Moody’s keeps outlook for Bangladesh banks’ negative

Staff Correspondent | New Age  Apr 28,2020

The outlook for the Bangladeshi banking system remains negative on business disruptions due to the coronavirus outbreak as it will weaken the banks’ operating environment and weigh on asset quality, according to the latest report of the Moody’s Investors Service.

Moody’s in its report titled ‘Banking System Outlook Update’ said that Bangladesh economy was facing disruptions to both domestic and export demand caused by the pandemic, which would result in a further deterioration in the banks’ credit profiles.

‘This adds to their persistent weakness in asset quality, a result of poor corporate governance, as well as weak laws and regulations,’ it said.

Nonperforming loans will increase across multiple sectors, including readymade garment, textile, retail, manufacturing and trade services, the report predicted.

While regulatory deferments of loan classification and repayments will provide temporary relief, they could raise risks for banks in the longer term, it said.

Profitability will deteriorate due to higher credit costs and lower net interest margins.

Capital accumulation will slow because of weaker profitability and new tax rules.

The deterioration in asset quality will lead to higher credit costs while net interest margins will contract because of declines in loan repayments and regulatory cap of 9 per cent lending rate.

The banks’ loan-to-deposit ratios will rise as borrowers draw down on their credit facilities and depositors withdraw their savings to alleviate cash flow crunches.

Smaller private sector banks will also be increasingly vulnerable to a depositors’ flight to quality.

Yet liquidity support measures by the Bangladesh Bank will help alleviate any potential liquidity squeeze at the banks, the report said.

It also said that the government would remain supportive of the banking system.

Operating environment will deteriorate due to coronavirus disruptions as export-oriented apparel and textile sectors have been hit by order cancellations and deferments.

Lockdown, coupled with declining remittance inflows, will also dampen domestic consumption and investments, the report said.

In the report, Moody’s also changed its outlook for the Mongolian banking system to negative from stable, while maintained its negative outlook for the Sri Lankan banking system.