AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report

Capital

Bangladesh Banking Sector Report

The COVID Crisis Poses A Historic Challenge To Banks - Only The Most Agile Will Survive

Key Highlights
Banks in Bangladesh were already struggling with a challenging environment Md. Nafeez Al Tarik CFA, FRM
Pre- Covid. The pandemic is worsening the impact of recent policy measures +880 170 852 2652
creating an Ill-timed double whammy from lending/deposit rate cap and legacy [email protected]
high NPLs.
Shohana Ahmed
Not being able to price loans effectively due to lending cap will essentially +880 171 742 8657
force commercial banks to limit loans to the segments of economy – small and [email protected]
medium- sized enterprises – most affected by the crisis, exactly when liquidity is
much need- ed Saad Niamatullah
+880 155 638 5402
The banking sector saw a BDT 18.2 bn fall in default loans and a 9% NPL in Mar [email protected]
’20 as Bangladesh Bank suspended reporting of default loans from January to
help businesses tide over the coronavirus pandemic. Tofayel Ahamed
+880 170 707 3589
The real underlying problem with toxic assets is still to be addressed. Mr Ali [email protected]
Reza Iftekhar, Chairman BAB, highlighted poor governance in the banking
sector as a reason for the increased amount of non-performing loans (NPLs)
Tight liquidity scenario is a risk despite BB’s measures and government’s high
bor- rowing from banking sector is likely to see large crowding out effects
Lack of a credit guarantee is limiting banks’ ability to lend to corporates during
the pandemic thus making the stimulus package ineffective. Bangladesh
government is working with the World Bank to introduce a partial credit
guarantee to share some of the potential losses with banks and started with an
initial USD 300 mn credit guarantee scheme.
On July 3, Bangladesh Bank ordered banks to disburse all the stimulus funds
within August. Such forced disbursement of loans without a credit guarantee is
likely to have negative repercussions for asset quality and further increase
NPL risk for banks. Scan or click here to see
the summary video of the
The COVID-19 pandemic has caused a historic fall in the no-operating income writeup. Also you can listen
of banks due to nosedive in LC opening and remittances to the po dc ast
The Capital to Risk-weighted Assets Ratio (CRAR) of the banking industry stood
at Find our recent blogs at
11.6% at the end of December 2019, which was 10.5% in 2018. Out of 58 glo ba lmac ro
sched- uled banks, 48 banks maintained a CRAR of 10% or higher as of .site
December 2019. Total capital shortfall stood at nearly BDT 236 bn in Dec’19.
With the economic crisis amid covid-19, Banks’s capital shortfall will increase
further due to rising NPL provisioning. However, BB’s timely decision to
restrict the dividend payment till Sept’20 is a welcoming step to strengthen the
financial health of banks.
Budget impact FY20: Black money to be allowed in banking sector may
accelerate the deposit growth slightly, corporate tax rate is unchanged while
higher excise duty is imposed on deposit
Among all Bangladeshi banks, BRAC Bank is best placed to deal with the
pandemic due to its strong asset quality, high capitalization, high investment in
digital bank- ing and its 51% stake in bKash - the leading MFS operator in
Bangladesh.
 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Overview of Bangladesh Banking Sector

Banks Will Be Severely Hit By COVID-19, Lending/Deposit
Cap And Legacy NPLs Created Ill-Timed Double Whammy
The Bangladesh bank sector will be one of the hardest hit sectors of the economy, owing to the
broad-based slowdown in the economy as a whole; combined with its exposure to the hardest hit
sectors of the economy, such as foreign trade, RMG and the capital market. The Bangladesh bank
sector was already struggling prior to the pandemic owing to the imposition of a 9% interest ceiling
on all loans (except credit cards), liquidity pressures and a persistently deteriorating non-performing
loan (NPL) situation. However, owing to the COVID-19 pandemic and subsequent lockdown, the
banking sector will face an acute crisis on multiple fronts, as banks’ asset quality is likely to deterio-
rate while their interest and fee-based income are all affected at the same time.

Lending cap will take a heavy toll on SME and retail businesses— The lending cap policy, which
took effect on April 1, risks hitting a financial sector that is already reeling from multiple problem
coming from different fronts. The Covid-19 crisis has significantly exacerbated the risks and
problems in the sector. Not being able to price loans effectively will essentially force commercial
banks to turn the tap off to the segments of economy – small and medium-sized enterprises – most
affected by the crisis, exactly when liquidity is much needed. The cautionary alarm was raised by
Selim RF Hussain, managing director of BRAC Bank indicating that cost of income ratio of SME
segment raised to 130% from its previous level of 85% effectively making the segment a loss
project. He also noted that “the Interest rate capping was practiced during the ‘70s. Later, in 1990,
free market policies were taken up by the government to reform the financial sector, and that is why
the banking sector grew at such a large scale. Now, this interest rate cap is taking the sector 30 years
back.” ( see a June 23 article on
S ME and r e tai l bu sin esses wi ll die out so on due to len ding r a te c ap ). We discuss the
lending cap later in this report.

The legacy NPL will get worse due to the Covid-19 crisis — The high level of non-performing
loans in the banking sector in Bangladesh has been an area of concern even before the pandemic.
With the pandemic, the risk profile of the borrower has deteriorated across the world – and
Bangladesh is no exception. With lending cap policy that take away the ability to cover the risk to the
full extent creat- ed an ill-timed double whammy. Naser Ezaz Bijoy, country head of Standard
Chartered Bank, opined that the NPL problem leaves Bangladesh poorly prepared to withstand the
coronavirus fallout, while the pandemic’s implications will increase the number of bad loans
(source: Euromoney). In 2019, long before Covid-19 hit, NPLs surged by more than 117%. So-
called soured loans topped USD 12 billion. That is not a huge tally relative to developed nations, but
it is undeniably detrimental to a poverty-stricken, $330 billion economy where banks comprise more
than 80% of all financing activi- ty. ABB (Association of Bankers, Bangladesh) chairman Ali Reza
Iftekhar said that the banks were fac- ing two challenges such as reason and results—The governance
of the banks is a reason whose result is the increased amount of non-performing loans (NPLs) (see a
June 20 article on S tock m ar k et badly
needs ‘f ully I T -based oper ati o n) . NPL detail discussion is in later part of
this report.

Steep fall in interest and non-interest income—The COVID-19 pandemic has caused a historic fall
in the operating income of banks. In an unprecedented situation, both interest income and non-
interest income have been drastically hit by the economy grinding to a total halt. The Bangladesh
economy has been hit by a ‘perfect storm’ as the pandemic targets all the main pillars of the
Bangladesh econ- omy which has powered its growth for the past decade.
The RMG sector, which contributes more than 80% of Bangladesh’s total export earn-
ings and directly employs 4 million workers has ground to a standstill as more than
USD
6 billion worth of orders have been cancelled. This will affect banks interest income as
the factories will be unable to pay installments, while the slowdown in export and im-
port L/C processing will hit non-interest income.
Other significant exports, such as seafood, footwear and agricultural products are also
facing order cancellations due to economic disruption due to the pandemic and reduc-
tion in demand due to lockdown measures. This will affect both interest income from
these export-oriented sectors and non-interest income from export L/C processing.
2
 Remittances, an important source of foreign exchange which amounted to USD 18.02
billion in the 2019-20 fiscal year, will be severely hit as the pandemic has significantly
affected all the major destinations for Bangladeshi workers such as Europe and the
Mid- dle East. Banks will lose their fee income for processing remittance transactions.
Economic downturn hits MFS transactions too—with the slowdown in economic
activity, financial transactions have also come down. Mobile financial service (MFS)
transactions
have declined by 27% in April 2020 compared to the previous year. This decline will
result in lower revenues from transaction fees for banks which have MFS subsidiaries,
such as BRAC Bank. The closure of shops will also lead to a drastic decline in card
trans- action fees and POS fees for banks.

Figure 1: Slowdown in the MFS transaction

Source: Bangladesh Bank

Bangladesh Banks’s Covid policy measures— Bangladesh Bank, the central bank of Bangladesh has
undertaken a number of measures to support the economy during the pandemic. Some of the steps
which will have a huge impact on bank sector earnings and asset quality.

Halt in loan classification till September 2020: On 19 March, Bangladesh Bank

an- nounced a ban on classification of any loans until 30 June 2020 regardless of
payments. This means that the classification status of all loans on 1 January 2020 shall
remain un- changed until 30 June 2020. In a later circular dated 15 June, Bangladesh
Bank extend- ed the moratorium period to 30 September 2020. This is in effect, a
moratorium on all loan payments till September 2020. The move has removed
incentives from borrowers to pay their loan installments on time in order to keep their
loans unclassified. As a re- sult, banks (and financial institutions) are not likely to be
able to collect loan payments from borrowers until then. Although the classifications
status of these loans shall not change, and as such banks will not be required to keep
provision against these loans, there is a risk of asset quality deterioration which might
suddenly raise the amount of NPLs after the moratorium period is over.
BDT 20bn interest subsidy: On 3 May, Bangladesh Bank issued a circular ordering
inter- est income on all types of bank loans for the months of April and May to be put
in a separate, blocked account, and forbidding the interest accrued for the two
months from being accounted as interest income for the banks. Later, on 10 June, the
Bangla-
desh Bank issued another circular allowing the interest to be transferred to the banks’
books but allowing customers to pay those two months’ interest income over 12
months in equal installments. This lessened the burden of interest payment on borrow-
ers. The government also announced interest rate subsidies for borrowers, providing
9%, 2% and 1% interest rate subsidy for small, medium and large borrowers respective-
ly. In this circular, “small” borrower was defined as those with outstanding loans below
BDT 100,000, medium borrowers as those having outstanding loans between 100,000
and 1 million, and large borrowers as those having outstanding loans greater than 1
million.
Covid-19 might put pressure on capital adequacy even though 2019’s numbers showed some pro-
gress— The Capital to risk-weighted assets ratio (CRAR) of the banking industry stood at 11.6% at
end of December 2019, which was 10.5% in 2018. Reduction in provision requirement and some
recovery made against defaulted loan at the end of 2019 led to the increased capital base of State-
owned Commercial Bank’s (SCB) and Private Commercial Bank’s (PCB). Moreover, several
banks including City Bank, Dutch-Bangla and Standard Bank issued subordinated bonds to
strengthen the capital base (Tier-2) hence resulting a much better industry CARR. It was well above
the minimum regulatory re- quirement of 10% in line with the Basel III capital framework issued by
Bangladesh Bank in December
2014. Out of 58 scheduled banks, 48 banks maintained a CRAR of 10% or higher as of
December
2019. However, 43 banks were able to maintain both regulatory capital of 10% and capital conserva-
tion buffer of 2.5% as per Basel III standards. total capital shortfall stood at nearly BDT 236 bn in
Dec’19. With the economic crisis amid covid-19, Banks’s capital shortfall will increase further due
to rising NPL provisioning. However, BB’s timely decision to restrict the dividend payment till
Sept’20 is a welcoming step to strengthen the financial health of banks.

Figure 2: Asset share of banks based on CRAR (as on Dec' 2019)

Source: Bangladesh Bank

Taking the cross-country scenario into account, the capital adequacy of the country‘s banking sector
remained low compared to the ratios of neighboring countries as of end-December 2019.

Table 1: Comparison of capital adequacy indicators of neighboring countries

Countries CRAR (%)

2015 2016 2017
India 12.7* 13.3* 13.9* 13
Pakistan 17.3 16.2 15.8
Sri Lanka 15.4 15.6 15.2
Bangladesh 10.8 10.8 10.8
* Data as of end-September
Source: Bangladesh Bank

Currently, the local bond market is dominated by redeemable subordinated bonds mainly issued by
commercial banks, which help them construct their mandatory secondary capital base through the
bond proceeds with a specific tenure. The Bangladesh Bank is implementing Basel III in the local
banking industry so that banks are adequately capitalized to avert a systematic risk. To fulfill the Ba-
sel III requirements PCBs started to issue perpetual bonds. In this regard, The City Bank and
Jamuna Bank got the greenlight from the Bangladesh Securities and Exchange Commission
(BSEC) to begin issuing perpetual bonds of BDT400 crore each to strengthen their additional tier-1
capital base ( see
 a June 24 , ar ticl e Ci ty , Jam u n a banks t o iss ue B asel III comp lian t perpe tua l bo nds
” ). Other PCBs also looking to issue the perpetual bond in near future to fulfill the Basel III
requirement.
Figure 3 : CAR Ratio of top PCB (As at Dec 2019)

Source: Company Disclosures, ATC Research

Government Stimulus Packages not likely to work without Credit Guarantee: WB’s USD 300 mn
pro- posal might be a silver lining— The government has announced several stimulus measures to
help the economy deal with the fallout of the COVID-19 pandemic and associated lockdown and
other mitiga- tion measures. Most of these have been from the monetary side, in terms of easing
liquidity and in- troducing new refinancing schemes. Some of the measures undertaken by the
government are:

The cash reserve ratio (CRR) was reduced from 5.5% to 5% on 1 April. The CRR was
cut further to 4% on April 15. The cut in CRR is expected to free up BDT 171 billion in
liquid- ity for the banking sector.
The advance-to-deposit ratio (ADR) was increased 85% to 87% for conventional
banks, and from 90% to 92% for Islamic banks, which is expected to add BDT 228
billion in ex- tra liquidity for banks.

The repo interest rate was cut from 6% to 5.75% on 23 March. The repo rate was fur-
ther cut to 5.25% from 12 April to ensuring adequate liquidity in the financial system.

On 13 May, Bangladesh Bank introduced a long-term repo with tenure of 360 days as
opposed to the previous maximum 28-day repo. The borrowing margin has been set at
5% for treasury bonds and 15% on treasury bills, and the proceeds from borrowing can
be used in implementation of stimulus packages.
 Classification of loans due to non-payment was stopped in the January-September 2020
period. This means that no loans can be downgraded between 1 January and 30 Sep-
tember, 2020. As such, banks will not need to keep provision against NPLs until
Septem- ber. The Association of Bankers of Bangladesh (ABB) has been lobbying
Bangladesh Bank to increase the loan classification freeze period up to December 2020.
A BDT 50 billion package was announced on 02 April for payment of worker’s
wages exclusively through mobile financial services, which would be disbursed through
com- mercial banks. The funds would come from the government at zero interest, and
banks
will be allowed to charge a 2% service fee for verification of the workers’ details. If the
entire package is used up by export-oriented industries, this is likely to result in BDT
1 bn income for the banking sector.
Two refinancing packages with tenure of 3 years were announced by BB on 12 April to
be used for working capital finance. A BDT 300 bn package was announced for large
industries and the service sector, while BDT 200 bn was earmarked for Cottage, Micro,
Small and Medium Enterprises (CMSMEs). BB will re-finance 50% of the loan amount
at a rate of 4%, while the remaining 50% will have to be provided from the bank’s own
sources. The banks will be able to lend at a maximum interest rate of 9%, and the gov-
ernment will pay an interest subsidy of 4.5% for large borrowers and 5% for SMEs.
However, the government announced no credit guarantee, and thus banks will have to
undertake the credit risk of the borrower. The potential net interest income from the
two packages is around BDT 20 bn, but banks face the risk of the borrowers defaulting.
Additional loan packages totaling to around BDT 340 billion have been announced for
various vulnerable sectors including export-oriented industries, agriculture and low-
income professionals and businessmen.
Although all of these measures are expected to ease the liquidity conditions in the banking sector;
and while the government is offering interest rate subsidies to borrowers to enable them to borrow at
interest rates of 4.5% and 4%, the fact that there is no credit guarantee from the government makes it
very risky for banks to lend under these packages, as they will have to bear the full burden of any
borrower defaulting on these loans. Banks will likely be reluctant to lend until there is a clearer
picture of the economic recovery scenario. If banks do lend to corporates under the BB refinance
packages, they run the risk of increasing the NPLs in the banking sector, which have already hit
alarming levels in recent months. According to a survey conducted by BGMEA, only 2% applicants
were getting the loan under these schemes making the stimulus package somewhat ineffective. This
situation is reflected in the private sector credit growth, which dipped to a historic low at 8.2% in
March 2020. In June, The World Bank has proposed $300 million to the Bangladesh Bank as
support for forming a credit guarantee scheme to speed up lending by banks in high-risk sectors,
especially to SMEs, during the pandemic. Notably, the guarantee will be given on a bank’s portfolio
based on risk measurement instead of on individual loans. Such an agreement to share part of the
default risk would be enormously helpful in assuaging the fears of the banks with regard to risk of
defaults and will encourage lending activity in the economy to start its recovery.
On 3 July 2020, Bangladesh Bank ordered all banks to implement all of the stimulus packages
within
August 2020. Since the Covid pandemic is nowhere near to being controlled in Bangladesh, the out-
look for economic recovery is still very uncertain and it will be difficult for banks to accurately
assess credit risk of borrowers. At the same time, the credit guarantee being negotiated with World
Bank has not yet been implemented. Given these facts, forcing banks to disburse the entire stimulus
pack- age within August 2020 is likely to cause a further deterioration of asset quality in the
financial sys- tem and increase NPL risk for banks.
Covid risk trajectory remains uncertain — Similar to the rest of the world, there remains a great deal
of uncertainty on the true number of infections and deaths in Bangladesh. As of July 04, the number
of recorded deaths increased to 1,997 and total confirmed cases are 159,679. Low testing rates make
it difficult to accurately estimate the true prevalence of Covid-19 among the population, and there is
a risk of a second wave if lockdown measures are relaxed. The government adopted a new zone -
based lockdown policy after lifting the general lockdown on May 31. The only way that an economic
recovery can take place is after Covid is contained. Several countries around the world are opening
up their economies after successfully having controlled its spread. But given the extreme uncertainty
about the true extent of the Covid pandemic in Bangladesh, it is likely that we will have to wait until
a vaccine is available and administered to the population before the economic can recover to pre-
Covid levels of activity.
Pressing Matters in Bangladesh Banking Sector
Interest Rate Ceiling Will Worsen Bank Profitability

Well-intentioned policy might backfire — On February 23, Bangladesh Bank asked scheduled banks
to cap the interest rate at 9% for all types of lending, except credit cards, to expand business and
econ- omy effective from April 1, 2020. Previously the rate varied from 10% to 17% depending on
type of credit. This came while the entire sector is facing difficulty of disbursing loans due to
liquidity pres- sure. The key reason for this was the appeal of businesspeople to keep the interest rate
at single dig- its so that they can grow businesses in respite. While well-intentioned, the results of
the rate cap may turn out to be the direct opposite. Credit, particularly to individuals and small and
medium -sized enterprises (SMEs), will likely dry up, increasing the vulnerability of the banking
sector and jeopardiz- ing economic growth and stability. Global investors have seen this "event"
elsewhere -- history shows that a rate cap has generally a negative result. Solely from the
perspective of banking profitability, given the operating expense and tax structure and default
culture, it might make sense for the corpo- rate loans to have c.3% spread but it hardly makes sense
for the SME loans to have such minimal spread. Moreover, by offering a deposit rate that is lower
than what the market demands, depositors will look for alternative investment venues, causing a
slowdown in deposit growth. The resulting li- quidity crunch would exacerbate the funding
challenges already faced by banks today. Zahid Hussain, former World Bank economist, speaks for
many when he says “the 9% interest rate cap will not cover the costs and risks, thus resulting in the
sector’s portfolios becoming commercially unviable over- night. This will… reduce the supply of
credit to these customers, forcing them to borrow from unoffi- cial predatory lending sources such as
traditional moneylenders.” (see a June 16 article- Bang lade sh
banking: Covid over whelm s D hak a ’s we ak
sy stem ).
SME and retail businesses likely badly affected due to lending rate cap— The business of small and
medium enterprises (SMEs) and retail segments may be badly affected by a lack of access to finance
due to the interest rate cap as it is impossible for banks to run lending operations at the 9 percent
rate in these two high cost sectors. In a recent interview with TBS News, Selim RF Hussain, the
man- aging director of leading SME focused BRAC Bank, feared that it will be not possible to run
small, mi- cro, cottage and retail lending at this 9 percent interest (see a June 23 article ‘S ME
and r etail bu si -
nesses w il l die o ut s oon d ue t o lend ing r ate cap ’) ,. He kept on stating that with the new
lending cap, the effective cost to income ratio stood at 130% making the SME lending venture of
BDT 160 bn portfolio a loss-making unit of BRAC Bank. According to him, Banks can run SME
lending at this inter- est rate for six months at the highest, but no longer. All SME lending will have
to be shut down.

Figure 4: Cost to income ratio of BRAC Bank SME segments (comparison between before and
after lending cap imposition)
Apparently the picture speaks for all the SME segment of Bangladeshi Banks
Source: TBS, ATC Research
International experience suggests the lending rate cap might backfire — In Africa, the Kenyan
parlia- ment passed a bill in September 2016 capping interest rates on loans at 4% above the
policy rate. The rate cap was removed in November 2019 because it failed to achieve its goals, and
those three years caused significant harm to the economy and well-being of the people. A m em
oran d um by the president to parliament calling for repeal stated, "it is apparent that the capping of
interest rates has caused unintended effects that are significant and damaging to our economy and
in particular, the Micro, Small and Medium Enterprises (MSMEs) which are the hardest hit." (See
also a October 17,
2019 article on Uhur u si des with banks , cal ls f or r em oval of in ter est r ate ca ps ).
As Figure 5 illus- trates, as lending became unprofitable for banks, real credit growth rate turned
from double digit to negative almost immediately after the rate cap was implemented. In particular,
smaller banks that lent to individuals and micro and SMEs were hit hard. As the memorandum
pointed out, "Studies indicate that the lending activity … (declined) by about 5% in the 12 months
ending September 2017. Small banks have been disproportionately hit by capping due to their
different business model of relying more on higher-risk/higher-return borrowers..." The
memorandum also noted the "mushrooming", or growth of loan sharks and unregulated lenders
that took advantage of the lack of financing available to small businesses and individuals. The result
-- Kenya's private sector credit-to- GDP (gross domestic product) ratio shrank from a pre-rate cap
high of 34% to 28% by 2018. The economy suffered, with growth 0.4% lower in 2017 and 0.2%
lower in 2016 as credit dried up. Gov- ernment tax revenue growth decelerated from 12% to 5%.
Kenya is not an isolated example. The World Bank published a study on rate caps around the
world and concluded that "interest rate caps often have substantial unintended side-effects. These
side-effects include reduced price transparen- cy, lower credit supply and loan approval rates for
small and risky borrowers, lower number of insti- tutions and reduced branch density, as well as
adverse impacts on bank profitability."
In addition, non-performing loans (NPLs) in the Kenyan banking system shot up from 6.8% in 2015
to
12.3% in 2017. NPLs surged because borrowers' working capital and capital expenditure needs were
interrupted. Instead of promoting growth, as the interest rate cap intended, it instead caused de-
faults and hardships for businesses and individuals.
Beidi Gu, Managing Director of TRG Management LP, suggested that “There are more
effective means to promote access to credit. The Bangladesh government is already on the right path
by re- ducing the attraction of the National Savings Certificates, which compete with bank deposits.
A re- duction of the budget deficit and government borrowing from banks should also alleviate the
crowd- ing out effect and allow for more deposits being directed towards commercial loans rather
than gov- ernment securities. Likewise, on the demand side, the government is doing a good job of
supporting key industrial sectors, such as textiles. Other positive steps include reducing loan scams
and large borrower defaults so that liquidity can flow to productive users. Promoting technologies
that reduce credit distribution costs will also help in the long run.” (see article “ Int er est r a te c
ap: A cr i tique fr om
globa l perspe ctiv e ” published on January 17, 2020.). He also opined that “Unfortunately, rather
than
being a device to help the private businesses that have been Bangladesh's growth engine, the rate
cap could be a hindrance. It could have adverse consequences for the country's economic stability,
which has been exemplary among developing nations over the past decade.”

Figure 5: Kenyan real credit growth (yoy%) (before and after introducing the lending cap)

8
Source: Financial Express, ATC Research

9
2 months interest to be paid over 12 months, Govt. to provide subsidy—Bangladesh Bank (BB) di-
rected banks on May 2, 2020 to transfer all interest accrued or to be accrued between April 1 and
May 31 this year from all of their loans to an interest-free blocked account. Banks are likely to be
deprived of transferring nearly BDT 140 bn to their income book due to this decision. With the eco-
nomic fallout being contracted both exports and imports to a great extent, banks' profits books have
been dealt another big blow. It is unlikely that banks will enjoy profit this year if the amount is
stuck in a block account. On a positive note, On June 10, the central bank instructed to banks to
collect the suspended interest of the two months – April and May – in equal monthly instalments in
twelve months starting from July 2020. However, the dearth happened in the meantime won’t be
recovered soon.

Figure 6: Interest Rate Spread Is in Decreasing Trend

Source: Bangladesh Bank, ATC Research

Figure 7: Trend of Bangladesh banking sector NIM (Net Interest Margin)

Source: Bangladesh Bank, ATC Research

Persistent NPLs Big Concern Despite Regulatory Seesaw
Recent low number is due to BB’s rule to stop downgrading till Sep’20— Along with several
regulato- ry changes dictating the spread, loan structure and lending rate revision policy, banks in
Bangladesh are into deeper disarray as the Non-Performing loans soar persistently concentrated on
the state- owned banks and loan rescheduling continues encouraging the bad borrowers. The Non-
Performing Loans (NPL) stood at ~BDT 925 bn and NPL ratio reached to 9% as at Mar’20. It is
noteworthy that this number is after exclusion of bad assets that has already been rescheduled and
written off loans. In addition, the total bad loan number is heavily concentrated on the state-owned
banks. The size of NPLs in Bangladesh is much higher than in other countries in Asia and the Pacific.
Although the rate is apparently lower than the number indicated in Sep’19 (11.9%) and Dec’19
(9.32%) mainly due to loan rescheduling, one- time exit policy for bad loans offered by government
on May 2019 and BB’s rule to stop downgrading till Sep’20 for COVID-19, the real problem is
still unresolved. Total loan rescheduling increased to all time high BDT 504.3 bn (117.3% YoY) in
2019. The total amount of pro- visioning shortfall is BDT 86.3 billion as at Mar’20. Persistence in
default culture and taking advantage of relaxed loan rescheduling policy are the major contributors to
such high toxic assets. The only sil- ver lining is perhaps the fact that the bad assets are heavily
concentrated on state owned banks and development financial institutions. In the private commercial
banks domain, few good names can still be found with sound corporate governance and with stricter
loan rescheduling policy. Loan resched- uling and under provisioning continues in other banks where
the provision coverage is subpar, and many banks will not be able to record profits in current year if
the bad loans of these banks are ade- quately provisioned for.

Figure 8 (a): Non Performing Loan (NPL) trend

Figure 8(b): NPL Across Different Type of Bank: State-owned Banks (SCB) are the main
contributor

Source: Bangladesh Bank, ATC Research

 Figure 9: Trend of provisioning requirements and maintenance ratio

Source: Bangladesh Bank, ATC Research

Figure 10: Gross ratios of nonperforming loans to total loans in Asia

Source: ADB

Willful default likely to see a surge, rescheduling might help clean the balance sheet— Although
slow- down in investment activities and consumption might be weighing down on the continuous
rise in NPL ratios, regulatory tangle regarding rescheduling and recategorization (see appendix for
BB’s summary circular) created moral hazard issue among good or able borrowers to willfully
default their loans to take get their loans rescheduled at better terms. Apparently, these policy offers
a solution for cleaner balance sheets than a remedy to improve risk management. In short-term, it
might help the banks clean the book but in the long run the result might be even worse than current
scenario.
BB’s mass lending package to tackle the Corona crisis without credit guarantee might backfire— In
an effort to support the economy, the government has announced several timely and much-needed
stimulus packages amounting nearly BDT 1 trillion. Apparently, most of these stimuluses will be
mo- bilized through commercial banks under different refinancing schemes offered by BB where as
much as 50% of this scheme will be funded by commercial bank’s own source. Apart from the
liquidity pressure that might be created for this, the major concern lies into the repayment ability of
the bor- rowers who are mostly small, medium business who are heavy hurt by the pandemic.
Without proper credit guarantee, banks might get into deep trouble and legacy NPL might get worse.
 Additional credit risk likely to arise from capital market— Before market closure Mar’25, DSEX
took a hit due to the lockdown and lost nearly 10% YTD. If the price floor had not been imposed, it
would likely have performed far worse. Margin loans are likely to face a serious risk of default as
the stock prices might fall if the price floor is withdrawn and it will be challenging to sell off the
stocks due to an acute lack of liquidity. If those loans are properly provisioned for then most of the
top banks who have brokerage/ merchant bank subsidiary might face additional provisioning
pressure. According to unofficial surveys, the negative equity in the stock market reached more than
BDT 120 bn in the first half of 2020.
COVID19 lockdown will further escalate the NPL problem— The NPL ratio is likely to shoot up
further since the COVID19 lockdown is going to affect almost all the sectors. Thousands of
consumers are now being placed under quarantine or lockdown, affecting their earning power and
that of business- es serving them. As a result, the consumers might lose their ability to pay for credit,
particularly mortgages. Also, business loans, especially to small and medium enterprises, are at risk
due to the forced shutdown. RMG sector has already faced export order cancellation amounting
nearly USD 3 to
4 bn. Travel and F&B will be hard hit, as they will have no way to make up for the lost revenues in
the future. All these lockdown impacts will eventually affect the loan repayment capabilities.
Although, the government asked not to downgrade any loan to defaulted one until December 2020 if
borrow- ers fail to repay instalment, effective NPL is likely to rise further.
Asset management company formation for NPL might be solution but structural readiness is
questiona- ble— In mid-2019, The government has taken an initiative to form an asset management
company within FY20 to buy distressed loans of banks as part of its efforts to clean up the financial
sector like the Republic of Korea’s KAMCO or Malaysia’s Danaharta to take over NPLs from ailing
banks. Alt- hough it is common practice to solve distressed asset problem in financial world, a strong
regulatory framework and governance are the prerequisites and it is arguable whether Bangladesh is
ready on these two fronts.

Figure 11: Trend of measures taken by Bangladesh Gov to tackle NPL

Source: ADB
Tight Liquidity Scenario Is A Risk Despite BB’s Measure…
Government’s High Borrowing From Banking Sector Might
See Large Crowding Out Effects

BB’s initiatives might create nearly BDT 800 bn, but refinancing scheme might put pressure on
banks’ own liquidity — Even before Covid-19, the banking sector of Bangladesh was struggling with
liquidity and the situation is likely to get exacerbated with the further asset quality deterioration and
lower savings. Cash holding tendency amid an economic crisis will hurt banks' deposit growth.
Moreover, sub-optimal deposit rate will discourage the depositors to keep their money in the
Banking channel as the official inflation rate is hovering around 6%. Also, failure to pay regular
installment by the busi- ness due to COVID-19 will also create the liquidity mismatch for the banks.
However, in April 2020, BB took initiative to cut the CRR to 4% from 5.5%, Policy rate to 5.25%
from 6% and increased the ADR ratio by 200 bps in an effort to support the economy in COVID19
crisis. This initiative might cre- ate approximately BDT 400 bn liquidity in the market. But these
have not ignited the banking sector given the gravity of the economic fallout. The central bank has
so far taken seven stimulus packages worth nearly BDT 800 bn to revive the economy and of the
package, BDT 510 bn will be disbursed through a refinancing scheme. But to enjoy the refinance
scheme, banks will have to provide at least
50 percent of each loan to the borrowers from their own sources without any credit guarantee from
the central bank which might put pressure on their own liquidity given the existing relaxed repay-
ment scenario. This situation is likely to be prolonged till the end of the year.

Figure 12: CRR and Repo Rate

Source: Bangladesh Bank, ATC Research

Figure 13: ADR ratio trend

Source: Bangladesh Bank, ATC Research

Government heavy dependency might crowd out the private sector— Until May 12, 2020 the govern-
ment borrowed BDT 783 bn from the banking sector, which has already surpassed its revised full
- year bank borrowing target of BDT 729 bn although the gov initially set a bank borrowing target of
BDT 473 bn in FY19-20 budget. It might escalate further amid implementation of massive stimulus
packages amounting BDT 956 bn. the Government's such heavy dependency on the Bank to fund the
deficit will crowd out the private sector loan. Notably private sector credit growth has already de-
clined to 8% in Jan’ 20 which is 11-year low which was before the pandemic hit. Bangladesh Bank
has temporarily stopped publishing economic data due to operational disruption and social
distancing measures, however we expect private sector credit growth to fall sharply in the coming
days due to:
The 9% interest rate cap on all loans except for credit cards, slated to take effect from April 1.
Since prevailing interest rates on loans, especially SME loans, were higher than 9%, banks
were already in the process of scaling back their loan portfolio growth in anticipation of the
interest rate ceiling, even before the COVID-19 pandemic hit.
ii. In sharp contrast to the fall in private sector credit growth, public sector credit growth has
been experiencing significant growth, reaching 68.42% in April 2020. A big factor in the
increase in public sector credit was the strict monitoring of investment limits in National
Savings Certificates, which diverted government borrowing away from NSCs and into banks.
The 5-year Treasury bond yield currently stands at 8.74% while the 10-year Treasury Bond rate
stands at 8.90%. The coro- navirus pandemic will require the government to ramp up spending
in order to stem the econom- ic damage, while revenue growth is likely to hit historic lows due
to the fall in economic activity. These factors are likely to lead to a historically high budget
deficit, and therefore public sector credit growth is expected to grow significantly. Combined
with high interest rates on government securities and an uncertain economic recovery scenario,
we expect private sector credit growth to be crowded out by government borrowing even after
the pandemic.

Figure 14: Private sector credit growth: down to a historic low

Source: Bangladesh Bank, ATC Research

Figure 15: YoY growth of net credit to public sector

Source: Bangladesh Bank, ATC Research

Pandemic Will Slow The Loan And Deposit Growth
In January, the growth of deposit and loan were almost Nil, as the news started to widen that the
government has decided to fix a uniform interest rate for all types of deposits from April 1. It is ex-
pected that, due to the current COVID-19 situation deposit growth will remain slow as people are
withdrawing money to tackle the ongoing situation. This tendency of consumer behavior is observed
due to the low reliance over banks for future uncertainties of liquidity position; it also gives people a
sense of control over the situation. Now on the credit part, we can infer from the graph that growth
in deposits with advances has a great correlation. Therefore, sluggish growth of deposit will also
affect the credit growth as well.

Figure 16: Monthly Deposits & Advances

Source: Bangladesh Bank, ATC Research

Table 2: Interest rate spread (in %)

Interest rate on
Month Interest rate on deposits advances Spread
Sep'19 5.65 9.56
Oct'19 5.66 9.58
Nov'19 5.71 9.63
Dec'19 5.7 9.68
Jan'20 5.69 9.66
Feb'20 5.53 9.62

Source: Bangladesh Bank, ATC Research

Budgetary Impact of FY20-21: Money Whitening and Excise
Duty

Black money to be allowed in banking sector may accelerate the deposit growth slightly— For the
first time, the government proposed injecting black money in banks to help the sector amid the
ongoing liquidity pressure and burden of stimulus package and high bank borrowing. Through this,
the bank- ing sector is likely to get a boost in deposit as the government allowed black money
investments. In the proposed budget for FY2020-21, Finance Minister proposed to allow investing
black money in all financial schemes and instruments. In that case, black money can be invested in
cash, bank deposits, financial schemes and instruments, and all other kinds of deposits, saving
deposits, saving instru- ments or certificates but subject to 10 % tax.
Unchanged corporate tax and imposition of higher excise duty— Although there were discussions
on reducing the corporate tax rate in the pre-budget days to give the dying banking sector a
comport, the actual budget proposal didn't pay any heed to such case. Rather, excise duty on bank
balance credit/debit has been increased in next fiscal for balances greater than BDT 1 million. For
bank bal- ance less than BDT 1 million excise duty has been kept un-changed. However, this is less
likely to im- pact bank deposit significantly. The summarized version of the excise duty is given in
the following table—

Table 3 : Proposed Excise Duty on Higher Bank Balance

Balance Existing Proposed

Above BDT 1 mn to BDT 10 mn BDT 2,500 BDT 3,000

Above BDT 10 mn to BDT 50 mn BDT 12,000 BDT 15,000

Above BDT 50 mn BDT 25,000 BDT 40,000

Source: Budget Speech, ATC Research

People’s Leasing And Financial Services Limited (PLFSL)
Bankruptcy And NBFI Weakness Poses Additional Risk To
Financial Sector Stability

In July 2019, government has directed the central bank to liquidate People’s Leasing and Financial
Services Limited (PLFSL), a non-bank financial institution, due to the deterioration of its
financial health in last several years. This will be the first instance of liquidation of any financial
institution in the country. Previously, two banks- Bank of Credit and Commerce International and
Oriental, that were on their last legs were restructured but not liquidated. Non-banking
financial institutions (NBFIs) have been on the watchlist of various stakeholders, analysts and
observers for long time. The failure of PLFSL triggered a crisis of confidence. That has
subsequently worsened due to the unveil- ing of the scam of International Leasing and Financial
Services Ltd. (ILFSL) another NBFI of the finan- cial market. Bangladesh Bank (BB) conducts
stress tests on these financial institutions based on four risk factors: credit, interest rate, equity price
and liquidity. At end-September 2019, out of 33 NBFIs,
4, 19, and 10 were positioned in Green, Yellow, and Red zones respectively. Simply stated, only 4
are
healthy, 19 are vulnerable and 10 need serious attention. Most clients of the vulnerable NBFIs are
having difficulties cashing their deposits and profits at maturity. These companies misused the funds
obtained from their clients. They borrowed money from different banks and call money markets as
well.
There has been a maturity mismatch in the NBFI sector as they take deposit for a maximum period of
two years but give out loans for 10 to 20 years in general. NBFIs have now become a boil in the body
of the financial system. Measures are needed before the boil reaches toxic levels. To protect the
sector BB raised the limit on NBFI borrowing from the inter-bank call money market from 30%
to
40% of their equities with effect from September 1, 2019. Sensing their malpractices and to meet
their own liquidity shortage, banks started withdrawing their investments from the NBFIs. BB in-
structed banks not to withdraw their deposits from the NBFIs. But none of these made a difference.
The importance of adequate legal protection, clear institutional mandates and accountability to en-
sure sufficient independence and resources for oversight agencies to act effectively can hardly be
overemphasized. Prioritization of financial stability at these agencies and cross-sectoral levels; will
be crucial to ensure that risks outside the regulatory perimeter are mitigated and monitored.
Strength- ening the legal framework for NBFI resolution; would improve incentives and reduce the
potential risks to public resources that could arise from the failure of financial institutions.
 Key Highlights & Comments On Top
Bangladeshi Banks
Basic Information: BRAC Bank
BRAC Bank (DSE: BRACBANK)
Closing Price as on July 06,
2020 (BDT) 31.9 Key Highlights
52-week Price Range (BDT) 27.2-64.4
Number of Shares Mn 1,326 BRAC Bank is one of the best governed banks in Bangladesh, with a SME-
Market Cap BDT Mn 42,296 focused lending portfolio and a strong position in deposit accounts allowing it to
Market Cap USD Mn 499 consistently earn higher interest spread than other banks.
Average Daily Turnover Value
BDT Mn 38 BRAC Bank has one of the better credit management processes in the banking sector,
leading to an NPL ratio of 3.99% in 2019.
Financial Year End December
BRAC Bank is one of the better capitalized banks in Bangladesh, with a Tier-1 ratio of
Price Volume Chart: BRAC 13.82% and a CAR of 15.07%
Bank
It also owns 51% of bKash, the leading mobile financial services (MFS) provider
in Bangladesh. bKash has seen an increase in adoption during the COVID-19
pandemic; having China’s Alipay as a strategic investor is expected to lead to bKash
extending its lead as the most popular MFS in Bangladesh.
BRAC Bank has three subsidiaries, BRAC EPL Stock Brokerage – one of the
leading brokerage firms in Bangladesh, BRAC EPL Investments and BRAC Saajan
Exchange Ltd, a UK-based remittance provider with branches across Europe and
close integration with bKash for direct remittance transfers.
Source: DSE, ATC Research
We expect BRAC Bank to focus on managing its existing balance sheet in 2020
amid the coronavirus crisis instead of trying to grow its lending portfolio. BRAC
Bank’s top management aims to bring down its cost-to-income ratio (CIR) from 54%
reported in
2018 down to 45% by 2022 by leveraging technology, alternative delivery channels
and greater use of technology.
BRAC Bank has one of the lowest NPL ratios in Bangladesh due largely to its
strong corporate governance, risk management and credit underwriting practices.
NPL ratio came down to 3.1% in 2018 from 6% in 2015 based largely on aggressive
writing off bad loans, de-risking their corporate loan portfolio and shifting lending
focus to SME and retail sectors. BRAC Bank currently is rated Ba3 by Moody’s,
which is the same as Bangladesh sovereign credit rating and is the highest amongst
Bangladeshi banks.
BRAC Bank has also significantly upgraded its digital banking offerings. Its
online banking product is one of the best offerings amongst Bangladeshi banks,
which is likely to attract retail deposit clients and help increase its CASA ratio.
BRAC Bank has also continued its aggressive push into agent banking, where
customers are able to avail banking services through an agent, which significantly
reduces bank operating costs compared to needing to open a branch. BRAC Bank has
a total of 349 agent banking outlets across the country, covering 63 districts out of
64.
Key Risks
BRAC Bank mainly focuses on the SME segment so the government’s policy
decision to impose a 9% interest rate ceiling on all loans will reduce their spread
with higher risk. The COVID-19 pandemic will also heavily impact the SME sector
so there will be high chance of increase of NPL.
 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Key Financials & Ratios: BRAC (Amounts are in BDT Mn except per share data and percentage)
Bank
Income Statement

Balance sheet

Source: Company Disclosures, ATC Research

Per Share Data (BDT)

Key Ratios

Source: Company Disclosures, ATC Research

 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
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Bangladesh Banking Sector Report

Basic Information: City Bank

City Bank (DSE: CITYBANK)
Closing Price as on July 06,
16.4
2020 (BDT) Key Highlights
52-week Price Range (BDT) 14.8-29.7
Number of Shares Mn 1,016 The City Bank Limited (CBL) is 1st generation bank holding about 3.1% market
Market Cap BDT Mn 16,770 share of deposits. It strategically positioned itself as number 1 in cards segment with
Market Cap USD Mn 198 a portfolio worth BDT 56.4bn.
Average Daily Turnover Value
BDT Mn 25 It continues to outpace the industry in terms of loan growth and still improve on its
Financial Year End December
spread (NIM was 4.1% in H1’2019 vs 3.9% in H1’2018) by improving its CASA
ratio (37.0% in H1’2019 vs 34.0% in H1’2018) and borrowing cheap from overseas
Price Volume Chart: City Bank — part- nering with IFC is helping the bank in this regard.

City Bank’s ownership structure includes 28% stake of the sponsors, 21% stake of
the institutions, 9% foreign and rest of the 42% general public as at February 2020.
The bank’s strong foothold in customer service and digitalization, particularly
defined by state of the art app, City Touch app, rated highest in Android, targets a
younger age group, that is expected to garner strong deposit, CASA and retail loan
growths.
By partnering with IFC, the bank has revamped its SME program, with a long-
Source: DSE, ATC Research
term focus on SME-S business. The bank has invested heavily in SME infrastructure
and has started disbursing loans, mostly through its branches and SME centers based
out of Dhaka.
CBL’s Retail loan portfolio — comprising mostly of home, personal and car
loans (roughly 15% of loan book) — generated a staggering 40.0% CAGR in the
2015-2018 periods.

Aggressive provisioning hit taken by the bank in last 3-4 years has helped cleaning
up its balance sheet

The bank also tends to outperform its peers when it comes to commission income
owing to its strong foothold in trade services.

Key Risks
CBL’s credit ratings were downgraded by Moody’s in June mainly due to
deteriorating Capital condition because of falling profitability and excess dividend
disbursement policy. However, in H1’2019, CAR has been improved to 13% on the
back of in- creased profitability and subordinate bond issuance
the bank’s history of high cash dividend is negative for preserving capital. On the
pos- itive note, In 2018, the bank reduced its cash dividend to 6%.
Going forward, risks associated with asset quality pertains to the CBL’s
increasing exposure to SME-Small loans
 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
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Bangladesh Banking Sector Report

Key Financials & Ratios: City Bank (Amounts are in BDT Mn except per share data and percentage)

Income Statement

Balance sheet

Source: Company Disclosures, ATC Research

Per Share Data (BDT)

Key Ratios

Source: Company Disclosures, ATC Research

 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Basic Information: EBL

Eastern Bank (DSE: EBL)
Closing Price as on July 06,
30.9
2020 (BDT) Key Highlights
52-week Price Range (BDT) 28-38.6
Number of Shares Mn 812 EBL is the 4th largest listed private commercial bank (PCB) in terms of market
Market Cap BDT Mn 25,085 capital- ization, holding 1.8% and 2.2% market share in deposits and loans &
Market Cap USD Mn 296 advances re- spectively
Average Daily Turnover Value
BDT Mn 4 Despite deteriorating liquidity conditions in the industry, EBL continued its
Financial Year End December outstand- ing deposit growth of 19.3% in 2018 (deposits grew by 19% in 2017) and
13.1% YTD in 9M’19.
Price Volume Chart: The bank has one of the lowest NPL ratio — which has been on a declining
trajectory till 2018, reaching 2.4% from a peak of 4.3% in 2014 which could be
attribute to a prudent loan approval process coupled with competent management.
With an NPL coverage of roughly 130% in 2018, the bank seems to have already
taken high provi- sions, denoting strong asset quality and relatively lower provision
risk.
With more than 70% loan portfolio in corporate segment, it is considered as one of
the most preferred banks in the corporate segment.
It has a decent and growing portfolio of consumer loan products. The bank’s credit
EBL Source: DSE, ATC card segment has been growing rapidly in recent times. According to anecdotal, the
bank was third in the credit cards market share in 2017, topping some of the well-
known banks in this segment.
The board of EBL comprised of prominent figures with outstanding business and
aca- demic track records. Experienced and reputed businesspeople on the board
should drive the value
EBL’s ownership structure includes 32% stake of the sponsors, 46% stake of the
Research insti- tutions, 0.3% foreign and rest of the 24% general public as at February 2020.
Key Risks
The bank has a high exposure to the corporate segment. Compared to its closest
peers, the company is not aggressively diversifying to other segments. The competi-
tion to book corporate borrowers has intensified over the years and as such bank
spreads are not only low but can often come under pressure.
The total provision charged by EBL securities for margin loans is too low —
consider- ing many banks in the industry still carry negative equity attributable to
margin loans.
 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Key Financials & Ratios: EBL (Amounts are in BDT Mn except per share data and percentage)

Income Statement

Balance sheet

Source: Company Disclosures, ATC Research

Per

Key Ratios

Source: Company Disclosures, ATC Research

 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Basic Information: DBBL

Dutch Bangla Bank (DSE: DBBL)
Closing Price as on July 06,
56.9
2020 (BDT) Key Highlights
52-week Price Range (BDT) 49.1-79.6
Number of Shares Mn 500 Dutch Bangla Bank Limited (DBBL) is retail focused bank since its inception 1996.
Market Cap BDT Mn 28,450 DBBL has the highest number of ATM booths (4,705 as of 2018) in the country,
Market Cap USD Mn 335 which has made this bank the most convenient bank for retail clients. Due to the
Average Daily Turnover Value ATM cov- erage people tend to maintain banking relationship with DBBL which in
15
BDT Mn turn helps the bank to enjoy higher deposits in CASA account. DBBL has also
Financial Year End December introduced Fast Tracks for the first time in the country to ensure better and wider
range of services to its valued customers.
Price Volume Chart:
DBBL’s main goal, regardless of any business environment, is for a safe and
steady growth, what we can see from their stable asset growth. DBBL’s strategic
invest- ments in IT infrastructure, branch, ATM network, mobile banking services
and human capital continued. DBBL has been consciously making these strategically
important investments to provide much better customer service with a wide range of
products that will bring long-term stable growth and a more inclusive banking for all
of Bangla- desh.
DBBL’s classified loan as a percentage of total loan portfolios decreased to 4.4%
at the end of 2018. At the end of 2018, total equity stood at BDT 23,086 million as
com- pared to BDT 19,482 million in 2017. As of 31 December 2018, Capital
DBBL Source: DSE, ATC to risk- weighted asset Ratio (CRAR) under Basel III stood 15.6% (Tier 1 capital
9.3% and Tier
2 capital 6.3%) against the Bangladesh Bank minimum requirement of
11.87%.

DBBL’s ownership structure includes 86.99% stake of the sponsors, 3.99% stake
of the institutions, 0.02% foreign and rest of the 9% general public as at February
2020.
Research

Key Risks
DBBL has huge exposure in textile and RMG sector. Out of total loans and advances,
46% loans provided to these two sectors which may create concentration risk and
may lead to deterioration of asset quality and increase NPL.
.
 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Key Financials & Ratios: (Amounts are in BDT Mn except per share data and percentage)
DBBL
Income Statement

Balance sheet

Source: Company Disclosures, ATC Research

Per

Key

Source: Company Disclosures, ATC Research

 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
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Bangladesh Banking Sector Report

Basic Information: PRIMEBANK

Prime Bank (DSE: PRIMEBANK)
Closing Price as on July 06,
14.2
2020 (BDT) Key Highlights
52-week Price Range (BDT) 13.5-19.9
Number of Shares Mn 1,132 Prime Bank was established in 1995 by a group of prominent Bangladeshi business-
Market Cap BDT Mn 16,078 men and is one of the largest private commercial banks (PCBs) in Bangladesh.
Market Cap USD Mn 190
Average Daily Turnover Value
Prime Bank was regarded as one of the most prominent private banks before it faced
BDT Mn 5 a period of rising NPLs in 2015. Its management has been trying to emerge from the
Financial Year End December crisis through a renewed focus on a hiring high-quality human resources, aggressive
management of NPLs and a gradual shift into the higher-margin SME sector. The
Price Volume Chart: PRIMEBANK
management turnaround was largely completed by 2017 and Rahel Ahmed – an ex-
perienced banker having worked in several international banks was appointed as MD
of Prime Bank.
Under its new management, Prime Bank is trying to turn around the institution
through aggressive NPL management and shifting focus away from the corporate
sector to SME and retail, however, the coronavirus pandemic is likely to have
disrupt- ed their long term strategic plan by increasing the amount of NPLs in their
balance sheet and disrupting their written-off loan recovery efforts.
Prime Bank’s ownership structure includes 38.92% stake of the sponsors, 27.02%
Source: DSE, ATC Research stake of the institutions, 3.51% foreign and rest of the 30.55% general public as at
February 2020.
Prime Bank has 5 subsidiaries – Prime Bank Securities and Prime Bank
Investments are based in Bangladesh and focuses on the capital market while the
other 3 subsidi- aries are remittance houses based in Singapore, the UK and Hong
Kong.

Key Risks
Prime Bank’s loan portfolio is concentrated in the corporate segment. Due to its cor-
porate focus, it is likely to be less affected by the government’s 9% interest rate ceil-
ing policy, but its concentration in the highly competitive corporate sector limits its
potential for earning higher net interest margins while the coronavirus pandemic
poses an acute threat to its loan portfolio.
.
 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Key Financials & Ratios: (Amounts are in BDT Mn except per share data and percentage)
PRIMEBANK
Income Statement

Balance sheet

Source: Company Disclosures, ATC Research

Per Share Data (BDT)

Key Ratios

Source: Company Disclosures, ATC Research

 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Basic Information: ISLAMIBANK

Islami Bank (DSE:
Closing Price as on July 06,
16.8
ISLAMIBANK)
2020 (BDT)
52-week Price Range (BDT) 15.3-23.8
Number of Shares Mn 1,610 Key Highlights
Market Cap BDT Mn 27,048
Islami Bank Bangladesh Ltd was established in 1983 as a joint venture between
Market Cap USD Mn 319
sever- al prominent Bangladeshi businessmen and a consortium of Middle Eastern
Average Daily Turnover Value
BDT Mn 6 financial institutions. It was the first Islamic bank in South Asia and introduced the
December
concept of Islamic banking in Bangladesh.
Financial Year End
In 2017, the bank underwent a significant management change as a local conglomer-
Price Volume Chart: ISLAMIBANK
ate gained control of the board of directors and made a significant number of top-
level management changes. Arastoo Khan, a bureaucrat from the Ministry of Finance
was appointed as Chairman.
These changes were not received well by its foreign sponsor-shareholders, with the
Islamic Development Bank – which holds 7.5% of Islami Bank publicly airing its
griev- ances with the new board. According to the IDB, the new group of local
directors have wrested control away from the foreign shareholders who jointly own
52% of the outstanding shares of Islami bank. Since the management changes, there
have been several allegations of loans being approved to a certain local conglomerate
Source: DSE, ATC Research
outside of normal procedures.
Rescheduled loans have also increased 55% IN 2018, while NPLs have increased
30% in 2018 compared to 2017. Its capital adequacy ratio has declined to 12.17% on
solo basis, which is below the regulatory minimum of 12.5%.
Islami bank’s loan portfolio is largely concentrated in the corporate sector. Net inter-
est margin declined from 3.96% in 2013 to 3.62% in 2018, reflecting higher competi-
tion in the corporate lending segment. IBBL’s cost-to-income ratio has seen a steady
increase over the years, rising from 44% in 2013 to 49% in 2018. IBBL’s return on
assets decreased slightly from 0.67% in 2014 to 0.64% in 2018. IBBL’s return on as-
sets is relatively lower than other Bangladeshi banks.
IBBL’s large branch network, consisting of 384 branches has long been a key
strategic strength compared to other banks, allowing it to establish a large deposit
base across the country. However, Islami Bank’s alternative delivery channels have
lagged its competitors.
IBBL’s ownership structure includes 48.93% stake of the sponsors, 12.19% stake
of the institutions, 23.54% foreign and rest of the 15.34% general public as at
February
2020.
IBBL has two capital market subsidiaries – Islami Bank Securities Limited and Islami
Bank capital Management Limited.

Key Risks
IBBL cannot depend only upon its deposit base going forward, and must urgently
increase its service delivery avenues and seek to shift into higher margin lending
products.
Islami Bank had a mobile banking service called mCash, but it has not gained any
trac- tion in the mobile money market, which is dominated by BRAC Bank’s bKash
and Dutch Bangla Bank’s Rocket. Its offerings in the agent banking, online banking
and other alternative delivery channels do not stand out among the competition.
 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
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Bangladesh Banking Sector Report

Key Financials & Ratios: (Amounts are in BDT Mn except per share data and percentage)
ISLAMIBANK
Income Statement

Balance sheet

Source: Company Disclosures, ATC Research

Per Share Data (BDT)

Key Ratios

Source: Company Disclosures, ATC Research

 AT July 08, 2020 | AT Capital Bangladesh Banking Sector Report
Capital

Bangladesh Banking Sector Report

Basic Information: UCB

United Commercial Bank Limited (DSE: UCB)
Closing Price as on July 06,
11.7
2020 (BDT) Key Highlights
52-week Price Range (BDT) 10.7-16.8
Number of Shares Mn 1,160 United Commercial Bank Limited (UCB) started its journey in 1983, now it has
Market Cap BDT Mn 13,567 two subsidiaries named, UCB Capital Management Limited and UCB Investment
Market Cap USD Mn 160 Limited.
Average Daily Turnover Value
BDT Mn 4 UCB offers a wide range of banking products and financial services to corporate,
Financial Year End December SME and retail customers through a variety of delivery channels and through its
subsidiary companies. With a vast network of 187 branches along with Off-shore
Price Volume Chart: UCB banking unit, mobile financial service (UCash), Upay, Agent Banking, priority
banking (UCB Imperi- al), remittance services, credit card business.
With a view to bringing the unbanked people to the Banking facilities, UCB
started full-fledged operation of Mobile Banking Services under the brand name
“UCash” in the year 2013. Presently, the Bank has a substantial market share in
Mobile Banking Services of Bangladesh which is growing further over the time. The
Bank has dedicat- ed agents for providing the Mobile Banking Services countrywide.
UCB’s ownership structure includes 36.67% stake of the sponsors, 0.81% stake of
the government, 19.13% stake of the institutions, 1.28% foreign and rest of the
42.11% general public as at February 2020.
Source: DSE, ATC Research
Key Risks
UCB mainly focuses on corporate lending. Out of total loan portfolio, 65%
derives from corporates. But increasing NPL implies that it has poor governance
issue. UCB has to work on their governance and asset quality.
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Key Financials & Ratios: (Amounts are in BDT Mn except per share data and percentage)
UCB
Income Statement

Balance sheet

Source: Company Disclosures, ATC Research

Per Share Data (BDT)

Key Ratios

Source: Company Disclosures, ATC Research

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Appendix 1– Bangladesh Macroeconomic Outlook

Bangladesh’s GDP growth to be nearly 2% for 2019-20—The World Bank and IMF have both forecast
Bangla- desh GDP growth for 2019-20 to be 1.6% and 2% respectively. Before the pandemic, WB had
forecast Bangla- desh GDP growth to be 7.20%. Bangladesh Bank is more optimistic, forecasting GDP
growth to be 3.8% in the
2019-20 fiscal year before recovering to 5.7% in 2020-21. The actual GDP growth rate for 2020-21 is
difficult to predict as a lot depends on the outcome of the pandemic. If a vaccine is found relatively quickly,
then the world economy can start the recovery process in 2021-22. Global supply chains are expected to be
re-routed to reduce reliance on China. Bangladesh could potentially benefit if the world economy recovers
and foreign investors choose Bangladesh to diversify their supply chains away from China. However, WB
thinks prospects for a V-shaped recovery are slim and projects 1% GDP growth in 2020-21 fiscal.

Figure : Bangladesh GDP Growth Forecast

Source: Published Source and ATC Research

Table : Bangladesh Bank's primary projections of Economic Indicators

Indicators FY19 FY20 (Projected) FY21 (Projected) FY22 (Projected)

(Estimated)
GDP 8.15% 3.8% 5.7%
Export 10.1% -17.9% 0.8%
Import 1.8% -8.8% 4.8%
C/A Balance (& of GDP) -1.7% -2.2% -3.5%
Private Sector Credit Growth 11.3% 8.5% 11.9%
Source: Bangladesh Bank

For the last couple of years Bangladesh maintained an impressive GDP growth rate. However, in the
face of the global Covid 19 pandemic, GDP growth is expected to slow down significantly.
This pandemic has already started to affect both the supply and demand side of the economy. The Interna-
tional Monetary Fund (IMF) recently forecast the "Great Lockdown" recession will see - 3% GDP
growth for the global economy in 2020, but now they think even this the gloomy outlook could be too
positive. The coronavirus pandemic is set to leave 170 countries with lower GDP per capita by the end of
the year.
Due to Coronavirus, Bangladesh's economy has been losing BDT 33 billion every day from its service and
agriculture sectors during the nationwide shutdown over the coronavirus outbreak, a new study says.
The country incurred losses totaling an estimated BDT 1 trillion in March. The economic losses may
exceed BDT
2 trillion, almost 9% of the GDP, if the country remains under lockdown until the end of May. Degrowth
in
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Appendix 1– Bangladesh Macroeconomic Outlook

GDP will cause a liquidity crunch in the economy which will hit the banking sector
directly.
Export & Import Outlook

Source: Bangladesh Bank

Export bounced back on May by 182% as export earnings from RMG recovered when some of the orders
resumed. But overall export and import on April declined by 82% and 33% respectively.
Imports and exports declined by over 12% and 26% respectively through the Chattogram port in March.
This port accounts for almost 92% of Bangladesh's import-export
activities.
This is due to the damaging effects of the novel coronavirus around the world. In February, too, imports
had fallen by 16% from January, according to analysis by the customs value data of imported and export-
ed goods available at the port city's customs house. In March, the country imported goods worth BDT
31,617 crore as per the customs value, about BDT 4,500 crore less than that in the previous month. Ex-
port earnings saw a steep 83% fall year-on-year in April due to halted production and order cancellations
in the apparel sector brought on by a countrywide shutdown and the global economic fallout from Covid-
19.
However, this overall situation will reduce the banks commission and fee income as well as
corresponding asset growth like import loan, discounting products and CAPEX loan etc.

Remittance Outlook

Source: Bangladesh Bank

40
 Source: Bangladesh Bank
Remittance in one of the major sources of foreign exchange reserve. For last couple of years, Bangladesh
passed a golden era in terms of remittance.
On May remittance showed some improvements by 38% thanks to the occasion of Eid-ul-Fitr. Inflow of
remittance dropped to a three-year low to $1.08 billion in April following coronavirus outbreak in
differ- ent parts of the world. Remittance inflow in April of this year was the lowest since May of 2017
when the country received $1.077 billion in remittance. It dropped nearly about 12% in March.
Remittance inflow which usually sees a jump before any festival saw negative growth during Ramadan as a
large number of migrant workers lost their jobs under the impact of the Covid-19 outbreak. In the first 14
days of May, remittance growth fell by 8.15% year-on-year as expatriates sent less money home even
before Eid.
Banking industry will face a direct hit on fee-based income due to the decreasing remittance.

Forex reserve Outlook

Source: Bangladesh Bank

The country's foreign exchange (forex) reserve reached at US$36 billion mark on June following
lower import payment pressure on the economy due to the worldwide spread of coronavirus pandemic
and increased remittance due to the occasion of Eid-ul-fitr.
It was $32.55 billion on March 24. According to BB, higher gold prices in the global market along with re-
valuation gain have helped to increase the country's forex reserve recently.
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Appendix 2– Summary of Stimulus Package by Bangladesh Gov.

Sl. Title Size Fund Targeted Benefi- Type of Interest Interest

No. (in Dura- ciary/ Purpose Facility Rate for Rate/
BDT tion Banks Service
bn) Charges
for Benef
ciary
1 Package for Export 50 June Payment of Work- Loan for - 2%
Oriented Industries 2020 ers' Wages for 3 Workers' (Service
months (max.) Wages Charge)
2 Package for COVID- 300 3 years Affected business Working 4.5% 9%
19 affected Indus- (Except CMSME) of Capital (Interes
tries and Service Industry and Ser- Finance t Subsi-
Sector vice Sector for dy from
COVID-19 Govt.)
3 Package for COVID- 200 3 years Affected CMSMEs Working 5% 9%
19 affected CMSMEs for COVID-19 Capital (Interes
Finance t Subsi-
dy from
Govt.)
4 Package for manu- 128 - To facilitate raw Working 1% 2%
facturer exorters for materials imports Capital (Interes
raw material import- under back-to-back Finance t Subsi-
ers LCs for manufac- dy from
turer exporters BB)
under EDF
5 Special Incentive 50 Sep- All working capital Working 1% 4%
Refinance Scheme tember based Agriculture Capital
for Agriculture Sec- 2020 Sectors except crop Finance
tor and grains
6 Pre-Shipment Credit 50 3 years Export oriented Pre- 3% 6%
Refinance Scheme industries shipment
credit
7 Refinance Scheme- 30 3 years low-income peo- Micro 1% 9% (max.)
2020 for Low- ple, farmers and Finance [3.5% for
income people, Micro/ Marginal intermedi
Farmers and Micro/ Businesses (Ultra ary MFIs]
Marginal Business poor and under
pricileged people)

8 Refinance Scheme 150 3 years Affected business- Working 9% 9%

for Working Capital es (Except CMSME) Capital
Finance and Large of Industry and Finance
industries and Ser- Service Sector for
vice Sector COVID-19
9 Package for to assist 20 - Migrant workers, Loan for - -
migrant workers, unemployed youth the vulner-
unemployed youth and rural popula- able groups
and rural population tion
Source: Newspaper & ATC Research

42
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Appendix 3– Summary of Bangladesh Bank’s Circular in Recent Times

Circular regarding Cash Reserve Ratio Reduction:

23-Jun-14 3-Apr-18 23-Mar-20

Policy rate for Daily basis (in %) 6.00% 5.00% 4.50%
+Increase/ (decrease) (in bps) - (100) (50)
Policy rate for Bi-weekly basis
6.50% 5.50% 5.00%
(in %)
+Increase/ (decrease) (in bps) - (100) (50)
Source: Bangladesh Bank

Circular regarding Repo Rates:

14-Jan-16 3-Apr-18 23-Mar-20

REPO (in %) 6.75% 6.00% 5.75%
- (75) (25)
+Increase/ (decrease) (in bps)
Reverse REPO (in %) 4.75% 4.75% 4.75%
- +0 +0
+Increase/ (decrease) (in bps)
Source: Bangladesh Bank

Circular regarding Advance-Deposit Ratio (ADR):

7-Mar-16 30-Jan-18
Max limit for Conventional Banks (in %) 85.00% 83.50%
+Increase/ (decrease) (in bps) - (150)
Max limit for Islamic Banks (in %) 90.00% 89.00%
+Increase/ (decrease) (in bps) - (100)
Source: Bangladesh Bank

Circular regarding One-time Exit:

16-May

Cut-off date to consider a bad loan 31-Dec

Initial down payment 2.0%
Repayment timeline extension by 10 yea
Grace period (including timeline) 1 yea
max interest rate cap (in %) 9.0%
Required provisioning for banks 1.0%
Source: Bangladesh Bank

Circular regarding Loan Classification :

Loan Classification Overdue Period Total Time extend-
Delinquency ed by
Period
Previous (23-Sep- New (21-Apr-19)
12)
Overdue (Fixed-loans only) Day 0 6 months 6 months 6 months

Sub-standard (All Loan caterories) 3-6 months 3-9 months 9-15 months 3 months

Doubtful (All Loan caterories) 6-9 months 9-12 months 15-18 months 3 months
9 months or
Bad/ loss (All Loan caterories)
be- 12 months or beyond 18 months or beyond 3 months
yond

Source: Bangladesh Bank

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Appendix 4– Current Covid-19 scenario

Figure: Total confirmed COVID-19 cases (as of July 04, 2020)

The number of confirmed cases is lower than the number of actual cases; the main reason for that is limited testing

ource: European CDC

Figure: Total confirmed COVID-19 deaths (as of July 04, 2020)

L mited testing and challenges in the attribution of the cases of death means that the number of confirmed deaths may
i ot be an accurate count of the true number of deaths from COVID-19
n

rce: European CDC

Sou
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