Adverse weather ahead for banks: Moody’s

The global rating agency Moody's Investors Service yesterday gave a negative outlook for the country's banking sector for the next 12 to 18 months as coronavirus-induced disruptions to domestic and export demand is deteriorating lenders' credit profiles.

The general shutdown coupled with declining remittance inflows due to disruptions in the Middle East will also dampen domestic consumption and investment.

"This adds to their persistent weakness in asset quality in the banking sector -- a result of poor corporate governance, as well as weak laws and regulations," it said.

Deterioration of asset quality means defaulted loans in the banking sector will rise shortly.

Default loans will increase across multiple zones, including but not limited to the garment sector.

At the end of 2019, default loans stood at Tk 94,313 crore, up 0.42 per cent year-on-year, according to data from the Bangladesh Bank.

Provision coverage against the soured and unclassified loans in Bangladesh is now inadequate and it will narrow further in the days 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 longer term.

As of last year, a total 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 because of the decline in loan repayments and a regulatory 9 per cent cap on lending rates that took effect on April 1, the report said.

Capital base in the banking sector will deteriorate as well amid a slow capital accumulation because 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 levels of capital preserved by banks will provide 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 alleviate cash flow crunches due to the ongoing shutdown.

The BB on April 12 increased the loan-deposit ratio by 2 percentage points to 87 per cent for traditional banks and 92 per cent for Shariah-based banks.

But banks will still feel the pinch in controlling their loan-deposit ratio in the coming days due to their difficulties in mobilising deposit amid economic fallout.

Mutual Trust Bank Managing Director Syed Mahbubur Rahman agreed with the Moody's projection for the banking sector.

Banks will have to 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 immediate 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 per cent 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.