The outlook for the banking system remains poor

Bank profitability in Bangladesh will remain under pressure due to still high provisioning requirements and weak prospects for a rebound in credit growth due to prolonged economic weakness, Fitch Solutions said in a recently released report.

Subsidiary of US 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, especially for commercial banks. (SOCB).

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He said the profitability of the Bangladeshi banking sector, particularly SOCBs, suffered in the quarters leading up to December 2020.

And high loan loss provisions will likely continue in the coming quarters as NPLs continue to accumulate in a weak economic environment and weak lending practices, particularly SOCBs, before the pandemic, he said. added.

“We expect the profitability of loan loss provisioning of SOCBs to be more severe than that of private commercial banks (PCBs),” Fitch Solutions said in its Bangladesh Banking and Financial Services report.

Banks must retain 0.50% to 5% provisioning on general category loans, 20% on loans classified as below standard and 50% on loans classified as doubtful. They must set aside 100 percent against loans classified as bad debts or losses.

“The outlook for the Bangladeshi banking system remains poor,” he said.

Fitch Solutions said that, based on Bangladesh Bank data, private commercial banks (PCBs) had a provisioning excess of Tk 4,600 crore in December 2020 compared to Tk 2,370 crore in September 2020.

This provides them with an even larger buffer to draw on, should loan defaults exceed their projections, he said.

In contrast, Fitch Solutions said state commercial banks managed to reduce their provision to Tk 4,920 from Tk 5,520 during the same period.

But the shortfall nonetheless means continued high levels of provisioning in the coming quarters, which will weigh on profitability, he added.

The gross non-performing loan (NPL) ratio of the banking sector stood at 8.1% in December 2020, and the SOCB and PCB ratios stood at 21% and 4.8% respectively.

The report said December NPL data showed a decline from September 2020 due to the loan moratorium facility in effect during the period, loan rescheduling and a high level of loan cancellations. loans.

Yet aggregate NPLs in the sector were high.

“With the moratorium facility ending in December 2020, NPLs are expected to show an increase in subsequent readings. SOCBs make up almost half of total NPLs in the sector while they make up only a quarter of total assets industry,” said Fitch Solutions.

The report says there could be some recovery in credit growth, but a surge is unlikely.

Fitch Solutions said any recovery in profitability would be capped by a weak rebound in lending. It forecasts advance growth to slow to 10.5% in 2021 from 12% previously, only a slight recovery from 9% in 2020.

“Certainly our forecast continues to reflect some strengthening in credit growth of 8.9% year-on-year in January,” Fitch Solutions said, attributing the growth to export demand from two major markets, Europe and the United States.

However, he said delays in national vaccination would likely hamper a sharp rebound in the business climate in Bangladesh for businesses reliant on the domestic market and cap gains on loan growth.

Fitch Solutions said capitalization would come under further pressure due to the NPL in 2021 after a lending moratorium expired at the end of December 2020, with state banks’ lack of capital posing further downside risks. for credit growth.

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