Moody's Investors Service has downgraded the Baseline Credit Assessments (BCAs) and ratings of five Bangladeshi banks, and affirmed the ratings of three others.
The five banks are Al-Arafah Islami Bank, Dutch-Bangla Bank, Eastern Bank, Mercantile Bank, and Social Islami Bank.
On the other hand, Moody's has affirmed Brac Bank's BCA and ratings after considering the bank's strength in the small and medium enterprise (SME) segment.
This, Moody's says, makes the bank less vulnerable to credit concentration risks when compared to other banks in Bangladesh.
In addition, the affirmation of BCAs and ratings of The City Bank and NCC Bank reflect the banks' moderate level of problem loans, a situation that is largely in line with those of the similarly-rated peers in the country.
The BCAs and ratings of the banks were published on November 21.
Six banks' outlook demoted to 'negative'
The US-based bond credit rating company has revised the outlooks of six banks.
The outlook of Al-Arafah Islami Bank, Brac Bank, The City Bank, Mercantile Bank, NCC Bank and Social Islami Bank was downgraded to negative from stable to reflect Moody's expectation that the deterioration in credit conditions will pressure the asset quality and profitability of these banks.
Meanwhile, Moody's has 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.
Moody's has also maintained the outlook on Eastern Bank's ratings at stable, based on the bank's track record of good asset quality.
Rising levels of non-performing and rescheduled loans
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.
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 percent at June 30 this year from 10.4 percent the year before, while the proportion of performing rescheduled loans rose to more than 10 percent at December 31 last year, based on the central bank's data.
In addition, the rising regulatory forbearance in response to the credit deterioration will further mask asset risks and hamper loan recovery.
Bangladesh's Macro Profile relegated to "Weak-" from "Weak"
The deterioration in credit conditions will weigh on the asset quality and profitability of banks in Bangladesh.
This year, the central bank has deferred the default recognition of term loans, and introduced a one-time package that allows defaulted loans to be declassified and rescheduled on relaxed terms, on top of existing policies that allow the banks to reschedule problematic accounts.
To capture the rising asset risks, Moody's has downgraded Bangladesh's Macro Profile to "Weak-" from "Weak", by introducing a negative one-notch adjustment to Credit Conditions.
Banks with elevated levels of problem loans — including rescheduled and stay order loans — and high concentration risks in corporates will be vulnerable to the rising asset risks.
Detail of how Moody's rated the banks
Moody's has 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 six percent and nine percent respectively at September 30 this year, while their top 20 funded corporate exposures as a percentage of tangible common equity were at around 200 percent and 250 percent respectively at 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 Bank'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 percent of the bank's total loans at September 30 this year.
Meanwhile, the affirmations of The City Bank's and NCC Bank's b2 BCAs mainly reflect the banks' moderate levels of problem loans when compared to rated peers in Bangladesh.
Their problem loan ratios stood at around eight percent at September 30 this year.
The negative outlook on the ratings of Al-Arafah Islami Bank, Brac Bank, The City Bank, Mercantile Bank, NCC Bank 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. Dutch-Bangla 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 percent at September 30 this year.
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 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 to the local-currency deposit ratings.
Moody's does not have any particular governance concerns for the eight Bangladeshi banks, and therefore does not include corporate behaviour adjustments in their BCAs.
Their risk management frameworks are consistent, and commensurate with their respective risk appetites.
What could move the rating up/down
Given their negative outlooks, the BCAs and long-term ratings of Al-Arafah Islami Bank, Brac Bank, The City Bank, Mercantile Bank, NCC Bank and Social Islami Bank are unlikely to be upgraded over the next 12-18 months.
Nevertheless, Moody's could revise the banks' ratings outlooks 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 capitalisation, a decline in profitability, or further tightening of liquidity conditions will also exert downward pressure on the BCAs and ratings.