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Rating Action:

Moody's takes negative rating actions on 8 Bangladeshi banks

21 Nov 2019

Singapore, November 21, 2019 -- Moody's Investors Service has today downgraded the ratings of five and affirmed the ratings of three Bangladeshi banks.

The affected banks are:

(1) Al-Arafah Islami Bank Limited (AIBL);

(2) BRAC Bank Limited (BRAC);

(3) City Bank Limited, The (CBL);

(4) Dutch-Bangla Bank Limited (DBBL);

(5) Eastern Bank Limited (EBL);

(6) Mercantile Bank Ltd. (MBL);

(7) NCC Bank Limited (NCC); and

(8) Social Islami Bank Limited (SIBL).

The rating actions reflect Moody's expectation that credit conditions in Bangladesh will weaken — despite the robust economic conditions in the country — driven by persistent weaknesses in underwriting standards and high credit concentrations in large domestic corporates.

The rising regulatory forbearance in response to the credit deterioration will further mask asset risks and hamper loan recovery.

The deterioration in credit conditions will weigh on the asset quality and profitability of banks in Bangladesh. Moody's has therefore downgraded Bangladesh's Macro Profile to "Weak-" from "Weak", by introducing a negative one-notch adjustment to Credit Conditions.

Banks with elevated levels of problem loans — including rescheduled and stay order loans — and high concentration risks in corporates will be vulnerable to the rising asset risks. Moody's has therefore downgraded the Baseline Credit Assessments (BCAs) and ratings of five banks: AIBL, DBBL, EBL, MBL, and SIBL.

At the same time, Moody's has affirmed BRAC's BCA and ratings, after considering the bank's strength in the small and medium enterprise (SME) segment, which also makes it less vulnerable to credit concentration risks when compared to other banks in the country.

The affirmation of CBL's and NCC's BCAs and ratings reflect the banks' moderate level of problem loans; a situation that is largely in line with those of similarly-rated peers in the country.

Moody's has revised the outlooks of AIBL, BRAC, CBL, MBL, NCC and SIBL to negative from stable to reflect Moody's expectation that the deterioration in credit conditions will pressure the asset quality and profitability of these banks.

Meanwhile, Moody's has maintained the outlook on DBBL's ratings at stable, underpinned by robust funding and liquidity, because of its market position as the leading transaction bank in the country. Moody's has also maintained the outlook on EBL's ratings at stable, based on the bank's track record of good asset quality.

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_205342 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RISING ASSET RISKS IN BANGLADESH

The rating actions are primarily driven by persistent weaknesses in underwriting standards and high credit concentrations in large domestic corporates. Such a situation has led to rising levels of nonperforming and rescheduled loans in the banking system.

Specifically, the systemwide nonperforming loan ratio increased to 11.7% at 30 June 2019 from 10.4% the year before, while the proportion of performing rescheduled loans rose to more than 10% at 31 December 2018, based on the central bank's data.

In addition, the increasing regulatory forbearance will further mask asset risks and hamper loan recovery. This year, the central bank has deferred the default recognition of term loans, and introduced a one-time package that allows defaulted loans to be declassified and rescheduled on relaxed terms, on top of existing policies that allow the banks to reschedule problematic accounts.

To capture the rising asset risks, Moody's has downgraded Bangladesh's Macro Profile to "Weak-" from "Weak", by introducing a negative one-notch adjustment on Credit Conditions.

DOWNGRADE OF THE BCAs OF AIBL, DBBL, EBL, MBL AND SIBL

Moody's has downgraded the BCAs of EBL and DBBL to b2 from b1, largely because of the elevated levels of problem loans — including rescheduled loans and loans under stay orders — and high credit concentrations in their loan portfolios.

The problem loan ratios of EBL and DBBL stood at around 6% and 9% respectively at 30 September 2019, while their top 20 funded corporate exposures as a percentage of tangible common equity were at around 200% and 250% respectively at the same date.

Moody's downgraded the BCAs of AIBL, MBL and SIBL to b3 from b2 because their problem loan ratios, at double digits, are much higher than their rated peers in Bangladesh. These banks are also exposed to single-party concentration risks.

AFFIRMATION OF THE BCAs OF BRAC, CBL AND NCC

The affirmation of BRAC's b1 BCA reflects the bank's strength in the SME segment, that has led to superior asset quality and profitability when compared to its rated peers in Bangladesh. The bank is also less vulnerable to asset risks arising from corporate credit exposures, because of the high proportion of SME loans in its portfolio. BRAC's SME segment constituted 45% of the bank's total loans at 30 September 2019.

Meanwhile, the affirmations of CBL's and NCC's b2 BCAs mainly reflect the banks' moderate levels of problem loans when compared to rated peers in Bangladesh. Their problem loan ratios stood at around 8% at 30 September 2019.

RATINGS OUTLOOK

The negative outlook on the ratings of AIBL, BRAC, CBL, MBL, NCC and SIBL reflects Moody's expectation that the deterioration in credit conditions will further weigh on the asset quality and profitability of these banks.

The stable outlook on DBBL's ratings is underpinned by the bank's robust funding and liquidity. DBBL is the market leader in transaction banking, supported by automated teller machine and agent banking networks that are the largest in the country. As a result, the bank enjoys strong access to sticky, low-cost current and savings accounts (CASA), with a CASA ratio of more than 70% at 30 September 2019.

The stable outlook on EBL's ratings is supported by the bank's track record of good asset quality, as observed in its fairly stable problem loan ratio for the past five years. The bank continues to maintain good underwriting standards, with a focus on high quality corporates.

MODERATE LEVEL OF GOVERNMENT SUPPORT

Moody's continues to maintain a "Moderate" level of government support for all eight Bangladeshi banks, taking into consideration each bank's small market share, as well as the government's propensity and ability to support the banking system. This situation results in the incorporation of a one-notch uplift to the local-currency deposit ratings.

Moody's does not have any particular governance concerns for the eight Bangladeshi banks, and therefore does not include corporate behavior adjustments in their BCAs. Their risk management frameworks are consistent, and commensurate with their respective risk appetites.

WHAT COULD MOVE THE RATING UP/DOWN

Given their negative outlooks, the BCAs and long-term ratings of AIBL, BRAC, CBL, MBL, NCC and SIBL are unlikely to be upgraded over the next 12-18 months. Nevertheless, Moody's could revise the banks' ratings outlooks to stable if their asset quality improves significantly.

For DBBL and EBL, Moody's could upgrade the banks' BCAs and long-term ratings if their asset quality improves significantly.

However, Moody's could downgrade the banks' BCAs and long-term ratings if their asset quality deteriorates significantly. Weaker capitalization, a decline in profitability, or further tightening of liquidity conditions will also exert downward pressure on the BCAs and ratings.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Al-Arafah Islami Bank Limited is headquartered in Dhaka, and reported total assets of BDT367.6 billion ($4.3 billion) at 30 September 2019.

BRAC Bank Limited is headquartered in Dhaka, and reported total assets of BDT388.6 billion ($4.6 billion) at 30 September 2019.

City Bank Limited, The is headquartered in Dhaka, and reported total assets of BDT349.1 billion ($4.1 billion) at 30 September 2019.

Dutch-Bangla Bank Limited is headquartered in Dhaka, and reported total assets of BDT380.2 billion ($4.5 billion) at 30 September 2019.

Eastern Bank Limited is headquartered in Dhaka, and reported total assets of BDT322.4 billion ($3.8 billion) at 30 September 2019.

Mercantile Bank Ltd. is headquartered in Dhaka, and reported total assets of BDT317.8 billion ($3.8 billion) at 30 September 2019.

NCC Bank Limited is headquartered in Dhaka, and reported total assets of BDT255.4 billion ($3.0 billion) at 30 September 2019.

Social Islami Bank Limited is headquartered in Dhaka, and reported total assets of BDT332.0 billion ($3.9 billion) at 30 September 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Tengfu Li
Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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