One third of listed banks’ asset quality drops

One-third of the listed banks in Bangladesh, especially the shariah-based lenders, suffered a drop in profits in the last five years due to the deterioration in their asset quality, higher non-performing loans, and the impact of the coronavirus pandemic. 

Of the 34 banks listed on the Dhaka Stock Exchange, 31 published information on the return on asset (ROA), a significant performance indicator. Of them, 10 have almost seen a continuous fall in ROA since 2017.

The ROA indicates how profitable a bank is in relation to its total assets, which include cash, government securities and loans.

Only five banks saw a continuous rise in the indicator. The rest witnessed ups and downs and their ROA remained the same in the last five years.

Of the banks that posted a downward trend in ROA, seven are shariah-compliant: Social Islami Bank Ltd (SIBL), Islami Bank Bangladesh Ltd (IBBL), Al-Arafah Islami Bank (AIBL), Exim Bank, Union Bank, ICB Islamic Bank, and Standard Bank.

Traditional lenders National Bank, One Bank and South-Bangla Agricultural Bank (SBAC) are also on the list.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, said: "Allowing a huge amount of rescheduling of loans may sometime contribute to the reduction of the return on assets since the return falls."

"When a bank lends without following due diligence, the asset quality declines and it ultimately erodes the capital of the bank."

"It raises the burden on banks and their lending capacity shrinks. Eventually, the profitability falls and banks become weak."

According to Ahmed, the lack of efficiency in selecting good borrowers is at the heart of the problem.

SIBL's ROA has been declining every year since 2017. Its ROA went down to 0.42 per cent in 2021 from 0.54 per cent in 2018 and 1.4 per cent in 2017.

"The asset quality of SIBL was better in 2022 compared to the previous year," said Zafar Alam, managing director of the bank.

"The classified investments of SIBL dropped last year so 2023 would be better."

Alam thinks since Bangladesh's export earnings and remittance receipts are going up, 2023 would be a good year for the banking sector.

"The drop in the return on asset indicates that their profitability deteriorated and asset quality fell," said Toufic Ahmad Choudhury, director-general of the Bangladesh Institute of Bank Management.

It might be for higher NPLs and operational costs, flaws in efficiency, and/or the lower net interest income, he reasoned.

As of September, NPLs amounted to a whopping Tk 134,396 crore, representing 9.36 per cent of the total outstanding loans in the banking sector, Bangladesh Bank data showed.

"The banking sector should work on reducing NPLs and operational costs," Choudhury said.

The ROA of IBBL was 0.55 per cent in 2017 but it plunged to 0.30 per cent in 2021.

AIBL witnessed a fall in ROA from 0.99 per cent five years ago to 0.46 per cent in 2021.

Exim Bank's ROA decreased from 1.06 per cent to 0.42 per cent during the period.

A senior official of Standard Bank said the lender's return on assets was almost unchanged in 2017, 2018 and 2019 before declining in the following two years mainly due to the impact of the pandemic as businesses saw a sharp slowdown.

The bank's ROA was 0.75 per cent, 0.67 per cent, and 0.76 per cent in 2017, 2018 and 2019, respectively. It slipped to 0.36 per cent in 2021, showed the annual report of the bank.

"The asset quality is good and it would be better this year," said the senior official, seeking anonymity.

The ROA of Union Bank fell from 0.83 per cent to 0.39 per cent in a span of five years, while National Bank's ROA dipped from 1.43 per cent to 0.04 per cent.

SBAC, One Bank, Standard Bank, and ICB Islamic Bank also saw a drop in their return on assets during the five-year period.

Officials of IBBL, AIBL, Exim Bank and Union Bank could not be reached for comments despite repeated attempts. Officials of ICB Islamic Bank could not be contacted.