Moody's Ratings downgrades the outlook for Bangladesh's banking system to negative from stable one as the US-based agency cites adversities like rising asset risks, poor corporate governance and slower economic growth.
In its latest report, released Wednesday, the global ratings agency also has highlighted inflationary pressures among the cardinal causes which are expected to negatively impact banks' profitability and financial stability.
Banks' capitalization will be stable as a moderation in credit growth will offset a weakening of internal capital generation, according to Moody's findings.
"Banks' funding and liquidity will be stable, although they will remain tight. The negative outlook also reflects the government's deteriorating capacity to provide support for banks in times of need," the American ratings agency explains.
Moody's also forecasts that Bangladesh's real GDP (gross domestic product) growth will slow to 4.5 per cent in the fiscal year ending June 2025, from 5.8 per cent of the previous fiscal year.
Key challenges for the economy stem from political and social unrest that has led to a deterioration of law and order, supply-chain disruptions in the ready-made garment sector and a weakening of demand, according to Moody's.
Meanwhile, the central bank has sharply increased the policy rates from 6.0 per cent to 10 per cent over a 15-month period between June 2023 and September 2024. As such, the global ratings agency expects the inflation rate to remain high, at 9.8 per cent in fiscal 2025, making it difficult for the central bank to lower its policy rates.
"High inflation and unemployment rates will limit the interim government's political capital to implement significant reforms," it notes.
It also says the operating environment for banks will weaken because of a slowdown in the country's economic growth and high inflation.
Banks' asset quality and profitability are forecast to deteriorate as businesses face dual challenges of weakening demand and rising costs due to supply- chain disruptions. Structural risks to banks' asset quality, such as lax regulations and poor corporate governance, will persist.
Moody's predicts that the share of non-performing loans (NPLs) will rise further due to social unrest, structural weaknesses in the banking sector, and stricter NPL-classification rules set to take effect in April 2025.
"Asset quality will deteriorate as the operating environment worsens," it predicts.
Meanwhile, the share of classified loans rose to 20.20 per cent of the total outstanding loans by the end of 2024 from 9.00 per cent a year ago. It was 16.93 per cent as on September 30, 2024.
"As asset risks rise, the regulators may offer forbearance for borrowers, which can help banks manage NPLs by allowing them to modify payment terms of defaulted loans," the ratings agency notes.
Moody's also says profitability will deteriorate as loan-loss provisions increase.
"Loan-loss provisions will increase significantly across the system as existing reserves for stressed loans are insufficient, especially in light of rising asset risks," it adds.
However, banks' internal capital generation will weaken, but moderate loan growth amid the economic slowdown will limit capital consumption.
It also terms current levels of capitalization low, especially at state-owned banks.
As of the end of September 2024, the average ratio of capital-to-risk weighted assets for state-owned banks was-2.5 per cent, below the 9.4 per cent for their private-sector peers and far lower than regulatory minimum.
"State-owned banks will remain undercapitalized because of weak profitability that is strained by high levels of NPLs and the absence of government capital infusions," the ratings agency explains.
However, funding and liquidity levels will be stable systemwide, although financially weaker banks may face increased vulnerability.
The ratings agency also says government will remain supportive of banking system, but its fiscal capacity will be limited and deteriorating.
Moody's expects the government to continue to be willing to support banks through regulatory forbearance and liquidity measures to lower contagion risks.
"However, its fiscal capacity to provide support will be limited and deteriorating, further constrained by the interim government's lack of political power," it notes.
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