Moody’s Investors Service has downgraded Bangladesh’s banking system outlook from stable to negative, citing growing risks to asset quality and deteriorating economic conditions that threaten the profitability and financial stability of the sector.
In a report released today, Moody’s raised key concerns, including the rising volume of non-performing loans (NPLs), high inflation, and weakening economic growth. These factors, it warned, will likely continue to impact the stability of the country’s banks in the coming months.
Economic Slowdown and High Inflation
Moody’s forecasts that Bangladesh’s real GDP growth will decelerate to 4.5% in the fiscal year ending June 2025, down from 5.8% in the previous year. This slowdown is attributed to a mix of political and social instability, disruptions in the garment sector supply chain, and declining domestic and international demand.
The country’s central bank has raised policy rates from 6% to 10% over the past 15 months in a bid to curb inflation, which is expected to remain high at 9.8% in 2025. Moody’s notes that the challenging economic environment, exacerbated by high inflation, will further strain Bangladesh’s banking sector.
“The operating environment will deteriorate due to the economic slowdown and persistently high inflation rates,” Moody’s stated in its report.
Rising Asset Risks and Non-Performing Loans
A major concern highlighted in the report is the mounting asset risks within Bangladesh’s banking system. As of September 2024, the system-wide NPL ratio surged to 17% from 9% just nine months earlier. Moody’s warned that as the operating environment worsens, asset quality is likely to continue deteriorating. Additionally, stricter NPL classification rules set to take effect in April 2025 could further worsen the situation.
“Social unrest has severely affected the financial stability of some domestic businesses by reducing demand, disrupting supply chains, and creating labor shortages,” the agency said. These factors have added to the pressure on banks to manage their growing portfolios of non-performing loans.
State-Owned Banks Particularly Vulnerable
State-owned banks in Bangladesh are under particular stress, with their capital-to-risk-weighted-assets ratio falling to -2.5% as of September 2024. This is well below the private sector average of 9.4% and far below regulatory minimums. Moody’s warned that state-owned banks remain undercapitalized, largely due to weak profitability caused by high NPLs and the absence of capital infusions from the government.
“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,” Moody’s noted.
Liquidity Tight But Stable
Liquidity within the banking system is expected to remain stable but tight, with the system-wide loan-to-deposit ratio standing at 81% as of September 2024. While the liquidity position may not cause immediate risks, the pressure on banks remains significant due to the ongoing economic challenges.
Moody’s also acknowledged that the government is likely to continue supporting the banking sector with regulatory forbearance and liquidity measures to help mitigate contagion risks.
Despite these challenges, Moody’s expects overall capitalization across the banking system to remain stable, driven by slower credit growth. However, the ongoing risks and economic uncertainty present a difficult outlook for Bangladesh’s banking sector in the near future.
