,725 6,275 7,317 Manager Bungalow Mr. A. Senevirathne Rs.475,000 p.p/Rs.3,565p. sq.ft 15,825 8,725 20,045 7,355 4,220 (1,370) Mount Lavinia Branch Mr. G.W.G. Abeygunawardene Rs.8,500,000 p.p/Rs.5,500 to Rs.7,500 p. sq.ft 124,300 76,104 192,100 97,100 67,800 20,996 Negombo Branch  Mr. D.C. Sosa Rs.3,500,000 p.p/Rs.1500 to Rs.9,000p. sq.ft 19,536 18,230 32,000 30,000 12,464 11,770 Negombo Metro Building Mr. D.C. Sosa Rs.3,250,000 p.p/Rs.4,400 to Rs.11,000 p. sq.ft 133,029 188,240 170,000 240,000 36,971 51,760 Nittambuwa Branch  Mr. D.C. Sosa Rs.2,800,000 p.p/Rs.8,000 to Rs.20,000 p. sq.ft 139,225 120,658 155,932 172,068 16,707 51,410 Nochchiyagama Branch* Mr. W.M. S.K.Walisundara Rs 7,000 to Rs.7,500 p. sq.ft - 22,168 50,500 - 28,332 Nugegoda Branch Mr. G.W.G. Abeygunawardene Rs 10,500,000 p.p/Rs.6,500 to Rs.11,500 p. sq.ft 297,375 164,671 416,300 226,300 118,925 61,629 Nuwara Eliya Branch/ Bungalow Mr. A. Senevirathne Rs.5,000,000 to Rs.7,000,000 p.p/ Rs.3,600 to Rs.3,750 p. sq.ft 656,508 89,405 865,150 51,850 208,642 (37,555) Panchikawatta Branch Mr. G.W.G. Abeygunawardene Rs.12,500,000 p.p/Rs.4,500 p. sq.ft to Rs.9800 p. sq.ft 225,500 104,698 281,800 136,500 56,300 31,802 Pettah Branch  Mr. G.W.G. Abeygunawardene Rs.30,000,000 p.p/Rs.5,500 p. sq.ft to Rs.10,500 p. sq.ft 293,175 86,126 390,900 120,200 97,725 34,074 Pettah Metro** Mr. G.W.G. Abeygunawardene Rs.230 p.sq.ft to Rs.250 p.sq.ft - 91,438 127,700 - 36,262 Polonnaruwa Branch* Mr. W.M. S.K.Walisundara Rs.9,000 to Rs.12,000 p. sq.ft Pussellawa Branch Mr. A. Senevirathne Rs.2,750,000 p.p/Rs.9,000 p. sq.ft Ratnapura Branch Mr. E.P.P. Jayaratne Sea Street Branch  Mr. G.W.G. Abeygunawardene  -    -   - 49,362 - 80,000 - 30,638 30,030 31,894 39,325 59,175 9,295 27,281 Rs.4,750,000 p.p/Rs.2,000 to Rs.6,500 p. sq.ft 140,000 167,784 206,150 78,850 66,150 (88,934) Rs.27,500,000 p.p/Rs.5,500 p. sq.ft to Rs.7,500 p. sq.ft 129,937 49,202 191,500 65,800 61,563 16,598 82,550 46,126 111,000 - 30,394 265,000 57,432 51,732 67,179 Trincomalee Branch Mr. S. Suresh Rs.3,500,000 p.p/ Rs.4,200  p. sq.ft Vavuniya Branch* Mr. S. Suresh Rs. 3,850 p. sq.ft Wattala Branch Mr. D.C. Sosa Rs.6,000,000 p.p/Rs.7,500 p. sq.ft Welimada Branch Mr. E.P.P.Jayaratne Rs.5,000,000 p.p/Rs.2,000 to Rs.6,000 p. sq.ft 38,000 28,450 (8,126) 36,850 - 6,456 318,000 57,000 53,000 (432) 71,850 48,150 20,118 (19,029)  -   279 INTEGRATED REPORT 2021
  279. Notes to the Financial Statements 37 PROPERTY , PLANT AND EQUIPMENT  (Contd.) Bank Wellawaya Branch Wellawatte Branch  Name of Professional Valuer Mr. E.P.P. Jayaratne Mr. G.W.G. Abeygunawardene Centralised Operations Mr. G.W.G. Abeygunawardene Building Range of Estimates for Unobservable Inputs Rs.400,000 p.p to Rs.2,000,000 p.p/Rs.1,500 to Rs.6,000 p. sq.ft Rs.20,500,000 p.p/Rs.7,500 to Rs.12,000 p. sq.ft Rs.27,000,000 p.p/Rs.6,500 p. sq.ft to Rs.9,500 p. sq.ft Carrying Value before Revaluation of Revalued Amount of Revaluation Gain/ (Loss) recognised on Land Buildings Land Buildings Land Buildings Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 22,500 20,166 31,560 41,440 9,060 21,274 630,875 131,208 739,000 183,700 108,125 52,492 880,000 388,811 1,080,000 578,000 200,000 189,189 13,078,425 3,925,573 16,857,491 4,997,959 3,779,066 1,072,386 * Buildings constructed on the state land given on lease ** Condominium property 37 (d) Fair value measurement of Freehold land and buildings Given below are the valuation techniques used in measuring freehold land and buildings; Type  Valuation technique Inter-relationship between significant unobservable inputs and fair value measurement Freehold land and buildings Depreciated replacement cost basis This method involves the capitalisation of expected cost of construction at appropriate remaining life time of the building. Significant increase/(decrease) in estimated price per perch, price per sq.ft and depreciation rate would result in a significantly higher/(lower) fair value. Market comparable method Market comparable method considers the selling price of a similar property within a reasonable period of time in determining the fair value of the property being revalued. This involves evaluation of recent active market prices of similar assets, making appropriate adjustment for differences in size, nature, location and condition of the specific property. In this process, outlier transactions indicative of particularly motivated buyers or sellers are compensated for, since the price may not adequately reflect the fair market value. Investment method This method involves the capitalisation of the expected rental income at an appropriate rate of years purchased currently characterised by the real estate market. Significant increase/(decrease) in rent per sq.ft, outgoing expenses and number of years since purchase would result in a significantly higher/ (lower) fair value.  280 The fair values of the Group’s freehold land and buildings are determined by independent valuers at least once in every three years according to the Group’s policy. During the year the fair values of the Group’s freehold land and buildings were determined by independent valuers as per the Group’s policy to revalue the freehold land and buildings at least once in every three years.  HATTON NATIONAL BANK PLC
  280. 37 (e) Temporarily Idle Property, Plant and Equipment - Bank There was no temporarily idle property, plant and equipment as at 31st December 2021. 37 (f) Compensation from Third Parties for Property, Plant and Equipment - Bank No compensation was received from third parties for items of property, plant and equipment that were impaired, lost or given up. 37 (g) Capitalisation of Borrowing Costs Borrowing costs were not capitalized in the acquisition of property plant and equipments during the year 2021 (2020 - Nil) 37 (h) Title Restriction on Property, Plant and Equipment There were no restrictions on the title of the property plant and equipment of the Group/Bank as at the reporting date. 37 (i) Property, Plant and Equipment Pledged as Security for Liabilities - Bank There were no item of property, plant and equipment of the Bank pledged as securities for liabilities as at the reporting date. 37 (j) Fully Depreciated Property, Plant and Equipment The initial cost of fully depreciated property, plant and equipment which are still in use as at the reporting date is as follows; Bank 2021 2020 Rs 000 Rs 000 Leasehold building  1,413,183 1,258,881 Computer equipment 3,045,848 2,601,813 Office equipment, furniture and fixtures 3,524,618 3,290,057 As at 31st December Motor Vehicle 78,540 85,747 8,062,189 7,236,498 37(k) Assessment of Impairment The Board of Directors has assessed the potential impairment loss on property, plant and equipments as at 31st December 2021. Based on the assessment, no impairment provision is required to be made in the financial statements as at reporting date other than the impairment charge recognised through the revaluation of freehold land and buildings carried out in 2021. 37(l) Change in Classification from /(to) Investment Properties Group did not reclassify any property, plant and equipment as investment properties during the year. Details of investment properties reclassified as property plant and equipment have been provided in 36 (b) iv. 281 INTEGRATED REPORT 2021
  281. Notes to the Financial Statements 38 RIGHT-OF-USE ASSETS ACCOUNTING POLICY In accordance with Sri Lanka Accounting Standard - SLFRS -16 “Lease” Group accounts for all lease hold rights except for short term leases, which are held for use in the provision of services. At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is a lease or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. • Group acting as a lessee At commencement or on modification of a contract that contains a lease component, the Group allocates consideration of the contract to each lease component on the basis of its relative standalone price. However, for leases of branches and office premises the Group has elected not to separate non-lease component and accounts for the lease and non-lease components as a single lease component. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove any improvements made to branches or office premises. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The Group determines its incremental borrowing rate by analysing its borrowings from various external sources and makes certain adjustments to reflect the terms of the lease and type of asset leased. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group presents right-of-use assets in the face of the “statement of financial position” and lease liabilities within “other liabilities” in the statement of financial position. • Short-term leases and leases of low-value assets  The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including leases of IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. • Group acting as a lessor  At inception or on modification of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone selling prices. When the Group acts as a lessor, it determines at lease inception whether the lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset.  The Group applies the derecognition and impairment requirements in SLFRS 9 to the net investment in the lease. The Group further regularly reviews estimated unguaranteed residual values used in calculating the gross investment in the lease. The details of lease receivables which comprise of finance leases where the group acts as the lessor, are disclosed in note 31 of financial statements. 282 HATTON NATIONAL BANK PLC
  282. • Leases as lessee The Bank leases a number of branch and office premises. For some leases, payments are renegotiated every five years to reflect market rentals. Some leases provide for additional rent payments that are based on changes in local price indices. The leases on branch and office premises were entered in to many years ago and previously, these leases were classified as operating leases under LKAS 17. Information about leases for which the Bank is a lessee is presented below. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Right-of-Use Assets and Operating Lease Liability The Group uses its judgment to determine whether an operating lease contract qualifies for recognition of right-of-use assets. The Group applies judgements in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic benefit for it to exercise either the renewal or termination. Further, the Group cannot readily determine the interest rate implicit in the lease. Therefore, it uses its incremental borrowing rate to measure operating lease liability. The incremental borrowing rate is the rate of interest that the Group would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in similar economic environment. 38 (a) Movement in Right-of-use Assets Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 6,885,017 6,180,287 3,153,030 2,173,638 - - 64,187 - Cost Balance as at 1st January  Acquisition of subsidiary through HNB Finance PLC Additions/renewals of operating leases during the year 944,018 807,306 1,106,814 1,123,355 Expiration of operating lease agreements during the year (117,360) (102,576) (167,117) (143,963) 7,711,675 6,885,017 4,156,914 3,153,030 1,528,149 697,609 1,325,198 602,319 Balance as at 31st December Accumulated amortisation Balance as at 1st January Acquisition of subsidiary through HNB Finance PLC Amortisation for the year [Note 18 (b)] - 40,819 - 830,540 660,093 757,405 - - (47,098) (34,526) Balance as at 31st December 2,272,291 1,528,149 1,979,012 1,325,198 Carrying value as at 31st December 5,439,384 5,356,868 2,177,902 1,827,832 Depreciation on disposals 744,142 The operating lease liabilities are presented under Note 51 to the financial statements. Given below is the movement of the operating lease liability during the period. 283 INTEGRATED REPORT 2021
  283. Notes to the Financial Statements 38 RIGHT-OF-USE ASSETS (Contd.) 38 (b) Movement in lease liabilities Bank Balance as at 1st January  2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 6,087,039 5,810,225 2,131,436 1,668,211 - - 26,682 - 944,018 807,306 1,084,676 1,053,899 Acquisition of subsidiary through HNB Finance PLC Additions/renewal of operating lease agreements during the year Accretion of interest [Note 8 (b)] Payments to lease creditors Expiration of operating lease agreements during the year Balance as at 31st December (Note 51) Group 2021 730,245 907,093 192,856 354,456 (1,391,077) (1,335,009) (884,254) (834,110) (117,360) (102,576) (121,660) (111,020) 6,252,865 6,087,039 2,429,736 2,131,436 38 (c) Future Minimum Lease Payments under Non-cancellable Operating Leases Bank 2021 2020 Rs 000 Rs 000   Less than one year 1,233,020 1,214,824   Between one and five years 4,186,365 3,963,316   More than five years 6,902,618 7,552,598 12,322,003 12,730,738 As at 31 December Maturity analysis of contractual undiscounted cash flows Total undiscounted lease liabilities 38 (d) Sensitivity of Right-of-Use Assets/Lease Liability to Key Assumptions Sensitivity to Incremental Borrowing Rate Increase/(decrease) in incremental borrowing rate as at 31st December 2021 by 1% would have (decreased)/ increased the lease liability by approximately Rs 51.97 Mn and Rs 49.58 Mn respectively. Had the Bank increased/ (decreased) the incremental borrowing rate by 1%, the Bank’s profit before tax for the year would have (decreased)/ increased by approximately Rs 40.32 Mn and Rs 47.51 Mn respectively. 38 (e) Amounts Recognised in Profit or loss Bank For the year ended 31st December 284 Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Interest expense on operating lease liabilities 730,245 907,093 192,856 354,456 Amortisation of right-of-use assets 744,142 830,540 660,093 757,405 1,474,387 1,737,633 852,949 1,111,861 HATTON NATIONAL BANK PLC
  284. 38 (f) Amounts recognised in statement of cash flows in respect of operating lease liabilities during the year ended 31st December 2021 amounts to Rs 1,411 Mn (2020 - Rs 1,136 Mn) 38 (g) Extension Options Some leases of office premises contain options exercisable by the Group up to one year before the end of the non-cancellable contract period. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility. The extension options held are exercisable only by the Group and not by the lessors. The Group assesses at lease commencement date whether it is reasonably certain to exercise the extension options. The Group reassesses whether it is reasonably certain to exercise the options if there is a significant event or a significant change in circumstances within its control. 38 (h) Leases as Lessor The details of maturity analysis of finance lease receivables have been provided in Note 61 to the financial statements. 39 INTANGIBLE ASSETS AND GOODWILL   ACCOUNTING POLICY Basis of Recognition An intangible asset is recognised if it is probable that the future economic benefits that are attributable to the asset will flow to the Group and the cost of the asset can be measured reliably. An intangible asset is initially measured at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. (a) Goodwill Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets. Goodwill is measured at initial recognition in accordance with Note 3.1.1 to the financial statements. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss in such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of equity accounted investee. Any gain on bargain purchase is recognised immediately in the income statement. (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 identified, reliably measured and it’s probable that those will lead to future economic benefits, are included in the statement of financial position under the category “intangible assets” and are carried at cost less accumulated amortisation and any accumulated impairment losses (c) License The amount that would be required to obtain a license to operate a registered finance business is recognised as license in the financial statements Subsequent expenditure Expenditure incurred on software is capitalised, only when it is probable that this expenditure will enable the asset to generate future economic benefits 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. Goodwill Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss in such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of equity accounted investee. Amortisation The useful lives of intangible assets are assessed as either finite or infinite. Intangible assets, with finite lives, 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 the useful economic life based on a pattern in which the asset’s economic benefits are consumed by the Bank/Group. 285 INTEGRATED REPORT 2021
  285. Notes to the Financial Statements 39 INTANGIBLE ASSETS AND GOODWILL (Contd.) The estimated amortisation rates are as follows Class of Asset % per annum Computer software 16.67 Those assets are assessed for impairment whenever there is an indication that the intangible asset may be impaired. Expenditure on an intangible item that was initially recognised as an expense by the Group in previous annual financial statements or interim financial statements are not recognised as part of the cost of an intangible asset at a later date. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Goodwill and intangible assets with infinite useful lives are not amortised, but are assessed for impairment annually. The assessment of infinite life is reviewed annually to determine whether the infinite life continues to be supportable. De-recognition An intangible asset is de-recognised on disposal or when no future economic benefits are expected from its use and subsequent disposal. Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Impairment of Goodwill The Group estimates the value in use of the Cash Generating Units (CGU) to which goodwill has been allocated in order to determine whether goodwill is impaired. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value. Useful Life Time of Intangible Assets The Group reviews the residual values, useful lives and methods of depreciation of intangible assets at each reporting date. Management exercises judgement in the estimation of these values, rates, methods and hence those are subject to uncertainty. Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Cost 4,671,665 4,164,571 5,589,419 5,038,558 Acquisition of subsidiary through HNB Finance PLC - - 10,486 - Goodwill on acquisition [Note 39 (a) i] - - 58,185 - Balance as at 1st January Additions and improvements during the year Balance as at 31st December 504,339 507,094 661,046 550,861 5,176,004 4,671,665 6,319,136 5,589,419 3,362,493 3,087,930 3,839,425 3,470,478 Accumulated amortisation Balance as at 1st January - - 9,539 - 383,967 274,563 481,038 368,947 Balance as at 31st December 3,746,460 3,362,493 4,330,002 3,839,425 Carrying value as at 31st December 1,429,544 1,309,172 1,989,134 1,749,994 Acquisition of subsidiary through HNB Finance PLC Amortisation for the year [Note 18 (b)] 286 HATTON NATIONAL BANK PLC
  286. 39 (a) Analysis of Intangible Assets Bank 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 1,429,544 1,309,172 1,707,739 1,527,053 As at 31st December Computer Software Goodwill * -  -   181,395 122,941 License -  -   100,000 100,000 1,989,134 1,749,994 1,429,544 Group 1,309,172 *Goodwill amounting to Rs 122.94 Mn has been recognised in respect of acquisition of HNB Finance PLC in 2014. Further, goodwill amounting to Rs 58.2 Mn was recognised during the year ended 31st December 2021 in respect of acquisition of Prime Finance PLC by HNB Finance PLC. 39 (a) i Purchase consideration allocation The acquisition of Prime Finance PLC had the following effect on the Group’s assets and liabilities on acquisition date. Recognised values on Acquisition Rs 000 Cash and cash equivalents Financial assets measured at amortised cost - loans and advances to customers Financial assets measured at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income Property, plant and equipment 822,513 4,655,645 302,342 56 16,592 Intangible assets 948 Deferred tax Assets 731 Other assets 958,147 Due to banks (708,805) Financial liabilities measured at amortised cost - due to depositors Current tax liabilities Other liabilities Identifiable assets and liabilities Non Controlling Interest Net identifiable assets and liabilities Goodwill on acquisition (3,242,068) (52,220) (388,326) 2,365,555 (301,135) 2,064,420 58,185 Consideration paid full in cash 2,122,605 Net cash effect on acquisition of subsidiary through HNB Finance PLC 1,300,092 287 INTEGRATED REPORT 2021
  287. Notes to the Financial Statements 39 INTANGIBLE ASSETS AND GOODWILL (Contd.) As at 31st December 2021, the Bank carried out an impairment assessment on the goodwill recognised, on acquisition of HNB Finance PLC. The recoverable value of the goodwill has been determined based on the residual income method. Key assumptions used in residual income calculation 39 (a) ii Assessment of Impairment • Profit Growth Profit growth was projected based on the forecast given in the strategic plan of the company. • Discount factor The discount rate of 20% used is the risk free rate, adjusted by the addition of an appropriate risk premium. • Inflation The basis used to determine the value assigned to the budgeted cost inflation is the inflation rate based on projected economic conditions. The Board of Directors has assessed the potential impairment loss of other intangible assets as at 31 December 2021. Based on the assessment, no impairment provision is required to be made in the financial statements as at the reporting date. 39 (a) iii Title Restriction on Intangible Assets There are no restrictions on the title of the intangible assets of the Group as at the reporting date. 39 (a) iv Intangible Assets pledged as Security None of the Intangible assets have been pledged as security as at the reporting date. 39 (a) v Acquisition of Intangible Assets During the Year During the financial year, the Bank and Group acquired intangible assets to the aggregate value of Rs. 504 Mn  and Rs. 730 Mn respectively (2020 - Rs. 507 Mn and Rs.551 Mn respectively). Cash payments amounting to Rs. 504 Mn and Rs. 730 Mn respectively (2020 - Rs. 507 Mn and Rs. 551 Mn) were made for purchase intangible assets by the Bank and Group respectively, during the year. 39 (a) vi Fully Amortised Intangible Assets in Use 288 Intangible assets include fully amortised computer software amounting Rs. 2.6 Bn (2020 - Rs. 2.4 Bn) which are in use in the normal business activities of the Group.  HATTON NATIONAL BANK PLC
  288. 40 DEFERRED TAX ASSETS AND LIABILITIES         ACCOUNTING POLICY The policy adopted in accounting for deferred tax is given in Note 21 to the financial statements. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Deferred Tax Assets Deferred tax assets are recognised in respect of loan impairment allowances which will be recovered in the foreseeable future and on tax losses to the extent that it is probable that future taxable profit will be available against which the losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with future tax planning strategies. Bank As at 31st December Net deferred tax liabilities [Note 40 (a)] Net deferred tax assets [Note 40 (b)] Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 - - 5,157,978 5,371,390 4,461,561 806,539 4,941,105 1,728,958 4,461,561 806,539 (216,873) (3,642,432) 40 (a) Net Deferred Tax Liabilities Bank Group 2021 2020 2021 2020 Tax Effect Tax Effect Tax Effect Tax Effect Rs 000 Rs 000 Rs 000 Rs 000 6,511,212 6,466,332 12,431,718 12,908,877   Recognised/(realised) in the income statement (411,070) 106,468 (835,158) (415,571) Effect of change in tax rate (310,327) - (367,407) - (721,397) 106,468 (1,202,565) (415,571) 576,923 - 775,823 - As at 31st December Balance as at 1st January Originating during the year Recognised in OCI   Revaluation surplus recognised on buildings (754,541) (61,588) (763,270) (61,588) Balance as at 31st December 5,612,197 6,511,212 11,241,706 12,431,718 Offset against deferred tax assets  (5,612,197) (6,511,212) (6,083,728) (7,060,328) - - 5,157,978 5,371,390   Government securities Net deferred tax liabilities (Note 40) 289 INTEGRATED REPORT 2021
  289. Notes to the Financial Statements 40 DEFERRED TAX ASSETS AND LIABILITIES (Contd.) 40 (b) Net Deferred Tax Assets Bank Group 2021 2020 2021 2020 Tax Effect Tax Effect Tax Effect Tax Effect Rs 000 Rs 000 Rs 000 Rs 000 7,317,751 5,084,578 8,789,286 6,825,584   Recognised/(realised) in the income statement 3,801,399 2,233,173 3,489,971 1,969,756 Effect of change in tax rate (1,045,392) - (1,244,211) - 2,756,007 2,233,173 2,245,760 1,969,756 - (10,213) (6,054) As at 31st December Balance as at 1st January Originating during the year   Recognised in OCI Balance as at 31st December  10,073,758 7,317,751 11,024,833 8,789,286 Offset against deferred tax liabilities (5,612,197) (6,511,212) (6,083,728) (7,060,328) Net deferred tax assets (Note 40) 4,461,561 806,539 4,941,105 1,728,958 40 (c) Recognised Deferred Tax Assets and Liabilities 40 (c) i Recognised Deferred Tax Assets/(Liabilities) - Bank  Bank Temporary Statement of  Temporary Statement of  Difference Difference Financial Position Statement of  Other Financial Profit or Loss Comprehensive Position For the year ended Income 31st December For the year ended As at 31st As at 31st December December 2021 2021  2020   2020  2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 (2,219,446) (532,667) (3,012,771) (843,576) (310,909) (104,816) - - (506,933) (121,664) (426,632) (119,457) 2,207 (5,667) - - Accelerated depreciation for tax purposes   Property, plant and equipment   Intangible assets   Assets on leasing  business (3,319,000) (796,560) (4,318,768) (1,209,255) (412,695) 4,016 - - Revaluation of government securities 1,948,558 467,654 (1,024,600) (286,888) - - (754,542) 61,588 Revaluation surplus on freehold lands (15,780,037) (3,787,209) (12,067,721) (3,378,962) - - 408,247 - (2,403,836) (673,074) - - 168,677 - (5,612,197) (23,254,328) Revaluation surplus on freehold buildings (3,507,296) (23,384,154) Operating lease rights Temporary difference on allowance for impairment 290 HATTON NATIONAL BANK PLC (841,751) (6,511,212) (721,397) (106,467) (177,618) 61,588 813,471 195,233 730,171 204,448 9,215 112,735 - - 41,160,521 9,878,525 25,404,657 7,113,303 (2,765,221) 2,120,438 - - 41,973,992 10,073,758 26,134,828 7,317,751 (2,756,006) 2,233,173 - - 18,589,838 4,461,561 2,880,500 806,539 (3,477,403) 2,126,706 (177,618) 61,588
  290. 40 (c) iiRecognised Deferred Tax Assets/(Liabilities) - Group    Bank Temporary Statement of  Temporary Statement of  Statement of  Other Difference Difference Financial Profit or Loss Comprehensive Position Position For the year ended Income As at 31st As at 31st 31st December For the year ended Financial December December 2021 2021  2020   2020  2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 (2,993,867) (718,528) (3,692,196) (1,033,815) (315,287) 62,835 - - (506,933) (121,664) (426,632) (119,457) 2,207 (5,667) - - (3,563,013) (855,123) (4,712,721) (1,319,562) (464,439) (73,686) - - 467,702 (763,270) 54,565 Accelerated depreciation for tax purposes   Property, plant and equipment   Intangible assets   Assets on leasing  business Revaluation of government securities 1,948,758 (1,055,600) (295,568) - Revaluation surplus on freehold lands (28,021,563) (6,725,175) (22,390,486) (6,269,336) -  -   455,839  -   Revaluation surplus on freehold buildings  (12,232,750) (2,935,860) (9,305,939) (2,605,663) -  -   330,197  -   (948,462) (227,631) (2,330,989) (652,677) (425,046) (46,317,830) (11,116,279) (43,914,563) (12,296,078) Undistributed profits of subsidiaries and joint ventures* Unutilised tax losses Operating lease rights Temporary  difference on allowance for impairment and retirement benefits  - (1,202,565) 571,522 22,766 54,565 1,139,762 273,543 2,590,196 725,255 451,712 (275,418) - - 715,804 171,793 725,886 203,248 31,455 112,389 - - 43,558,625 10,454,070 27,589,796 7,725,143 (2,728,927) 1,976,834 - 2,102 45,414,191 10,899,406 30,905,878 8,653,646 (2,245,760) 1,813,805 - 2,102 (216,873) (13,008,685) (3,642,432) (3,448,325) 2,385,327 22,766 56,667 (903,639) 588,040 *During the year deferred tax liability recognised on undistributed profits from subsidiaries reduced based on the assessment carried out in accordance with LKAS-12. 40 (d) Tax losses - Subsidiaries HNB Assurance PLC - Group As per Section 67 of Inland Revenue Act No. 24 of 2017 (‘the Act’) which was effective from 1st April 2018, HNB Assurance PLC (“HNBA”) commenced generation of a taxable income due to change in tax base. Further the Act allows to deduct 100% of taxable income against the tax losses incurred whereas in the previous Inland Revenue Act No. 10 of 2006, it was limited to 35% of the total statutory income. As at 31st December 2021, life insurance business had a cumulative tax loss of Rs. 1,140 Mn (2020 - Rs 2,590 Mn) which was incurred as per Section 92 Inland Revenue Act No. 10 of 2006. According to the transitional provisions of new Act, brought forward tax losses can be claimed against taxable income for a period of 6 years with effect from 1st April 2018. HNBA made an assessment of future taxable profits and identified that total tax losses can be claimed within the period specified in the transitional provisions. During the year, HNBA utilised a tax loss of Rs.1,499.5 Mn against the taxable income generated for the year ended 31st December 2021 (2020 - Rs. 984.3 Mn) which resulted in a reversal of deferred tax asset of Rs. 451.7 Mn for the year ended 31st December 2021 (2020 - Rs. 275.4 Mn). The Group does not have unrecognised deferred tax asset on tax losses as at the reporting date. 291 INTEGRATED REPORT 2021
  291. Notes to the Financial Statements 40 DEFERRED TAX ASSETS AND LIABILITIES (Contd.) 40 (e) New Amendments to Income Tax Law Announced by the Government As provided for in LKAS 12 - Income taxes, deferred tax assets and liabilities should be measured at the tax rates that are expected to be applied in the period in which the asset will be realised or the liability will be settled, based on the tax rate (and tax laws) that have been enacted or substantively enacted by the reporting date. As instructed by the Ministry of Finance on 31st January 2020, changes to the current tax rate was proposed as disclosed in Note 21 (d), pending formal amendments being made to the Act and to be implemented with effect from 1st January 2020. The Inland Revenue (Amendment) Act No. 10 of 2021 was passed in Parliament and certified by the Speaker on 13th May 2021. Accordingly, the new tax rates disclosed in Note 21 (d) have been considered to be substantively enacted as at reporting date for the current and deferred tax computation as at 31st December 2021. 41 OTHER ASSETS         ACCOUNTING POLICY The financial assets included in other assets have been accounted for based on the accounting policy discussed in Note 3.4 to the financial statements. Bank As at 31st December 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Un-amortised cost on staff loans 2,765,605 3,507,696 2,823,876 3,597,683 1,473,924 1,428,648 4,442,650 3,522,072 Reimbursement under special senior citizen deposit scheme 4,405,150 1,866,333 4,405,150 1,866,333 Receivable from pension fund [Note 53 (c) i] 1,248,708 - 1,248,708 - - - 811,813 - 2,554,720 1,757,421 2,175,859 2,112,335 75,642 64,396 75,642 68,006 (108,655) (108,655) (125,033) (120,950) 12,415,094 8,515,839 15,858,665 11,045,479 Deposits and prepayments Stationary and other consumables Allowance for impairment [Note 41 (a)] 292 2020 Other debtors Inventories - Real Estate Stock Group 2021 As at 31st December 2021 other assets includes Rs 6,123 Mn (2020 - Rs 2,279 Mn) financial assets in the Bank and Rs 8,034 Mn (2020 - Rs 3,851 Mn) in the Group. HATTON NATIONAL BANK PLC
  292. 41 (a) Movement in Impairment Allowance Bank Balance as at 1st January  2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 108,655 106,734 120,950 106,734 - 1,921 4,083 14,216 108,655 108,655 125,033 120,950 Net impairment charge/(reversal) for the year As at 31st December  Group Impairment provision of Rs 108 Mn in the Bank and Rs 125 Mn in the Group has been recognised in respect of non financial assets as at 31st December 2021 (2020 - Rs 108 Mn in Bank and Rs 120 Mn in Group). 41 (b) Credit and Market Risk Information about the Group’s credit and market risks for financial assets are included in Note 5 to the financial statements. 42 DUE TO BANKS          ACCOUNTING POLICY The accounting policy pertaining to due to banks has been given in Note 3.4 to the financial statements. Due to banks represents refinance borrowings, call and time deposits and borrowings from banks. Subsequent to initial recognition, these are measured at their amortised cost using the Effective Interest Rate (EIR) method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in “interest expenses” in the Income Statement. Gains and losses are recognised in the Income Statement when the liabilities are de-recognised. Bank As at 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Local bank borrowings 2,581,394 8,975,341 2,581,394 8,975,341 Foreign bank borrowings 6,695,883 68,028,599 6,695,883 68,028,599 Refinance borrowings 6,987,216 11,812,686 6,987,216 11,812,686 Other balances 811,009 930,083 811,009 930,083 Other balances 17,075,502 89,746,709 17,075,502 89,746,709 The maturity analysis of due to banks is given in Note 61 to the financial statements 42 (b) Credit and Market Risk Information about the Group’s credit and market risks for due to banks are included in Note 5 to the financial statements. 293 INTEGRATED REPORT 2021
  293. Notes to the Financial Statements 43 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS           ACCOUNTING POLICY The accounting policy pertaining to securities sold under repurchase agreements has been given in Note 3.4 to the financial statements. Securities sold under agreements to repurchase at a specified future date are not de-recognised from the statement of financial position, as the Group retains substantially all of the risks and rewards of ownership. The corresponding cash received is recognised in the statement of financial position as an asset and a corresponding obligation to return it with accrued interest, as ‘’securities sold under repurchase agreements’’, reflecting the transaction’s economic substance as a loan to the Group. The difference between the sale and repurchase price is treated as interest expense and is accrued over the life of the agreement using the Effective Interest Rate (EIR). Bank As at 31st December Securities sold under repurchase agreements   With banks   With customers 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 9,215,426 6,000,750 33,524,226 10,361,383 9,215,426 6,000,750 24,308,800 4,360,633 33,524,226 44 Group 2021 FINANCIAL LIABILITIES MEASURED AT AMORTISED COST - DUE TO DEPOSITORS   10,361,383   24,308,800 4,360,633 ACCOUNTING POLICY The accounting policy pertaining to financial liabilities measured at amortised cost- due to depositors has been given in Note 3.4 to the financial statements. Due to depositors include non-interest bearing deposits, savings deposits, term deposits, deposits payable at call, certificate of deposits and margin deposits. Subsequent to initial recognition, deposits are measured at their amortised cost using the Effective Interest Rate (EIR) method, except where the Group designates liabilities measured at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in “interest expenses” in the Income Statement. Gains and losses are recognised in the Income Statement when the liabilities are derecognised. Group has not designated any liabilities at fair value through profit or loss as at the reporting date. Bank As at 31st December Local currency deposits Foreign currency deposits 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 847,200,450 783,984,735 878,888,337 811,406,831 228,508,837 1,075,709,287 Group 2021 183,836,669 967,821,404 228,177,483 1,107,065,820 183,542,081 994,948,912 Analysis of Due to Customers 44 (a) i By Product Bank As at 31st December Current account deposits Savings deposits Time deposits Certificates of deposit Margin deposits 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 73,204,038 367,749,343 632,199,785 322,715 2,233,406 1,075,709,287 294 HATTON NATIONAL BANK PLC Group 63,999,271 319,664,996 582,147,218 338,098 1,671,821 967,821,404 72,951,564 370,187,281 63,301,642 321,968,238 661,370,854 607,669,113 2,233,406 1,671,821 322,715 1,107,065,820 338,098 994,948,912
  294. 44 (a) ii By Currency Bank Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Sri Lankan Rupees 847,200,450 783,984,735 878,888,337 811,406,831 United States Dollars 202,588,420 159,028,401 202,258,694 158,735,434 Great Britain Pounds 10,699,629 As at 31st December 11,689,047 10,699,629 11,689,047 Euros 5,375,398 5,769,782 5,373,770 5,768,161 Australian Dollars 7,240,959 6,822,056 7,240,959 6,822,056 Other currencies 1,615,013 1,516,801 1,615,013 1,516,801 1,075,709,287 967,821,404 1,107,065,820 994,948,912 The maturity analysis of due to depositors is given in Note 61 to the financial statements. 45 DIVIDENDS PAYABLE Details of dividends declared for the year after the reporting date are disclosed in Note 23 (a) to the financial statements as an event after the reporting period in accordance with the Sri Lanka Accounting Standard - LKAS 10 on “Events after the reporting period”. Bank Balance as at 1st January Final cash dividends declared in the prior year 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 962,185 1,449,472 980,507 1,466,959 2,303,891 1,751,424 2,471,891 1,871,424 - (32,153) - (32,153) (2,276,864) (2,206,558) (2,438,769) (2,325,723) 989,212 962,185 1,013,629 980,507 Transfer to retained earning Dividends paid during the year Balance as at 31st December 46 Group FINANCIAL LIABILITIES AT AMORTISED COST - OTHER BORROWINGS ACCOUNTING POLICY The accounting policy pertaining to financial liabilities at amortised cost - other borrowings has been given in Note 3.4 to the financial statements. Other borrowings represent refinance borrowings and borrowings from other financial institutions. Subsequent to initial recognition these borrowings are measured at their amortised cost using the Effective Interest Rate (EIR) method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in “interest expenses” in the income statement. Gains and losses are recognised in the income statement when the liabilities are derecognised. Bank As at 31st December Refinance borrowings Foreign borrowings Local borrowings Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 7,282,396 3,276,624 7,282,396 3,276,624 17,465,473 27,249,637 17,465,473 27,249,637 - - 807,965 - 24,747,869 30,526,261 25,555,834 30,526,261 The maturity analysis of financial liabilities at amortised cost – other borrowings is given in Note 61 to the financial statements. 295 INTEGRATED REPORT 2021
  295. Notes to the Financial Statements 47 DEBT SECURITIES ISSUED   ACCOUNTING POLICY The accounting policy pertaining to debt securities issued has been given in Note 3.4 to the financial statements. Debt securities issued represent funds borrowed for long term funding purposes. Subsequent to initial recognition debt securities are measured at their amortised cost using the Effective Interest Rate (EIR) method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in “interest expenses” in the income statement. Gains and losses are recognised in the income statement when the liabilities are de-recognised. Bank Fixed / Interest Interest Repayment Issue Date floating rate rate of Terms interest comparable rate government securities (Gross) (p.a) Maturity Date As at 31.12.2021 Group Colombo Interest Face Stock Payment Value Exchange Frequency Listing Rs 000 Rs 000 Rs 000 Rs 000 2013/2023 Listed Annually 2,000,000 Fixed 8.00% 8.58% 10 Years 30th Aug 2013 29th Aug 2023 1,878,709 1,791,002 1,852,737 1,766,243 Listed Semi Annually 84,040 Fixed 8.33% 8.58% 10 Years 15th Dec 2014 15th Dec 2024 84,040 84,040 64,040 64,040 665,000 Fixed 1 Year 8.24% Average Tbill rate 20 Years 01st Apr 2011 31st Mar 2040 -  -   548,308 581,125 1,962,749 1,875,042 2,465,085 2,411,408 Rs 000 2014/2024* Not Listed Monthly Total debt securities  issued As at 31.12.2020 As at 31.12.2021 Year of issuance As at 31.12.2020 Analysis of total debt   securities issued   Due within one year   Due after one year 54,356 54,356 51,645 54,356 1,908,393 1,820,686 2,413,440 2,357,052 HNB Assurance PLC, subsidiary of the Bank has invested Rs 46 Mn (2020 - 47 Mn) in debt securities issued by the Bank. * Debt securities issued by HNB Finance PLC. Capital repayment will commence from 2024. * There were no debt securities designated at FVTPL as at 31st December 2021. * The Group did not have any defaults of principal and interest or other breaches with respect to its debt securities during the year ended 31st December 2021. 48 CURRENT TAX LIABILITIES ACCOUNTING POLICY The policy adopted in accounting for current tax liabilities is given in Note 21 (c) to the financial statements. Bank 2021 Rs 000 Balance as at 1st January Acquisition of Subsidiary Company held through HNB finance Provision for the year Reversal of (over)/under provision Payments during the year Notional tax credits Withholding tax/other credits Balance as at 31st December 296 HATTON NATIONAL BANK PLC          7,725,731          7,374,514        (1,371,850)        (3,545,046)           (131,660)       10,051,689 Group 2020 Rs 000             5,348,985                 52,220             5,745,249  -            (3,202,642)  -                (165,861)             7,725,731 2021 2020 Rs 000 Rs 000            8,093,584            7,932,077          (1,481,686)         (3,946,039)            (131,587)         10,518,569             5,621,389             6,307,827                  (4,439)          (3,665,332)                 (42,467)              (123,394)             8,093,584
  296. 49 INSURANCE PROVISION - LIFE   The insurance provision-life represents the life fund of the subsidiary HNB Assurance PLC, which is carrying out life insurance business.  ACCOUNTING POLICY Insurance Provision - Life Insurance Life insurance liabilities are recognised when contracts are entered into and premiums are charged. These liabilities are measured by using a prospective actuarial valuation method. The liability is determined as the sum of the present value of future benefits, the expected future management and distribution expenses, less the present value of future gross premiums arising from the policy discounted at the appropriate discount rate as specified by the Insurance Regulatory Commission of Sri Lanka. The liability is based on best estimate assumptions and with due regard to significant recent experience. An appropriate allowance for provision of risk margin for adverse deviation from expected experience is included in the valuation. Liability Adequacy Test (LAT) As required by Sri Lanka Accounting Standard - SLFRS 4 - “Insurance Contracts”, the entity performed a Liability Adequacy Test (LAT) in respect of life insurance contract liabilities with the assistance of an external actuary. In performing the LAT, current best estimates of future contractual cash flows, including related cash flows such as claims handling and policy administration expenses, policyholder options and guarantees, as well as investment income from assets backing such liabilities, are used. Number of valuation techniques are applied including discounting cash flow, interest rate applied is based on the management’s expectation of current market interest rates. The liability value is adjusted to the extent that it is sufficient to meet future benefits and expenses. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Valuation of Life Insurance Contract Liabilities of Subsidiary, HNB Assurance PLC (HNBA) The liability for life insurance contracts with Discretionary Participation Features (DPF) is either based on current assumptions or on assumptions established at the inception of the contract, reflecting the best estimate at the time, increased with a margin for risk and adverse deviation. All contracts are subject to a liability adequacy test, which reflect management’s best current estimate of future cash flows. The main assumptions used relate to mortality, morbidity, longevity, investment returns, expenses, lapse and surrender rates and discount rates. For those contracts that insure risk related to longevity, prudent allowance is made for expected future mortality improvements, as well as wide ranging changes to lifestyle, which could result in significant changes to the expected future mortality exposure. Estimates are also made as to future investment income arising from the assets backing the life insurance contracts. These estimates are based on current market returns, as well as expectations about future economic and financial developments. Assumptions on future expenses are based on current expense levels, adjusted for expected expense inflation, if appropriate. Lapse and surrender rates are based on the Group’s historical experience of lapses and surrenders. Discount rates are based on current industry risk rates for the non-participating products, whereas it is the expected fund yield of par fund for the policies with discretionary participating benefit. Group As at 31st December 2021 2020 Rs 000 Rs 000 20,097,793 16,841,994 Insurance Contract Liabilities   Life insurance fund                                                                                                              Claims outstanding Total Insurance Contract Liabilities - Life Insurance 280,222 231,039 20,378,015 17,073,033 297 INTEGRATED REPORT 2021
  297. Notes to the Financial Statements 49 INSURANCE PROVISION - LIFE (Contd.) Group Balance as at 01st January  2021 2020 Rs 000 Rs 000 16,841,994 14,269,182 4,255,670 3,197,316 Change in contract liabilities - life fund   Increase in life insurance fund before surplus distribution to shareholders   Surplus distributed to shareholders   Increase in life insurance fund Effect of taxation on surplus/bonus transferred to policyholders Change in contract liabilities - life fund (after tax) Balance as at 31st December (980,000) (612,203) 3,275,670 2,585,113 (19,871) (12,301) 3,255,799 2,572,812 20,097,793 16,841,994 The valuation of the life insurance business as at 31st December 2021 was carried out by Mr. Abhishek Chadha, FIA, on behalf of Messrs. Willis Towers Watson India Private Limited. Valuation of life insurance business is performed on a semi annual basis. According to the appointed actuary’s report, the reserve for the year amounted to Rs. 20,378 Mn (2020 : Rs 17,073 Mn) and in the opinion of the actuary this amount is adequate to cover the liabilities pertaining to the life insurance business of HNB Assurance PLC. Sensitivity of the Value of Insurance Liabilities Change in assumptions 2021 2020 % % +10% 0.22  0.21  As at 31st December Mortality Impact on gross liabilities -10% (0.22)  (0.21) Discount rate +50% basis points (0.56)  (0.74) -50% basis points 0.58  0.76  Expense +10% 0.44  0.40  -10% (0.43)  (0.40) Liability Adequacy Testing  (LAT) A Liability Adequacy Test (LAT) for life insurance contract Liability was carried out by Mr. Abhishek Chadha, FIA, on behalf of Messrs Willis Towers Watson India Private Limited, as at 31st December 2021 as required by SLFRS 4 - Insurance Contracts. When performing the LAT, the Company discounted all contractual cash flows and compared this amount with the carrying value of the liability. According to the consultant actuary’s report, assets are sufficiently adequate as compared to the reserves as at 31st December 2021. No additional provision was required against the LAT as at 31st December 2021.  298 HATTON NATIONAL BANK PLC
  298. 50 INSURANCE PROVISION - NON LIFE   The  insurance provision non life balance represents the non life fund of subsidiary HNB General Insurance Limited which is carrying out general insurance business.  ACCOUNTING POLICY Insurance Provision – Non Life Insurance Non life insurance contract liabilities are recognised when contracts are entered into and premiums are charged.  These liabilities comprise claims liabilities and premium liabilities. Claims Liabilities Claims liabilities are recognised in respect of both with reinsurance and without reinsurance. Claims liabilities refer to the obligation by the insurance company, whether contractual or otherwise to make future payments in relation to all claims that have been incurred as at valuation date. These include provision for claims reported, claims Incurred But Not Reported (“IBNR”) together with related claims handling costs. Claims liabilities consist of the best estimate value of the claim liabilities and the Provision of Risk Margin for Adverse Deviation (PRAD) calculated at line of business level. Premium Liabilities Premium liabilities is the higher of the aggregate of the Unearned Premium Reserve (UPR) and the best estimate value of the insurer’s Unexpired Risk Reserves (URR) at the valuation date and the Provision of Risk Margins for Adverse Deviation (PRAD) calculated at line of business level. The provision for unearned premiums represents premiums received for risks that have not yet expired. Generally, the reserve is released over the term of the contract and is recognised as premium income. Group uses 1/24th basis to defer the gross written premium of all policies, except for the marine insurance policies and title insurance policies, where marine insurance premiums are deferred based on 60:40 basis and title insurance premiums are transferred to reserves for title insurance for reporting period. Liability Adequacy Test (LAT) As required by Sri Lanka Accounting Standard - SLFRS 4 on “Insurance Contracts”, the entity performed a Liability Adequacy Test (LAT) in respect of general insurance contract liabilities with the assistance of an external actuary.  Title Insurance Reserve    Title insurance reserve is maintained by the Group 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 profit is recognised in the first year of the policy given the higher probability of claims occurring in the first year. From the second year onwards, profit is recognised by amortising the premium received over a five year period using the straight line method. Profit in the first year will be recognised in the second year and thereafter it will be periodically recognised. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Valuation of Non Life Insurance Contract Liabilities of Subsidiary, HNB General Insurance Limited (HNBGI) The estimates of general insurance contracts have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims Incurred, But Not yet Reported and claims Incurred, But Not Enough Reported (IBNR/ IBNER) at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty. The main assumption underlying in estimating the amount of outstanding claims is the past claims development experience. Large claims are usually addressed separately, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit assumptions are made regarding future rates of claims inflation or loss ratios. 299 INTEGRATED REPORT 2021
  299. Notes to the Financial Statements 50 INSURANCE PROVISION - NON LIFE (Contd.) 2021 2020 Rs 000 Rs 000 2,826,784 2,505,096 As at 31st December Unearned premium Gross Reinsurance Net   Reserve for title insurance Claims outstanding - gross   Claims incurred but not reported - gross (483,311) (397,076) 2,343,473 2,108,020 63,531 56,731 2,407,004 2,164,751 1,145,463 950,112 183,454 194,287 3,735,921 3,309,150 Incurred But Not Reported (IBNR) and Incurred But Not Enough Reported (IBNER) IBNR and IBNER claims Reserves as at 31st December 2021 have been actuarially computed by the consultant actuary, Ms. Sipika Tandon Mathur, FIA, for and on behalf of Willis Towers Watson India Private Limited (2020 - valuation was carried by Mr.Matthew Kung-Chuong Tiong, FIAA, for and on behalf of NMG Consulting). The valuation is based on internationally accepted actuarial methods and is performed on a semi-annual basis and ensured adequate reserves are maintained. Sensitivity of claims outstanding As at 31st December 2021 Change in assumptions 31st December 2021 +/- 10% Reported Claim Outstanding Rs 000 Impact on Gross Liabilities Rs 000 Impact on Net Liabilities Rs 000 Impact on Profit before tax Rs 000 Impact on Equity after tax Rs 000  950,111 +/- 95,011 +/-  58,833 +/-  58,833 +/-  42,144 Liability Adequacy Testing (LAT) A Liability Adequacy Test (LAT) for non life insurance contract liability was carried out by Ms. Sipika Tandon Mathur, FIA, for and on behalf of Willis Towers Watson India Private Limited as at 31st December 2021 as required by Sri Lanka Accounting Standard SLFRS 4 - Insurance Contracts. The valuation is based on internationally accepted actuarial methods and is performed on semi annual basis. According to the consultant actuary’s report, HNB General Insurance Limited adequately satisfies the LAT as at 31st December 2021. No additional provision was required against the LAT as at 31st December 2021. 51 OTHER LIABILITIES   ACCOUNTING POLICY The financial liabilities included in other liabilities have been accounted for based on the accounting policy discussed in Note 3.4 to the financial statements. The operating lease liability has been accounted for based on the accounting policy discussed in Note 38 to the financial statements. Employee benefit obligations have been accounted for based on the accounting policy discussed in Note 53 to the financial statements. 300 HATTON NATIONAL BANK PLC
  300. Bank As at 31st December Bills payable Employee benefit obligations [Note 51 (a)] Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 1,665,885 1,416,957 1,665,885 1,416,957 238,829 2,569,551 796,535 3,116,239 Impairment allowance for off-balance sheet credit exposures [Note 51 (b)] 2,192,974 2,210,246 2,192,974 2,210,246 Operating lease liability [Note 38 (b)] 6,252,865 6,087,039 2,429,736 2,131,436 Other creditors 3,037,654 2,731,117 6,264,978 5,130,584 Payable to vendors for lease creditors 1,012,249 1,263,123 1,246,543 1,446,535 14,400,456 16,278,033 14,596,651 15,451,997 As at 31st December 2021 other liabilities include Rs 9.3 Mn (2020 - Rs 2,377 Mn) financial liabilities for the Bank and Rs 2,329 Mn (2020 - Rs 4,652 Mn) for the Group. 51 (a) Employee benefit obligations Bank As at 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 - 2,360,318 - 2,360,318 84,614 82,639 84,614 82,639 Liability for leave accrual plan [Note 53 (e)] 154,215 126,594 154,215 126,594 Provision for gratuity benefits (Note 53 (g) - - 557,706 546,688 238,829 2,569,551 796,535 3,116,239 Net pension liability (Note 53 (c) i ) Liability for EPF interest rate guarantee [Note 53 (d)] 51 (b) Movement in Impairment for Off Balance Sheet Credit Exposures During the Year   ACCOUNTING POLICY The expected credit losses on off balance sheet credit exposures is measured based on the methodology described in Note 31 (b) to the financial statements. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Impairment for Financial Guarantees, Letters of Credit and Undrawn Loan Commitments The Group assesses impairment for off balance sheet exposures such as financial guarantees, letters of credit and undrawn commitments in line with expected credit loss principles as detailed in Note 31 (e) to the financial statements. 301 INTEGRATED REPORT 2021
  301. Notes to the Financial Statements 51 OTHER LIABILITIES (Contd.) Bank/Group   2021 2020 Rs 000 Rs 000 735,795 810,503 53,352 (74,708) 789,147 735,795 Stage 1   Balance as at 1st January   Net impairment charge/(reversal) for the year   Balance as at 31st December Stage 2   Balance as at 1st January 256,266 201,327   Net impairment (reversal)/charge for the year (101,494) 54,939   Balance as at 31st December 154,772 256,266 1,218,185 1,123,884 30,870 94,301   Balance as at 31st December 1,249,055 1,218,185 Total impairment allowance for off balance sheet credit exposures 2,192,974 2,210,246 Stage 3   Balance as at 1st January   Net impairment charge for the year 52 SUBORDINATED TERM DEBTS    ACCOUNTING POLICY The accounting policy pertaining to subordinated term debts is given in Note 3.4 to the financial statements. Subordinated term debts represent funds borrowed for long term funding purposes which are subordinated to the other claims. Subsequent to initial recognition, subordinated term debts are measured at their amortised cost using the Effective Interest Rate (EIR) method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in “interest expenses” in the income statement. Gains and losses are recognised in the income statement when the liabilities are de-recognised.  Bank As at 31st December Subordinated debentures [Note 52 (a)] 302 HATTON NATIONAL BANK PLC Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 23,552,323 28,298,365 24,391,912 28,945,457 23,552,323 28,298,365 24,391,912 28,945,457
  302. 52 (a) Subordinated Debentures Bank Year of issuance Colombo Stock Exchange Listing Interest Payment Frequency Face Fixed / Interest Value floating Rate interest rate Interest Rate of Comparable Government Securities (Gross) (p.a) Repayment Terms Issue Date Maturity Date Rs 000 2006 Group As at 31.12.2021 As at 31.12.2020 As at 31.12.2021 As at 31.12.2020 Rs 000 Rs 000 Rs 000 Rs 000 Listed At maturity 514,345  Fixed 11.00% N/A 15 Year 1st Apr 2006 31st Mar 2021 - 501,428 - 466,403 Listed At maturity 1,362,800  Fixed 11.25% 9.13% 18 Year 1st Apr 2006 31st Mar 2024 1,072,701 964,288 1,072,701 964,288 2007 Listed 700,000  Fixed 16.75% 7.88% 15 Year 1st Aug 2007 31st Jul 2022 758,625 758,625 758,625 758,625 2011 Listed Semi Annually 2,000,000  Fixed 11.50% N/A 10 Year 5th Sep 2011 4th Sep 2021 - 2,000,000 - 2,000,000 2016 Listed Fixed 11.25% N/A 5 Year 28th Mar 2016 28th Mar 2021 - 7,599,795 - 7,328,525 Annually Annually 7,000,000  Listed Annually 2,000,000  Fixed 11.75% N/A 5 Year 1st Nov 2016 1st Nov 2021 - 2,039,274 - 2,039,274 Listed Annually 4,000,000  Fixed 13.00% 8.75% 7 Year 1st Nov 2016 1st Nov 2023 4,086,904 4,086,904 4,086,904 4,086,904 Listed Annually 1,922,570  Fixed 12.30% 9.32% 5 Year 23rd Sep 2019 22nd Sep 2024 1,987,358 1,987,358 1,845,439 1,970,530 Listed Annually 8,077,430  Fixed 12.80% 10.65% 7 Year 23rd Sep 2019 22nd Sep 2026 8,360,693 8,360,693 8,297,181 8,297,178 Listed Annually 1,033,820  Fixed 13.20% 9.32% 5 Year 30th Dec 2019 30th Dec 2024 - - 1,158,820 1,033,730 Listed Annually 7,000,000 Fixed 11.79% 10 Year 28th Jul 2021 29th Jul 2031 7,286,042 - 7,172,242 - 23,552,323 28,298,365 24,391,912 28,945,457   Due within one year 1,479,621 12,634,077 1,472,481 12,327,782   Due after one year 22,072,702 15,664,288 22,919,431 16,617,675 2019 2021 Total subordinated   debentures 9.50% Analysis of subordinated   debentures HNB Assurance PLC has invested Rs 194 Mn in (2020 - 224 Mn) subordinated debentures issued by the Bank and Rs 125 Mn (2020 - 125 Mn) in the debentures issued by HNB Finance PLC. The Group did not have any defaults of principal and interest or other breaches with respect to its debt securities during the year ended 31st December 2021. BASEL III Compliant Subordinated Debentures BASEL III compliant subordinated debentures are either perpetual or dated subordinated securities on which there is an obligation to pay coupons with a minimum maturity period of five years and which can be converted to ordinary shares at an objective, pre-specified trigger point determined by the Monetary Board. They may be called before maturity date at the option of the Group and subject to permission by the Group’s lead regulator. These capital securities are included within the Group’s regulatory capital base as Tier 2 capital. The securities would, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. 303 INTEGRATED REPORT 2021
  303. Notes to the Financial Statements 53 EMPLOYEE BENEFIT OBLIGATIONS ACCOUNTING POLICY Defined Benefit Plan A defined benefit plan is a post-employment benefit plan other than a defined contribution plan . (a) Pension Fund The Bank operates an approved pension fund to facilitate the following payments for permanent staff of the Bank: i Pensions to Retiring Staff Pensionable staff members who are in the permanent cadre are eligible to draw pension from the pension fund as per the trust deed dated 24th September 1981. ii Benefits to Staff who Opted for the Optional Scheme for Pension introduced in 2005 Staff members who opted for the optional scheme for pension introduced in 2005 are eligible for the payment in accordance with the terms and conditions agreed upon. iiiGratuity Gratuity would be the payments to staff who satisfy the criteria as per the Gratuity Act No 12 of 1983 at the time of leaving the services of the Bank without pension rights. Payment of gratuities to employees who have completed more than five years of service under the said act is covered through the Bank’s own non-contributory pension scheme which is in force. These liabilities are assessed by an actuarial valuation using project credit method. The Bank’s obligation in respect of defined benefit pension plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods, and discounting that benefit to determine its present value, then deducting the fair value of any plan assets to determine the net amount to be shown in the statement of financial position. The value of any defined benefit asset is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Bank. An economic benefit is available to the Bank if it is realisable during the life of the plan, or on settlement of the plan liabilities. The Bank determines the net interest expense/(income) on the net defined benefit liability/(asset) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability/(asset) at the beginning of the annual period. The discount rate is the yield as 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 qualified actuary using the projected unit credit method. The demographic assumptions underlying the valuation are retirement age, early withdrawals from service and retirement on medical grounds, death before and after retirement etc. The assets of the fund are held separately from those of the Bank’s assets and are administered independently by the trustees of the fund. Details of the pension fund are given in Note 53 (a) to the financial statements. 304 HATTON NATIONAL BANK PLC
  304. (b) Other Long-term Employee Benefits The Bank’s net obligation in respect of long-term employee benefits other than pension fund, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. 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 obligation. The calculation is performed using the projected unit credit method. Any actuarial gains and losses are recognised in the statement of profit or loss in the period in which they arise. The Bank’s liability towards the portion of the accumulated leave which is expected to be utilised beyond one year from the end of the reporting period is treated as other long term employee benefits. When the benefits of a plan has changed or when a plan is curtailed, the resulting change in benefits that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gain or losses on the settlement of a defined plan when the settlement occurs. (c) Gratuity Obligation - Group Companies The subsidiaries of the Bank do not operate pension funds and make a provision for gratuity obligation. These liabilities are assessed either by actuarial valuations using projected credit method or by the use of gratuity formula. Provision for gratuity benefits of group companies is given in Note 53 (a) to the financial statements. (d) Employees’ Provident Fund - Bank Employees’ Provident Fund is an approved private provident fund which has been set up to meet the provident fund liabilities of the Bank to which the Bank and employees contribute at 12% and 8% respectively on the salary of each employee. Staff members who are members of the fund are entitled to receive a minimum interest rate which is the higher of one year fixed deposit rate of HNB or National Savings Bank on their balance on a semi-annual basis. Accordingly this obligation was treated as a defined benefit liability and an actuarial valuation was conducted to value the Bank’s obligation of the same. (e) Widows’, Widowers’ and Orphans’ Pension Fund The Bank operates a separate Widows’, Widowers’ and Orphans’ Pension Scheme (WW & OP) which was established with effect from 1st September 1995. The contributions are from employees only and the Bank does not have any legal or constructive obligation towards the above scheme. Details of Widows’, Widowers’ and Orphans’ Pension Fund are given in Note 53 (f) to the financial statements (f) Defined Contribution Plans  A defined contribution plan is a post-employment plan under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay a further contribution if the fund does not hold sufficient assets to pay all employee benefits relating to employee services in the current and prior periods. Obligations for contributions to defined contribution plans are recognised as an expense in the statement of profit or loss as and when they are due. (i) Employees’ Trust Fund The Bank and the Group contribute 3% of the salary of each employee to the Employees’ Trust Fund. (ii) Employees’ Provident Fund – Group Companies The Group entities and their employees contribute at 12% and 8% respectively on the salary of each employee to Employees’ Provident Fund except for the Bank as explained above. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Defined Benefit Obligation The defined benefit obligation is determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates, increase in cost of living allowances and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates of Government of Sri Lanka Treasury Bonds with maturities corresponding to the expected duration of defined benefit obligation. Future salary increases and pension increases are based on expected future inflation rates, expected future salary increment rates and expected future pension increases. 305 INTEGRATED REPORT 2021
  305. Notes to the Financial Statements 53 EMPLOYEE BENEFIT OBLIGATIONS (Contd.) 53 (a) Bank As at 31st December Group 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 238,829 209,233 796,535 755,921 Funded defined benefit plan [Note 53 (c) i] (1,248,707) 2,360,318 (1,248,707) 2,360,318 Total employee benefit obligations (1,009,878) 2,569,551 (452,172) 3,116,238 Unfunded defined benefit plans  [Note 53 (a) i] 53 (a) i Unfunded defined benefit plans   Liability for EPF interest rate guarantee plan [Note 53 (d)]   Liability for leave accrual plan [Note 53 (e)]   Provision for gratuity benefits 84,614 82,639 84,614 82,639 154,215 126,594 154,215 126,594 - - 557,706 546,688 238,829 209,233 796,535 755,921 53 (b) Implementation of the Provisions of the Minimum Age of Workers Act No 28 of 2021 In accordance with the provisions of the above Act, during the year the Group extended the minimum retirement age of its employees as follows. Age of Employee (As at 17th November 2021) Minimum Retirement Age 54 or above and below 55 years 57 Years 53 or above and below 54 years 58 Years 52 or above and below 53 years 59 Years Below 52 years 60 Years Accordingly the amended minimum retirement age has been treated as a plan amendment and incorporated plan amendment in accordance with LKAS-19 in the assessment of actuarial valuation of defined benefit obligations. Impact from same is disclosed in Note 53 (c) iii to the financial statements as past service benefit. 53 (c) Funded Defined Benefit Plan  Pension Fund - Bank   An actuarial valuation of the pension fund was carried out as at 31st December 2021 by Mr M Poopalanathan, AIA, Messrs Actuarial and Management Consultants (Pvt) Ltd, a firm of professional actuaries. The valuation method used by the actuary to value the fund is the projected unit credit method, the method recommended by the Sri Lanka Accounting Standard - LKAS 19 on “Employee Benefits”. The Bank contributed 18.26% out of the pensionable salary, to the pension fund in 2021 (2020 - 13.95%). 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 five 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 noncontributory pension scheme, which is in force.  306 HATTON NATIONAL BANK PLC
  306. 53 (c) i Deficit on funded defined benefit plan - pension fund Bank/Group   2021 2020 Rs 000 Rs 000 Present value of funded obligation [Note 53 (c) iii] 17,725,989 20,687,877 Total present value of obligations 17,725,989 20,687,877 Fair value of plan assets [Note 53 (c) ii] As at 31st December (18,974,697) (18,327,559) (Surplus)/deficit on funded defined benefit plan - pension fund (1,248,708) 2,360,318 Recognised (asset)/liability for defined benefit obligations - pension fund (1,248,708) 2,360,318 As per Sri Lanka Accounting Standard LKAS 19 – “Employee Benefits” if a plan is in surplus, the amount recognised as the net defined benefit asset in the statement of financial position is the lower of the surplus in the defined benefit plan and the asset ceiling which is the present value of any economic benefits available to the entity in the form of a refund or a reduction in future contributions. Since the actuarial valuation of the pension fund as at 31st December 2021 resulted in a surplus, Bank assessed the requirement to apply the asset ceiling, and recognised the surplus in the pension fund valuation amounting to Rs 1,249 Mn as a net receivable in respect of pension fund (2020 – net payable of Rs 2,360 Mn). 53 (c) ii Fair Value of Plan Assets consists of the following   Bank/Group   As at 31st December Equity securities and debentures Government securities Balance with Hatton National Bank PLC Fixed deposits Others 2021 2020 Rs 000 Rs 000 3,007,346 2,160,812 10,533,220 1,856,720 23,897 171,118 5,464,844 14,188,728 (54,610) (49,819) 18,974,697 18,327,559 53 (c) iii Movement in the Present Value of Defined Benefit Obligations   Bank/Group   2021 2020 Rs 000 Rs 000 20,687,877 17,765,531 680,370 844,754 Interest on obligation 1,861,909 1,918,677 Actuarial (gain)/loss (1,987,849) 1,308,089 Past service benefit [Note 16 (a)] (2,291,509) - Liability for defined benefit obligations as at 1st January Current service cost [Note 16 (a)] Benefits paid by the plan (1,224,809) (1,149,174) Liability for defined benefit obligations as at 31st December 17,725,989 20,687,877 307 INTEGRATED REPORT 2021
  307. Notes to the Financial Statements 53 EMPLOYEE BENEFIT OBLIGATIONS (Contd.) 53 (c) iv Movement in the Present Value of Plan Assets   Bank/Group   Fair value of plan assets as at 1st January Expected return on plan assets 2021 2020 Rs 000 Rs 000 18,327,559 17,060,662 1,649,480 1,842,552 (1,224,809) (1,149,174) 18,974,697 18,327,559 1,179,388 Contributions paid into plan Benefits paid by the plan 821,927 (956,921) Actuarial loss Fair value of plan assets as at 31st December (248,408) 53 (c) v Net Interest on Defined Benefit Liability     Bank/Group   For the year ended 31st December 2021 2020 Rs 000 Rs 000 1,861,909 Interest on obligation (1,649,480) Expected return of plan assets Net interest on defined benefit liability [Note 16 (a)] 212,429 1,918,677 (1,842,552) 76,125 53 (c) vi Actuarial Gains and Losses Recognised in Other Comprehensive Income Bank For the year ended 31st December  Actuarial (gain) / loss on present value of defined benefit obligations 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 1,987,849 (1,308,088) 2,057,709 (1,360,590) 1,100,788 (1,608,998) (956,921) Actuarial loss on fair value of plan assets Actuarial gain/(loss) recognised during the year Group 1,030,928 (248,408) (1,556,496) (956,921) (248,408) 53 (c) vii Actuarial Assumptions    Type of Assumption Criteria Demographic assumptions Mortality - In service - After retirement Staff turnover Disability Financial assumptions Normal retirement age Rate of discount Salary increases Post-retirement pension increase rate 308 Description A 1967-70 Mortality table issued by the Institute of Actuaries, London A (90) Annuities table (Males and Females) issued by the Institute of Actuaries, London The withdrawal rate at an age represents the probability of an active employee leaving within one year of that age due to reasons other than death, ill health and normal retirement. The same withdrawal rates which were used in the last valuation (as at 31st December 2020) to determine the liability on account of the active employees in the funded scheme, were used in the actuarial valuation carried out as at 31st December 2021. Assumptions similar to those used in other comparable schemes for disability were used as the data required to do a scheme specific study was not available. As per the provisions of Minimum Age of Workers Act No. 28 of 2021 (2020 - 55 years) A long-term interest rate of 11.00% p.a. (2020 – 9.00% p.a.) has been used to discount future liabilities. A salary increment of 9.80% p.a. (2020 – 8.50% p.a.) has been used in respect of the active employees. Nil (2020 - Nil) The average duration of the pension fund obligation is 14.5 years as at 31st December 2021 (2020 - 14 years). HATTON NATIONAL BANK PLC
  308. 53 (c) viiiSensitivity of Assumptions Employed in Actuarial Valuation Assumptions regarding discount rate and salary increment rate have a significant effect on the amounts recognised in the statement of comprehensive income and statement of financial position. The following table demonstrates the sensitivity of a reasonably possible change in such assumptions with all other variables held constant, in the actuarial valuation of the pension fund as at 31st December 2021. Increase/(decrease)  in Discount Rate Increase/(decrease) in Salary Increment Rate Sensitivity Effect on Statement of Comprehensive Income  Increase/(decrease) Sensitivity Effect on Pension Fund Surplus Increase/(decrease)  Rs 000 Rs 000 1% 1,859,396 1,859,396 -1% (2,263,649) (2,263,649) 1% (1,546,468) (1,546,468) -1% 1,349,932 1,349,932 53 (c) ix Distribution of Present Value of Defined Benefit Obligations - Pension Fund - Bank Given below is an analysis of the distribution of present value of defined benefit obligation pertaining to the pension fund of the Bank excluding the frozen pension benefit for the employees who have opted for the optional scheme for pensions introduced in 2005. As at 31st December 2021 Rs 000 Less than one year 462,185 1 - 3 years 1,092,745 3 - 5 years 1,477,958 5 - 10 years 3,516,351 Above 10 years 9,111,716 15,660,955 309 INTEGRATED REPORT 2021
  309. Notes to the Financial Statements 53 EMPLOYEE BENEFIT OBLIGATIONS (Contd.) 53 (d) Provision for EPF Interest Rate Guarantee Plan - Bank/Group EPF is an approved provident fund which has been set up to meet the provident fund liabilities of the Bank. Staff members who are members of the fund are entitled to receive a minimum interest rate which is the higher of one year fixed deposit rate of HNB or National Savings Bank on their balance on a semi-annual basis. Accordingly, this obligation was treated as a defined benefit liability and an actuarial valuation was conducted  by Mr. M. Poopalanathan, AIA of Messers Actuarial and Management Consultants (Pvt) Limited to value the Bank’s obligation on same with the following actuarial assumptions. Bank/Group   2021 2020 Discount rate 11.00% 9.00% Long term interest rate to credit the fund 11.00% 9.00% As at 31st December Liability for EPF interest rate guarantee Bank/Group   Present value of obligation as at 1st January Provision made during the year (Note 16) Present value of obligation as at 31st December [Note 53 (a) i] 2021 2020 Rs 000 Rs 000 82,639 80,292 1,975 2,347 84,614 82,639 53 (e) Provision for Leave Accrual Plan - Bank/Group Employees are entitled to accumulate annual leave up to a maximum of ninety days and such accumulated leave to be utilised prior to their retirement. This has been treated as other long term benefit in terms of Sri Lanka Accounting Standards - LKAS 19 on “Employee benefits” and an actuarial valuation has been conducted by Mr. M. Poopalanathan, AIA of Messrs Actuarial and Management Consultants (Pvt) Limited on same with the following assumptions. Bank/Group   Discount rate Future salary increase 2021 2020 11.00% 9.00% 9.80% 8.50% Liability for leave accrual plan Bank/Group   Present value of obligation as at 1st January Provision made during the year (Note 16) Present value of obligation as at 31st December [Note 53(a) i] 2021 2020 Rs 000 Rs 000 126,594 136,963 27,621 (10,369) 154,215 126,594 53 (f)  Widows’, Widowers’ and Orphans’ Pension Fund The results of the actuarial valuation of the Widows’, Widowers’ and Orphans’ Pension Fund conducted by Mr. M. Poopalanathan, AIA of Messrs Actuarial and Management Consultants (Pvt) Limited indicate that the actuarial present value of the promised benefit is Rs 1,361.2 Mn and that the fair value of the fund assets is Rs 2,546.7 Mn resulting in a past service surplus of Rs 1,185.4 Mn (2020 : Rs 985.3Mn) in the Widows’, Widowers’ and Orphans’ Pension Scheme as at 31st December 2021. No contribution is made by the Bank and the members’ contribution during the period amounted to Rs 127.6 Mn.   310 HATTON NATIONAL BANK PLC
  310. 53 (g) Provision for Defined Benefit Plan - Unfunded Group   2021 2020 Rs 000 Rs 000 Balance as at 1st January 546,688 412,471 Provision during the year [Note 16] 106,187 97,597 11,665 - Acquisition of subsidiary held through HNB Finance PLC Actuarial (gain)/loss recognised in OCI (69,860) 52,502 Payments during the year (36,974) (15,882) Balance as at 31st December 557,706 546,688 Group   2021 As at 31st December 2020 Actuarial Assumptions   Discount rate 8% - 11% 7% - 10%    Future salary increment rate 6% - 9.5% 8.5% - 8%  Actuarial valuations for HNB Assurance PLC and HNB Finance PLC as at 31st December 2021 and 31st March 2021 respectively were carried out by actuary, Mr. Pushpakumar Gunasekara, Associate of Institute of Australia of Messers Smiles Global (Pvt) Ltd .  54 STATED CAPITAL Ordinary shares Ordinary shares in the Bank are recognised at the amount paid per ordinary share net of directly attributable issue costs. The shares of the Bank are quoted on the Colombo Stock Exchange. The holders of ordinary shares are entitled to receive dividends declared from time to time and are entitled to one vote per share at General Meetings of the Bank. 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. 54 (a) Stated Capital - Bank/Group 2021 Number of 2020 Value  shares Number of Value  shares Rs 000 Rs 000 Voting ordinary shares   Balance as at 1st January   Issue of shares through scrip dividend [Note 54 (b)]   Balance as at 31st December 410,319,604 29,244,472 401,343,863 27,839,768 10,540,320 1,436,119 8,975,741 1,404,704 420,859,924 30,680,591 410,319,604 29,244,472 101,656,112 6,327,857 99,062,844 5,981,137 3,388,537 355,796 2,593,268 346,720 Non-voting ordinary shares   Balance as at 1st January   Issue of shares through scrip dividend [Note 54 (b)]   Balance as at 31st December 105,044,649 6,683,653 101,656,112 6,327,857 525,904,573 37,364,244 511,975,716 35,572,329 54 (b) Issue of Shares through Script Dividends Bank issued 10,540,320 voting shares in the form of script dividend at a price of Rs 136.25 and 3,388,537 non-voting shares at a price of Rs.105 on 30th March 2021. 311 INTEGRATED REPORT 2021
  311. Notes to the Financial Statements 55 STATUTORY RESERVE FUND Bank Balance as at 1st January Transfers during the year Balance as at 31st December Group 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 7,660,000 7,060,000 7,660,000 7,060,000 8,560,000 7,660,000 8,560,000 7,660,000 900,000 600,000 900,000 600,000 Nature and purpose of reserve Statutory reserve fund is maintained as per the statutory requirements in terms of Section 20 (1) and (2) of the Banking Act No 30 of 1988. This fund is built up by transferring a sum equivalent to not less than 5% of the profit after tax before any dividend is declared or any profits are transferred until the fund equals 50% of the Bank’s stated capital. Thereafter, a further sum equal to 2% of profit after tax is transferred until the fund equals to the stated capital of the Bank. 56 RETAINED EARNINGS Bank Balance as at 1st January Profit for the year Other comprehensive income for the year Transfer to other reserves Transfer of unclaimed dividends Dividends Balance as at 31st December Group 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 22,665,227 17,980,160 29,361,200 23,072,623 17,299,767 1,217,686 (1,900,000) (267) (4,095,806) 35,186,607 11,462,636 (1,706,874) (1,600,000) 32,153 (3,502,848) 22,665,227 19,024,882 1,253,791 13,095,420 (1,736,150) (1,900,000) (1,600,000) (4,095,806) (3,502,848) (267) 43,643,800 32,155 29,361,200 This represents cumulative net earnings, inclusive of final dividend proposed amounting to Rs 4,733 Mn. The balance is retained and reinvested in the business of the Bank/Group. 57 OTHER RESERVES 57 (a) Bank As at 31st December Capital reserve [Note 57 (b)] General reserve [Note 57 (c)] Fair value reserve [Note 57 (d)] Life policy holder reserve fund [Note 57 (e)] Restricted regulatory reserve [Note 57 (f)] Exchange equalization reserve [Note 57 (g)] 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 15,084,556 10,782,706 30,816,980 23,054,710 57,100,000 (1,254,053) - - 70,930,503 312 HATTON NATIONAL BANK PLC Group 56,100,000 1,221,363 68,104,069 57,100,000 (1,258,039) (103,302) 56,100,000 1,270,055 748,391 381,156 381,156 87,099,997 81,655,946 163,202 101,634
  312. 57 (b)  Capital Reserve Bank Balance as at 1st January Other Comprehensive Income for the period, net of tax Impairment charges Balance as at 31st December Group 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 10,782,706 10,790,994 23,054,710 23,062,998 4,301,850 - 7,762,270 - - (8,288) - (8,288) 15,084,556 10,782,706 30,816,980 23,054,710 Nature and purpose of reserve Capital reserve relates to revaluation surplus that resulted from the revaluations of freehold land and buildings. 57 (c)  General Reserve Bank Group 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 Balance as at 1st January 56,100,000 55,100,000 56,100,000 55,100,000 Transfer during the year 1,000,000 1,000,000 1,000,000 1,000,000 57,100,000 56,100,000 57,100,000 56,100,000 Balance as at 31st December Nature and purpose of reserve General reserve comprises of the amounts appropriated by the Board of Directors as a general banking reserve. 57 (d)  Fair Value Reserve Bank Balance as at 1st January Group 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 1,221,363 2,752,097 1,270,055 2,759,863 Transfer of fair value losses on debt instruments measured at FVOCI upon reclassification to amortised cost measurement category - 17,292 - 17,292 Gains realised on derecognition of debt instruments - (1,053,543) - (1,106,649) Net change in fair value during the year (2,475,416) (494,483) (2,528,094) (400,451) Balance as at 31st December (1,254,053) 1,221,363 (1,258,039) 1,270,055 Nature and purpose of reserve The fair value reserve comprises of net change in fair value of financial assets measured at fair value through other comprehensive income. 57 (e)  Life Policy Holder Reserve Fund Group   2021 2020 Rs 000 Rs 000 Balance as at 1st January 748,391 172,297 Transfer to/(from) life policy holder reserve fund (851,693) 576,094 Balance as at 31st December (103,302) 748,391 Nature and purpose of reserve The life policyholders’ reserve fund includes the fair value gains/(losses) recorded under other comprehensive income arising from life insurance related financial assets categorised as measured at fair value through other comprehensive income. 313 INTEGRATED REPORT 2021
  313. Notes to the Financial Statements 57 OTHER RESERVES (Contd.) 57 (f)  Restricted Regulatory Reserve Group   Balance as at 1st January Transfer to/(from) Restricted Regulatory Reserve Balance as at 31st December 2021 2020 Rs 000 Rs 000 381,156 381,156 - - 381,156 381,156 Nature and purpose of reserve Restricted regulatory reserve – HNB Assurance PLC “Company” As per Direction No. 16 issued by the Insurance Regulatory Commission of Sri Lanka (IRCSL) all life insurance companies were allowed to transfer one - off surplus attributable to policyholders’ non participating fund to shareholders’ fund with the approval of the IRCSL. This transfer has been presented as a separate reserve as “Restricted Regulatory Reserve” under equity in accordance with the Direction. 57 (g)  Exchange Equalization Reserve Group   Balance as at 1st January Transfer to/(from) exchange equalization reserve Balance as at 31st December 2021 2020 Rs 000 Rs 000 101,634 78,378 61,568 23,256 163,202 101,634 Nature and purpose of reserve Exchange equalization reserve comprises of all foreign currency differences arising from the translation of the financial statements of foreign operations within the joint venture group. 58 NON-CONTROLLING INTERESTS   ACCOUNTING POLICY Non-Controlling Interest (NCI) are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Accordingly, the Bank has non-controlling interest in two subsidiaries namely, HNB Assurance PLC (NCI of 40%) and HNB Finance (NCI of 49%) as at the reporting date as follows: Group   2021 2020 Rs 000 Rs 000   HNB Assurance PLC 3,269,503 2,829,695   HNB Finance PLC 3,329,719 2,580,269 6,599,222 5,409,964 As at 31st December Subsidiaries 314 HATTON NATIONAL BANK PLC
  314. NCI percentage As at 31st December 2021 Non-current assets Current assets Non-current liabilities Current liabilities Net assets Other adjustments Net asset Net assets attributable to NCI Acquisition of subsidiary through HNB Finance PLC Net assets attributable to NCI For the year ended 31st December Revenue Profit OCI Total comprehensive income Profit allocated to NCI OCI allocated to NCI NCI percentage As at 31st December 2020 Non-current assets Current assets Non-current liabilities Current liabilities Net assets Other adjustments Net assets Net assets attributable to NCI For the year ended 31st December Revenue Profit OCI Total comprehensive income Profit allocated to NCI OCI allocated to NCI HNB Assurance PLC HNB Finance PLC Total 40 .00% 57.84% Rs 000 Rs 000 Rs 000 17,937,182 17,914,707 (24,113,936) (3,667,498) 8,070,455 103,302 8,173,757 3,269,503 3,269,503 41,409,103 2,977,237 (36,668,857) (2,334,916) 5,382,567 (146,413) 5,236,154 3,028,584 301,135 3,329,719 59,346,285 20,891,944 (60,782,793) (6,002,414) 13,453,022 (43,111) 13,409,911 6,298,087 301,135 6,599,222 Rs 000 Rs 000 Rs 000 13,708,255 1,221,758 1,172,052 7,279,424 513,584 542,156 20,987,679 1,735,342 1,714,208 488,703 468,821 297,057 313,583 785,760 782,404 HNB Assurance PLC HNB Finance PLC Total 40.00% 57.84% Rs 000 Rs 000 Rs 000 15,757,102 15,968,376 (20,382,183) (3,173,196) 8,170,099 (1,095,861) 7,074,238 2,829,695 32,727,051 4,687,066 (31,472,686) (1,427,504) 4,513,927 (52,868) 4,461,059 2,580,269 48,484,153 20,655,442 (51,854,869) (4,600,700) 12,684,026 (1,148,729) 11,535,297 5,409,964 Rs 000 Rs 000 Rs 000 11,651,831 1,164,457 1,188,414 2,803,635 (273,165) (288,344) 14,455,466 891,292 900,070 465,783 475,366 (157,998) (166,778) 307,785 308,588 315 INTEGRATED REPORT 2021
  315. Notes to the Financial Statements 59 CONTINGENT LIABILITIES AND COMMITMENTS     ACCOUNTING POLICY Commitments and Contingencies Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured as defined in the Sri Lanka Accounting Standard LKAS 37 on “Provisions, Contingent Liabilities and Contingent Assets”. To meet the financial needs of customers, the Group enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend. Letters of credit and guarantees (including stand by letters of credit) commit the Group to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans. Operating lease commitments of the Bank (as a lessor and as a lessee) and pending legal claims against the Group also form part of commitments of the Group. Contingent liabilities are not recognised in the statement of financial position but are disclosed unless they are remote. But these contingent liabilities do contain credit risk and therefore form part of the overall risk of the Group. All discernible risks are accounted for in determining the amount of all known liabilities. The Group’s share of any contingencies and capital commitments of a subsidiary or joint venture for which the Group is also liable severally or otherwise are also included with appropriate disclosures. Financial Guarantees Financial guarantees are initially recognised in the financial statements within other liabilities at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the income statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.  Expected credit loss provisions recognised for same are set out in Note 51 (b) to the financial statements. Any increase in the liability relating to financial guarantees is recorded in the income statement. The premium received is recognised in the income statement in “net fee and commission income” on a straight line basis over the life of the guarantee. No material losses are anticipated as a result of these commitments and contingencies. ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Provisions and Other Contingent Liabilities The Group operates in a regulatory and legal environment that, by nature, has a heightened element of litigation risk inherent to its operation. As a result, it is involved in various litigation and regulatory investigations and proceedings, arising in the ordinary course of the business. When the Group can reliably measure the outflow of economic benefits in relation to a specific case and such outflows are probable, the Group records a provision against the case. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent liabilities are not recognised in the statement of financial position but are disclosed unless those are remote. 316 HATTON NATIONAL BANK PLC
  316. 59 (a)  Contingent Liabilities and Commitments - Bank/Group As at 31st December 2021 2020 Rs 000 Rs 000 32,567,799 28,334,448 Guarantees 100,774,437 104,470,363 Acceptances 22,336,884 26,213,711 Bills for collection 20,880,918 16,127,896   Forward exchange sales 12,150,970 28,293,790   Forward exchange purchases 44,324,835 63,759,268 Documentary credit Forward exchange contracts 4,069,632 3,851,339 Commitments for unutilised facilities - direct 193,057,343 152,404,973 Commitments for unutilised facilities - indirect 246,079,532 208,492,441 676,242,350 631,948,229 Cheques sent on clearing 59 (b) 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 Approved and contracted but not provided for Approved and not contracted for 2021 2020 Rs 000 Rs 000 323,328 297,209 23,782 5,990 347,110 303,199 59 (c)  Litigation against the Bank In the banking industry, litigation is a common incidence due to the nature of the transactions agreed between various stakeholders including the customers and the Bank. The Bank has formal controls and policies in place for managing legal claims. Once professional advice has been obtained and the amount of loss is reasonably estimated, the Bank makes adjustments to account for any adverse effects of such claims on its financial standing. Based on the assessment carried out, Bank is of the view that apart from three legal cases pertaining to guarantee related issues (viz HC (Civil) 657/2019 MR, M 5491 and HC (Civil) 143/2020) and one legal case pertaining to a LC related issue (HC (Civil) 663/2019 MR), the other legal cases filed against the Bank will not have a material impact on the financial position of the Bank. 59 (d) Tax Assessments 59 (d) i Tax assessments against the bank Assessments to the value of Rs 230.9 Mn on VAT on financial services (relating to 2003,2004 and 2012) and assessment to the value of Rs 12.2 Mn on PAYE for the Y/A 2015/16 received by the Bank are outstanding and have been duly appealed. 59 (d) ii Tax assessments against Group entity - HNB Assurance PLC (HNBA) Assessments to the value of Rs 21.99 Mn on VAT on reinsurance claims and commissions (relating to Y/A 2010/11), assessments to the value of Rs 109.66 Mn on VAT and NBT on financial services (relating to 2014, 2015 and 2016), assessments to the value of Rs 144.81n on VAT, assessments to the value of Rs 1,156 Mn on Income tax (relating to Y/A 2011/12, 2012/13, 2013/14, 2014/15, 2015/16 ,2016/17and 2017/18) received by the HNBA are outstanding and have been duly appealed. 317 INTEGRATED REPORT 2021
  317. Notes to the Financial Statements 60 RELATED PARTY DISCLOSURES The Group carries out transactions with parties who are defined as related parties in the Sri Lanka Accounting Standard - LKAS 24 on “Related party disclosures”, in the ordinary course of its business. The details of such transactions 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. 60 (a)  Parent and ultimate controlling party The Bank does not have an identifiable parent of its own. 60 (b)  Transactions with Key Management Personnel (KMP) According to Sri Lanka Accounting Standard - LKAS 24 on “Related party disclosures”, Key Management Personnel (KMP) are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Bank’s KMP include the Board of Directors (including executive and non-executive directors) Key Management Personnel (KMP) of the Group Bank is the ultimate parent of its subsidiaries listed out in Note 35 to the financial statements. Thus the KMPs of the Bank have the authority and responsibility for planning, directing and controlling the activities of the Group and have been identified as KMPs of the Group as well. Close Family Members (CFMs) of KMPs are those family members who may be expected to influence, or be influenced by that KMP in their dealings with the entity. CFMs may include the domestic partner and children of KMP, the children of KMP’s domestic partner and dependents of KMP and the KMP’s domestic partner. 60 (b) i Compensation to KMP Bank For the year ended 31st December  Short-term employee benefits Post-employment benefits Group 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 140,856 149,554 144,868 154,050 2,485 2,450 2,485 2,450 143,341 152,004 147,353 156,500 60 (b) ii Transactions, Arrangements and Agreements Involving Key Management Personnel (KMPs) and their Close Family Members (CFMs) Statement of Financial Position - Bank Closing Balance As at 31st December   Average Balance 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 122,541 112,505 111,316 173,772 122,541 112,505 111,316 173,772 10,000 - 10,000 . Assets   Financial assets measured at amortised cost - loans and advances to customers Liabilities   Securities sold under repurchase agreements   Debt securities issued and subordinated term debts   Financial liabilities measured at amortised cost - due to depositors 318 HATTON NATIONAL BANK PLC - 10,000 2,356 10,000 674,541 539,322 674,721 609,457 684,541 549,322 687,077 619,457
  318. Commitments and Contingencies Closing Balance As at 31st December 2021 2020 Rs 000 Rs 000 125 ,172 80,537 125,172 80,537 Commitments for unutilised facilities  Direct Direct and indirect accommodation – Bank As at 31st December Direct and indirect accommodation as a percentage of the Bank’s regulatory capital Interest income Interest expenses Fee and commission income/(expenses)  0.06% 0.02% 2021 2020 Rs 000 Rs 000 6,132 10,632 37,236 37,505 100 188 2021 2020 Rs 000 Rs 000 130,797  240,264  40,027  63,686  Number of shares held by KMP As at 31st December   Voting Non-Voting 2020 Rs 000 Income Statement - Bank For the year ended 31st December  2021 Rs 000 Cash dividends paid to KMP amount to Rs. 741,875 in 2021 (2020 - Rs. 1,306,630) 60 (b) iiiTransactions, Arrangements and Agreements with Entities which are Controlled and/or Jointly Controlled by the KMP or their Close Family Members (CFMs) Statement of Financial Position - Bank Closing Balance As at 31st December   Average Balance 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 99,408 - 133,261 30,990 99,408 - 133,261 30,990 8,203 335 15,983 22,959 8,203 335 15,983 22,959 Assets   Financial assets measured at amortised cost  - loans and advances to customers Liabilities   Financial liabilities measured at amortised cost - due to depositors 319 INTEGRATED REPORT 2021
  319. Notes to the Financial Statements 60 RELATED PARTY DISCLOSURES (Contd.) Commitments and Contingencies Closing Balance As at 31st December 2021 2020 Rs 000 Rs 000 Commitments for unutilised facilities  Direct 61,046  -     Indirect 91,860  -   152,906 - Income Statement - Bank For the year ended 31st December    Interest income Interest expenses Fee and commission income/(expenses)  2021 2020 Rs 000 Rs 000 9,181 2,687 161 1,938 1,025 62 60 (c) Transactions with Group Entities The group entities include subsidiaries and joint venture of the Bank. 60 (c) i  Transactions with Subsidiaries Statement of Financial Position - Bank Closing Balance As at 31st December   Average Balance 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 778,795 Assets Financial assets measured at amortised cost - loans and advances to customers 301,000 - 182,568 Other assets 719,731 726,695 765,034 616,500 1,020,731 726,695 947,602 1,395,295 600,000 - 1,758,330 - Liabilities   Securities sold under repurchase agreements   Debt securities issued and subordinated term debt   Financial liabilities measured at amortised cost - due to depositors 320 HATTON NATIONAL BANK PLC 232,232 427,185 291,136 387,944 2,112,577 2,878,405 2,831,483 3,783,023 2,944,809 3,305,590 4,880,949 4,170,967
  320. Commitments and Contingencies Closing Balance As at 31st December   Guarantees 2021 2020 Rs 000 Rs 000 26,690 27,690 1,752,150 2,051,150 1,778,840 2,078,840 2021 2020 Rs 000 Rs 000 Commitments for unutilised facilities  Direct Income Statement - Bank For the year ended 31st December    70,063 132,326 Interest expenses 145,342 243,625 Fee and commission income/(expenses)  390,670 355,617 Other income 291,476 196,051 Other expenses 868,042 749,840   Expenses reimbursed to the bank 32,703 37,887   Expenses reimbursed by the bank 83,042 73,169   Insurance claims received 16,529 22,836 Interest income Other transactions 60 (c) ii Transactions with the Joint Venture Statement of Financial Position - Bank Closing Balance Average Balance 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 552,372 761,231 383,240 447,638 552,372 761,231 383,240 447,638   Financial liabilities measured at amortised cost - due to depositors 57,293 242,322 72,023 70,761   Securities sold under repurchase agreements 55,300 - 96,960 - 112,593 242,322 168,983 70,761 As at 31st December   Assets Financial assets measured at amortised cost - loans and advances to customers Liabilities 321 INTEGRATED REPORT 2021
  321. Notes to the Financial Statements 60 RELATED PARTY DISCLOSURES (Contd.) Commitments and Contingencies Closing Balance As at 31st December   Letter of Guarantees Commitments for unutilised facilities  Direct 2020 Rs 000 31,800 30,190 3,899,450 3,408,650 38,220   Indirect 2021 Rs 000 32,320 3,969,470 3,471,160 2021 2020 Rs 000 Rs 000 30,466 43,715 3,838 2,703 Income Statement - Bank For the year ended 31st December    Interest income 1,934 Interest expenses Fee and commission income/(expenses)  Other income 810 9,315 56,310 125 - 6,951 Other expenses Expenses reimbursed to the bank - 60 (d) Transactions with Post Employment Benefit Plans of the Bank Closing Balance As at 31st December   Liabilities   Financial liabilities measured at amortised cost - due to depositors   Debt securities issued and subordinated term debts   Securities sold under repurchase agreements Equity   Stated capital  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 2,459,412 8,119,479 4,057,164 7,446,603 908,180 242,500 130,159 5,013,900 Interest expenses Other transactions   Dividends paid   Contributions made 737,228 8,886,223 5,095,503 8,426,331 59,262 56,157 57,969 54,644 56,157 57,969 54,644 2021 2020 Rs 000 Rs 000 376,502 655,471 7,095 6,887 2,538,714 2,101,529 2021 2020 Number of shares held by Post Employment Benefit Plans of the Bank As at 31st December   Voting Non voting 322 6,100 130,159 Income Statement - Bank For the year ended 31st December    760,644 7,603,471 59,262 Average Balance 2021 HATTON NATIONAL BANK PLC 159,359 755,919 155,368 731,535
  322. 60 (e) Transactions with Government of Sri Lanka/Entities Controlled, Jointly Controlled, Significantly Influenced by the Government of Sri Lanka The Government of Sri Lanka indirectly holds 25.88% of the voting rights of the Bank as at 31st December 2021 through Sri Lanka Insurance Corporation Ltd, Employees Provident Fund , National Savings Bank and Employees Trust Fund. Accordingly, the Bank has considered Government of Sri Lanka and other entities which are controlled, jointly controlled or significantly influenced by the Government of Sri Lanka (government related entities) as related parties according to Sri Lanka Accounting Standard - LKAS 24 on “Related Party Disclosures”. During the year ended 31st December 2021, the Bank has carried out transactions with the Government of Sri Lanka and other government related entities in the ordinary course of its business, the details of which are given below. The pricing applicable to such transactions was based on the assessment of risk and pricing model of the Bank and was comparable with what was applied to transactions between the Bank and its unrelated customers. Statement of Financial Position - Bank Closing Balance Average Balance 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 25,820,489 7,212,395 17,851,282 19,280,815 - - 6,704,060 1,369,670 Financial assets measured at amortised cost - debt and other financial instruments 159,647,189 185,522,038 171,065,394 158,391,027 Financial assets measured at fair value through other comprehensive income 199,100,863 245,059,017 228,078,564 200,655,750 - - 5,518 1,009,347 As at 31st December   Assets Balances with Central Bank of Sri Lanka Reverse repurchase agreements Financial assets measured at fair value through profit or loss Financial assets measured at amortised cost - loans and advances to customers 57,588,792 55,503,605 53,771,534 53,559,438 442,157,333 493,297,055 477,476,352 434,266,047 Liabilities Financial liabilities measured at amortised cost - due to depositors 12,877,122 8,123,437 9,484,487 6,346,501 Due to banks 11,601,283 12,565,962 11,909,792 13,295,677 Debt securities issued/Subordinated term debts 10,469,914 14,624,745 12,269,565 14,624,745 Securities sold under repurchase agreements 11,350,910 6,032,510 6,566,840 2,749,020 Current tax liabilities 10,051,689 7,725,731 8,504,241 6,681,649 56,350,918 49,072,385 48,734,925 43,697,592 Commitments and Contingencies Closing Balance As at 31st December   2021 2020 Rs 000 Rs 000 Forward foreign exchange contracts   Sales   Purchases  - 189,000 18,651,479 27,547,110 Documentary credit 5,724,780 396,925 Guarantee 9,817,056 8,193,340  Direct  7,978,560 14,859,880   Indirect 5,058,991 14,683,303 Commitments for unutilised facilities 323 INTEGRATED REPORT 2021
  323. Notes to the Financial Statements 60 RELATED PARTY DISCLOSURES (Contd.) 60 (f) Transactions with Government of Sri Lanka/Entities Controlled, Jointly Controlled, Significantly Influenced by the Government of Sri Lanka Income Statement - Bank For the year ended 31st December    Interest income Interest expenses Fee and commission income/(expenses)  Other income Impairment charge/(reversal) for loans and other losses Tax expenses (income tax, financial services VAT, crop insurance levy, local taxes and stamp duty) 2021 2020 Rs 000 Rs 000 33,307,171 29,308,262 2,392,709 2,485,720 49,432 35,469 155,798 80,623 13,671 2,329 10,699,838 9,788,489 2021 2020 111,072,789 110,889,094 1,578,854 2,351,113 Number of Shares held by Government As at 31st December  Voting Non voting Cash dividends paid to government related entities amounts to Rs. 510.26 Mn in 2021 (2020 - Rs. 470.02 Mn) Transactions which are not individually significant Apart from the transactions listed above the Bank has carried out transactions with the Government of Sri Lanka and other government related entities in the form of utility bills, telephone charges, CRIB charges etc. The total of such payments made during the year ended 31st December 2021 was Rs. 665.62 Mn (2020 - Rs. 483.24 Mn). 60 (g) Disclosure Requirement under Section 9.3.2 (a) and section 9.3.2 (b) of the Listing Rules of Colombo Stock Exchange (CSE) • Recurrent related party transactions In accordance with rule No. 9.3.2 (b) there are no recurrent related party transactions (loans and advances), which in aggregate exceeds more than 10% of the gross revenue of the Group. • Non-recurrent related party transactions In accordance with rule No. 9.3.2 (a) the Bank does not have any non-recurrent related party transactions carried out during the financial year under review with a value exceeding 10% of the equity or 5% of the total assets whichever is lower, as per the audited financial statements of the Group. 324 HATTON NATIONAL BANK PLC
  324. 61 MATURITY ANALYSIS 61 (a)   As at 31st December 2021 Bank ASSETS Cash and cash equivalents Placements with banks Balances with central banks Reverse repurchase agreements Derivative financial instruments Financial assets recognised through profit or loss - Measured at fair value Financial assets at amortised cost - loans and advances Financial assets at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income Investment in joint venture Investment in subsidiaries Investment properties Property, plant and equipment Right-of-use assets Intangible assets and goodwill   Deferred tax assets Other assets Total assets LIABILITIES Due to banks Derivative financial instruments Securities sold under repurchase agreements Financial liabilities at amortised cost - due to depositors Dividends payable Financial liabilities at amortised cost - other borrowings Debt securities issued Current tax liabilities Deferred tax liabilities Insurance provision - life Insurance provision - general Other provisions Other liabilities Subordinated term debts Total shareholders’ equity Non-controlling interests Total equity and liabilities Maturity gap Cumulative gap Group Within More than 12 months 12 months Rs 000 Rs 000 38,185,254 927,487 Total Within More than 12 months 12 months Total Rs 000 Rs 000 Rs 000 Rs 000 25,820,489 - 38,185,254 25,820,489 927,487 40,900,372 3,338,211 6,246,276 927,487 3,033,062 25,820,489 - 40,900,372 6,371,273 25,820,489 6,246,276 927,487 103,365 - 103,365 862,641 - 862,641 447,148,494 429,106,199 876,254,693 467,800,657 443,452,688 911,253,345 61,179,018 99,498,502 160,677,520 65,362,033 106,568,607 171,930,640 171,204,902 666,348 6,428,649 725,843,517 32,221,531 755,000 3,017,285 469,774 24,953,738 4,773,036 1,429,544 4,461,561 5,986,445 632,493,104 203,426,433 755,000 3,017,285 469,774 24,953,738 5,439,384 1,429,544 4,461,561 12,415,094 1,358,336,621 172,088,328 452,978 9,426,514 767,405,497 38,716,159 2,877,420 964,854 49,724,473 1,724,924 1,989,134 4,941,105 6,432,151 686,245,066 210,804,487 2,877,420 964,854 49,724,473 2,177,902 1,989,134 4,941,105 15,858,665 1,453,650,563 12,063,201 353,356 33,524,226 5,012,301 - 17,075,502 353,356 33,524,226 12,063,201 353,356 33,524,226 5,012,301 - 17,075,502 353,356 33,524,226 1,033,999,205 989,212 41,710,082 - 1,075,709,287 989,212 1,060,576,080 1,013,629 46,489,740 - 1,107,065,820 1,013,629 8,236,601 54,356 10,051,689 3,928,598 7,659,223 1,479,621 1,112,339,288 (386,495,771) (386,495,771) 16,511,268 1,908,393 6,741,233 22,072,702 152,041,354 245,997,333 386,495,771 - 24,747,869 1,962,749 10,051,689 3,928,598 14,400,456 23,552,323 152,041,354 1,358,336,621 8,894,598 54,356 10,518,569 280,222 3,672,388 4,550,802 11,112,878 1,479,621 1,148,093,926 (380,688,429) (380,688,429) 16,661,236 2,410,729 5,157,978 20,097,793 63,533 3,483,773 22,912,291 176,668,041 6,599,222 305,556,637 380,688,429 - 25,555,834 2,465,085 10,518,569 5,157,978 20,378,015 3,735,921 4,550,802 14,596,651 24,391,912 176,668,041 6,599,222 1,453,650,563 325 INTEGRATED REPORT 2021
  325. Notes to the Financial Statements 61 MATURITY ANALYSIS (Contd.) 61 (b) As at 31st December 2020    Bank ASSETS Cash and cash equivalents Placements with banks Balances with central banks Reverse repurchase agreements Derivative financial instruments Financial assets recognised through profit or loss - Measured at fair value Financial assets at amortised cost - loans and advances Financial assets at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income Investment in joint venture Investment in subsidiaries Investment properties Property, plant and equipment Right-of-use assets Intangible assets and goodwill   Deferred tax assets Other assets Total assets LIABILITIES Due to banks Derivative financial instruments Securities sold under repurchase agreements Financial liabilities at amortised cost - due to depositors Dividends payable Financial liabilities at amortised cost - other borrowings Debt securities issued Current tax liabilities Deferred tax liabilities Insurance provision - life Insurance provision - general Other provisions Other liabilities Subordinated term debts Total shareholders’ equity Non-controlling interests Total equity and liabilities Maturity gap Cumulative gap 326 HATTON NATIONAL BANK PLC Group Within More than Total Within More than 12 months 12 months 12 months 12 months Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 34,123,562 1,032,318 7,212,395 - 34,123,562 7,212,395 1,032,318 84,499 - 84,499 1,094,827 393,184,055 379,396,665 772,580,720 410,080,231 390,735,740 800,815,971 51,201,487 135,404,029 186,605,516 53,176,376 140,173,120 193,349,496 219,550,082 622,983 3,159,618 702,958,604 29,721,576 755,000 3,017,285 475,109 20,705,056 4,733,885 1,309,172 806,539 5,356,221 588,892,932 249,271,658 755,000 3,017,285 475,109 20,705,056 5,356,868 1,309,172 806,539 8,515,839 1,291,851,536 220,457,578  -    -    -    -   415,220  -    -   6,153,817 737,856,874 35,937,066 2,521,811  -   1,028,956 41,827,384 1,412,612 1,749,994 1,728,958 4,891,662 633,625,632 256,394,644 2,521,811 1,028,956 41,827,384 1,827,832 1,749,994 1,728,958 11,045,479 1,371,482,506 34,898,957 7,720,500  -   2,827,050 1,032,318 Total Rs 000  -   4,405,934 7,212,395  -    -   34,898,957 12,126,434 7,212,395 2,827,050 1,032,318  -   1,094,827 82,722,773 337,014 10,361,383 7,023,936  -    -   89,746,709 337,014 10,361,383 82,722,773 337,014 10,361,383 7,023,936  -    -   89,746,709 337,014 10,361,383 929,892,091 962,185 37,929,313  -   967,821,404 962,185 952,356,290 980,507 42,592,622  -   994,948,912 980,507 30,526,261 1,875,042 7,725,731  -    -    -   3,917,784 16,278,033 28,298,365 134,001,625  -   1,291,851,536 12,192,693 58,453 8,093,584  -    -   3,309,150 4,266,262 12,291,241 12,490,450  -    -   1,099,459,800  (361,602,926)  (361,602,926) 18,333,568 2,352,955  -   5,371,390 17,073,033  -    -   3,160,756 16,455,007 154,249,475 5,409,964 272,022,706  361,602,926   -   30,526,261 2,411,408 8,093,584 5,371,390 17,073,033 3,309,150 4,266,262 15,451,997 28,945,457 154,249,475 5,409,964 1,371,482,506 12,192,693 54,356 7,725,731  -    -    -   3,917,784 8,910,182 12,634,077   -    -   1,069,710,269  (366,751,665)  (366,751,665) 18,333,568 1,820,686  -    -    -    -    -   7,367,851 15,664,288 134,001,625  -   222,141,267  366,751,665   -  
  326. 62 SEGMENT REPORTING     ACCOUNTING POLICY An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the chief operating decision maker to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Unallocated items comprise mainly of corporate assets, expenses, tax assets and liabilities. 62 (a) Basis for Segmentation  Group’s activities have been segregated into eight different segments based on the business activities that each unit is engaged for the purpose of reviewing the operating results of the Group as well as to make decisions about resource allocation. The operating results of the Bank is split between corporate, retail, SME, micro and treasury. Real estate, insurance and NBFI represent the operating results and financial position of the subsidiaries, Sithma Development (Pvt) Ltd, HNB Assurance PLC and HNB Finance PLC respectively. Segment performance is evaluated based on operating income, profits or losses which, in certain respects, are measured differently from operating profits or losses in the consolidated financial statements. Inter segment transactions are accounted for at fair market prices charged to inter-bank counterparts for similar services on an arm’s length basis. Such transfers are eliminated on consolidation. Income taxes are not allocated to operating segments. Other expenses which cannot be directly identified against a particular business segment have been treated as consolidation adjustments. The Group’s management reviews internal management reports from each division at least monthly. 62 (b) Information about reportable segments 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.  327 INTEGRATED REPORT 2021
  327. Notes to the Financial Statements 62 SEGMENT REPORTING (Contd.) For the year ended 31st December Net interest income Foreign exchange income Net fee and commission income Other operating income Total operating income Impairment charge for loans and other losses Net operating income Profit from operations Share of profit of joint venture Income tax expenses Non - controlling interests Net Profit for the year attributable to equity holders of the parent company Corporate Micro 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 5,881,015 361,573 3,329,351 9,571,939 6,228,846 3,343,093 - 11,408,567 141,001 2,049,347 13,598,915 6,809,032 6,789,883 - 14,298,239 150,180 4,365,300 18,813,719 1,272,391 17,541,328 - 13,162,875 302,708 2,120,768 15,586,351 3,164,742 12,421,609 - 7,772,862 271,604 2,339,534 10,384,000 3,587,920 6,796,080 - 10,284,251 174,080 1,914,798 12,373,129 2,459,902 9,913,227 - 857,464 1,865 159,806 1,019,135 696,707 322,428 - 1,058,418 1,895 103,971 1,164,284 240,984 923,300 - - - - - - - - - 2021 2020 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 445,909,400 445,909,400 171,902,142 171,902,142 382,560,873 382,560,873 164,499,393 164,499,393 238,392,204 238,392,204 688,395,688 688,395,688 205,465,205 205,465,205 614,340,708 614,340,708 228,282,039 228,282,039 197,715,739 197,715,739 208,950,182 208,950,182 175,585,198 175,585,198 29,076,531 29,076,531 10,903,678 10,903,678 25,938,834 25,938,834 7,444,919 7,444,919 2021 2020 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 (41,673,839) (4,700,000) (46,373,839) 60,251,523 5,500,000 65,751,523 59,941,700 59,941,700 73,188,785 73,188,785 13,182,684 13,182,684 28,539,790 28,539,790 1,340,197 1,340,197 1,769,649 1,769,649 - - - - - - - - For the year ended 31st December Information on cash flows    Cash flows from operating activities    Cash flows from investing activities    Cash flows from financing activities  Net cash flow (used) / generated during the year Capital expenditure    - Property, plant and equipment    - Intangible assets Total Capital Expenditure SME 2020 As at 31st December Segment assets  Investment in joint venture  Total assets Segment liabilities  Total liabilities  Retail 2021 Geographic information The Group functions in one geographic location. Accordingly, geographic information is not presented in the financial statements. Total operating income 9% 17% Net Operating Income 12% 6% 22% 6% 23% 29% 1% 2% 13% 27% 11% 24% 1% Corporate Retail SME Micro 328 HATTON NATIONAL BANK PLC Treasury Real Estate Insurance Finance 1% Corporate Retail SME Micro Treasury Real Estate Insurance Finance
  328. Treasury Real Estate Insurance NBFI Eliminations /Unallocated Consolidated 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 18,440,948 2,837,153 1,879 12,222 21,292,202 6,964,860 14,327,342 - 12,401,203 686,505 194 1,062,258 14,150,160 2,583,799 11,566,361 - (15,209) 1,017,160 1,001,951 1,001,951 - (24,071) 997,063 972,992 972,992 - 2,496,287 225,740 10,937,322 13,659,349 1,890 13,657,459 - 2,443,101 140,843 9,023,037 11,606,981 13,853 11,593,128 - 3,802,744 467,911 258,896 4,529,551 754,372 3,775,179 - 3,075,333 339,664 162,893 3,577,890 774,256 2,803,634 - 2,928,018 1,582,347 (573,310) 195,428 4,132,483 27,323 4,105,160 - (2,972,490) 536,071 1,355,972 123,625 (956,822) 10 (956,832) - 56,462,368 5,204,722 10,316,211 12,421,028 84,404,329 19,534,309 64,870,020 22,760,747 292,837 (2,969,222) (1,059,480) 50,837,187 1,842,260 8,025,557 11,368,876 72,073,880 16,046,578 56,027,302 17,173,109 407,215 (3,918,061) (566,843) - - - - - - - - - - 19,024,882 13,095,420 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 394,285,880 394,285,880 41,693,276 41,693,276 441,699,725 441,699,725 87,457,891 87,457,891 10,954,225 10,954,225 10,954,225 10,954,225 10,461,958 10,461,958 10,461,958 10,461,958 35,851,889 35,851,889 35,851,889 35,851,889 31,725,478 31,725,478 31,725,478 31,725,478 44,386,340 44,386,340 44,386,340 44,386,340 37,414,117 37,414,117 37,414,117 37,414,117 23,634,635 2,877,420 26,512,055 251,847,586 251,847,586 24,744,323 2,521,811 27,266,134 242,552,844 242,552,844 1,450,773,143 2,877,420 1,453,650,563 1,453,650,563 1,453,650,563 1,368,960,695 2,521,811 1,371,482,506 1,371,482,506 1,371,482,506 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 (43,215,524) 59,766,382 16,550,858 28,267,700 (164,297,770) (136,030,070) 647,986 (900,454) (252,468) 550,225 (505) (258,020) 291,700 3,141,494 (1,176,386) (550,835) 1,414,273 2,371,954 (2,058,169) (461,317) (147,532) 494,123 (3,365,819) (311,253) (3,182,949) 2,047,581 423,492 (195,960) 2,275,113 (39,414,489) 2,499,951 (5,459,664) (42,374,202) (32,213,711) (710,101) (1,443,676) (34,367,488) (45,555,668) 52,123,674 (6,321,752) 246,254 164,773,496 (161,143,053) (2,358,973) 1,271,470 - - (986) (986) (505) (505) (177,280) (16,904) (194,184) (82,901) (36,702) (119,603) (170,590) (139,802) (310,392) (114,836) (7,065) (121,901) (714,145) (504,340) (1,218,485) (890,286) (507,094) (1,397,380) (1,063,001) (661,046) (1,724,047) (1,088,528) (550,861) (1,639,389) Segment assets Segment liabilities  3% 1% 3% 31% 28% 2% 4% 14% 17% 16% Corporate Retail SME Micro 3% 1% 3% 1% 16% Treasury Real Estate Insurance Finance 57% Corporate Retail SME Micro Treasury Real Estate Insurance Finance 329 INTEGRATED REPORT 2021
  329. Notes to the Financial Statements 63 NET ASSETS VALUE PER ORDINARY SHARE Bank Group 2021  2020  2021  2020  Rs 000 Rs 000 Rs 000 Rs 000 152,041,354 134,001,625 176,668,041 154,249,475 525,905 525,905 525,905 525,905 289.10 254.80 335.93 293.30 As at 31st December   Amount used as the numerator: Equity holders funds (Rs 000) Number of ordinary shares used as the denominator: Total number of shares* (‘000) [Note 22 (c)] Net assets value per ordinary share (Rs) *Number of shares used in net assets value per ordinary share calculation of 2020 has been adjusted by the number of shares issued as scrip dividends in 2021. 64 EVENTS OCCURRING AFTER THE REPORTING PERIOD Events after the reporting period are those events, favourable and unfavourable, that occur between the reporting date and the date the financial statements are authorised for issue. There are no events occurring after the reporting date which require adjustments to or disclosure in the financial statements, other than those disclosed below: 64 (a)  Proposed Dividends Refer Note 23 (a) to the financial statements. 64 (b) Proposed Surcharge Tax The Government of Sri Lanka in its Budget for 2022 proposed a one-time tax, referred to as surcharge tax. The Bill governing the imposition and administration of the surcharge tax was published in the Gazette on 7th February 2022. Surcharge tax is payable by any individual, partnership, company or each company of a group of companies (holding and subsidiaries) whose taxable income exceeds Rs 2,000 Mn for the Y/A 2020/2021, at the rate of 25% on the taxable income for such year of assessment. The proposed surcharge tax has not been accounted for in the consolidated financial statements as at 31st December 2021 as the said Bill is not considered to be substantively enacted as per Sri Lanka Accounting Standard LKAS – 12 – “Income Taxes” as at the reporting date . 65 COMPARATIVE INFORMATION The presentation and classification of the following items in these financial statements are amended to ensure the comparability with the current year. Bank Note As disclosed  Group Current  Adjustment As disclosed  previously Presentation Rs 000 Current  Adjustment previously Presentation Rs 000 Rs 000 Rs 000 Income Statement Net losses from trading Net other operating income (74,890) (837,108) 762,218 (54,678) (816,896) 762,218 2,888,113 3,650,331 (762,218) 3,042,217 3,804,435 (762,218) Net other operating income of Rs 762 Mn previously classified as net losses from trading has been reclassified. 66 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 129 for the statement of the directors’ responsibility for financial reporting. 330 HATTON NATIONAL BANK PLC
  330. Income Statement in US Dollars Bank For the year ended 31st December Group 2021 2020 2021 2020 US $ 000 US$ 000 US$ 000 US$ 000 Gross income 566,805 616,194 668,606 715,277 Interest income 485,777 553,044 529,167 600,295 Less : Interest expenses 241,612 315,166 250,993 329,813 Net interest income 244,165 237,878 278,174 270,482 48,741 41,473 52,603 44,691 1,334 1,330 1,777 1,990 Fee and commission income Less: Fee and commission expenses Net fee and commission income Net interest, fee and commission income Net losses from trading  Net gain from financial investments at fair value through other comprehensive income Net insurance premium income   47,407 40,143 50,826 42,701 291,572 278,021 329,000 313,183 (2,572) (4,454) (1,891) (4,346) 965 1,103 966 1,113 - - 52,429 47,394 - 5,606 29 5,888 33,894 19,422 35,303 20,242 323,859 299,698 415,836 383,474 92,514 81,184 96,240 85,377 231,345 218,514 319,596 298,097 53,000 60,970 67,378 73,974 - - 44,120 39,239 58,509 56,715 72,512 71,974 Total operating expenses 111,509 117,685 184,010 185,187 Operating profit before taxes on financial services Net gains arising on de-recognition of financial assets Net other operating income Total operating income Less: Impairment charge for loans and other losses Net operating income Less : Operating expenses Personnel expenses Benefits, claims and underwriting expenditure Other expenses 119,836 100,829 135,586 112,910 Less: Taxes on financial services 22,164 20,589 23,451 21,540 Operating profit after taxes on financial services 97,672 80,240 112,135 91,370 - - 1,443 2,167 PROFIT BEFORE INCOME TAX 97,672 80,240 113,578 93,537 Less: Income tax expense 12,441 19,253 14,628 20,846 PROFIT FOR THE YEAR 85,231 60,987 98,950 72,691 85,231 60,987 93,730 69,675 - - 5,220 3,016 85,231 60,987 98,950 72,691 Share of profit of joint venture (net of income tax) Profit attributable to:   Equity holders of the Bank   Non-controlling interests PROFIT FOR THE YEAR Earnings per share Basic earnings per ordinary share ($) 0.16 0.12 0.18 0.13 Diluted earnings per ordinary share ($) 0.16 0.12 0.18 0.13 * 0.04 0.04 * 0.04 0.04 Dividend per share Dividend per share: Gross ($) Exchange rate of US$ 1 was Rs. 202.975 as at 31st December 2021 (Rs. 187.95 as at 31st December 2020) The income statement given on this page is solely for the convenience of the stakeholders of financial statements and does not form part of the audited financial statements. *Final dividend proposed, which is to be approved at the Annual General Meeting.  331 INTEGRATED REPORT 2021
  331. Statement of Profit or Loss and Other Comprehensive Income in US Dollars Bank For the year ended 31st December PROFIT FOR THE YEAR Group 2021 2020 2021 2020 US $ 000 US$ 000 US$ 000 US$ 000 85,231 60,987 98,950 72,691 Other comprehensive income that will not be reclassified to profit or loss in subsequent periods Change in fair value of investments in equity instruments designated at fair value through other comprehensive income (1,269) (7,302) (1,269) (7,302) Remeasurement of post-employment benefit obligations 5,079 (8,281) 5,423 (8,561) 24,037 - 42,109 - Revaluation gain on freehold land and buildings Share of other comprehensive income of joint venture that will not be reclassified to profit or loss - - 6 3 Less: Tax expense relating to items that will not be reclassified to profit or loss (2,842) - (3,872) 11 Total other comprehensive income that will not be reclassified to profit or loss 25,005 (15,583) 42,397 (15,849) (14,644) 4,435 (19,297) 8,135 - (5,605) (29) (5,888) 920 (800) 920 (800) - - 4,196 (3,065) - - 304 141 Other comprehensive income that will be reclassified to profit or loss in subsequent periods Debt instruments at fair value through other comprehensive income : Net gains / (losses) on investments in debt instruments measured at fair value through other comprehensive income Reclassification of net gains on de-recognition of debt instruments at fair value through other comprehensive income to income statement Net change in expected credit losses of debt securities measured at fair value through other comprehensive income Transfer to life policy holder reserve fund Share of other comprehensive income of joint venture   that will be reclassified to profit or loss Less: Tax expense relating to items that will be reclassified to profit or loss 3,717 328 3,760 290 Total other comprehensive income that will be reclassified to profit or loss (10,007) (1,642) (10,146) (1,187) OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 14,998 (17,225) 32,251 (17,036) TOTAL COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 100,229 43,762 131,201 55,655 100,229 43,762 125,998 52,635 - - 5,203 3,020 100,229 43,762 131,201 55,655 Total comprehensive income attributable to:   Equity holders of the Bank   Non-controlling interests TOTAL COMPREHENSIVE INCOME FOR THE YEAR Exchange rate of US$ 1 was Rs. 202.975 as at 31st December 2021 (Rs. 187.95 as at 31st December 2020) The statement of profit or loss and other comprehensive income given on this page is solely for the convenience of the stakeholders of financial statements and does not form part of the audited financial statements. 332 HATTON NATIONAL BANK PLC
  332. Statement of Financial Position in US Dollars Bank As at 31st December ASSETS Cash and cash equivalents Placements with banks Balances with Central Bank of Sri Lanka Reverse repurchase agreements Derivative financial instruments Group 2021 2020 2021 2020 US $ 000 US$ 000 US$ 000 US$ 000 188,128 127,210 4,570 181,557 38,374 5,492 201,504 31,389 127,210 30,774 4,570 185,682 64,519 38,374 15,042 5,493 Financial assets measured at fair value through profit or loss  Financial assets measured at amortised cost - loans and advances to customers Financial assets measured at amortised cost - debt and other financial instruments Financial assets measured at fair value through other comprehensive income  Investment in joint venture Investment in subsidiaries Investment properties Property, plant and equipment Right-of-use assets Intangible assets and goodwill   Deferred tax assets Other assets Total assets 509 4,317,057 791,612 1,002,224 3,720 14,865 2,314 122,940 26,798 7,043 21,981 61,166 6,692,137 449 4,110,565 992,846 1,326,266 4,017 16,054 2,528 110,163 28,502 6,966 4,291 45,309 6,873,379 4,250 4,489,486 847,053 1,038,574 14,176 4,754 244,978 10,730 9,800 24,343 78,131 7,161,722 5,825 4,260,793 1,028,728 1,364,164 13,417 5,475 222,545 9,725 9,311 9,199 58,768 7,297,060 LIABILITIES Due to banks Derivative financial instruments Securities sold under repurchase agreements Financial liabilities measured at amortised cost - due to depositors Dividends payable Financial liabilities measured at amortised cost - other borrowings Debt securities issued Current tax liabilities Deferred tax liabilities Insurance provision - life Insurance provision - non-life Other provisions Other liabilities Subordinated term debts Total liabilities 84,126 1,741 165,164 5,299,713 4,873 121,926 9,670 49,522 19,355 70,947 116,036 5,943,073 477,503 1,793 55,128 5,149,356 5,120 162,417 9,976 41,105 20,845 86,608 150,563 6,160,414 84,126 1,741 165,164 5,454,198 4,994 125,906 12,145 51,822 25,412 100,397 18,406 22,420 71,914 120,172 6,258,817 477,503 1,793 55,128 5,293,689 5,217 162,417 12,830 43,062 28,579 90,838 17,607 22,699 82,213 154,006 6,447,581 EQUITY Stated capital Statutory reserve fund Retained earnings Other reserves Total shareholders’ equity Non-controlling interests Total equity Total equity and liabilities  Contingent liabilities and commitments Net assets value per ordinary share ($) 184,083 42,173 173,354 349,454 749,064 749,064 6,692,137 3,331,653 1.42 189,265 40,756 120,592 362,352 712,965 712,965 6,873,379 3,362,321 1.36 184,083 42,173 215,020 429,117 870,393 32,512 902,905 7,161,722 3,331,653 1.66 189,265 40,756 156,218 434,456 820,695 28,784 849,479 7,297,060 3,362,321 1.56 Exchange rate of US$ 1 was Rs. 202.975 as at 31st December 2021 (Rs. 187.95 as at 31st December 2020) The statement of financial position given on this page is solely for the convenience of the stakeholders of financial statements and does not form part of the audited financial statements. 333 INTEGRATED REPORT 2021
  333. Sources and Utilisation of Income 2016 2017 2018 2019 2020 2021 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 75 ,608,193 96,175,453 108,104,923 115,210,769 103,944,602 98,600,557 8,742,630 10,119,741 13,251,166 10,787,317 11,869,016 16,446,768 84,350,823 106,295,194 121,356,089 125,998,086 115,813,618 115,047,325 8,703,575 8,866,642 10,717,978 11,444,259 11,459,352 10,757,563 41,236,605 56,526,138 60,525,342 65,997,133 59,235,456 49,041,200 Sources of Income Interest Non interest income Total Utilisation of Income Employees Salaries and other payment to staff Suppliers and providers of funding Interest paid 8,501,199 9,419,591 9,963,875 10,091,780 8,376,595 9,505,352 49,737,804 65,945,729 70,489,217 76,088,913 67,612,051 58,546,552 1,035,930 1,128,802 1,354,762 2,246,114 2,359,326 2,442,963 237,160 3,035,468 9,292,421 9,656,010 15,258,468 18,778,047 1,273,090 4,164,270 10,647,183 11,902,124 17,617,794 21,221,010 24,636,354 27,318,553 29,501,711 26,562,790 19,124,421 24,522,200 10,492,948 10,851,763 13,983,508 12,530,538 7,661,785 7,222,433 Dividends - Cash 2,071,683 3,175,513 2,463,253 2,251,830 2,303,891 3,418,380 Retained through scrip dividend 1,451,296 977,592 1,724,277 1,751,423 1,791,915 1,314,761 Other expenses Provisions and depreciation Depreciation and amortisation Impairment for loans and other losses Net Income before Government Taxes and Levies Government Income Tax, VAT, SGT, NBT, Crop Insurance, DRL(Incl Deferred Tax) Shareholders Retained profits 10,620,427 12,313,685 11,330,673 10,028,999 7,366,832 12,566,626 Total 84,350,823 106,295,194 121,356,089 125,998,086 115,813,618 115,047,325 Sources and Utilisation of Income 2021 14% 15% 9% 20% 6% 86% 7% 19% Interest Non Interest Income 334 HATTON NATIONAL BANK PLC Employees Suppliers and providers of funding Provisions and depreciation Government Shareholders 51% 73% Dividends - Cash Dividends - Scrip Retained profits
  334. Value Added Statement 2021 2020 Rs 000 Value Added Income earned by providing banking services Cost of services Value added by banking services Non-banking income Net Gain /(loss) from trading & Financial investment Impairment for loans and other losses Value allocated to employees Salaries,wages & other benefits To providers of capital Dividends to shareholders - Cash To Government Income tax Value Added tax on financial services Crop insurance levy Local Taxes Stamp Duty 6,002,665 4,498,822 165,000 15,924 17,428 To expansion and growth Retained income Retained through Scrip dividend Depreciation & Amortization Deferred Taxation Analysis of Value Addition 2021 % Rs 000 114,987,851 58,546,552 115,062,863 67,612,052 56,441,299 385,587 47,450,811 327,000 (326,112) (18,778,047) 37,722,727 423,756 (15,258,468) 32,943,099 % 10,757,563 28.52 11,459,352 34.79 3,418,380 9.06 2,303,891 6.99 9,788,489 29.71 7,366,831 1,791,915 2,359,326 (2,126,705) 32,943,099 22.36 5.44 7.16 (6.46) 100.00 10,699,838 28.36 12,566,626 1,314,761 2,442,964 (3,477,405) 37,722,727 33.31 3.49 6.48 (9.22) 100.00 5,745,249 3,869,649 134,255 15,776 23,561 Analysis of Value Addition 2020 35% 29% 28% 34% 9% 28% Employees Providers of Capital Government Expansion & Growth 30% 7% Employees Providers of Capital Government Expansion & Growth 335 INTEGRATED REPORT 2021
  335. Value Created to Stakeholders For the year ended 31st December 2021 2020 Rs 000 Rs 000 98 ,600,557 103,944,603 9,893,263 7,794,929 (326,112) 423,756 Direct Economic value generated Interest Income Fee Commission Income Net Gain/(loss) from trading & Financial investment 6,879,617 3,650,331 115,047,325 115,813,619 To Depositors/Debenture Holders as Interest 49,041,200 59,235,456 To Employees as Emoluments 10,757,563 11,459,352 2,442,964 2,359,326 18,778,047 15,258,468 8,505,997 7,527,756 Other operating income Total Direct Economic value generated Economic value distributed Depreciation/ Amortisation Set Aside Impairment charge for loans and other losses To providers of Supplies and services 10,699,839 9,788,489   - Income tax 6,002,665 5,745,249   - VAT and NBT on Financial Services 4,498,822 3,869,649 165,000 134,255 33,352 39,336 To Government as Taxation   - Crop Insurance Levy   - Stamp duty and Other Local taxes To Central Bank of Sri Lanka as Deposit insurance premium To Shareholders as Dividends 987,001 823,771 3,418,380 2,303,891 To Community as Donation/CSR 12,352 25,069 Total Economic value distributed 104,643,343 108,781,578 10,403,982 7,032,041 Economic value retained 336 HATTON NATIONAL BANK PLC
  336. Ten Year Statistical Summary Year ended 31st December (Rs Mn) OPERATING RESULTS Income Interest income Interest expense Non interest income Operating expenses (Incl. financial VAT, NBT & DRL) Profit before income tax Income tax on profit Profit after taxation LIABILITIES AND SHAREHOLDERS' FUNDS Customer deposits Refinance borrowings Other liabilities Deferred tax liabilities Shareholders' funds Total ASSETS Loans and receivables to customers (Net) Cash, short term funds and statutory deposits with the Central Bank of Sri Lanka Property, plant and equipment Deferred tax assets Other assets Total RATIOS Return on average shareholders funds (%) Income growth (%) Return on average assets (%) Dividend cover (Times) Property, plant and equipment to shareholders' funds (%) Total assets to shareholders' funds (Times) Liquid assets to liabilities (%) SHARE INFORMATION Market value per share (Rs) - Voting - Non Voting Group Earnings per share (Rs) *Group Earnings per Share (Adjusted) (Rs) Price earnings ratio Group Net Assets per share (Rs) **Group Net Assets per share (Adjusted) (Rs) Dividend per share (Rs) Cash dividend per share (Rs) Gross dividends (Rs Mn) OTHER INFORMATION No of employees No of customer centres No of student banking centres 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 51,539 47,326 25,368 4,213 61,006 56,771 31,424 4,236 59,500 51,868 26,967 7,633 61,153 52,615 26,280 8,538 84,351 75,608 41,237 8,743 106,295 96,175 56,526 10,120 121,356 108,105 60,525 13,251 125,998 115,211 65,997 10,787 115,814 103,945 59,235 11,869 115,047 98,601 49,041 16,447 16,294 9,876 2,342 7,534 19,575 10,008 2,998 7,010 20,470 12,064 3,059 9,005 19,824 15,050 4,601 10,449 22,968 20,146 6,002 14,143 27,719 22,050 5,583 16,467 37,879 22,952 7,433 15,518 41,538 18,463 4,431 14,032 41,497 15,081 3,619 11,463 46,181 19,825 2,525 17,300 341,424 6,429 50,496 1,111 46,899 446,358 387,158 5,615 66,084 51,454 510,310 419,327 4,889 87,736 60,899 572,851 527,126 4,227 128,424 379 65,051 725,208 623,495 4,140 154,080 231 77,017 858,963 701,519 5,244 134,884 5,083 108,148 954,878 799,975 5,639 163,312 1,809 115,754 1,086,489 810,035 6,364 179,723 1,382 127,504 1,125,009 967,821 15,089 174,939 134,002 1,291,852 1,075,709 14,270 116,316 152,041 1,358,337 302,761 351,965 396,277 498,342 584,413 639,102 749,049 741,769 772,581 876,255 39,024 9,418 95,155 446,358 29,238 9,521 768 118,818 510,310 33,838 9,305 287 133,144 572,851 35,033 11,474 180,360 725,208 52,042 13,945 208,564 858,963 63,533 17,905 234,337 954,878 62,342 21,304 253,794 1,086,489 59,487 21,077 302,676 1,125,009 41,336 20,705 807 456,423 1,291,852 64,006 24,954 4,462 388,661 1,358,337 18 39 1.8 2.2 14 18 1.5 2.1 16 (2) 1.7 2.6 17 3 1.6 3.0 20 38 1.8 4.0 18 26 1.8 4.0 14 14 1.5 3.7 12 4 1.3 3.5 9 (8) 0.9 2.8 12 (1) 1.3 3.7 20 10 22 19 10 23 15 9 23 18 11 24 18 11 24 17 9 24 18 9 24 17 9 30 15 9.64 40 16 8.93 28 148.00 112.50 20.75 15.10 7.13 129.96 147.00 119.00 19.20 14.55 7.66 144.06 194.90 152.90 24.50 18.67 7.96 168.67 210.60 177.90 26.09 20.07 8.07 186.20 225.00 190.00 34.99 28.06 6.43 220.61 249.00 195.00 35.50 30.32 7.01 247.79 214.00 168.50 35.25 33.53 6.07 269.28 172.20 135.50 29.32 27.89 5.87 290.78 126.50 100.60 25.58 24.90 4.95 301.28 135.00 122.25 36.18 36.18 3.73 335.93 98.97 8.50 8.50 3,379 109.45 8.50 8.50 3,400 129.12 8.50 8.50 3,431 143.68 8.50 5.00 3,451 173.59 8.50 5.00 3,523 232.00 8.50 6.50 4,153 252.25 8.50 5.00 4,188 276.68 8.00 4.50 4,003 293.30 8.00 4.50 4,096 335.93 9.00 6.50 4,733 4,679 247 166 4,604 250 168 4,451 249 168 4,285 249 168 4,190 251 150 4,348 251 152 4,781 250 155 4,913 252 156 4,836 252 162 5,042 255 162 * Earnings per share has been adjusted for weighted average number of shares outstanding during the current year. ** Net Assets per share has been computed for the current number of shares issued as at 31st December 2021 337 INTEGRATED REPORT 2021
  337. Quarterly Statistics For the three months ended 2021 *2020 December September June March December September June March 31st 30th 30th 31st 31st 30th 30th 31st 1,358,337 876,255 1,075,709 152,041 1,338,982 1,352,781 849,751 1,060,054 142,699 1,322,361 1,336,831 790,229 1,032,194 140,965 1,312,221 1,307,981 763,240 996,065 136,605 1,299,917 1,291,852 772,581 967,821 134,002 1,213,967 1,248,149 743,048 922,448 133,362 1,172,256 1,169,789 734,019 865,313 130,537 1,146,959 1,146,079 753,995 841,078 130,207 1,135,544 13,980,187 2,961,100 886,863 12,417,650 2,246,331 (761,891) 12,561,953 2,132,377 (704,025) 10,599,567 2,282,753 57,014 10,895,870 2,119,504 580,103 11,372,954 1,966,774 (276,503) 11,016,380 1,387,956 230,592 11,423,942 2,070,815 (1,371,300) through other comprehensive income Net gains arising on derecognition of financial assets Net other operating income Total operating income 12,720 433,206 18,274,076 14,218 1,943,757 15,860,065 2,353,847 16,344,152 168,989 2,148,807 15,257,130 1,053,543 123,459 14,772,479 39,637 572,783 13,675,645 154,660 321,695 13,111,283 13,024 2,632,394 14,768,875 Less :Impairment charge for loans and other losses Net operating income 7,584,686 10,689,390 4,864,527 10,995,538 3,665,858 12,678,294 2,662,976 12,594,154 3,446,941 11,325,538 2,723,393 10,952,252 4,424,278 8,687,005 4,663,856 10,105,019 4,672,439 929,654 22,321 5,064,976 6,146,119 1,043,301 648,179 3,157,939 6,018,689 1,277,750 1,000,216 4,381,639 5,796,280 1,248,117 854,544 4,695,213 5,455,665 1,096,466 1,049,728 3,723,679 5,432,685 1,067,941 1,175,851 3,275,775 5,374,108 793,713 694,063 1,825,121 5,856,527 911,529 698,902 2,638,061 Statement of Financial Position (Rs. Mn) Total assets Loans and advances to customers Due to customers Shareholders’ funds Average assets Statement of Profit or Loss (Rs 000) Net interest income Net fee and commission income Net gain/(loss) from trading Net gain from financial investments at fair value Less : Operating expenses Taxes on financial services Income tax expenses Profit for the quarter ended Other comprehensive income for the quarter ended 4,277,872 (1,424,556) (20,756) 211,560 (3,116,299) (442,209) 904,365 (583,465) Total comprehensive income for the quarter ended 9,342,848 1,733,383 4,360,883 4,906,773 607,380 2,833,566 2,729,486 2,054,596 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 171.00 147.75 142.75 133.75 139.00 111.75 165.00 130.75 135.30 105.50 132.50 103.90 120.00 91.00 174.00 139.00 Low 133.00 120.25 128.00 105.50 123.00 91.50 125.00 96.00 110.00 80.10 100.00 76.20 90.00 74.50 103.10 97.10 Closing 135.00 122.25 141.00 133.75 134.00 107.25 126.00 97.20 126.50 100.60 127.00 99.60 113.30 87.70 105.10 100.30 V- Voting NV - Non Voting 289.10 271.34 268.04 259.75 254.80 253.59 248.21 247.59 Financial measures Profitability (Annualised) Interest Margin Return on Assets (before Tax), % Return on Equity 3.70 1.48 12.09 3.59 1.49 11.77 3.53 1.67 13.23 3.26 1.71 13.88 3.68 1.24 8.68 3.85 1.17 7.91 3.91 1.02 6.90 4.02 1.18 8.19 Productivity Cost to Income Ratio 25.57 38.75 36.82 37.99 36.93 39.73 40.99 39.65 BASEL III Risk weighted capital ratios Common Equity Tier I Capital (%) Tier I Capital (%) Total Capital (%) Leverage Ratio 14.53 14.53 18.16 7.97 14.43 14.43 18.22 7.86 15.31 15.31 18.42 8.03 14.82 14.82 17.88 7.67 14.73 14.73 17.98 7.73 14.69 14.69 18.33 7.84 15.25 15.25 19.07 8.46 13.85 13.85 17.25 7.90 3.38 0.15 3.92 0.42 4.25 0.64 4.28 0.78 4.31 0.90 6.51 3.03 6.40 3.16 5.90 3.13 Net Asset Value per Share (Adjusted) Asset quality Gross NPA ratio (%) Net NPA ratio (% ) * Quarterly information has been amended based on classification changes made in 2021. 338 HATTON NATIONAL BANK PLC
  338. Investor Relations 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 2021 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 7,675 registered Voting Shareholders as at 31st December 2021 (2020 - 8,517) 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 4,717 1,070,189 0.30 45 13,641 0.02 4,762 1,083,830 0.26 1,001 - 10,000 2,040 6,286,490 1.75 40 146,120 0.24 2,080 6,432,610 1.53 10,001 - 100,000 652 19,243,419 5.36 24 715,017 1.17 676 19,958,436 4.75 100,001 - 1,000,000 108 25,382,230 7.07 11 3,165,110 5.18 119 28,547,340 6.80 1,000,000 30 306,811,233 85.51 8 57,065,186 93.39 38 363,876,419 86.66 7,547 358,793,561 100.00 128 61,105,074 100.00 7,675 419,898,635 100.00 Over ANALYSIS OF SHAREHOLDERS Resident / Non-Resident 31st December 2021 Resident Non-Resident Total ANALYSIS OF SHAREHOLDERS Individuals/Institutions 31st December 2020 No of Share No of % No of Share No of holders Shares holders Shares 7,547 128 7,675 358,793,561 85.49 8,356 61,105,074 14.51 161 419,898,635 100.00 8,517 31st December 2021 313,231,601 76.51 96,150,789 23.49 409,382,390 100.00 31st December 2020 No of Share No of % No of Share No of holders Shares holders Shares % 79,240,002 19.36 330,142,388 80.64 Individuals 7,224 88,258,713 21.02 8,058 Institutions 451 331,639,922 78.98 459 7,675 419,898,635 100.00 8,517 Total % 409,382,390 100.00 As at 31/12/2021 the average size of holding of ordinary shareholding was 54,835 voting shares. (31/12/2020 - 48,066 voting shares) As per the rule No. 7.6 (iv) of the Listing Rules of the Colombo Stock Exchange, percentage of public holding of voting shares as at 31st December 2021 was 69% approximately. (68% as at 31st December 2020). As per the rule No. 7.13.1 of the Listing Rules of the Colombo Stock Exchange, No. of shareholders, representing public holding as at 31st December 2021 - 7,661. (8,499 as at 31st December 2020). An aggregate of 961,289 number of shares remain unregistered arising from a direction given by the CBSL dated 26th August 2010 in terms of Sec. 12(IC)(c) of the Banking Act, and these unregistered shares are not included herein. 339 INTEGRATED REPORT 2021
  339. Investor Relations 3 SHARE INFORMATION - NON VOTING There were 11 ,307 registered Non Voting Shareholders as at 31st December 2021 (2020- 12,190) distributed as follows. Resident Non-Resident No of Share No of % No of Share No of holders Shares holders Shares Total No of Share No of % holders Shares 1 - 1,000 6970 2,251,088 2.17 39 13,623 0.98 7009 2,264,711 2.15 1,001 - 10,000 3557 11,180,181 10.79 39 142,101 10.24 3596 11,322,282 10.78 10,001 - 100,000 623 16,142,117 15.57 15 577,783 41.65 638 16,719,900 15.92 100,001 - 1,000,000 54 14,280,908 13.78 4 653,840 47.13 58 14,934,748 14.22 Over 6 1,000,000 11,210 ANALYSIS OF SHAREHOLDERS Resident / Non-Resident 59,803,008 57.69 0 0 0 6 103,657,302 100.00 97 1,387,347 100.00 11,307 31st December 2021 Resident Non-Resident Total % 59,803,008 56.93 105,044,649 100.00 31st December 2020 No of Share No of % No of Share No of holders Shares holders Shares % 11,210 97 11,307 103,657,302 98.68 12,068 67,655,499 66.55 1,387,347 1.32 122 34,000,613 33.45 100.00 12,190 105,044,649 101,656,112 100.00 Individuals / Institutions 31st December 2021 31st December 2020 No of Share No of % No of Share No of holders Shares holders Shares % Individuals 10,996 36,247,592 34.51 11,812 43,581,313 42.87 Institutions 311 68,797,057 65.49 378 58,074,799 57.13 105,044,649 100.00 12,190 101,656,112 100.00 Total 11,307 As at 31/12/2021 the average size of holding of ordinary shareholding was 9,290 non-voting shares. (31/12/2020- 8,339 non- voting shares) As per the rule No. 7.6 (iv) of the Listing Rules of the Colombo Stock Exchange, percentage of public holding as at 31st December 2021 was 99% approximately. (99% as at 31st December 2020). As per Rule No. 7.13.1 of the Listing Rules of the Colombo Stock Exchange, No. of shareholders representing public holding as at 31st December 2021 - 11,298. (12,179 as at 31st December 2020). 340 HATTON NATIONAL BANK PLC
  340. 4 SHARE TRADING VOTING Number of Transactions 2021 2020 37 ,634 49,819 Number of Shares Traded (Mn) 151 142 Value of Shares Traded (Rs Mn) 20,648 16,286 2021 2020 30,855 31,199 NON VOTING Number of Transactions Number of Shares Traded (Mn) 102 48 Value of Shares Traded (Rs Mn) 11,458 4,205 5DIVIDENDS 2021 2020 Cash Dividend (Rs) 6.50 Cash Dividend 4.50 Scrip Dividend (Rs) 2.50 Scrip Dividend 3.50 Cash Dividend payout ratio (%) 20 Cash Dividend payout ratio (%) 20 6EARNINGS VOTING 2021 2020 Group Earnings Per Share (Rs) 36.18 24.90 3.73 4.95 Highest Lowest Year End Rs. Rs. Rs. 235.00 185.00 225.00 202.00 165.50 190.00 271.00 220.00 249.00 Price Earnings ratio (Times)-Voting Shares 7 MARKET VALUES 2016 - Voting - Non Voting 2017 - Voting 214.00 184.10 195.00 2018 - Voting - Non Voting 257.50 200.00 214.00 200.00 150.00 168.50 214.90 130.50 172.20 168.50 118.30 135.50 173.20 91.70 126.50 136.20 74.70 100.60 170.00 123.50 135.00 146.75 92.00 122.25 - Non Voting 2019 - Voting - Non Voting 2020 - Voting - Non Voting 2021 - Voting - Non Voting 341 INTEGRATED REPORT 2021
  341. Investor Relations Dividend Per Share and Dividend Yield Rs . % 10 10 8 8 6 6 4 4 2 2 0 17 18 19 20 21 0 Rs. Mn Rs. 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 400 350 300 250 200 150 100 50 0 17 Dividend Per Share Cash Dividend Yield (Voting) - Right Total Dividend Yield (Voting) - Right 8 Group Net Assets Per Share and Closing Price Per Share Shareholder Funds and HNB Market Capitalization 18 19 20 21 Capital & Reserves Rs Mn HNB Market Capitalization Rs Mn (Voting & Non Voting) 18 19 20 21 Group Net Assets Per Share Closing Price Per Share (Voting) MARKET CAPITALISATION (AS AT 31ST DECEMBER) Market Capitalization Ranking Capital & Reserves *HNB Market Capitalization CSE Market Capitalization HNB Market Capitalization as a % of CSE Market Capitalization Rs Mn Rs Mn Rs Mn % 2016 77,017 74,420 2,745,410 2.71 7 2017 108,148 97,684 2,899,290 3.37 5 2018 115,754 84,627 2,839,450 2.98 5 2019 127,504 69,111 2,851,310 2.42 9 2020 134,002 51,905 2,960,648 1.75 16 2021 152,041 56,816 5,489,168 1.04 22 2021 % 2020 % *HNB Market Capitalisation include only Voting shares 9 PUBLIC SHAREHOLDING Number Number of shareholders representing the public holding (Voting) Number of shareholders representing the public holding (Non Voting) Complaint under Option 1 - Float Adjusted Market Capitalization (Rs Bn) 342 17 HATTON NATIONAL BANK PLC Number 7,661 69 8,499 68 11,298 99 12,179 99 39.2 35.3
  342. 10 . INFORMATION ON MOVEMENT IN SHARE CAPITAL Year Issue Basis Prior to Public issue No. of Shares 50,000 1971 Public issue 1977 Rights issue (@ Rs 10/-) 42:50 220,000 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 2002 Bonus 1:10 6,500,000 2004 Rights (Voting @ Rs 55/- and Non-Voting @ Rs 33/-) 2:5 28,600,000 2005 Issue of underlying Shares for GDR 2007 Bonus 2009 Shares issued under ESOP 2010 Shares issued under ESOP 2011 Sub Division of Shares 2011 Rights (Voting @ Rs 219.50/- and Non-Voting @ Rs 119.50/-) 2011 Private placement of unsubscribed rights 2011 Shares issued under ESOP 2012 Scrip Dividend 2012 Shares issued under ESOP 759,078 2013 Shares issued under ESOP 2,308,752 2014 Shares issued under ESOP 3,042,455 2015 Shares issued under ESOP 3,223,714 2016 Shares issued under ESOP 1,314,043 2016 Scrip Dividend 6,680,061 2017 Shares issued under ESOP 1,201,044 2017 Scrip Dividend 2017 Rights Issue (Voting @Rs 220/- and Non-voting @Rs 190/-) 2018 Shares issued under ESOP 2018 Scrip Dividend 2019 Scrip Dividend 7,756,118 2020 Scrip Dividend 11,569,009 2021 Scrip Dividend 13,928,857 Total 525,904,573 230,000 17,664,700 1:1 117,764,700 240,747 2,198,875 1:2 119,179,782 1:10 21,858,851 8,975,700 613,488 7,890,528 5,830,259 1:6 67,706,913 263,948 3,832,951 343 INTEGRATED REPORT 2021
  343. Investor Relations 11 20 MAJOR SHAREHOLDERS (VOTING) OF THE BANK AS AT 31ST DECEMBER 2021 Name % on total capital % on total voting capital No. of Shares 2021 No. of Shares 2020 9.75 41,021,326 39,993,959 1. EMPLOYEE'S PROVIDENT FUND 7.80 2. SRI LANKA INSURANCE CORPORATION LTD-LIFE FUND 6.62 8.27 34,793,743 36,310,723 3. MILFORD EXPORTS (CEYLON) (PVT) LIMITED 6.33 **7.91 33,279,619 32,446,141 4. STASSEN EXPORTS (PVT) LIMITED 5.48 **6.85 28,845,668 28,123,237 5. MR. S.E. CAPTAIN 5.21 6.51 27,399,702 26,713,485 6. LOLC FINANCE PLC/BROWNS INVESTMENTS PLC 4.00 5.00 21,043,977 - 7. BROWNS INVESTMENTS PLC 3.99 4.99 20,980,055 - 8. SONETTO HOLDINGS LIMITED. 3.93 4.91 20,684,835 20,166,790 9. SRI LANKA INSURANCE CORPORATION LTD-GENERAL FUND 3.40 4.25 17,875,190 18,465,839 10. DISTILLERIES COMPANY OF SRI LANKA PLC 2.45 **3.07 12,905,917 12,582,692 11. CITIBANK NEWYORK S/A NORGES BANK ACCOUNT 2 2.36 2.95 12,425,090 19,374,800 12. NATIONAL SAVINGS BANK 2.30 2.87 12,075,700 11,773,268 13. PEOPLE'S LEASING & FINANCE PLC / DON AND DON HOLDINGS (PRIVATE) LIMITED 2.03 2.54 10,700,848 1,994,231 14. RBC INVESTOR SERVICES TRUST-RBC EMERGING MARKETS SMALL-CAP EQUITY FUND 1.68 2.10 8,853,176 7,261,129 15. MR. D.N.N. LOKUGE 1.66 2.08 8,752,193 - 16. STANDARD CHARTERED BANK SINGAPORE S/A HL BANK SINGAPORE BRANCH 1.50 1.88 7,899,166 7,701,334 17. MS. L.A. CAPTAIN 1.50 1.87 7,865,444 7,668,457 18. EMPLOYEES TRUST FUND BOARD 0.59 0.74 3,106,188 4,254,621 19. BNYMSANV RE-FIRST SENTIER INVESTORS ICVC - FSSA ASIA ALL-CAP FUND 0.58 0.72 3,036,462 3,817,988 20. 0.43 0.54 2,278,390 2,221,329 63.86 79.79 335,822,689 280,870,023 0.18 61.97 961,289 937,214 15.99 19.98 84,075,946 128,512,367 Total voting shares 80.03 161.74 420,859,924 410,319,604 Shares held by 11,307 Non-voting shareholders 19.97 105,044,649 101,656,112 100.00 525,904,573 511,975,716 CEI PLASTICS LTD Sub total * Unregistered Shares Balance held by 7,661 voting shareholders (Total voting shareholders- 7,675) Total No. of Ordinary shares * 961,289 shares remain unregistered arising from a direction given by the CBSL dated 26th August 2010 in terms of Sec. 12(IC)(c) of the Banking Act. **Pursuant to the provisions of the Banking Act Directions No. 1 of 2007, the total collective voting rights in the Bank, of Milford Exports (Ceylon) Limited, Stassen Exports Limited and Distilleries Company of Sri Lanka (who collectively hold 17.83% of the voting shares of the Bank) are limited to 10% of the total voting rights of the Bank with effect from 15th March 2012 as the voting rights in excess of such percentage is deemed invalid from that date. 344 HATTON NATIONAL BANK PLC
  344. 12 20 MAJOR SHAREHOLDERS (NON-VOTING) OF THE BANK AS AT 31ST DECEMBER 2021 Name % on total capital % on total voting capital No. of Shares 2021 No. of Shares 2020 1. BROWNS INVESTMENTS PLC 6.97 34.88 36,638,886 - 2. LOLC FINANCE PLC/BROWNS INVESTMENTS PLC 1.89 9.49 9,964,516 - 3. ACUITY PARTNERS (PVT) LIMITED/MR.ELAYATHAMBY THAVAGNANASOORIYAM/MR.ELAYATHAMBY THAVAGNANASUNDARAM 1.02 5.11 5,368,439 - 4. AKBAR BROTHERS PVT LTD A/C NO 1 0.88 4.43 4,653,891 4,080,215 5. MR. S.E. CAPTAIN 0.31 1.55 1,626,603 1,574,132 6. EMPLOYEES TRUST FUND BOARD 0.29 1.48 1,550,673 2,023,004 7. DEUTSCHE BANK AG AS TRUSTEE FOR JB VANTAGE VALUE EQUITY FUND 0.16 0.79 824,919 1,081,374 8. HATTON NATIONAL BANK PLC A/C NO 2 0.14 0.72 755,919 731,535 9. SABOOR CHATOOR (PVT) LTD 0.14 0.68 719,303 696,100 10. MR. E. CHATOOR 0.13 0.65 680,966 659,000 11. MR. J.D. BANDARANAYAKE (JOINT - 1 : DR. V. BANDARANAYAKE VASANTHA & JOINT - 2 : MISS I. BANDARANAYAKE ISHANI) 0.11 0.55 577,258 - MR. J.D. BANDARANAYAKE (JOINT - 1 : MISS N. BANDARANAYAKE NILUKA & JOINT - 2 : DR. V. BANDARANAYAKE VASANTHA) 0.11 0.55 577,160 - 13. E.W. BALASURIYA & CO. (PVT) LTD 0.10 0.50 524,717 507,791 14. PEOPLE'S LEASING & FINANCE PLC/MR. I.D.R. PERERA 0.10 0.49 509,997 - 15. MISS R.H. ABDULHUSSEIN 0.09 0.43 452,428 423,318 16. MR. M.J. FERNANDO 0.08 0.41 430,043 416,171 17. SAM INNOVATORS (PVT) LTD 0.08 0.40 417,823 282,462 18. DR. R.D. BANDARANAIKE 0.08 0.39 406,545 393,431 19. LANKA SYNTHETIC FIBRE CO LTD 0.07 0.35 382,668 370,324 20. MR. Y.H. ABDULHUSSEIN 0.07 0.35 373,418 346,857 12.82 64.20 67,436,172 13,585,714 7.15 35.80 37,608,477 88,070,398 19.97 100.00 105,044,649 101,656,112 59.87 314,853,986 409,382,390 0.18 961,289 937,214 80.03 420,859,924 410,319,604 100.00 525,904,573 511,975,716 12. Sub total Balance held by 11,298 Non-voting shareholders (Total Non-voting shareholders-11,307) Total Non-voting shares Shares held by 7,675 voting shareholders * Unregistered voting Shares Total voting shares Total No. of Ordinary shares * 961,289 aggregate of shares remain unregistered arising from a direction given by the CBSL dated 26th August 2010 in terms of Sec. 12(IC)(c) of the Banking Act. 345 INTEGRATED REPORT 2021
  345. Investor Relations 13 DEBENTURE INFORMATION HNB SUBORDINATED DEBENTURES 2006 i ) Market Value 12 months ended 31st December 2021 These debentures have not traded during the year ended 31st December 2021 ii) Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable Rate % comparable Govt. Govt. Security % Security % NA - NA NA 501,428 - 11.00 4.69 1,072,701 - 11.25 9.13 964,288 - 11.25 6.24 15 year Fixed Rate (11.00% p.a.) (Zero Coupon) 18 year Fixed Rate (11.25% p.a.) (Zero Coupon) i) HNB SUBORDINATED DEBENTURES 2007 Market Value 12 months ended 31st December 2021 These debentures have not traded during the year ended 31st December 2021 ii) Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable 15 year Fixed Rate (16.75% p.a.) 346 HATTON NATIONAL BANK PLC 758,625 16.75 16.75 Rate % comparable Govt. Govt. Security % Security % 7.88 758,625 16.75 16.75 5.55
  346. i ) HNB SUBORDINATED DEBENTURES 2011 Market Value 12 months ended 31st December 2021 These debentures have not traded during the year ended 31st December 2021 ii) Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable NA 10 year Fixed Rate (11.50% p.a.) i) NA NA Rate % comparable Govt. Govt. Security % Security % NA 2,000,000 11.50 Market Value 12 months ended 31st December 2021 Market Value Highest Rs Lowest Rs 98.05 98.05 10 year Fixed Rate (8.00% p.a.) 4.85 HNB SENIOR DEBENTURES 2013 ii) 11.83 Traded Yield (%) Last Traded Rs Highest Lowest Last Traded 9.03 9.03 9.03 98.05 Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable 10 year Fixed Rate (8.00% p.a) 1,878,709 8.00 14.25 Rate % comparable Govt. Govt. Security % Security % 8.58 1,791,002 8.00 14.25 5.95 347 INTEGRATED REPORT 2021
  347. Investor Relations i ) HNB SENIOR DEBENTURES 2014 Market Value 12 months ended 31st December 2021 These debentures have not traded during the year ended 31st December 2021 ii) Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable 10 year Fixed Rate (8.33% p.a.) i) 84,040 8.33 Govt. Security % Security % 8.50 9.50 84,040 8.33 6.45 Market Value 12 months ended 31st December 2021 These debentures have not traded during the year ended 31st December 2021 Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable 5 year Fixed Rate (11.25% p.a.) i) 8.50 HNB SUBORDINATED DEBENTURES 2016 - March ii) Rate % comparable Govt. NA NA Rate % comparable Govt. Govt. Security % Security % NA NA 7,599,795 11.25 11.25 4.69 HNB SUBORDINATED DEBENTURES 2016 - November Market Value 12 months ended 31st December 2021 Market Value Highest Rs Traded Yield (%) Lowest Rs Last Traded Highest Lowest Last Traded Rs 7 year Fixed Rate (13.00% p.a.) 348 111.18 5 year debentures have not traded during the year ended 31st December 2021 HATTON NATIONAL BANK PLC 107.25 111.18 9.62 7.34 7.34
  348. ii ) Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable i) Govt. Govt. Security % Security % 5 year Fixed Rate (11.75% p.a.) NA NA NA NA 2,039,274 11.75 11.75 4.98 7 year Fixed Rate (13.00% p.a.) 4,086,904 13.00 13.00 8.75 4,086,904 13.00 13.00 5.98 HNB SUBORDINATED DEBENTURES 2019 Market Value 12 months ended 31st December 2021 These debentures have not traded during the year ended 31st December 2021 ii) Rate % comparable Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable Rate % comparable Govt. Govt. Security % Security % 5 year Fixed Rate (12.30% p.a.) 1,987,358 12.30 12.30 9.32 1,987,358 12.30 12.30 6.42 7 year Fixed Rate (12.80% p.a.) 8,360,693 12.80 12.80 10.65 8,360,693 12.80 12.80 6.82 349 INTEGRATED REPORT 2021
  349. Investor Relations i ) HNB SUBORDINATED DEBENTURES 2021 Market Value 12 months ended 31st December 2021 These debentures have not traded during the year ended 31st December 2021 ii) Interest Rate 12 months ended 31st December 31st December 2021 31st December 2020 Amount Coupon Annual Interest Amount Coupon Annual Interest Rs 000 Rate % Effective Rate of Rs 000 Rate % Effective Rate of Rate % comparable 10 year Fixed Rate (9.5% p.a.) 7,286,042 9.50 9.50 Rate % comparable Govt. Govt. Security % Security % 11.79 NA NA Note: HNB Senior Debenture information is listed under Debt Securities issued, Note 47 of the Financial Position. Note: HNB Debenture information is listed under Subordinated Term Debts, Note 52 of the Financial Position. NA Ratios 2021 2020 Debt to Equity Ratio (%) * 28.27 67.56 Interest Cover (Times) ** Liquidity Asset Ratio (LAR) (%) * Debt includes Borrowings and Debentures ** Includes interest paid on Borrowings and Debentures 350 NA HATTON NATIONAL BANK PLC 5.12 3.95 28.02 39.57
  350. Independent Assurance Statement INTRODUCTION DNV represented by DNV Business Assurance Lanka (Private) Limited (‘DNV’) has been commissioned by the management of Hatton National Bank PLC (‘HNB’ or ‘the Bank’, Corporate Registration Number PQ 82) to carry out an independent assurance engagement of its non-financial/ sustainability performance disclosed in the Bank’s Annual Report 2021 (‘the Report’) in its printed format. The non-financial performance in this Report covers the disclosures related to material topics for the reporting period 1 January 2021 – 31 December 2021. The sustainability disclosures in this Report have been prepared by HNB on the Guiding Principles and Content Elements of the International <IR> Framework (December 2013, the ‘<IR> Framework’) of the International Integrated Reporting Council (‘IIRC’) and the Global Reporting Initiative’s (GRI’s) Sustainability Reporting Standards (‘GRI Standards’) to bring out the various Content Elements of the <IR> Framework and performance trends related to identified material topics. The reporting topic boundaries for non-financial performance are based on the internal and external materiality assessment carried out by HNB and covers identified material topics for the Bank’s operations as brought out in the Report in the section ‘About the Report’. We performed our assurance (Type 2, Moderate level) activities based on AccountAbility’s AA1000 Assurance Standard v3, and DNV’s assurance methodology VeriSustainTM . In doing so, we evaluated the qualitative and quantitative disclosures presented in the Report, together with using the Guiding Principles of the <IR> Framework, together with HNB’s protocols for how the non-financial performance was measured, recorded and reported. Our assurance engagement was planned and carried out in December 2021 – February 2022. The intended user of this assurance statement is the Management of HNB. We disclaim any liability or responsibility to a third party for decisions, whether investment or otherwise, based on this Assurance Statement. We planned and performed our work to obtain the evidence we considered necessary to provide a basis for our assurance opinion and this process did not involve engagement with any external stakeholders. RESPONSIBILITIES OF THE MANAGEMENT OF HNB AND OF THE ASSURANCE PROVIDER The Management of the Bank has the sole responsibility for the preparation of the Report as well as the processes for collecting, analysing and reporting the information presented in the Report and also responsible for ensuring the maintenance and integrity of its website and any referenced disclosures on non-financial performance and management approach. In performing this assurance work, DNV’s responsibility is to the Management of HNB; however, this statement represents our independent opinion and is intended to inform the outcome of the assurance to the stakeholders of the HNB. DNV’s assurance engagements are based on the assumption that the data and information provided by the client to us as part of our review have been provided in good faith and free from material misstatements or errors. We were not involved in the preparation of any statements or data included in the Report except for this Assurance Statement. We did not come across limitations to scope of the agreed assurance agreement during our assurance process. We understand that any reported data on financial performance of the Bank and the Group including its subsidiaries within the Report are based on financial disclosures and data which has been subjected to a separate independent statutory audit process and is not included in our scope of work. BASIS OF OUR OPINION We planned and performed our work to obtain the evidence considered necessary to provide a basis for our assurance opinion, and as part of the assurance engagement, a multi-disciplinary team of sustainability and assurance specialists conducted remote assessments and interactions with key internal stakeholders at the Bank’s Head Office in Colombo and six (6) operational branches of the Bank in Sri Lanka based on DNV’s sampling plan. We adopted a risk-based approach, that is, we concentrated our remote verification efforts on the issues of high material relevance to the Bank and its key stakeholders. Due to the COVID-19 pandemic and associated travel restrictions, we carried out remote assessments as in-person discussions and onsite assessments were not feasible. We undertook the following activities: • Reviewed the Bank’s approach to addressing the Guiding Principles and Content Elements of the <IR> Framework, including stakeholder engagement and its materiality determination process; • Verified the value creation disclosures related to the capitals identified by the Bank (capitals of the <IR> Framework and Digital Capital) as well as claims made in the Report; • Assessed the robustness of the data management system, data accuracy, information flow and controls for the reported disclosures; • Examined and reviewed selected evidences including documents, data and other information made available by the Bank related to non-financial disclosures presented within the Report; • Conducted interviews with top and senior management team of the Bank and other representatives, including data owners and decisionmakers from different divisions and functions of the Bank to validate the non-financial disclosures. We were free to choose interviewees and interviewed those with overall responsibility to deliver the Bank’s sustainability objectives; The VeriSustain protocol is available on request from www.dnv.com and is based on our professional experience, international assurance best practices including the International Standard on Assurance Engagements 3000 (ISAE 3000) Revised (Assurance Engagements other than Audits or Reviews of Historical Financial Information) and GRI’s Reporting Principles. GRI’s Principles for defining Report Content and Quality. 1 Project Number: PRJN-332915-2021-AST-LKA 351 INTEGRATED REPORT 2021
  351. Independent Assurance Statement • Review of processes and systems for preparing site level sustainability/non-financial data and implementation of sustainability strategy through remote assessments and interviews with management teams at HNB’s Head Office and six (6) branches at Kurunegala, Kurunegala Metro, Ragama, Negombo, Negombo Metro and Kegalle. We were free to choose the sites we sampled for our remote assessments; • Performed sample-based reviews of the mechanisms for implementing the Bank’s sustainability related policies, as described in the Report; • Performed sample-based checks of the processes for generating, gathering and managing the quantitative data and qualitative information included in the Report based on the selected GRI Standards. OPINION AND OBSERVATIONS On the basis of our assurance work undertaken, nothing has come to our attention to suggest that the Report does not properly describe HNB’s adherence to the criteria of reporting (Guiding Principles and Content Elements) related to the <IR> Framework, representation of the material topics, business model, disclosures on value creation through seven (7) identified capitals, related strategies and management approach and chosen topic-specific disclosures from the GRI Standards for identified material topics. Without affecting our assurance opinion, we also provide the following observations. Principles of the AA1000 Accountability Principles Standard (2018) Inclusivity The participation of stakeholders in developing and achieving an accountable and strategic response to Sustainability. The Report describes the modes and channels used towards engaging the Bank’s key stakeholders, that is, investors, customers, employees, community and regulators/government, in line with their identified concerns. The key objectives and plans related to the pillars of the Bank’s strategy are brought out within the Report in line with stakeholder expectations. Nothing has come to our attention to suggest that the Report does not meet the requirements related to the Principle of Inclusivity. Materiality The process of determining the issues that are most relevant to an organization and its stakeholders. The Report brings out the process followed by the Bank towards identifying and prioritising its material matters, which includes Project Number: PRJN-332915-2021-AST-LKA 352 HATTON NATIONAL BANK PLC evaluations of impacts on HNB’s strategic goals, key trade-offs, common interests and stakeholder concerns, opportunities and risks, as well as overall accountability and oversight. Thirteen (13) material matters are arrived at towards defining the Bank’s ability towards value creation within the Report, and the Bank confirms that the levels of priorities of material matters remains unchanged from the previous reporting period. Nothing has come to our attention to suggest that the Report does not meet the requirements related to the Principle of Materiality. Responsiveness The extent to which an organization responds to stakeholder issues. The Report brings out descriptions of the Bank’s policies, strategies, management approach and governance mechanisms related to the identified material matters along with responses to key stakeholder concerns including its incorporation into defining material matters. Key performance metrics related to the Bank’s performance in the reporting period as well as medium-term goals and future plans are described within the Report. Nothing has come to our attention to suggest that the Report does not meet the requirements related to the Principle of Responsiveness. Impact The level to which an organisation monitors, measures and is accountable for how its actions affect its broader ecosystems. The Report brings out the processes and metrics followed by HNB towards identifying, monitoring, measuring and evaluating the Bank’s significant impacts related to its material matters and identified capitals on key stakeholder groups. The outputs of processes followed by the Bank as well as key outcomes are described within the Report, along with descriptions of how this contributes towards adapting business strategies and policies. Nothing has come to our attention to suggest that the Report does not meet the requirements related to the Principle of Impact. Specific Evaluation of the Information on Sustainability Performance We consider the methodology and the process for gathering information developed by HNB for its sustainability performance reporting to be appropriate, and the qualitative and quantitative data included in the Report was found to be identifiable and traceable; the personnel responsible were able to demonstrate the origin and interpretation of the data and its reliability. We observed that the Report presents a faithful description of the reported sustainability activities and goals achieved for the reporting period.
  352. Reliability Neutrality The accuracy and comparability of information presented in the report , as well as the quality of underlying data management systems. The extent to which a report provides a balanced account of an organization’s performance, delivered in a neutral tone. The Report brings out the Bank’s non-financial performance related to its identified material matters through chosen GRI topic-specific Standards. The majority of the data and information verified through our remote assessments at the Head Office and sampled operational sites were found to be fairly accurate and reliable. Some of the data inaccuracies identified during the verification process were found to be attributable to transcription, interpretation and aggregation errors and these errors have been corrected. The Report brings out the Bank’s non-financial performance during the reporting period in a neutral manner in terms of presentation so as to not unduly influence stakeholder opinions made on reported data and information. This includes descriptions of key challenges and responses of the Bank, overall macroeconomic environment and significant concerns related to stakeholders. Nothing has come to our attention to suggest that the Report does not meet the requirements related to the Principle of Reliability. Additional principles as per DNV VeriSustain Completeness How much of all the information that has been identified as material to the organisation and its stakeholders is reported. The Report describes the strategies, business model and management approach that the Bank has put in place towards creating value for its stakeholders using the <IR> Framework and its key requirements, and selected GRI topic-specific Standards for bringing out non-financial performance related to identified material matters for the chosen reporting scope and boundaries of the Bank’s operations in Sri Lanka. Nothing has come to our attention to suggest that the Report does not meet the requirements related to the Principle of Completeness with respect to scope, boundary and time. Nothing has come to our attention to suggest that the Report does not meet the requirements related to the Principle of Neutrality. STATEMENT OF COMPETENCE AND INDEPENDENCE DNV applies its own management standards and compliance policies for quality control, in accordance with ISO IEC 17021:2015 - Conformity Assessment Requirements for bodies providing audit and certification of management systems, and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. We have complied with the DNV Code of Conduct during the assurance engagement and maintain independence where required by relevant ethical requirements including the AA1000AS v3 Code of Practice. This engagement work was carried out by an independent team of sustainability assurance professionals. We were not involved in the preparation of any statements or data included in the Report except for this Assurance Statement and Management Report. DNV maintains complete impartiality toward stakeholders interviewed during the assurance process. We did not provide any services to HNB or its subsidiaries in the scope of assurance for the reporting period that could compromise the independence or impartiality of our work. For DNV Kiran Radhakrishnan Lead Assessor, DNV Business Assurance India Private Limited, India. Rohitha Wickramasinghe Operations Manager – Sri Lanka DNV Business Assurance Lanka (Private) Limited Vadakepatth Nandkumar Assurance Reviewer, DNV Business Assurance India Private Limited, India 22 February 2022, Colombo, Sri Lanka. DNV Business Assurance Lanka (Private) Limited is part of DNV – Business Assurance, a global provider of certification, verification, assessment and training services, helping customers to build sustainable business performance. www.dnv.com 2 The DNV Code of Conduct is available on request from www.dnv.com 353 INTEGRATED REPORT 2021
  353. Annexure APPLICATION OF <IR> GUIDING PRINCIPLES This report is prepared in accordance with the <IR> Framework and has applied the following guiding principles: IR Guiding Principle How we have Complied Strategic Focus and Future Orientation The strategic focus and future orientation is derived by the management team considering inputs from diverse sources including our risk management process and evaluation of external environment. Our Bank strategy related to key material topics are presented on page 30-31 and our future plans are given in all business line reviews and the Chairman’s and Managing Director/CEO’s messages on pages 16 and 20 respectively. Connectivity of Information We have provided links to other reports for additional and supporting information related to identified material topics. The value creation for stakeholders on page 34-35 provides an overview of our business operations and interactions between capitals, business lines, risks and opportunities and value delivered to Stakeholders. Stakeholder Relationships We have a process of stakeholder identification and engagement and details of stakeholder engagement and relationship management is discussed and signposted on page 29. Materiality The process for determining materiality is based on identifying relevant matters and evaluating importance based in <IR> framework and is described on page 30. Conciseness We have made every effort to present relevant material information, including organisational context,strategy, governance, performance and prospects in a concise and effective manner. Reliability & Completeness We have established an internal and external process of evaluating our nonfinancial disclosures further external auditors have provided assurance on financial statements as given page 130-134, and nonfinancial disclosures related to the integrated reporting framework has been assured by DNV GL and their Independent assurance statement is given on page 351-353. Consistency & Comparability We have provided possible comparable information on a consistent basis for the benefit of stakeholders to understand our performance trends. Where there has been a departure in computation or measurement. criteria or restatements, same has been indicated in the relevant segment 354 HATTON NATIONAL BANK PLC
  354. GRI Index APPLICATION OF <IR> GUIDING PRINCIPLES This report is prepared in accordance with the <IR> Framework and has applied the following guiding principles: GRI Standards Disclosures Reference SDG Goals SDG Targets GRI 101 : FOUNDATION 2016 Page No IR 8 GENERAL DISCLOSURES GRI 102 : General Disclosures 2016 ORGANISATIONAL PROFILE GRI 102-01 Name of the organisation IR 372 GRI 102-02 Activities, brands, products and services IR 10-12 GRI 102-03 Location of headquarters IR 372 GRI 102-04 Location of operations IR 11, 46, 370-371 GRI 102-05 Ownership and legal form IR 372 GRI 102-06 Markets served IR 46, 48-51 GRI 102-07 Scale of the organisation GRI 102-08 Information on employees and other workers GRI 102-09 Supply chain IR 61-62 GRI 102-10 Significant changes to the organisation and its supply chain IR 24, 118, 34-35 GRI 102-11 Precautionary principle or approach IR 30-31, 118-121 GRI 102-12 External initiatives IR 58-69 GRI 102-13 Membership of associations IR 8 GRI 102-14 Statement from senior decision-maker IR 16-19 GRI 102-15 Key impacts, risks and opportunities IR 118-124 IR 14-15 Goal 8 & 10 8.5,10.3 IR 52-57 STRATEGY ETHICS AND INTEGRITY GRI 102-16 Values, principles, standards and norms of behavior IR 13, 52-57/ CG & RMR 20-25 GRI 102-17 Mechanisms for advice and concerns about ethics IR 84 GRI 102-18 Governance structure IR 85, CG & RMR 6, 47, 81 GRI 102-19 Delegating authority IR 85, 88-95 GRI 102-20 Executive-level responsibility for economic, environmental and social topics IR 87, CG & RMR 8 GRI 102-22 Composition of the highest governance body and its committees Goal 5 & 16 5.5, 16.7 IR 85-86/ CG & RMR 8-9 GRI 102-23 Chair of the highest governance body Goal 5 & 16 5.5, 16.7 IR 94-95, CG & RMR 4-5 GRI 102-24 Nominating and selecting the highest governance body Goal 5 &16 5.5, 16.7 IR 98-100, CG & RMR 9, 12 GRI 102-25 Conflicts of interest Goal 16 16.6 CG & RMR 22 GOVERNANCE 355 INTEGRATED REPORT 2021
  355. GRI Index GRI Standards Disclosures Reference SDG Goals GRI 102-26 Role of highest governance body in setting purpose , values and strategy IR 32-33 GRI 102 -27 Collective knowledge of highest governance body CG & RMR 8-10 GRI 102-28 Evaluating the highest governance body's performance IR 86-88 GRI 102-29 Identifying and managing economic, environmental and social impacts GRI 102-30 Effectiveness of risk management processes CG & RMR 49, 59-60 GRI 102-31 Review of economic, environmental and social topics IR 61-62, CG & RMR 7 GRI 102-32 Highest governance body's role in sustainability reporting IR 16-19, CG & RMR 17 GRI 102-33 Communicating critical concerns IR 30-31 GRI 102-34 Nature and total number of critical concerns CG & RMR 67 GRI 102-35 Remuneration policies IR 55, 87 CG & RMR 23 GRI 102-36 Process for determining remuneration IR 96-97 GRI 102-37 Stakeholders involvement in remuneration Goal 16 SDG Targets 16.7 Goal 16 16.7 Goal 8 8.8 Page No IR 61-62, CG & RMR 7 IR 96-97 STAKEHOLDER ENGAGEMENT GRI 102-40 List of stakeholder groups GRI 102-41 Collective bargaining agreements IR 29 GRI 102-42 Identifying and selecting stakeholders IR 34-35 GRI 102-43 Approach to stakeholder engagement IR 7, 34-35 GRI 102-44 Key topics and concerns raised IR 29 GRI 102-45 Entities included in the consolidated financial statements IR 146 GRI 102-46 Defining report content and topic boundaries IR 351-353 GRI 102-47 List of material topics IR 30-31 GRI 102-48 Re-statements of information IR 127 GRI 102-49 Changes in reporting IR 8-9 GRI 102-50 Reporting period IR 127, 372 GRI 102-52 Reporting cycle IR 372 GRI 102-53 Contact point for questions regarding the report IR 372 GRI 102-54 Claims of reporting in accordance with the GRI standards IR 8-9 GRI 102-55 GRI content index IR 355-362 GRI 102-56 External assurance IR 130-134, 351-353 IR 56 REPORTING PRACTICE 356 HATTON NATIONAL BANK PLC
  356. GRI Standards Disclosures Reference SDG Goals SDG Targets Page No GRI 103-1 Explanation of the material topic and it 's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 36-40 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 201-1 Direct economic value generated and distributed Goal 8 & 9 8.1, 8.2, 9.1, 9.4, 9.5 IR 14 GRI 201-2 Financial implications and other risks and opportunities due to climate change Goal 13 13.1 IR 62, 119 GRI 201-3 Defined benefit plan obligation and other retirement plans IR 304-311 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 96-97 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 202-2 Proportion of senior management hired from the local community ECONOMIC PERFORMANCE GRI 103 : Management Approach 2016 GRI 201 : Economic Performance 2016 MARKET PRESENCE GRI 103 : Management Approach 2016 GRI 202 : Market Presence 2016 Goal 8 8.5 IR 52-57 INDIRECT ECONOMIC IMPACTS GRI 103 : Management Approach 2016 GRI 203 : Indirect Economic Impact 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 32-33 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 203-1 Infrastructure investment and services supported Goal 9 &11 9.1, 9.4, 11.2 IR 34-35 GRI 203-2 Significant indirect economic impacts Goal 1, 3 & 8 1.2, 1.4, 3.8, 8.2, 8.3, 8.5 IR 335-336 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, CG & RMR 15 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 204-1 Proportion of spending on local suppliers PROCUREMENT PRACTICES GRI 103 : Management Approach 2016 GRI 204 : Procurement Practices 2016 Goal 8,17 8.3, 17.17 IR 62 357 INTEGRATED REPORT 2021
  357. GRI Index GRI Standards Disclosures Reference SDG Goals SDG Targets Page No ANTI-COMPETITIVE BEHAVIOUR GRI 103 : Management Approach 2016 GRI 206 : Anti-competitive Behaviour 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, CG & RMR 80 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 206-1 Legal action for anti-competitive behaviour, anti-trust and monopoly practices GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 217-220 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 207-1 Approach to tax Goal 1, 10 &17 1.1, 10.4, 17.1, 17.3 IR 217-220 GRI 207-2 Tax governance, control and risk management Goal 1, 10 &17 1.1, 10.4, 17.1, 17.3 IR 217-218 GRI 207-3 Stakeholder engagement and management of concerns related to tax Goal 1, 10 &17 1.1, 10.4, 17.1, 17.3 IR 219 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23 Goal 16 16.3 IR 316, CG & RMR 21 TAX 2019 GRI 103 : Management Approach 2019 GRI 207 : Tax 2019 MATERIALS GRI 103 : Management Approach 2016 GRI 301 : Materials 2016 GRI 103-3 Evaluation of the management approach GRI 301-1 Materials used by weight or volume Goal 8 & 12 8.4, 12.2 IR 60 IR 32-33 GRI 301-2 Recycled input materials used Goal 8 & 12 8.4, 12.2, 12.5 IR 60 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23 ENERGY GRI 103 : Management Approach 2016 GRI 302 : Energy 2016 GRI 103-3 Evaluation of the management approach GRI 302-1 Energy consumption within the organisation Goal 7,8 & 12 7.3, 8.4, 12.2 IR 61-62, 69 IR 32-33 GRI 302-3 Energy intensity Goal 7, 8,12 & 13 7.3, 8.4, 12.2, 13.1 IR 61-62, 69 GRI 302-4 Reduction of energy consumption Goal 7, 8,12 & 13 7.3, 8.4, 12.2, 13.1 IR 61-62, 69 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23 BIODIVERSITY GRI 103 : Management Approach 2016 GRI 304 : Biodiversity 2016 358 GRI 103-3 Evaluation of the management approach GRI 304-2 Significant impact of activities, products and services on biodiversity Goal 6,14 &15 6.6, 14.2, 15.1, 15.5 IR 69 GRI 304-3 Habitats protected or restored Goal 6,14 &15 6.6, 14.2, 15.2, 15.5 IR 69 HATTON NATIONAL BANK PLC IR 32-33
  358. GRI Standards Disclosures Reference SDG Goals SDG Targets Page No GRI 103-1 Explanation of the material topic and it 's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 58-62 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 305-1 Direct (Scope 1) GHG emissions Goal 3,12, 13 &- 15 3.9, 12.4, 13.1, 15.2 IR 61-62 GRI 305-2 Energy indirect (Scope 2) GHG emission Goal 3, 15, 12 &13 3.9, 12.4, 13.1, 15.2 IR 61-62 GRI 305-4 GHG emissions intensity Goal 13, 14 & 15 13.1, 14.3, 15.2 IR 61-62 GRI 305-5 Reduction of GHG emissions Goal 13, 14 & 15 13.1, 14.3, 15.2 IR 61-62 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 58-62 EMISSIONS GRI 103 : Management Approach 2016 GRI 305 : Emissions 2016 WASTE 2020 GRI 103 : Management Approach 2020 GRI 306 : Waste 2020 GRI 103-3 Evaluation of the management approach GRI 306-1 Waste generation and significant waste-related impacts Goal 3, 6, 12 & 14 3.9, 6.3, 6.4, 6.6, 12.4, 14.1 IR 60, 62 IR 32-33 GRI 306-2 Management of significant waste-related impacts Goal 3, 6 & 12 3.9,6.3,12.4,12.5 IR 60, 62 GRI 306-3 Waste generated Goal 3, 6,12, 14 & 15 3.9, 6.3, 6.4, 6.6, 12.4, 14.1, 15.1 IR 60, 62 GRI 306-4 Waste diverted from disposal Goal 8 & 12 8.4, 12.4 IR 60, 62 GRI 306-5 Waste directed to disposal Goal 6, 14 & 15 6.6, 14.2, 15.1,15.5 IR 60, 62 ENVIRONMENTAL COMPLIANCE GRI 103 : Management Approach 2016 GRI 307 : Environmental Compliance 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, CG & RMR 1-3 GRI 103-3 Evaluation of the management approach GRI 307-1 Non-compliance with environmental laws and regulations IR 32-33 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 52-57 Goal 16 16.3 IR 61 EMPLOYMENT GRI 103 : Management Approach 2016 GRI 401 : Employment 2016 GRI 103-3 Evaluation of the management approach GRI 401-1 New employee hires and employee turnover Goal 5, 8 & 10 5.1, 8.5, 8.6, 10.3 IR 54 IR 32-33 GRI 401-2 Benefits provided to full time employees that are not provided to temporary or part-time employees Goal 5 & 8 5.4, 8.5 IR 55-56, CG & RMR 23 359 INTEGRATED REPORT 2021
  359. GRI Index GRI Standards Disclosures Reference SDG Goals SDG Targets Page No LABOUR MANAGEMENT RELATIONS GRI 103 : Management Approach 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 52-57 GRI 103-3 Evaluation of the management approach IR 32-33 Minimum notice periods regarding operations changes IR 56 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 52-57 GRI 103-3 Evaluation of the management approach IR 32-33, CG & RMR 1-3 GRI 403-1 Occupational health and safety management system GRI 403-2 Hazard identification, risk assessment, and incident investigation CG & RMR 42-43 GRI 403-3 Occupational health services IR 55-56 GRI 403-4 Worker participation, consultation, and communication on occupational health and safety IR 55-56 GRI 403-5 Worker training on occupational health and safety IR 55-56 GRI 403-6 Promotion of worker health CG & RMR 42-43 GRI 403-7 Prevention and mitigation of occupational health and safety impacts directly linked by business relationships IR 119 GRI 403-8 Workers covered by an occupational health and safety management system IR 120 GRI 403-9 Work-related injuries IR 55 GRI 403-10 Work-related ill health IR 56 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 52-57 GRI 402 : Labour GRI 402-1 Management Relations 2016 OCCUPATIONAL HEALTH AND SAFETY GRI 103 : Management Approach 2018 GRI 403 : Occupational Health and Safety 2018 Goal 3, 8 &16 3.3, 3.4, 3.9, 8.8, 16.1 IR 55-56 TRAINING AND EDUCATION GRI 103 : Management Approach 2016 GRI 404 : Training and Education 2016 360 GRI 103-3 Evaluation of the management approach GRI 404-1 Average hours of training per year per employee Goal 4, 5,8 &10 4.3, 4.4, 4.5, 5.1, 8.2, 8.5 & 10.3 IR 53-54 GRI 404-2 Programs for upgrading employees skills and transition assistance programs Goal 8 8.2, 8.5 IR 53-54 GRI 404-3 Percentage of employees receiving regular performance and career development reviews Goal 5, 8 & 10 5.1, 8.5, 10.3 IR 53-54 HATTON NATIONAL BANK PLC IR 32-33
  360. GRI Standards Disclosures Reference SDG Goals SDG Targets Page No DIVERSITY AND EQUAL OPPORTUNITY GRI 103 : Management Approach 2016 GRI 405 : Diversity and Equal Opportunity 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The Management approach and its components IR 16-23, 52-57 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 405-1 Diversity of governance bodies and employees Goal 5 & 8 5.1, 5.5, 8.5 IR 56-57 FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING GRI 103 : Management Approach 2016 GRI 407 : Freedom of Association and Collective Bargaining 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 58-69 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 407-1 Operations and suppliers in which the right to freedom of association and collective bargaining may be at risk Goal 8 8.8 IR 62 HUMAN RIGHTS ASSESSMENT GRI 103 : Management Approach 2016 GRI 412 : Human Rights Assessment 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 52-57 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 412-2 Employee training on human rights policies or procedures IR 57, 96-97 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 58-69 LOCAL COMMUNITIES GRI 103 : Management Approach 2016 GRI 103-3 GRI 413 : Local Communities GRI 413-1 2016 Evaluation of the management approach IR 32-33 Operations with local community engagement, impact assessments and development programs IR 65-69 361 INTEGRATED REPORT 2021
  361. GRI Index GRI Standards Disclosures Reference SDG Goals SDG Targets Page No MARKETING AND LABELING GRI 103 : Management Approach 2016 GRI 417 : Marketing and Labeling 2016 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 51 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 417-1 Requirements for product and service Information and labeling Goal 12 12.8 IR 51 GRI 417-2 Incidents of non-compliance concerning product and services information and labeling Goal 16 16.3 IR 51 GRI 417-3 Incidents of non-compliance concerning marketing communication Goal 16 16.3 IR 29, 51 GRI 103-1 Explanation of the material topic and it's boundary IR 30-31 GRI 103-2 The management approach and its components IR 16-23, 44-51 GRI 103-3 Evaluation of the management approach IR 32-33 GRI 418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer data CUSTOMER PRIVACY GRI 103 : Management Approach 2016 GRI 418 : Customer Privacy 2016 362 HATTON NATIONAL BANK PLC Goal 16 16.3, 16.10 IR 50
  362. Sustainability Disclosure Topics & Accounting Metrics TOPIC ACCOUNTING METRIC Data Security (1) Number of data breaches, (2) percentage involving personally Quantitative identifiable information (PII), (3) number of account holders affected Financial Inclusion & Capacity Building CATEGORY Systemic Risk Management CODE PAGE NO FN-CB-230a.1 IR 50 Number, Percentage (%) Description of approach to identifying and addressing data security risks Discussion and n/a Analysis FN-CB-230a.2 IR 50 (1) Number and (2) amount of loans outstanding qualified to programs designed to promote small business and community development Quantitative Number, Reporting currency FN-CB-240a.1 IR 328 (1) Number and (2) amount of past due and nonaccrual loans qualified to programs designed to promote small business and community development Quantitative Number, Reporting currency FN-CB-240a.2 IR 41 Number of no-cost retail checking accounts provided to previously unbanked or underbanked customers Quantitative Number FN-CB-240a.3 IR 39 Number of participants in financial literacy initiatives for unbanked, underbanked, or underserved customers Quantitative Number FN-CB-240a.4 IR 42, 44, 51 Quantitative Reporting currency FN-CB-410a.1 IR 328 Commercial and industrial credit exposure, by industry Incorporation of Environmental, Social, and Governance Factors in Credit Analysis Business Ethics UNIT OF MEASURE Description of approach to incorporation of environmental, social, and governance (ESG) factors in credit analysis Discussion and n/a Analysis FN-CB-410a.2 IR 61 Total amount of monetary losses as a result of legal proceedings associated with fraud, insider trading, anti-trust, anti-competitive behavior, market manipulation, malpractice, or other related financial industry laws or regulations Quantitative FN-CB-510a.1 CG & RMR 63 Description of whistleblower policies and procedures Discussion and n/a Analysis Global Systemically Important Bank (G-SIB) score, by category Quantitative Reporting currency FN-CB-510a.2 IR 53, 108 Basis points FN-CB-550a.1 IR 27, CG & (bps) RMR 54 Description of approach to incorporation of results of mandatory Discussion and n/a and voluntary stress tests into capital adequacy planning, long- Analysis term corporate strategy, and other business activities FN-CB-550a.2 CG & RMR 50 ACTIVITY METRICS ACTIVITY METRIC CATEGORY UNIT OF MEASURE CODE PAGE NO (1) Number and (2) value of checking and savings accounts by segment: (a) personal and (b) small business Quantitative Number, Reporting currency FN-CB-000.A IR 39 (1) Number and (2) value of loans by segment: (a) personal, (b) small business, and (c) corporate7 Quantitative Number, Reporting currency FN-CB-000.B IR 328 363 INTEGRATED REPORT 2021
  363. Glossary of Financial /Banking Terms A B ACCEPTANCES The signature on a Bill of Exchange indicates that the person on whom it is drawn accepts the conditions of the Bill. In other words, a Bill of Exchange that has been accepted. BILLS SENT FOR COLLECTION A Bill of Exchange drawn by an exporter usually at a term, on an importer overseas and brought by the exporter to his Bank with a request to collect the proceeds. ACCOUNTING POLICIES The specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements. BONUS ISSUE The issue of new shares to existing shareholders in proportion to their shareholdings. It is a process for converting a company’s reserves (in whole or part) in to issued capital and hence does not involve an infusion of cash. ACCRUAL BASIS Recognising the effects of transactions and other events when they occur without waiting for receipt or payment of cash or cash equivalent. ACTUARIAL GAIN/LOSS Gain or loss arising from the difference between estimates and actual experience in a company’s pension plan. AMORTISATION The systematic allocation of the depreciable amount of an intangible asset over its useful life. AMORTISED COST Amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and minus any reduction for impairment or uncollectability. ASSOCIATE An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. AVAILABLE FOR SALE FINANCIAL ASSETS Available for sale financial assets are those non derivative financial assets that are designated as available for sale or are not classified as loans and receivables, held to maturity investments or financial assets at fair value through profit or loss. 364 HATTON NATIONAL BANK PLC C CAPITAL ADEQUACY RATIO The percentage of risk-adjusted assets supported by capital as defined under the framework of risk-based capital standards developed by the Bank for International Settlements (BIS) and as modified 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. 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 insignificant risk of changes in value. CASH GENERATING UNIT (CGU) The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. CEDED INSURANCE ARRANGEMENTS An arrangement where an insurance company passes the part or all of its risks from its insurance policy portfolio to a reinsurance firm. COLLECTIVELY ASSESSED LOAN IMPAIRMENT PROVISIONS Also known as portfolio impairment provisions. Impairment assessment on a collective basis for homogeneous groups of loans that are not considered individually significant and to cover losses that has been incurred but has not yet been identified at the reporting date. Typically, assets within the consumer banking business are assessed on a portfolio basis. COMMERCIAL PAPER An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. The debt is usually issued at a discount, reflecting prevailing market interest rates. COMMITMENT TO EXTEND CREDIT Credit facilities available to clients either in the form of loans, bankers’ acceptances and other on-balance sheet financing or through off -balance sheet products such as guarantees and letters of credit. COMPREHENSIVE INCOME The change in equity of a business enterprise during a period from non-owner sources. This includes all changes in equity during a period except those resulting from investments by owners and distributions to the owners. Comprehensive income equals net income plus other comprehensive income. CONTINGENCIES Conditions or situations at the reporting date, the financial effect of which are to be determined by the future events which may or may not occur. CONTRACTUAL MATURITY Contractual maturity refers to the final payment date of a loan or other financial instrument, at which point all the remaining outstanding principal will be repaid and interest is due to be paid. CORPORATE GOVERNANCE The system of internal controls and procedures by which corporate entities are governed. It is concerned with the way in which power is exercised over the management and direction of entity, the supervision of executive actions and accountability to owners and others. CORRESPONDENT BANK A Bank in a foreign country that offers banking facilities to the customers of a Bank in another country.
  364. COST INCOME RATIO Operating expenses excluding loan loss provision as a percentage of total operating 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 profits of the investee arising after the date of acquisition. Distributions received in excess of such profits 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. CREDIT RATINGS An evaluation of a corporate’s ability to repay its obligations or likelihood of not defaulting, carried out by an independent rating agency. CREDIT RISK Credit risk is the risk of financial loss to the Bank if a customer or counter party to a financial instrument fails to meet its contractual obligations, and arises principally from the loans and advances to customers and other banks and investment in debt/equity securities. CURRENCY RISK The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. CURRENCY SWAPS The simultaneous purchase of an amount of a currency for spot settlement and the sale of the same amount of same currency for forward settlement. D DEBT RESTRUCTURING/RESCHEDULING This is when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. It can involve altering the repayment schedule as well as debt or interest charge reduction. DIVIDEND YIELD Dividend earned per share as a percentage of its market value. DEFERRED TAX Sum set aside in the financial statements for taxation that may become payable in a financial year other than the current financial year. DIVIDEND PAYOUT RATIO It is the percentage of earnings paid to shareholders in dividends. DELINQUENCY A debt or other financial obligation is considered to be in a state of delinquency when payments are overdue. Loans and advances are considered to be delinquent when consecutive payments are missed. DOCUMENTARY LETTERS OF CREDIT 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 specific terms and conditions. Such undertakings are established for the purpose of facilitating international trade. DERECOGNITION Removal of a previously recognised financial asset or financial liability from an entity’s statement of financial position. DERIVATIVES A derivative is a financial instrument or other contract, the value of which changes in response to some underlying variable (eg. an interest rate), that has an initial net investment smaller than would be required for other instruments that have a similar response to the variable, and that will be settled at a future date. DEMINIMIS Features that could impact the cash flows of a financial asset by a de minimis amount both on a period by period basis and cumulatively. DEPRECIATION The process of systematically allocating the cost of long - lived (tangible) assets to the periods during which the assets are expected to provide economic benefits. DILUTED EARNINGS PER SHARE The earnings per share that would result if all dilutive securities were converted into common shares. DIVIDEND COVER Profit after tax divided by gross dividends. This ratio measures the number of times dividend is covered by the current year’s distributable profits. E EARNINGS PER SHARE (EPS) Profit attributable to ordinary shareholders, divided by the number of ordinary shares in issue. ECONOMIC VALUE ADDED (EVA) A measure of productivity which takes into consideration cost of total invested equity. EFFECTIVE INTEREST RATE Rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instruments or when appropriate a shorter period to the net carrying amount of the financial asset or financial liability. EFFECTIVE TAX RATE Income tax expense for the year divided by the profit before tax. EQUITY INSTRUMENT Equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. EQUITY METHOD The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the postacquisition changes in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investor’s share of the profit or loss of the investee. 365 INTEGRATED REPORT 2021
  365. Glossary of Financial /Banking Terms EMBEDDED DERIVATIVES An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. FINANCIAL ASSET OR FINANCIAL LIABILITY AT FAIR VALUE THROUGH PROFIT OR LOSS Financial asset or financial liability that is held for trading or upon initial recognition designated by the entity as ‘at fair value through profit or loss’. ESOP (EMPLOYEE SHARE OPTION PLAN) A method of giving employees shares in the business for which they work. FINANCIAL INSTRUMENT Financial Instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. EX-DIVIDEND DATE The first date that a share trades without the (i.e. “ex”) dividend EXERCISE PRICE The fixed price at which an option holder can buy or sell the underlying. EXPECTED CREDIT LOSSES (ECL) Expected credit losses are a probability – weighted estimate of credit losses over the expected life of the financial instrument. 12 MONTH EXPECTED CREDIT LOSSES (12MECL) The portion of life time expected credit losses that represent the expected credit losses resulting from default events of a financial instrument that are possible within 12 months after the reporting date. EXPOSURE AT DEFAULT (EAD) Gross carrying amount of financial instruments subject to impairment calculation. F FAIR VALUE The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transactions. It is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. FINANCE LEASE A lease in which the lessee acquires all the financial benefits and risks attaching to ownership of the asset under lease. 366 HATTON NATIONAL BANK PLC FINANCIAL RISK The risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates or credit rating or credit index. FOREIGN EXCHANGE INCOME The gain recorded when assets or liabilities denominated in foreign currencies are translated into Sri Lankan Rupees on the reporting date at prevailing rates which differ from those rates in force at inception or on the previous reporting date. Foreign exchange income also arises from trading in foreign currencies. FORWARD EXCHANGE CONTRACT Agreement between two parties to exchange one currency for another at a future date at a rate agreed upon today. FORWARD-LOOKING INFORMATION Incorporation of macroeconomic scenarios into the impairment calculations. G GOODWILL An intangible asset that represents the excess of the purchase price of an acquired company over the value of the net assets acquired. GROSS DIVIDENDS The portion of profit inclusive of tax withheld distributed 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 financial obligations to third parties. Certain other guarantees represent non-financial undertakings such as bid and performance bonds. H HEDGING A strategy under which transactions are effected with the aim of providing cover against the risk of unfavourable price movements (interest rate, foreign exchange rate, commodity prices, etc.). A hypothetical combination of the derivative and its underlying that eliminates risk. HELD TO MATURITY INVESTMENTS Non derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. I IMPAIRED LOANS Loans where the Group does not expect to collect all the contractual cash flows or expects to collect them later than they are contractually due. IMPAIRMENT This occurs when recoverable amount of an asset is less than its carrying amount. IMPAIRMENT ALLOWANCES Impairment allowances are provisions held on the statement of financial position as a result of the raising of a charge against profit for the incurred loss. An impairment allowance may either be identified or unidentified and individual (specific) or collective (portfolio) respectively. INCREMENTAL COST Costs that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
  366. INCURRED BUT NOT ENOUGH REPORTED (IBNER) The reserves for claims that become due with the occurrence of the events covered under the insurance policy, but have not been reported yet. INCURRED BUT NOT REPORTED (IBNR) An estimate of the liability for claimgenerating events that have taken place but have not yet been reported to the insurer or self-insurer. INDIVIDUALLY SIGNIFICANT LOANS Exposures which are above a certain threshold decided by the Bank’s management which should be assessed for objective evidence, measurement, and recognition of impairment on an individual basis. INDIVIDUALLY SIGNIFICANT LOAN IMPAIRMENT PROVISIONS Also known as specific impairment provisions. Impairment is measured individually for assets that are individually significant to the Group. Typically, assets within the corporate banking business of the Group are assessed individually. IRREVOCABLE COMMITMENT A loan amount that may be drawn down, or is due to be contractually funded in the future. INTANGIBLE ASSET An identifiable 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 RATE SWAP An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. INTEREST RATE RISK The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. INTEREST SPREAD This represents the difference between the average interest rate earned and the average interest rate paid on funds. INSURANCE RISK Risk, other than financial risk, transferred from the holder of a contract to the issuer. INVESTMENT PROPERTIES Investment property is property (land or a building - or part of a building - or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use or sale. INTEREST COVER A ratio showing the number of times interest charges is covered by earnings before interest and tax. J JOINT CONTROL Joint control is the contractually agreed sharing of the control over an economic activity and exists only when the strategic financial 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 LETTER OF CREDIT (L/C) Written undertakings by a Bank on behalf of its customer (typically an importer), authorising a third party (e.g. an exporter) to draw drafts on the Bank up to a stipulated amount under specific terms and conditions. Such undertakings are established for the purpose of facilitating international trade. LIABILITY ADEQUACY TEST (LAT) Assessment on each reporting date whether the recognized insurance liabilities are adequate, using current estimates of future cash flows under the insurance contract. LIFE TIME EXPECTED CREDIT LOSSES (LTECL) The expected credit losses that result from all possible default events over the expected life of a financial instrument. 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. LIQUIDITY RISK The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. LOANS AND RECEIVABLES Non derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those intended to sell immediately or in the near term and designated as fair value through profit or loss or available for sale on initial recognition. LOSS GIVEN DEFAULT (LGD) LGD is the percentage of an exposure that a lender expects to loose in the event of obligor default. 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 financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spreads and other asset prices. MATERIALITY The relative significance of a transaction or an event, the omission or misstatement of which could influence the decisions of users of financial statements. 367 INTEGRATED REPORT 2021
  367. Glossary of Financial /Banking Terms N NET ASSET VALUE PER SHARE Shareholders’ funds divided by the number of ordinary shares in issue. NET-INTEREST INCOME The difference between what a Bank earns on assets such as loans and securities and what it pays on liabilities such as deposits, refinance funds and inter-bank borrowings. NON CONTROLLING INTEREST Equity in a subsidiary not attributable, directly or indirectly to a parent. NON – GENUINE A cash flow characteristic that affects the instrument’s contractual cash flows only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur. NET PREMIUM METHOD A Net Premium Valuation is an actuarial calculation, used to place a value on the liabilities of a life insurer. O OFF BALANCE SHEET TRANSACTIONS Transactions that are not recognised as assets or liabilities in the statement of financial position, but which give rise to contingencies and commitments. ONEROUS CONTRACT A type of contract where the costs involved with fulfilling the terms and conditions of the contract are higher than the amount of economic benefits received. 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. 368 HATTON NATIONAL BANK PLC PAST DUE A financial asset is past due when a counterparty has failed to make a payment when contractually due. PRICE EARNINGS RATIO (P/E RATIO) Market price of an ordinary share divided by earnings per share (EPS). PROBABILITY OF DEFAULT (PD) PD is an internal estimate for each borrower grade of the likelihood that an obligor will default on an obligation. PRUDENCE Inclusion of a degree of caution in the exercise of judgement needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. R REGULAR WAY TRADES A type of trade that is settled through the regular settlement cycle required for the particular investment being traded. The settlement cycle is the time that the regulations of the securities market allows for the buyer to complete payment and for the seller to deliver the goods being purchased. REPURCHASE AGREEMENT This is a contract to sell and subsequently repurchase government securities at a given price on a specified future date. RETURN ON AVERAGE ASSETS (ROAA) A profitability ratio calculated as profit after tax expressed as a percentage of average total assets, used along with ROE, as a measure of profitability and as a basis of intra-industry performance comparison. RETURN ON AVERAGE EQUITY (ROAE) Profit after tax 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. 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 specific future date. RIGHTS ISSUE Issue of shares to the existing shareholders at an agreed price, generally lower than market price. RIGHT OF USE ASSETS The Right of use asset is a lessee’s right to use an asset over the life of a lease. RISK-WEIGHTED 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 reflect a comparable risk per rupee among all types of assets. The risk inherent in off - balance sheet instruments is also recognised, first by adjusting notional values to balance sheet (or credit) equivalents and then by applying appropriate risk weighting factors. 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. SHAREHOLDERS’ FUNDS Shareholders’ funds consist of stated capital, statutory reserves, capital and revenue reserves. SOLELY PAYMENTS OF PRINCIPAL AND INTEREST TEST (SPPI)Classification decision for non- equity financial assets under SLFRS 9. SPECIFIC IMPAIRMENT PROVISIONS Impairment is measured individually for loans that are individually significant to the Bank. STATE-OWNED ENTERPRISE A state-owned enterprise is a legal entity that is created by a government in order to partake in commercial activities on the government’s behalf.
  368. STATUTORY RESERVE F