Moody’s Ratings has revised its outlook on Bangladesh’s banking sector from stable to negative, citing increasing asset risks and worsening economic conditions. In a report released today, the agency highlighted several pressing concerns, including declining asset quality, persistent inflation, and slowing economic growth, all of which are expected to undermine banks’ profitability and financial stability.
According to Moody’s, Bangladesh’s real GDP growth is projected to decline to 4.5 percent for the fiscal year ending in June 2025, down from 5.8 percent in the previous year.
“The economic environment will deteriorate as growth slows and inflation remains elevated,” the report stated.
The economic deceleration is attributed to a combination of political and social unrest, supply chain disruptions in the garment industry, and weakening demand both domestically and internationally. To combat rising inflation, Bangladesh’s central bank has raised its policy rate from 6 percent to 10 percent over the past 15 months. However, inflation is anticipated to stay high, reaching 9.8 percent in 2025.
Moody’s warned that the banking sector will face heightened asset risks due to the continued rise in non-performing loans (NPLs). As of September 2024, the systemwide NPL ratio had surged to 17 percent, a sharp increase from 9 percent recorded just nine months earlier.
“Asset quality will continue to decline as economic conditions deteriorate,” Moody’s remarked, further noting that “social unrest has significantly undermined the financial stability of certain domestic businesses by reducing consumer demand, disrupting supply chains, and causing labour shortages.”
The situation is likely to be aggravated by the introduction of more stringent NPL classification regulations set to come into effect in April 2025, the agency cautioned.
Despite these challenges, overall capital levels across the banking sector are expected to remain stable due to subdued credit growth. Nevertheless, state-owned banks are particularly vulnerable, with an average capital-to-risk-weighted-assets ratio of -2.5 percent as of September 2024, significantly lower than the private sector’s average of 9.4 percent and well below regulatory requirements.
Moody’s observed that “state-owned banks will remain undercapitalised due to weak profitability, which is strained by high levels of NPLs and the absence of government capital injections.”
While systemwide liquidity is expected to remain stable, it will remain tight, with the loan-to-deposit ratio recorded at 81 percent as of September 2024.
The agency acknowledged that the government is likely to maintain support for banks through regulatory forbearance and liquidity measures to mitigate the risk of broader financial instability.
