Moody’s downgrades Bangladesh’s banking outlook to negative

 

Moody’s Ratings downgraded Bangladesh’s banking system outlook to negative from stable, citing rising asset risks, political instability and worsening economic conditions. In its latest report released Wednesday, Moody’s highlighted key concerns, including escalating asset risks, weakening economic growth, and heightened inflationary pressures that are expected to negatively impact banks’ profitability and financial stability.

 

The American credit ratings agency also forecasts that Bangladesh’s real GDP growth will slow to 4.5 percent in the fiscal year ending June 2025, from 5.8 percent the previous year. “The operating environment will deteriorate due to economic slowdown and a high inflation rate,” Moody’s said. The report also warns that Bangladesh’s banking sector will face mounting asset risks as non-performing loans continue to rise.

 

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.”

 

Despite challenges, overall capitalisation 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 percent as of September 2024, well below the private sector average of 9.4 percent and regulatory minimums. “State-owned banks will remain undercapitalised because of weak profitability that is strained by high levels of NPLs and the absence of government capital infusions,” Moody’s said.