FE Report
S&P Global Ratings affirmed its 'B+' long-term and 'B' short-term issuer credit ratings on Bangladesh-based BRAC Bank Ltd. The outlook on the long-term rating is stable.
"We affirmed the rating because we expect BRAC Bank's above-industry average profitability and capital buffers will sustain its credit profile over the next 12-18 months. At the same time, we believe Bangladesh's broader banking system faces increasing pressure on earnings capacity, from an already moderate base. We have reflected the increased system-wide risks in our revised BICRA scores on Bangladesh," S&P Global Ratings said in a statement issued from Singapore.
"By our estimates, BRAC Bank's pre-diversification risk-adjusted capitalization will remain above 5.0 per cent over the next 12-24 months. In our view, the bank is implementing prudent capital strategy, which includes completion of a stake sale in its subsidiary bKash Ltd., and plans to retain all profits going ahead. We also expect loan growth to slow over the next 12-18 months, from 20 per cent year-on-year growth in the first half of 2018," the statement added.
The bank is likely to increase its franchise in Bangladesh's competitive yet underpenetrated financial services industry. We expect expansion and better use of BRAC Bank's distribution network to drive growth. In our view, the bank will continue to invest in its branch infrastructure, cyber security and technology initiatives.
BRAC Bank's profitability is likely to decline from 2017 levels. Interest spreads are declining as funding costs rise amid fierce competition for deposits among banks and alternate saving instruments, such as the government's national savings certificates. That said, we expect BRAC bank to maintain above-industry profitability owing to higher spreads on its small and midsize enterprise and retail loans, as well as fee income from mobile banking and trade finance. The bank's ratio of core earnings to average assets averaged about 1.3 per cent over the past five years, much better than the industry average of 0.7 per cent. We expect BRAC Bank's credit cost to remain broadly stable, given a relatively low nonperforming loans and adequate provisioning levels.
"In our opinion, industry risk for banks in Bangladesh has increased. This in because of heightened profitability pressures, given high and increasing stressed assets in the system, and generally low provisioning levels. New domestic banks will start operating in the country over the next 12 months, thereby further increasing competitive intensity."
The stable outlook on BRAC Bank reflects our view that the bank will steadily navigate competitive operating conditions in Bangladesh and maintain its financial profile over the next 12-18 months.
"We could upgrade BRAC Bank if its profitability stabilizes at a level that is higher than the industry average, and the bank improves its market share in a sustainable fashion without strategic or operational missteps. This could be shown by sustained good asset quality metrics and prudential underwriting standards over the next 12-18 months."
The global rating agency sees no downside risk given substantial capital buffers at the current rating level.
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