Moody's Investors Service has downgraded the ratings of five Bangladeshi banks and affirmed the ratings of three others.
The New York based rating agency published a report in this regard on November 21.
Moody's downgraded the Baseline Credit Assessments (BCAs) and ratings of Al-Arafah Islami Bank Limited, Dutch-Bangla Bank Limited, Eastern Bank Ltd, Mercantile Bank Limited, and Social Islami Bank Limited.
At the same time, Moody's affirmed Brac Bank's BCA and ratings, after considering the bank's strength in the small and medium enterprise (SME) segment, which also makes it less vulnerable to credit concentration risks when compared to other banks in the country.
The BCAs and ratings affirmations of The City Bank and NCC Bank, reflect the moderate level of problem loans at these two bank’s, a situation that is largely in line with those of similarly rated peer banks in the country.
Bangladesh's credit conditions to weaken
The rating actions reflect Moody's expectation that credit conditions in Bangladesh will weaken, despite the robust economic conditions in the country, driven by persistent weaknesses in underwriting standards and high credit concentrations in large domestic corporates, the report said.
The rising regulatory forbearance in response to credit deterioration will further mask asset risks and hamper loan recovery.
The deterioration in credit conditions will weigh on asset quality and profitability of banks in Bangladesh.
Moody's has, therefore, downgraded Bangladesh's Macro Profile to "Weak-" from "Weak", by introducing a one-notch negative adjustment to Credit Conditions.
Banks with elevated levels of problem loans, including rescheduled and stay order loans, with high concentration risks in corporates, will be vulnerable to the rising asset risks.
Outlook on six banks revised to 'negative' from 'stable'
Moody's revised the outlooks of Al-Arafah Islami Bank, Brac Bank, The City Bank, Mercantile Bank, NCC Bank, and Social Islami Bank, from stable to negative, to reflect Moody's expectation that the deterioration in credit conditions will pressure the asset quality and profitability of these banks.
The global credit ratings giant maintained the outlook on Dutch-Bangla Bank's ratings at stable, underpinned by robust funding and liquidity, because of its market position as the leading transaction bank in the country.
It also maintained the outlook on Eastern Bank's ratings at stable, based on the bank's track record of good asset quality.
Rising asset risks in Bangladesh
The rating actions are primarily driven by persistent weaknesses in underwriting standards and high credit concentrations in large domestic corporates.
Such a situation has led to rising levels of nonperforming and rescheduled loans in the banking system.
Specifically, the systemwide nonperforming loan ratio increased to 11.7% on June 30, 2019, from 10.4% the year before, while the proportion of performing rescheduled loans rose to more than 10% on December 21, 2018, according to Bangladesh Bank data.
In Moody’s estimation, the increasing regulatory forbearance will further mask asset risks and hamper loan recovery.
This year, the central bank deferred the default recognition of term loans, and introduced a one time package that allows defaulting loans to be declassified and rescheduled on relaxed terms, on top of existing policies that allow the banks to reschedule problematic accounts.
Downgrading of BCAs of five banks
Moody's downgraded the BCAs of Eastern Bank and Dutch-Bangla Bank to b2 from b1, largely because of the elevated levels of problem loans — including rescheduled loans and loans under stay orders — and high credit concentrations in their loan portfolios.
The problem loan ratios of Eastern Bank and Dutch-Bangla Bank stood at around 6% and 9% respectively on September 30, 2019, while their top 20 funded corporate exposures as a percentage of tangible common equity were at around 200% and 250% respectively on the same date.
Moody's downgraded the BCAs of Al-Arafah Islami Bank, Mercantile Bank, and Social Islami Bank to b3 from b2 because their problem loan ratios at double digits, are much higher than their rated peers in Bangladesh. These banks are also exposed to single party concentration risks.
Affirmation of the BCAs of Brac Bank, City Bank, NCC Bank
The affirmation of Brac's b1 BCA reflects the bank's strength in the SME segment that has led to superior asset quality and profitability when compared to its rated peers in Bangladesh.
The bank is also less vulnerable to asset risks arising from corporate credit exposures, because of the high proportion of SME loans in its portfolio. Brac's SME segment constituted 45% of the bank's total loans on September 30, 2019.
Meanwhile, the affirmations of The City Bank's and NCC's b2 BCAs mainly reflect the moderate levels of problem loans at these two banks when compared to their rated peers in Bangladesh. Their problem loan ratios stand at around 8%.
The negative outlook on the ratings of Al-Arafah Islami Bank, Brac, City Bank, Mercantile, NCC, and Social Islami Bank, reflects Moody's expectation that the deterioration in credit conditions will further weigh on the asset quality and profitability of these banks.
The stable outlook on Dutch-Bangla Bank's ratings is underpinned by the bank's robust funding and liquidity. The bank is the market leader in transaction banking, supported by automated teller machine and agent banking networks that are the largest in the country. As a result, the bank enjoys strong access to sticky, low-cost current and savings accounts (Casa), with a Casa ratio of more than 70% on September 30, 2019.
The stable outlook on Eastern Bank's ratings is supported by the bank's track record of good asset quality, as observed in its fairly stable problem loan ratio for the past five years. The bank continues to maintain good underwriting standards, with a focus on high quality corporates.
Moderate level of government support
Moody's continues to maintain a "Moderate" level of government support for all eight of these Bangladeshi banks, taking into consideration each bank's small market share, as well as the government's propensity and ability to support the banking system. This situation results in the incorporation of a one notch uplift of local currency deposit ratings.
Moody's does not have any particular governance concerns regarding these eight Bangladeshi banks, and therefore, does not include corporate behavior adjustments in their BCAs. Their risk management frameworks are consistent, and commensurate with their respective risk appetites.
What can move the ratings up or down
Given their negative outlooks, the BCAs and long-term ratings of Al-Arafah Islami Bank, Brac, City Bank, Mercantile, NCC, and Social Islami Bank are unlikely to be upgraded over the next 12 to18 months. Nevertheless, Moody's could revise the ratings outlooks of these banks to stable if their asset quality improves significantly.
For Dutch-Bangla Bank and Eastern Bank, Moody's could upgrade the banks' BCAs and long-term ratings if their asset quality improves significantly.
However, Moody's could downgrade the banks' BCAs and long term ratings if their asset quality deteriorates significantly. Weaker capitalization, a decline in profitability, or further tightening of liquidity conditions will also exert downward pressure on the BCAs and ratings.