Outlook for banking system remains poor
Profitability of banks in Bangladesh will remain under pressure as a result of continued high requirement of provisioning and a weak outlook for a rebound in credit growth due to extended economic weakness, said Fitch Solutions in a report released recently.
The affiliate of the American credit rating agency Fitch Ratings Inc said weak capital buffers and high levels of non-performing loans (NPLs) would be a persistent problem in the banking system, in particular for state-owned commercial banks (SOCB).
It said profitability for the Bangladesh banking sector, particularly the SOCBs, suffered over the quarters leading into December 2020.
And continued high loan-loss provisions are likely over the coming quarters as NPLs continue to accumulate amid a weak economic environment and weak lending practices, particularly of the SOCBs, prior to the pandemic, it added.
"We expect the profitability hit from loan loss provisioning on SOCBs to be more severe than private commercial banks (PCBs)," said the Fitch Solutions in its report on banking and financial services on Bangladesh.
Banks have to keep 0.50 per cent to 5 per cent in provisioning against general category loans, 20 per cent against classified loans of substandard category, and 50 per cent against classified loans of doubtful category. They have to set aside 100 per cent against the classified loans of bad or loss category.
"Outlook for Bangladesh banking system remains poor," it said.
Fitch Solutions said based on Bangladesh Bank data, private commercial banks (PCBs) were running a Tk 4,600 crore provisioning surplus as of December 2020, up from Tk 2,370 crore in September 2020.
This provides them with an even greater buffer to draw from, should loan delinquencies exceed their projections, it said.
In contrast, the Fitch Solutions said state commercial banks managed to reduce their provision to Tk 4,920 from Tk 5,520 over the same period.
But the shortfall nevertheless implies continued high levels of provisioning over subsequent quarters and this will weigh on profitability, it added.
The gross non-performing loans (NPL) ratio of the banking sector stood at 8.1 per cent in December 2020, and the ratios of the SOCBs and PCBs stood at 21 per cent and 4.8 per cent respectively.
The report said December data of the NPLs showed a decline relative to September 2020 because of the loan moratorium facility in effect during the period, loan rescheduling, and a high level of loan write-offs.
Yet, aggregate NPLs in the sector was high.
"With the moratorium facility having ended December 2020, NPLs should show a rise in subsequent readings. SOCBs account for almost half of total sector NPLs despite only having a quarter of total sector assets," said Fitch Solutions.
The report said there might be some recovery in credit growth but surge unlikely.
Fitch Solutions said any profitability recovery would be capped by a weak rebound in loans. It forecast that growth of advances to slow down to 10.5 per cent in 2021 from 12 per cent previously, representing only a slight recovery from 9 per cent in 2020.
"To be sure, our forecast continues to reflect some strengthening of credit growth from 8.9 per cent year on year in January," said Fitch Solutions, attributing the growth to export demand from two of the major markets Europe and the United States.
It, however, said delays to domestic vaccination would likely hinder a sharp rebound in business sentiment in Bangladesh for businesses reliant on the domestic market and cap gains to loan growth.
Fitch Solutions said capitalisation would come under further stress due to the NPL in 2021 following the expiry of a loan moratorium at the end of December 2020, with capital shortfall at state banks posing further downside risks to the view on credit growth.