In the third quarter of the fiscal year 2023 (Q3FY23), the performance of the banking sector in Bangladesh displayed a mixed outlook.
Bangladesh Bank's latest quarterly report (Q3FY23) revealed several key indicators on banks' overall health.
One of the concerning developments was the increase in the ratio of non-performing loans (NPLs) to total loans. This rise was particularly evident in Private Commercial Banks (PCBs). The ratio of gross NPLs to total loans climbed from 8.16 percent in Q2FY23 to 8.80 percent in Q3FY23, largely attributed to the discontinuation of relaxed loan repayment policies. PCBs witnessed a similar trend, with their NPL ratio increasing from 5.13 percent to 5.96 percent. Foreign Commercial Banks (FCBs) and Specialized Banks (SBs) maintained relatively stable NPL ratios at 4.91 percent and 12.80 percent, respectively.
However, State-owned Commercial Banks (SCBs) showed a slight improvement in their gross NPL ratio, decreasing to 19.87 percent in Q3FY23 from 20.28 percent in the previous quarter. Unfortunately, the ratio of net NPLs to total loans increased during this period, reaching 0.30 percent in Q3FY23 compared to (-) 0.08 percent in Q2FY23. This increase reflected a shortfall in provisions maintained during the quarter.
The capital adequacy ratio of the banking system remained stable, although some fluctuations were observed among different categories of banks. PCBs' capital-to-risk-weighted assets ratio (CRAR) decreased slightly from 13.80 percent in Q2FY23 to 13.08 percent in Q3FY23. SCBs also experienced a decline, with their CRAR dropping from 6.26 percent to 5.90 percent. The overall CRAR for the banking industry decreased from 11.83 percent to 11.23 percent during this period, the central bank report states.
The profitability of the banking sector declined, with both return on assets (ROA) and return on equity (ROE) decreasing. The net profit of the sector fell to BDT 14.75 billion in Q3FY23 from BDT 15.02 billion in Q3FY22, partially due to a decline in non-interest income. The overall ROA and ROE reduced to 0.39 percent and 6.82 percent in Q3FY23 from 0.45 percent and 7.89 percent in Q3FY22, respectively. SCBs and PCBs also witnessed a drop in their ROA and ROE.
The Bangladesh Bank (BB) report on a positive note says deposit growth in the banking sector surged to 6.6 percent in Q3FY23 from 5.60 percent in Q2FY23 due to the removal of the deposit interest rate restriction. Conversely, bank advance growth declined from 14.1 percent in Q2FY23 to 13.0 percent in Q3FY23. This led to a slight increase in the overall advance-deposit ratio (ADR), rising to 79.36 percent in Q3FY23 from 79.00 percent in Q2FY23.
Excess liquidity in the banking sector, which had tightened in the previous two quarters of FY23, experienced a modest increase in Q3FY23. This was attributed to higher deposit growth compared to moderated advance growth and reduced foreign currency sales by the central bank. The excess liquidity improved to 9.1 percent at the end of Q3FY23 from 8.6 percent at the end of Q2FY23.
The BB Q3FY23 report emphasized the challenges posed by the high non-performing loan ratio in the banking sector. It highlighted the need for ongoing measures in supervision and loan recovery frameworks. Additionally, the BB took an active role in amending the Bank Company Act of 1991 to address these challenges.
A senior BB official referring the report told the Daily Observer that the lower growth in bank deposits, tightening liquidity conditions, and a significant depreciation of the Bangladeshi Taka were identified as potential future challenges for the banking sector. These factors underscored the importance of continued vigilance and adaptability within the industry.
