Country's banking sector showed mixed performance in the second quarter (Q2) of this calendar year with a fall in their profitability that drew the regulator's note of caution.
The banking situation has been portrayed by the central bank in its latest report, released Monday, that carried a suggestion for the banks to cut the volumes of their non-performing loan (NPL) among other corrective measures.
"The asset quality of banks improved slightly during the period under review while the capital-to-risk-weighted asset ratio (CRAR) recorded a minimum fall," a senior official of the Bangladesh Bank (BB) said in explaining the situation.
He also said key profitability indicators - returns on assets (ROA) and returns on equity (ROE) - also decreased slightly during the Q2 of 2015.
"The banks will have to take effective measures to improve their profitability through reducing the amounts of non-performing loans (NPL)," the BB official noted.
Both the ROA and ROE decreased by 22 and 72 basis points at the end of June 2015 in respect of the position of the previous quarter and reached the levels of 0.42 and 4.9 percent respectively, according to the Quarterly Financial Stability Assessment Report (QFSA) for April-June 2015.
Talking to the FE, a senior official of a leading private commercial bank (PCB) said the banks' profitability decreased recently due to squeeze in both interest and non-interest incomes.
The weighted average spread between lending and deposit rates offered by the commercial banks was unchanged at 4.87 per cent in the Q2 of 2015 from the Q1. It was 5.31 per cent in June last year.
On the other hand, the weighted average rates on lending came down to 11.67 per cent during the April-June period of this calendar year from 11.93 per cent three months before. It was 13.10 per cent in June 2014, according to the QFSA.
"Non-interest income also got hit as some clients, particularly corporate entities, prefer to negotiate on fees, charges and commissions with the bank concerned," the private banker explained.
However, asset quality, measured by NPL to the aggregate loan portfolio, slightly improved and the classified loans to regulatory capital recorded a moderate improvement over the preceding quarter, according to the QFSA.
The aggregate amount of NPL in the country's banking sector came down to Tk 525.2 billion during the April-June period from 546.6 billion in the preceding quarter.
"It is mentionable that more than three-fourths of the non-performing loans were in the bad/loss category," it noted.
The report also says the NPL ratio decreased by 80 basis points, reaching 9.7 percent at end-June 2015 from 10.5 per cent recorded at end-March 2015.
Besides, non-performing loans net of specific loan loss provisions and interest suspense to total loans and to regulatory capital decreased to 2.8 per cent and 20.8 per cent respectively at end-June 2015 from 3.7per cent and 25.8 per cent recorded at end-March 2015, according to the QFSA.
The central bank also identified that default of largest borrowers would have a major impact on the banking-sector capital to CRAR while the banks have been asked to manage borrower-concentration risk properly.
The BB issued an early warning on the basis of latest stress-testing analysis through releasing its latest QFSA.
"Stress-testing analysis, based on the data as of June 30, indicated that default of the largest borrowers would have a major impact on the banking-sector CRAR, implying that the banking sector as a whole should pay due attention to managing concentration risk in a prudent manner," the report said.
By a contrast, the banking industry was found to be fairly resilient in the face of various market-risk shocks, it added.
Moreover, the individual banks and the banking system as a whole were found to be well-resilient against various liquidity- stress scenarios during the period under review.
The banking sector's aggregate CRAR at end-June 2015 was 10.3 per cent, slightly higher than the minimum requirement of 10.0 per cent, but 40 basis points lower than the ratio recorded at end-March 2015.
The Tier-1 capital ratio stood at 7.9 per cent as opposed to 8.2 per cent recorded at end-March last, according to the report.
Under the Basel-III framework, the banks are required to maintain a capital-to-CRAR of at least 10.0 per cent and Tier-1 capital ratio of at least 5.5 per cent.
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