Moody’s downgrades BD banking outlook to negative

Moody's Ratings on Wednesday changed Bangladesh's banking sector outlook from stable to negative, for what they stated “rising asset risks and worsening economic conditions.”

The report raised concerns including deteriorating asset quality, high inflation, and weakening economic growth, which would negatively impact banks' profitability, and financial stability, according to a press release.

Moody's forecasts that Bangladesh's real GDP growth will slow to 4.5% in FY25, from 5.8% the previous year.

The operating environment will deteriorate due to economic slowdown and a high inflation rate, Moody's also said.

The slowdown is driven by a combination of political and social instability, disruptions in supply chains within the garment sector, and weakening demand both domestically and internationally.

Bangladesh Bank raised policy rates from 6% to 10% over 15 months in an attempt to curb inflation, which is expected to remain high at 9.8% in 2025.The report warned that Bangladesh's banking sector will face mounting asset risks as non-performing loans continue to rise.

As of September 2024, the systemwide NPL ratio had surged to 17% from 9% just nine months earlier. Asset quality will deteriorate as the operating environment worsens, Moody's said, adding that "social unrest has severely affected the financial stability of some domestic businesses by reducing demand, disrupting supply chains and creating labour shortages."

Additionally, new, stricter NPL classification rules taking effect in April 2025 could further exacerbate the situation, Moody's said. Despite challenges, overall capitalization is expected to remain stable due to slower credit growth.

However, state-owned banks remain particularly vulnerable, with an average capital-to-risk-weighted-assets ratio of -2.5% as of September 2024, well below the private sector average of 9.4% and regulatory minimums.

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 said.

Liquidity across the banking system is expected to be stable but tight, with the systemwide loan-to-deposit ratio standing at 81% as of September 2024.