Adverse weather ahead for banks: Moody’s
The global rating agency Moody's Investors Service yesterday gave a poor outlook for the country's banking sector for another 12 to 1 . 5 years as coronavirus-induced disruptions to domestic and export demand is deteriorating lenders' credit profiles.
The general shutdown in conjunction with declining remittance inflows because of disruptions in the centre East may also dampen domestic consumption and investment.
"This increases their persistent weakness in asset quality in the banking sector -- due to poor corporate governance, and also weak regulations," it said.
Deterioration of asset quality means defaulted loans in the banking sector will rise shortly.
Default loans increase across multiple zones, including but not limited by the garment sector.
Towards the end of 2019, default loans stood at Tk 94,313 crore, up 0.42 % year-on-year, according to data from the Bangladesh Bank.
Provision coverage against the soured and unclassified loans in Bangladesh is currently inadequate and it'll narrow further in the times to ahead.
While regulatory deferments of loan classification and repayments will provide temporary relief to keep provisioning, inadequate provisioning could raise risks for banks in the long run.
As of last year, a complete of 12 banks suffered provision shortfall of Tk 10,797 crore.
Besides, profitability in banks will deteriorate due to higher credit costs and lower net interest margins (NIMs) between lending and deposit.
NIM means income from loans after deducting the interest given to depositors.
The major indicator of the banks will contract as a result of the decline in loan repayments and a regulatory 9 % cap on lending rates that took influence on April 1, the report said.
Capital base in the banking sector will deteriorate as well amid a slow capital accumulation as a result of weaker profitability.
New tax rules imposed on retained earnings, stock dividends or both, which took effect in July 2019, will further constrain internal capital generation at listed banks.
Current degrees of capital preserved by banks provides limited buffers against potential loan losses.
Banks' loan-to-deposit ratios will rise further as borrowers draw down on their credit facilities and depositors withdraw their savings to ease cash flow crunches due to the ongoing shutdown.
The BB on April 12 increased the loan-deposit ratio by 2 percentage points to 87 % for traditional banks and 92 % for Shariah-based banks.
But banks will still feel the pinch in controlling their loan-deposit ratio in the coming days because of their difficulties in mobilising deposit amid monetary fallout.
Mutual Trust Bank Managing Director Syed Mahbubur Rahman agreed with the Moody's projection for the banking sector.
Banks must struggle to manage their profit due to the lower NIMs.
"Defaulted loans will increase further. So, the central bank should give more support to the banking sector," said Rahman, also an instantaneous past chairman of the Association of Bankers, Bangladesh, a forum of MDs of banks.
Moody carries out the rating for eight banks in Bangladesh, which accounted for 20 % and 17.5 per cent of total loans and deposits in the banking sector.
Of the banks, the agency has given the higher rating for Brac Bank, which is Ba3-Negative.
