Moody’s Banking System Outlook - Bangladesh

Bangladesh has 57 Banks which is already operating in full fledge. Besides that there are non-banking financial institutions which are also providing banking service to this economy. Banking service in Bangladesh has a mix output in terms of performance and profitability. Moody’s recent report on Bangladesh has sketched the current scenario of Bangladesh’s banking sector and also gave an outlook for the future based on their professional assessment expertise and experience on the banking industries all over the world.

Moody’s report has some key findings on the recent banking sector scenario of Bangladesh. This report are prepared by Moody’s investor service. The outline of those findings are.

  • Banks in Bangladesh are stable over the next 12-18 months because of the healthy operating environment, and despite legacy asset quality issues and tighter liquidity conditions.
  • Bangladesh’s economic growth is high and stable, powered by robust private investment and consumption growth.
  • The Key driving factor for the overall loan growth was Term loans in line with the robust underlying investment cycle.
  • Srikanth Vadlamani, one of Moody’s Vice President and Senior Credit Officer disclosed that the loan growth multiplier in Bangladesh with the current level of economic growth is 1.1x.
  • There was a strong trend of disbursement of loan in the construction and infrastructural development by the banking institutions.
  • Retail loan growth has shown a hike in recent time though this hike is really small in scale compared to any other sector.
  • Bank’s biggest weakness in Bangladesh is the asset quality. Particularly Moody referred the state owned banks as the biggest participant of this industry which is vulnerable to the bad loans driven by corporate delinquencies.
  • Banks are relying mostly on market funds to accommodate the loan growth as loan to deposit ratios rising especially for the private sector banks. Moody’s observation is that, loan growth has consistently outpaced deposit growth over the past three years.

Observations on Bangladesh’s banking

  • Retail loan section is suggested to be strengthened.
  • Banks’ capital level should deteriorate mildly, due to faster loan growth and reduced profitability.
  • Credit costs will stay elevated over the next 12-18 months, as some rescheduled loans became non-performing; thereby necessitating a corresponding amount of provisioning.
  • Steady credit growth and the rebound in remittance inflows will also support domestic consumption.
  • Asset quality has been worsening in the highly fragmented banking system.
  • Credit cost is dragging profitability. Because of the 30%-35% of pre-provision income following tightened rescheduling rules in 2012, returns on average assets for private sector banks will stabilize at low levels.
  • Net interest margin and core profitability will remain stable for private sector banks, with stronger loan demand to support loan yields and net interest income.

Remarks from Moody’s Investor Service

  • Outlook for Bangladesh’s banking system is negative despite the country’s robust economy because of the deterioration in the banks’ asset quality.
  • Credit costs will rise, in tandem with the deterioration in asset quality.
  • Underlying weaknesses in corporate governance, especially at state-owned banks, has led to high non-performing loan ratios.
  • Banks in Bangladesh will continue to maintain adequate funding and liquidity.
  • Bangladesh government will remain supportive of the banking system as government was always supportive to the banks in past failure.