HNB’s strategic vision to drive transformation, growth and industry leadership

Hatton National Bank (HNB)’s strategic direction is firmly aligned with the broader objectives of Sri Lanka’s economic recovery. With the country emerging from a severe financial crisis during COVID, Damith Pallewatte, the newly appointed managing director/CEO of HNB believes that the banking sector has a crucial role to play in supporting national growth. “We are on the path to recovery, and our role is to support this recovery by fostering sustainable growth,” said Pallewatte.

The bank’s growth strategy hinges on three main pillars: organic growth, inorganic growth, and digitalisation. This three-pronged growth strategy is driven on the solid foundation of business stability and sustainability, leveraging best-in-class customer experience, each of which provides valuable lessons for the banking sector.

HNB is focused on deepening its existing customer base, particularly in key sectors like agriculture, microfinance, and small and medium enterprises (SMEs). By providing specialised banking products and services for underserved sectors, HNB is contributing to both economic diversification and industrialisation. For example, the bank’s emphasis on sectors like IT, hospitality and financial services supports economic expansion beyond traditional industries. In fact, HNB’s loan growth for 2024 in the micro, small, and medium enterprise (MSME) sector is around 11%, reflecting its commitment to these key areas.

Expanding beyond Sri Lanka’s borders is a key strategy for HNB. “We aim to diversify our revenue sources and reduce risk by expanding into overseas markets. Our goal is to be a regional or even global player within five years,” explained Pallewatte. This growth strategy ensures that the bank’s revenue base becomes more robust, mitigating risks by establishing a presence in multiple markets. The expansion efforts focus on entering regions with strong growth potential while adapting HNB’s business models to meet local market needs.

In a fragmented banking market, HNB sees opportunities in consolidation. With 30 banks operating in Sri Lanka, Pallewatte emphasised that mergers and acquisitions could help create larger, more efficient institutions capable of addressing the growing financial needs of both businesses and consumers. The benefits of consolidation, including improved cost-efficiency, economies of scale, and enhanced capacity to handle larger transactions, are crucial for the banking sector’s resilience. HNB is monitoring potential opportunities for mergers in Sri Lanka’s banking sector, with plans to lead in market consolidation over the next five to seven years.

Embracing digital transformation and customer-centric innovation

Digital transformation is one of the key pillars of HNB’s strategy. The bank is keen on customer-centric innovation, ensuring that technology not only enhances the customer experience but also helps streamline internal processes for greater operational efficiency.

HNB’s digital transformation began in its retail banking segment, where it sought to make banking more accessible, intuitive, and convenient for customers. The bank’s Digital Banking app has experienced tremendous growth, from just 20,000 users at the start of the COVID-19 pandemic to nearly 800,000 users today. The app provides customers with a comprehensive suite of services, allowing them to open accounts, access loans, and conduct transactions—all from their smartphones.

“Non-face-to-face onboarding is a game-changer for us,” said Pallewatte. This innovation has not only increased customer engagement but also ensured compliance with know-your-customer (KYC) requirements, allowing HNB to serve customers across Sri Lanka, even in remote or underserved areas. This model offers an actionable example for banks in emerging markets looking to offer digital services while maintaining regulatory compliance.

SOLO—which acts as a fully-fledged digital wallet and an aggregator payment platform—is another key innovation. This platform allows consumers to perform a wide variety of financial functions, such as paying bills, transferring funds to payee partners or any mobile and all in one place. “With SOLO, we’ve created an ecosystem where HNB and non-HNB customers can manage all their payments seamlessly,” said Pallewatte. The Digital Banking and SOLO apps have a combined 1.2 million customer base, although users of SOLO do not have to be HNB customers, as they can bind their other bank or card accounts to the platform. The plan going forward is to integrate the two platforms to provide customers and non-customers easier access to HNB’s products and services.

In addition, HNB has integrated quick response (QR) code technology into its digital wallet, allowing customers and businesses to make transactions using mobile phones. These advancements are not only about enhancing convenience but also contributing to financial inclusion—by enabling digital payments in a country where cash-based transactions have traditionally been dominant.

Empowering merchants and SMEs with digital tools

On the merchant side, HNB has pioneered the use of QR codes to allow businesses to accept electronic payments. This has been especially transformative for SMEs, which may have previously lacked access to digital payment systems due to high costs or complexity.

With a claimed market share of approximately 40% in merchant acquiring services, HNB is helping SMEs adopt these digital payment solutions and enabling them to access critical financing. “Our QR technology enables us to track transaction volumes and offer financing to businesses based on their digital transaction history,” Pallewatte explained. By offering data-driven lending based on real-time transaction data, HNB is empowering SMEs to grow without the need for traditional credit histories, thus opening up credit access to a broader range of businesses.

A balanced approach for high-net-worth individuals

While HNB has focused heavily on mass-market digital banking, it has not overlooked the needs of high-net-worth individuals (HNWIs). Pallewatte acknowledged that this segment of clients values personal relationships and the expertise that traditional banking offers, but there is a growing demand for digital tools in this segment as well.

"For our affluent customers, we offer bespoke private banking services. The personal touch is essential, but we are also introducing digital tools that allow them to manage their wealth more effectively,” Pallewatte said. HNB’s private banking service—including The Club, an exclusive offering for the wealthiest clients with deposits in excess of LKR 25 million (about $86,500)—combines traditional relationship banking with advanced digital tools to meet the needs of a new generation of affluent customers who are increasingly tech-savvy.

To complement the growth of its HNWI proposition, HNB is integrating more cross-business synergies within the group. This includes leveraging its life insurance subsidiary, which fully owns a general insurance company, alongside its non-bank financial institution that cater to relatively higher-risk market segments. Additionally, the bank's joint venture investment bank and energy fund further expand the scope of services available to clients, offering opportunities in sectors that align with global trends in sustainability and innovation.

Through these initiatives, HNB aims to provide a comprehensive financial ecosystem that can cater to both traditional and modern financial services needs. With these offerings, the bank is positioned to attract more diverse investors who are increasingly looking for investment avenues beyond the conventional asset classes.

Commitment to sustainability, green financing and social impact

Sustainability plays a key role in HNB’s long-term strategy. The bank has been at the forefront of green financing, supporting projects that contribute to both environmental and social impact. HNB’s commitment to renewable energy and green financing includes investments in hydropower, solar, wind, and biomass energy, as well as financing Sri Lanka’s first waste-to-energy project in Colombo.

“We view sustainability as integral to our mission, not just a trend. Supporting businesses in their transition to renewable energy and supporting vulnerable sectors of the economy are key ways we can make a positive impact,” Pallewatte emphasised. The Prosperity Solution—HNB’s initiative to support agriculture modernisation through technology—has helped farmers adopt tools such as drones and precision farming techniques. This social impact initiative supports both environmental sustainability and economic growth in Sri Lanka’s rural communities.

Expanding beyond Sri Lanka

HNB is also focused on expanding its presence beyond Sri Lanka’s borders. One of the key components of this strategy is the bank’s recent bid to acquire the Bangladesh operations of Bank Alfalah. Bangladesh, with its much larger population and rapidly growing export sector, presents a significant opportunity for HNB to diversify its revenue sources.

Pallewatte compared the two nations, emphasising the differences in both population and economic scale: “We are a 22 million nation, whereas Bangladesh is a 173 million nation, which offers significant growth opportunities to seize. Their GDP ( gross domestic product ) is around $460 billion, compared to our $84 billion economy. They have a much larger market, and their economy has the capacity to attract diverse range of investments into the country. The scale is different.

“We see huge potential in Bangladesh despite the current temporary setback. It’s a fast-growing market with a growing middle class and a diverse economy. Our products can be tailored to meet the local demand with little modification, and our experience in Sri Lanka gives us a solid foundation,” Pallewatte noted. HNB’s regional expansion strategy involves careful due diligence and market research to ensure that it can adapt its business models to local markets effectively.

Sovereign rating and role in attracting FDIs

Sri Lanka’s sovereign credit rating remains in default as of now, but the country is undergoing important reforms to address its fiscal challenges. Although Sri Lanka’s sovereign ratings have not been upgraded yet, the debt restructuring process initiated by the new government has created positive momentum. “We have seen a bit of optimism being built. Positivity is created,” said Pallewatte, referencing the political stability after recent elections.

The successful completion of this debt restructuring has the potential to improve Sri Lanka’s credit profile significantly. Once Sri Lanka’s sovereign rating improves, it will become more attractive for foreign direct investment (FDI), which is crucial for the nation's economic recovery. A more favourable rating will also improve investor confidence, encouraging increased international investment across various sectors, including infrastructure, technology, and manufacturing.

“This shift is critical for attracting foreign capital, which is key to our broader economic recovery,” said Pallewatte. His confidence is also buoyed by Sri Lanka’s strategic location at the crossroads of global trade routes, which, once the rating improves, will further solidify Sri Lanka’s position as a key player in global trade and supply chains.

The Colombo Port City project, in particular, stands to benefit from this evolving economic landscape. Pallewatte sees the Port City project as a cornerstone of Sri Lanka’s future role in global trade. “Port City is a completely different jurisdiction to facilitate ease of doing business. It will enable less restrictions on foreign currency transactions and create an environment that encourages investment,” he explains.

This development, combined with improved sovereign ratings, is expected to position Sri Lanka as a vital hub for logistics, manufacturing, and global supply chains. HNB, under Pallewatte’s leadership, is actively looking to capitalise on these developments by supporting trade and export-oriented businesses.

Funding, asset-liability management and net interest margin

A less visible aspect of HNB’s strategy is its financial management, particularly in areas like funding, asset-liability management (ALM) and net interest margin (NIM). These aspects are crucial in ensuring HNB's financial stability while supporting its expansion plans.

Pallewatte explained that currently, the bank’s liquidity levels remain strong with liquidity coverage ratio (LCR) around 300% against the 100% requirement.

“Our focus continues to be on raising low-cost funding, especially focusing on low-cost current account savings account (CASA). While our concentration level for funding remains low, with nearly 60% of deposits and debt coming from retail depositors, we look at alternative sources of funding such as short-term and long-term borrowings through local and foreign sources and through long-term debt instruments, based on the need to ensure stable funding,” he said.

The bank is also focused on the optimisation of its funding mix, ensuring it has the flexibility to navigate fluctuating interest rates and capital requirements. By maintaining a diversified funding structure, HNB is positioning itself for resilience during periods of economic instability.

HNB has developed a comprehensive ALM framework to address the risks posed by interest rate fluctuations and currency volatility. “Managing interest rate risk is a key focus for us, particularly as we look to grow both domestically and regionally,” Pallewatte shared. The bank uses hedging instruments such as interest rate swaps and currency forwards to minimise the impact of volatile interest rates on its balance sheet.

In addition to hedging, HNB carefully manages the duration gap between its assets and liabilities, ensuring that the maturities of loans and deposits are well-matched. This is essential to mitigate the impact of interest rate changes on profitability and liquidity.

“Net interest margin remains a critical metric for our profitability,” Pallewatte stated. With Sri Lanka’s interest rate environment in flux, HNB is focused on maintaining a healthy NIM by carefully balancing loan pricing with funding costs. By targeting high-growth sectors such as export trade, SMEs, and green financing projects, HNB has been able to better align its lending book to core objectives thereby driving growth and profitability.

Currently, about 35% of total deposits are in sticky CASA. It keeps a total loans-to-deposit ratio at around 70%, of which 50% goes to corporates, and 25% each to SMEs and retail segments, giving it ample liquidity.

Additionally, HNB has made efforts to optimise its deposit mix, ensuring that it can fund its loan book efficiently while managing costs. The bank is also focusing on generating non-interest income from fee-based services like digital banking and merchant acquiring, which supplement traditional interest income and help offset pressures on NIM.

Wholesale and corporate banking driving growth

HNB’s wholesale banking division plays a pivotal role in supporting large-scale corporate clients and facilitating major economic projects. This segment is critical as the bank seeks to foster growth, enabling companies to access financing for expansion, infrastructure development, and international trade.

HNB’s corporate banking services cater to large corporations, with products designed to meet the unique needs of this sector. These include working capital solutions, trade finance, project financing, and syndicated loans. HNB offers structured finance solutions, allowing companies to tailor their financial products to match their operational cash flow needs, while ensuring that the bank’s risk exposure is carefully managed.

“We are focusing on building long-term relationships with our corporate clients, offering them tailored financing solutions that allow them to scale and grow in the regional and international markets,” Pallewatte stated. Wholesale banking is also central to HNB’s regional expansion strategy, as the bank works to support cross-border trade and FDI into Sri Lanka.

With a strategic focus on trade finance and capital market services, HNB is positioning itself as a key partner for businesses looking to expand regionally. This includes facilitating cross-border payments, managing foreign exchange risk, and financing trade transactions, particularly as the bank deepens its presence in Bangladesh and other prospective markets.

Financial performance and the road ahead

Reflecting on HNB’s performance, Pallewatte noted that despite the challenges posed by rising interest rates and inflation in 2022 and a reversal of rates in 2023 and 2024, the bank has continued to show growth. By focusing on strategic sectors such as manufacturing, exports such as agriculture and apparel, and logistics, HNB has been able to maintain profitability and expand its loan book. “We’ve seen strong performance in sectors like export trade, where we’ve been able to provide critical financing solutions,” Pallewatte shared.

In 2024, HNB demonstrated robust financial performance, marked by significant growth in key indicators. Year-over-year profit after tax reached LKR 22.2 billion (approximately $76 million), growing by 34%, despite a decline in the average weighted prime lending rate (AWPLR) by approximately 10 percentage points over the past nine months, compared to the corresponding period in 2023. Total deposits reached LKR 1.6 trillion (about $5.5 billion), with CASA deposits growing by 14.5% during the nine-month period.  

Advances exceeded LKR 1 trillion (about $3.8 billion), reflecting strong credit growth. Regarding asset quality, HNB's net Stage 3 or impaired loans ratio improved to 3.32% in the third quarter of 2024, down from 4.09% in the first half of 2024, and the Stage 3 provision coverage ratio increased to 60.50% from 56.08% over the same period. These indicators reflect HNB's effective strategies in managing growth and maintaining asset quality.

Looking ahead to 2024, HNB is poised to continue its growth trajectory, focusing on several strategic areas. HNB plans to enhance its digital banking platforms, aiming to increase customer engagement and service. The bank is investing in advanced technologies to offer innovative financial solutions, catering to the evolving needs of its customers. The bank is exploring opportunities to expand its presence in the South Asian region, leveraging its expertise to tap into emerging markets.

This expansion is expected to diversify revenue streams and reduce reliance on the domestic market. HNB is committed to integrating sustainable practices into its operations. The bank plans to increase financing for sustainable projects and adopt environmentally-friendly practices within its branches and operations.

These strategic initiatives are expected to strengthen HNB's market position and drive sustainable growth in the coming years.

Looking forward, HNB’s strategy is focused on sustainable loan growth while managing risks associated with economic fluctuations. The bank’s goal is to continue expanding its loan book in a way that ensures financial stability while supporting Sri Lanka’s recovery and long-term growth.

A rich resource for industry learning

Under Pallewatte’s leadership, HNB is embracing digital transformation, sustainability, and regional expansion as core components of its strategy for growth. By focusing on financial inclusion, green financing and providing customer-centric banking solutions, HNB is positioning itself to thrive in both the local and regional markets.

From implementing digital banking solutions to supporting sustainable development and empowering SMEs, HNB offers insights for success, allowing banks to better serve their customers, drive economic growth and ensure long-term sustainability.