Moody’s lowers Bangladesh’s banking rating to ‘very weak’

Revised Version:

The global credit rating agency Moody’s disclosed its assessment of Bangladesh’s banking sector on Tuesday, just a day after downgrading the country’s sovereign rating from B1 to B2 and revising the outlook from stable to negative. Senior bankers interpreted the downgrade in the banking sector as a ripple effect of the sovereign rating change and the challenging conditions in the banking industry.

A weaker banking sector signals a tougher economic environment and heightened risks for banks, including increased financial instability, slower growth prospects, and higher default risks, all of which could erode banks’ creditworthiness and profitability.

Moody’s stated, “We expect the central bank’s initiative to improve asset quality recognition will lead to a short-term rise in non-performing loans (NPLs) but ultimately contribute to greater systemic stability.”

Despite the risks to asset quality, the agency noted that the funding and liquidity of most rated banks have remained relatively stable. However, for years, Bangladesh’s banking sector has faced significant challenges, including surging NPLs, liquidity shortages, and governance failures.

Bad loans reached a record Tk 284,977 crore as of September 2023, driven by poor credit risk management, political interference, and weak regulatory oversight under the former Awami League government.

Some private Shariah-compliant banks and state-owned banks were at the center of controversies involving large-scale loan irregularities often tied to politically connected entities. This has severely undermined public trust in the banking sector and exacerbated operational challenges such as acute liquidity shortages.

In its sovereign outlook, Moody’s warned: “We anticipate a substantial portion of loans extended to politically connected borrowers under the Sheikh Hasina regime will default this year, further highlighting structural weaknesses in the banking system. This is likely to escalate the fiscal burden of banking sector reforms currently being discussed with the IMF.”

The agency also pointed to governance issues in the banking sector and a weakening monetary policy framework as key factors undermining macroeconomic stability and fiscal discipline.

Long-Term Ratings of Six Banks Downgraded

Moody’s also revised its ratings for six Bangladeshi banks, reflecting the broader negative sentiment towards the banking sector.

• BRAC Bank: Downgraded from B1 to B2 for long-term local and foreign currency deposit ratings.
• Mercantile Bank and Premier Bank: Downgraded from B2 to B3.
• City Bank, Eastern Bank, and Dutch-Bangla Bank: Retained their B2 ratings, but their outlook was revised from stable to negative.

Moody’s stated, “We have revised the long-term deposit ratings of all six banks to negative, reflecting heightened risks.”

Md Mahbubur Rahman, Additional Managing Director and Chief Financial Officer of City Bank, noted that Moody’s concerns over Bangladesh’s political developments and their economic impact were evident in the sovereign and sector downgrades.

He emphasized that the downgrade for the six banks is a direct consequence of the sovereign rating change. While City Bank’s B2 rating was maintained, as in the previous year, Rahman cited political instability, slowing economic growth, liquidity issues, deteriorating asset quality, and shrinking foreign currency reserves as factors affecting the long-term outlook for these banks.

“Such rating downgrades could negatively influence trust, deter investor interest, and raise the cost of foreign funding for the banking sector. However, the extent of the impact will vary across banks,” he added.