US rating agency Moody's Investors Service yesterday changed its outlook for Bangladesh's banking system to stable from negative, which will relieve the central bank boss of stress.
It comes at a time when there is a negative perception at home and abroad about the country's banking sector.
For all latest news, follow The Daily Star's Google News channel. The changed outlook reflects "our expectation that profitability and liquidity stress has eased despite ongoing asset-quality difficulties", Moody's said in a report.
It said profitability would be stable due to steady net interest margins (a profitability indicator that measures the difference between interest income and interest paid out by financial institutions) and credit costs.
Capital will also be stable because internal capital generation will be in line with capital consumption, it said, adding that the lenders' funding and liquidity will be tight but stable.
"The stable outlook also reflects our expectation that the government will continue to support banks when needed to maintain systemic stability," it said.
Zahid Hussain, former lead economist at the World Bank's Dhaka office, said Moody's latest outlook is a positive sign for Bangladesh's banking sector.
"There has been an erosion in global confidence about Bangladesh's banking sector. The latest outlook will prevent this," he said.
The central bank has implemented several reform measures in the banking sector in line with the International Monetary Fund's $4.7 billion loan programme, a Bangladesh Bank official told The Daily Star yesterday.
It has been a year since the reforms were taken up and some improvements are already visible, he said, adding, they expect more progress ahead. Moody's latest outlook could be a reflection of the reforms, he said.
Moody's had downgraded the outlook to negative from stable in March last year when Bangladesh went for the IMF loan programme.
Moody's in its latest outlook mentioned that the economy's operating environment would deteriorate as economic growth slows and inflation remains elevated.
Bangladesh's real GDP growth, which historically has been about 6.5 percent, is expected to slow to 6 percent in the fiscal year ending June 2024 and 6.3 percent in the fiscal year 2025, Moody's said.
"There has been an erosion in global confidence about Bangladesh's banking sector. The latest outlook will prevent this."
— Zahid Hussain, former lead economist at the World Bank's Dhaka office
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It also said the moderation in economic growth will be due to a weakening of external demand and persistently high import prices and inflation. As a result, the country's trade deficit will moderately widen.
In the banking sector, Moody's said despite rising asset risks, loan-loss provisions would be broadly steady because of regulatory forbearance that allows banks to actively restructure or reschedule problem exposures and continue classifying those loans as performing.
It forecasts the bank's capitalisation to be stable.
"We expect banks' internal capital generation will keep pace with capital consumption. However, banks' current capital levels remain modest."
It, however, said relatively weak capitalisation will give Bangladeshi banks a limited buffer against large and unexpected loan losses. State-owned banks will remain undercapitalised because of their weak earnings capacity caused by high levels of nonperforming loans and the absence of government capital infusions.
Moody's said it expects the banks' funding and liquidity to stabilise as the central bank measures to restrict imports and the opening of letters of credit have helped reduce foreign-currency outflows.
Incentives offered by the government and banks for remittance will help foreign-currency inflow increase but their effectiveness will be limited.
While Bangladeshi banks are self-sufficient in foreign-currency liquidity, the country's declining foreign-currency reserves will pose a risk to them as their access to dollars via the central bank in times of need will be limited, it said.
It expects domestic currency liquidity to remain tight because of high interest rates and inflation.
Moody's expects the government to support banks, particularly the larger ones, through regulatory forbearance and liquidity measures when needed.
The repayment capacity of domestic companies -- to which banks have significant exposures -- will continue to deteriorate because of rising borrowing costs, high inflation and weakening exports caused by slowing economic growth in key export markets, Moody's said.
Structural weaknesses, such as lax regulations and poor corporate governance, will continue to pose asset risks. As a result, stressed loans, which include performing loans with modified payment terms in addition to nonperforming loans, are expected to remain elevated, it said.
Zahid Hussain said the central bank has undertaken some policy programmes including the introduction of a smart interest rate system. Besides, the dollar situation has also improved slightly. "This might have been instrumental in Moody's outlook change," he said.
He also said funding and lending costs in the banking sector have increased. As a result, Moody's assumes that profitability will remain stable.
In the case of liquidity, Moody's might have thought that liquidity would be stable, even though there are problems in distressed assets because of necessary liquidity support from the central bank, he further said.
