Banking risk monthly outlook: March 2025

A forecast deterioration in asset quality in Bangladesh will put pressure on the sector’s already low capital buffers. The banking sector faces very high near-term risk largely stemming from a potential failure of state-owned banks. The NPL ratio is expected to rise to about 22% in 2025 and the results of the asset quality review will be a key determinant of next steps for the banking sector. The postponed asset quality review from Q4 2024 to Q1 2025 has further undermined confidence in the banking sector by preventing needed capital injections and holding up previously planned bank mergers.

Kazakh tax code proposals aimed at accelerating banks’ credit provision to firms and away from households. The proposed amendments to the 2026 Tax Code are set to raise overall taxation of commercial lenders, albeit with carve outs for income derived from nonfinancial corporate credit. Finalization of the document is expected by July 2025, before coming into effect from Jan. 1, 2026. Draft Tax Code amendments, paired with prudential loosening for corporate lending, are expected to reinforce local banks’ incentives to shift away from household lending in place of firms. In turn, the sector is likely to deepen corporate credit and slow the decade-long shift towards household lending.

Mexican banks adopting a wait-and-see approach upon tariff-exposed industries will likely curtail corporate credit growth. Following the risk of tariff increases, Mexican banks are likely to adopt a more cautious stance for trade-exposed loans, limiting credit lines to existing agreements and halting potential loans. Corporate loans, particularly those related to automotive, and trade are likely to see further limitations going forward. However, financial entities are expected to primarily focus on housing as the ongoing inertia of lending in banks is likely to continue over the course of the years.

Associated terms and conditions alongside the anticipated new ECF from the IMF will likely boost banking sector stability. As Mozambique approaches the end of the IMF's three-year ECF program, set to expire in May 2025, a renewal is anticipated to focus on restructuring public debt and bolstering stability within the banking sector. This includes transitioning from Basel II to Basel III, adjusting capital adequacy risk weights for loans to state-owned enterprises, refining regulations on loan classification and provisioning, and reducing banks’ sovereign exposure to government. The tighter risk weights and provisioning will likely lead to short-term pressure on the banking sector’s capital buffers, but in the next three-to-five years this will likely drive the sector toward international best practices and lower risks.