SINGAPORE (S&P Global Ratings) Aug. 14, 2024--The political situation in Bangladesh has exacerbated the banking industry's frailties, including weak liquidity, thin capital buffers, and ailing asset quality.
"We see risk of policy inaction and a potential slowdown in financial reforms," said S&P Global Ratings credit analyst Shinoy Varghese.
At Bangladesh Bank, the departure of the governor and some senior officials could delay some of the ongoing structural reforms. For example, the central bank is due to implement prompt corrective actions in March 2025. This would have forced many banks to focus on capital adequacy, stressed assets, and weak corporate governance.
Nonetheless, we believe day-to-day operations of Bangladesh Bank are unaffected. The central bank has been able to provide liquidity backstops to banks, both in domestic and foreign currencies, and also conduct clearing and settlement. Notably, the central bank's website was hacked in late July, highlighting the vulnerability to cyber-risk.
SLOW ROAD BACK TO NORMALCY
We see signs that banking operations are gradually returning to normal back after weeks of unrest that culminated in the country's abrupt change of government in early August. ATMs are now getting loaded with cash under private security cover. As per the latest circular from Bangladesh Bank, banks are to limit cash withdrawals to Bangladesh taka (BDT) 2 lakh (about US$ 1,700) per account, given the unpredictable security situation.
Liquidity at several banks will, in our view, remain tight over the next 12 months. Last year a shortage in foreign exchange availability hit hardest for some public sector and Islamic banks, delaying payments on their U.S. dollar denominated letters of credit. This situation had been normalizing before the riots started in June.
"Remittance inflows could get volatile owing to the political uncertainty," said Mr. Varghese. "Disruptions in economic activity and weak external demand should continue to pressure exports. Interbank market activity will remain largely subdued."
The two rated banks, BRAC Bank Ltd. (B+/Stable/B) and Dutch-Bangla Bank PLC (B/Stable/B), have been largely maintaining positive net foreign exchange positions. Unlike some larger peers, they have been able to meet their foreign-exchange obligations on time; these are mostly in the form of trade-related letters of credit (LC)
STRUCTURAL WEAKNESSES PREDATED RECENT EVENTS
Bangladesh's banking industry faces structural asset-quality challenges from weak lending standards and foreclosure laws. State-owned banks continue to hold substantial amounts of weak assets.
"The unrest will exacerbate these vulnerabilities, and potentially affect economic activity and some borrowers ability to pay," said Mr. Varghese. "Collections have declined, which could further pressurize banks' asset quality."
Excessive credit growth in recent years, particularly for Islamic banks, has also weakened domestic liquidity. Many such banks now have loan-to-deposit ratios well above the regulatory limit of 92% for Islamic banks. This is more relaxed than the 87% for conventional banks.
Our banking industry risk assessment (BICRA) for Bangladesh is 9, near the bottom of our 1-10 scale (10 being the weakest). This reflects the high economic and industry risk that the Bangladesh banking sector is exposed to. We currently have a negative trend on the industry risk for Bangladesh's banks reflecting the ongoing currency stress in the country and the tighter availability of U.S dollar within the banking sector.
Related Research
- Bangladesh Economy Faces Fresh Risks From Political Volatility, Aug. 7, 2024
- Banking Industry Country Risk Assessment: Bangladesh, Dec. 13, 2023'
This report does not constitute a rating action.
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| Primary Credit Analyst: | Shinoy Varghese, Singapore +65 6597-6247; shinoy.varghese1@spglobal.com |
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