Industry Desk: The central bank has been continuing its reporting to improve the performance of the banking sector and ensure a sound, efficient and resilient financial system. In FY 2017-18, BB has adopted a number of policy measures giving emphasis on risk management and corporate governance in the banks, periodic review of stability of the individual bank as well as the whole banking system, exercise of stress testing, monitoring of large borrowers, prevention of fraud-forgeries and strengthening of internal control and compliance system through self-assessment of anti-fraud internal controls etc. Monitoring of scheduled banks’ investment in shares has been made stringent in light of the amendment brought in the Bank Company Act, 1991 (amended up to 2013).
Performance of Risk Management Committee at the board level is being evaluated regularly to ensure proper risk management practice in the banks.
The review of the guideline namely ‘Risk Management Guideline for Banks’ issued in 2012 is now in process to facilitate banks in adopting contemporary methods to deal with various risk issues prudently. Besides, all core risks management guidelines have been revised recently for timely identification, measurement, control, and monitoring of all existing and probable risks of banks.
Banking Sector Performance
The banking sector in Bangladesh comprises four categories of scheduled banks – State-Owned Commercial Banks (SCBs), State-Owned Development Financial Institutions (DFIs), Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs). One newly licensed private commercial bank has started its operation in 2016. Therefore, the number of scheduled banks increased to 57 in 2017 from 56 in 2015 and the number of bank branches increased to 9654 in December 2017 from 9397 in December 2016. At the end of June 2018, total number of bank branches increased further to 9720.
In 2017, the SCBs held 27.60 percent share of the total assets which was 27.53 percent in 2016. PCBs’ share of the total assets increased from 64.50 percent in 2016 to 65.02 percent in 2017. The FCBs held 4.80 percent share of the total assets in 2017, showing a decline of 0.35 percentage points over the previous year.
The DFIs’ share of the total assets was 2.58 percent in 2017 against 2.82 percent in 2016.
Total deposits of the banks in 2016 rose to Tk 8933.9 billion from Tk 7928.6 billion in 2016 showing an overall increase of 12.7 percent. The SCBs’ share in total deposits slightly decreased from 28.4 percent in 2016 to 28.4 percent in 2017. PCBs’ deposits in 2017 stood at Tk 5788.0 billion or 64.8 percent of the total deposits compared to Tk 5110.4 billion or 64.5 percent in 2016. FCBs’ deposits in 2017 slightly increased by Tk 24.4 billion over the year 2016 although, their contribution to total deposits decreased slightly. The DFIs’ deposits in 2017 was Tk 249.4 billion against Tk 226.6 billion in 2016 showing an increase of 10.1 percent over the year.
Summary Balance Sheet
Total industry assets in 2017 showed an overall increase of 12.7 percent over 2016. During this period, the SCBs’ assets increased by 13 percent and those of the PCBs increased by 13.6 percent. Loans and advances of Tk 6739.2 billion constituted the most significant portion (57.96 percent) of the sector’s aggregate assets of Tk 11626.7 billion. Cash in hand including foreign currencies was Tk 106.5 billion; deposits with BB were Tk 736.9 billion; other assets were Tk 1904.4 billion and investment in government bills and bonds were Tk 2139.6 billion.
Deposits continued to be the main sources of funds of the banking industry and constituted 76.8 percent (Tk 8933.9 billion) of total liability in 2017. Capital and reserves of the banks were Tk 837.7 billion (7.2 percent) in 2017 compared to Tk 753.5 billion (7.4 percent) in 2016.
Capital adequacy focuses on the total position of the banks’ capital and the protection of depositors and other creditors from the potential losses that a bank might incur. It helps absorbing all possible financial risks related to credit, market, operation, interest rate, liquidity, reputation, settlement, strategy, environment and climate change etc. Under Basel-III, the banks in Bangladesh are instructed to maintain the Minimum Capital Requirement (MCR) at 10 percent of the Risk Weighted Assets (RWA) or Tk 4 billion as capital, whichever is higher. Under the Supervisory Review Process (SRP), banks are directed to maintain a level of “adequate” capital which is higher than the minimum required capital and sufficient to cover for all possible risks in their business. This higher level of capital for the banks is usually determined and finalized through SP-SREP (Supervisory Review Evaluation Process, the central bank’s assessment) dialogue. The amount of capital was Tk 205.8 billion as on 31 December 2008 which increased to Tk 837.58 billion at the end of December 2017, showing capital growth of 306.98 percent.
On 31 December 2017, in aggregate, the SCBs, DFIs, PCBs and FCBs maintained CRAR of 5.86, -33.67, 12.36 and 25.37 percent respectively. However, individually, 3 SCBs, 2 PCBs and 2 DFIs failed to maintain the minimum required Capital to Risk Weighted Assets Ratio (CRAR). The CRAR of the banking industry as a whole was 10.80 percent at the end of December 2017 as against 10.84 percent at the end of December 2016. The CRAR of the industry was 10.86 percent at the end of June 2018.
Loans and advances are the major components in the asset composition of all commercial banks. The high concentration of loans and advances increases the vulnerability of assets to credit risk.
The most important indicator to demonstrate the asset quality in the loan portfolio is the ratio of gross Non-Performing Loans (NPLs) to total loans and net NPLs to net total loans. At the end of December 2017, the gross NPL ratio to total loans of the banking sector stood at 9.23 percent. PCBs had the lowest and DFIs had the highest ratio of gross NPLs to total loans. SCBs’ gross NPLs to total loans ratio was 25.05 percent and the NPL ratio of DFIs, PCBs and FCBs were 26.02, 4.58 and 9.56 percent respectively at end December 2017. The gross NPL ratios to total loans for the SCBs, PCBs, FCBs and DFIs were recorded as 26.84, 5.77, 7.89 and 23.79 percent respectively at the end of June 2018.
The ratio of NPL to total loans of all banks had shown an overall declining trend from its peak (34.9 percent) in 2000 up to 2011 (6.1 percent). Then, it increased in 2012 (10.0 percent) and decreased again in 2013 (8.9 percent). Afterward, the ratio increased in 2014 (9.69 percent) and again declined in 2015 (8.79 percent). In 2016, it increased to 9.23 percent due mainly to increase in total classified loans, defaulted outstanding and non-recovery of the interest charged on loans. At the end of June 2017, the ratio of NPL to total loans of the industry stood at 10.13 percent.
The SCBs and DFIs continue to have high level of NPLs due mainly to substantial loans provided by them on considerations other than commercial criteria. Poor appraisal and inadequate follow-up and supervision of the loans disbursed by the SCBs and DFIs in the past eventually resulted in these poor quality assets. Furthermore, these banks were reluctant to write-off the historically accumulated bad loans because of poor quality of collaterals. However, recovery of NPLs has witnessed some signs of improvement, mainly because of the steps taken with regard to internal restructuring of these banks to strengthen their loan recovery mechanism and write-off measures initiated in recent years. Provisions and interest suspense) was 2.3 percent for the banking sector and it was 11.1 percent for SCBs. The table illustrates that SCBs’ and DFIs’ non-performing portfolios.
In 2016, the ratio of net NPLs (net of provisions and interest suspense) to net total loans (net of have increased in 2016 as compared to that of the last year. The net NPLs to net total loans ratios were 10.5, 0.1, and 1.9 percent for the DFIs, PCBs and FCBs respectively at the end of December 2016. The ratios were 11.6, 8.8, 0.7 and 0.9 percent for SCBs, DFIs, PCBs and the amount of NPLs of the four types of bank since 2009 to 2017. The amount of NPLs of the SCBs increased from Tk 117 billion in 2009 to Tk 310.3 billion in 2017. The amount of NPLs of the PCBs stood at Tk 230.6 billion in 2017 increasing from Tk 61.7 billion in 2009. The amount of NPLs of the DFIs increased to Tk 56.8 billion in 2016 from Tk 42.1 billion in 2009. The amount of NPLs of the FCBs increased to Tk 24.1 billion in 2017 as against Tk 3.5 billion in 2009. The table also demonstrates that total NPLs of the banking sector have increased to Tk 621.8 billion in 2017 as compared to Tk 594.1 billion in 2016 and the amount of NPLs has increased in all types of banks except PCBs in 2017 as compared to the last year. The amount of NPLs of SCBs, DFIs, PCBs and FCBs stood at Tk 345.8, 55.2, 317.3 and 23.2 billion respectively at the end of June 2018.
The banking sector continuously failed to maintain the required level of provision against their NPLs from 2009 to 2017 except the year 2009 and 2011. From 2012 to June 2017 banking sector showed shortfall in maintaining provision and it showed increasing trend.
The main reason for the shortfall in provision was the inability of some SCBs and PCBs, including those in the problem bank category due to increase in classified loans, poor quality and inadequacy of collaterals, low profit and provision transfer for write-offs. On the other hand, the FCBs were in a much better position since they were able to keep adequate provisions.
34 out of 40 PCBs were able to maintain the required provision at the end of December 2017, but the remaining three failed due to their poor asset portfolios and earning levels.
In order to rectify an unnecessarily and artificially inflated size of the balance sheet, a uniform guideline for write-off was introduced in 2003. Banks may write off bad/loss loans complying with the conditions covered by the guideline.
It is difficult to draw any conclusion about the quality of management based solely on the quantitative indicators. Nevertheless, the total expenditure to total income, operating expenses to total expenses, earnings and operating expenses per employee, and interest rate spread are generally used to determine management soundness. Technical competence and leadership of mid and senior level management, compliance with rules/ regulations/plan and response to changing circumstances, etc. are taken into consideration in evaluating the quality of management.
As evident, in 2017 the expenditure-income (EI) ratio of the DFIs was the highest among the bank categories, which was mainly attributable to poor non-interest income and higher operating expenses. The EI ratio of the DFIs increased from 113.9 percent in 2015 to 137.8 percent in 2017. The EI ratio of the SCBs was 90.2 percent in 2017, the second highest, which could mainly be attributable to high administrative and operating expenses. In 2017, The EI ratio of PCBs and FCBs were 73.5 percent and 45.7 percent respectively, which decreased slightly in 2017 as compared to the previous year. At the end of June 2018, the EI ratio of SCBs and DFIs stood at 87.9 and 132.8 percent respectively whereas those of PCBs and FCBs stood at 74.5 and 45.5 percent respectively.
Earnings and Profitability
Although there are various indicators of earnings and profitability, the most representative and widely used one is return on assets (ROA), which is supplemented by return on equity (ROE) and net interest margin (NIM).
Earnings as measured by ROA and ROE differ greatly within the banking industry.
Analysis of these indicators reveals that the ROA of the SCBs and DFIs was negative and less than the industry average. ROA of the PCBs showed a consistently strong position up to 2010, but it was in a decreasing trend during 2011-2012 due to declining net profit. However, after 2012 it has been consistently increasing. The table also shows that though FCBs’ ROA showed a decreasing trend from 2014, it remains in a strong position.
ROE of the SCBs stood at -6.02 percent in 2017, but it has deteriorated as compared to -1.47 percent in the last year. ROE of the DFIs was also negative which stood at -13.88 percent in 2017. ROE of the PCBs increased to 11.09 percent in 2017 from 10.75 percent in 2016. ROE of the FCBs declined to 13.08 percent in 2017 from 14.6 percent in 2016. At the end of June 2017, ROE of SCBs, DFIs, PCBs and FCBs stood at -19.38,-814, 7.50 and 10.81 percent respectively.
Aggregate net interest income of the banking industry in 2017 stood at Tk 328.66 billion which was Tk 292.90 billion in 2016. NII of the SCBs increased to Tk 49.47 billion in 2017 from Tk 40.4 billion in 2015. NII of the DFIs decreased to Tk 0.93 billion in 2016 from Tk 1.7 billion in the last year. PCBs held the major portion (77.32 percent) of NII of the banking industry in 2017 like previous years. NII of the PCBs increased to Tk 254.11 billion from Tk 222.64 billion in the last year. NII of FCBs declined slightly from Tk 28.2 billion in 2015 to Tk 24.15 billion in 2017. The NII of the banking industry stood at Tk 165.42 billion at the end of June 2018.
SCBs have been able to increase their net interest income (NII) by reducing their cost of funds from 2009 to 2011. In 2012, the NII of SCBs dropped, and deteriorated afterwards. The NII of the PCBs had been significantly high since 2009. Overall NII of the banking industry showed a consistently upward trend from 2009 to 2017 though it went reverse in 2013 due to lackluster performance of the SCBs.
Presently, the commercial banks have to maintain CRR (cash reserve ratio) averaging 6.5 percent daily on a biweekly basis against average total demand and time liabilities (ATDTL) of the second preceding month, with an obligation to maintain daily minimum 6.0 percent cash against the same ATDTL held by the bank. The current rate of SLR (statutory liquidity reserve) for conventional banks is 13 percent of ATDTL. In case of Islamic Shariah based commercial banks, the rate
of SLR is 5.5 percent of their ATDTL. Three banks (two specialized banks and BDBL) are exempted from maintenance of SLR, but they have to maintain the CRR at the stated rate. The banks maintain CRR in cash with Bangladesh Bank. However, they are allowed to hold government approved securities (unencumbered portion) including Government Islamic Investment Bond (GIIB) for maintenance of the SLR.
In 2017 the FCBs have the highest liquidity ratios followed by the steady trend (percentage of liquid assets in total assets) during the last few years although the ratio for DFIs is zero as they do not need to maintain SLR.
CAMELS rating is a supervisory tool to assess and review the financial soundness of the banking companies. It helps BB to remain always vigilant over the banks and identify those banking companies which have problems and require close supervision. The previous CAMELS rating guideline has been reviewed by the Department of Off-site Supervision with a view to assessing the banks’ soundness more accurately, reflecting the banks’ financial condition and management issues more pragmatically, making the guideline more country perspective oriented and making an effort to address good governance issues in the banking sector. The revised CAMELS rating guideline came into effect from 2013.
The revised CAMELS rating guideline has brought not only major changes in ratios or indicators but also modifications in the questionnaire for evaluation of qualitative issues. Basel-III principles related to capital adequacy have also been reflected in the guideline. Along with emphasizing best quality capital, investments in the capital market, the amount of off-balance sheet items in comparison to the capital of the banks, large loan exposures to capital, etc. are considered to calculate capital adequacy. HHI (Herfindahl-Hirschman Index) has been incorporated in the updated CAMELS rating guideline to analyze loan concentration, as a complement to percentages of classified loans and provisioning in the evaluation of asset quality. The amount of loan disbursed to different risk associated sectors has been
included as well. Under this rating system, banking companies are assigned two sets of ratings- (i) performance ratings, based on six individual ratings that address six components of CAMELS (capital, assets, management earnings, liquidity and sensitivity to market risk) and (ii) an overall composite rating based on a comprehensive assessment of the overall condition of the banking company. Both ratings are expressed by using a numerical scale of “1” to “5” in ascending order of supervisory concern, “1” representing the best rating, while “5” indicating the worst. Any bank rated 4 or 5, i.e., ‘Marginal’ or ‘Unsatisfactory’ under Bangladesh Bank has introduced the Early Warning System (EWS) since March 2005 to address the difficulties faced by the banks in any of the areas of CAMELS. Any bank found to have difficulty in any areas of operation, is brought under the Early Warning category and monitored very closely to help improve its performance. Presently, there is no bank under EWS.
According to June 2018 based CAMELS rating, 6 banks were rated ‘1’ or ‘Strong’; the rating of 30 banks was ‘2’ or ‘Satisfactory’; rating of 14 banks was ‘3’ or ‘Fair’; 4 banks were rated ‘4’ or ‘Marginal’, 3 banks were rated ‘5’ or ‘Unsatisfactory’.
The central bank has added some extra issues in evaluation of the CAMELS rating but Daily Industry consider the issues like ‘CSR’.
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