Moody's downgrades outlook on Bangladesh's banking system to negative

Moody's Investors Service revised the outlook on Bangladesh's banking system to negative from stable in a report published on Wednesday (1 March). 

Two other banking systems with negative outlooks are China and Pakistan.

The agency, however, maintained its stable outlook on 13 Asia-Pacific (APAC) banking systems.

Additionally, while maintaining its negative outlook on China's banking system, the agency had revised the banking system outlook for Vietnam to stable from positive and for Pakistan to negative from stable, in January 2023. In total, 13 APAC banking system outlooks are currently stable, compared to 15 at same time last year.

The 13 banking systems with stable outlooks at present are Australia; Hong Kong SAR, China; India; Indonesia; Japan; Korea; Malaysia; New Zealand; Philippines; Singapore; Taiwan, China; Thailand; and Vietnam.

Despite the uneven macroeconomic and operating conditions in many APAC economies amid higher inflation and weaknesses in exports, the stable outlook on most banking systems is supported by the banks' relatively strong solvency and liquidity, reads the report.

Moody's expects that operating conditions for banks in Japan and Thailand will improve in 2023.

On the other hand, the report names Bangladesh among Australia, Korea, New Zealand and Pakistan which will have worsening state of banking operations.

The report explains that this divergence is driven by a combination of factors including domestic consumption, tourism, housing market dynamics and export performance.

"Most APAC banks' problem loan ratios and credit costs will increase in 2023, but only modestly, with banks' large credit reserves supporting overall stable asset risk. Moreover, residual loan restructurings and forbearance measures in Thailand and Indonesia will continue to support borrowers that were affected by the pandemic. While household debt will remain high as a share of GDP in 2023 in Australia, Korea, New Zealand, Hong Kong and Thailand, the credit risk borne by banks will be mitigated by relatively stable employment conditions and/or macro-prudential measures as well as prudent loan-to-value ratios for mortgage loans," said the report.

Meanwhile, Moody's expects the asset quality of corporate loans of banks in China, Hong Kong and Vietnam to deteriorate because of property market-related challenges. 

Similarly, the asset risk for banks in Bangladesh and Pakistan will worsen amid macroeconomic challenges, the agency noted.

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Moody's expects APAC banks' profitability to remain generally steady after increasing in 2022 as higher policy rates drove up banks' net interest margins. While policy rate hikes will continue in 2023 in many economies, their increases will not be as significant as in 2022, hence providing only a modest uplift to net interest margins. Moreover, banks' rising funding and operating costs will limit the upside for profitability. Loan loss provisions will increase as a share of pre-provision income, yet the increases will be moderate for most banks because of their already strong loan loss coverage ratios.

The report concluded that APAC banks will maintain strong and stable funding and liquidity, despite recent moderate weakening amid monetary policy tightening. Banks' core capital ratios will remain broadly stable because of muted credit growth. Furthermore, government support for banks will remain strong in most APAC banking systems, supporting the credit ratings of the banks.