CAMELS Rating of different banks
Evaluating performance of 2021
Industry Report: During the FY2021, the main priority of Bangladesh Bank (BB) was to maintain resilience and stability of financial system as well as to support the government initiatives of recovering the economy from the challenging domestic and global market conditions caused by the ongoing COVID-19 pandemic. Almost all the large financial markets around the world have been extremely affected due to the lockdown and other restrictive measures aiming at restricting the escalation of pandemic.
Bangladesh also lost the pace of internal production as well as export earnings due to regional or countrywide lockdown during the first wave of the pandemic. However, while the pandemic subsided and the economy started to recover in response to the various policy measures taken by the government and BB, second wave of the pandemic hit again in April 2021. Despite being under enormous pressure created by the internal and external situations of the financial market, all scheduled banks of the country remained operational for normal business hours or for specified time in every working day during the lockdown period to provide regular banking services to their customers throughout the pandemic over the last one year and a half.
To assist the scheduled banks and non-bank financial institutions (NBFIs) to survive in this critical situation and to continue their contribution in revamping the country’s economy, BB has issued a series of policies and prudential measures from the very beginning of the pandemic situation. These include but not limited to: re-fixation of the regulatory liquidity ratios to ensure additional liquidity in the banking sector, issuance of various directives for banks to follow from time to time for preventing the outbreak of COVID-19 by maintaining proper office environment in the banks as well as compensation package for the employees as frontline workers during the lock down period, easing of foreign trade and foreign currency transaction regulations, temporary relaxation in the loan classification policy, implementation of the government’s stimulus packages for different segments of the economy and refinance schemes to provide liquidity support to those packages, introduction of special fund for capital market investment, restriction on dividend payouts with a view tostrengthening banks’ capital base to improve their risk resilience capacity under present situation, etc.
Other major policies and circulars issued during the financial year were guidelines on interest rate risk in the banking book for effective measurement and management of interest rate risk by banks, guidelines on country risk management (GCRM) for banks to address the risk of both on and off-balance sheet exposures to minimise loss of banks caused by adverse events in a foreign country, policy regarding verification of audited financial statements submitted by borrowers before loan approval/renewal and preserving the same in the loan file, policy for post import financing, etc.
Besides, as part of supervisory activities, BB conducted regular and special on-site inspections throughout the year. The performance of the risk management committees of the board of directors of banks were evaluated routinely. Special monitoring was continued by BB to oversee the liquidity.
Aggregate Industry Liabilities Source: Department of Off-site Supervision, Bangladesh Bank. level of the banking sector and consequently, a sufficient and strong level of aggregate liquidity was observed at the end of FY2021. Moreover, BB continued its efforts to reduce overall NPLs of the banking sector.
Banking Sector Performance
Depending on the ownership structure, there are four categories of scheduled banks in Bangladesh: state-owned commercial banks (SCBs), specialised banks (SBs), private commercial banks (PCBs) and foreign commercial banks (FCBs). Total number of scheduled banks operating in FY21 was 61. Two new banks (the Bengal Commercial Bank Limited and the Citizens Bank Limited) received licence and started their operation. The number of bank branches stood at 10,952 at the end of December 2021 which was 10,778 at the end of December 2020.
The SCBs held 25.1 percentshare of the total assets which was 24.5 percent in 2020. PCBs’ share of the total assets was 67.3 percent in 2021 which was 67.8 percent in 2020. The FCBs held 5.5 percent share of the total assets in 2021, showing no change over the last year. The SBs’ share of the total assets was 2.1 percent in 2021 which was 2.2 in 2020.
At the end of December 2021, total assets of the banking sector stood at Tk 18406.0 billion which was 12.9 percent higher than that of the previous year. Total deposits of the banking sector stood at Tk 13797.9 billion in 2021, which was 13.6 percent higher than Tk 12145.3 billion in 2020. From the year 2020 to 2021, considering the share in total deposit of the banking sector, SCBs’ share increased from 25.0 percent to 25.9 percent, PCBs’ share decreased from 68.1 percent to 67.3 percent, FCBs’ share remained unchanged at 4.3 percent and SBs’ share decreased from 2.6 percent to 2.5 percent.
Banking Network by Branches
As on 30 June 2021 the total number of branches of 61 scheduled banks were 10,793. Among total branches, 5239 of the branches (48.5 percent) were in rural areas and the rest 5554 branches (51.5 percent) were in urban areas.
The SCBs had 2039 rural branches and 1762 urban branches. Specialised banks had 1216 rural branches and 288 urban branches. Private commercial banks had 1984 rural branches and 3437 urban branches. Foreign commercial banks had 67 urban branches.
Aggregate Capital Adequacy Position
During this period, SCBs’ assets rose by 15.6 percent and that of PCBs’ increased by 12.0 percent. The aggregate banking sector assets consisted of Tk 11,239.22 billion as loans and advances (61.1 percent of total assets), Tk 164.72 billion as cash in tills including foreign currencies, Tk 1,123.50 billion as deposit, with BB including foreign currencies, Tk 3,033.37 billion as investment in treasury securities (government bills and bonds) and Tk 2,845.20 billion as other assets during the period.
Deposits continued to be the main sources of funds of the banking industry in FY2021 and it constituted 74.96 percent of the total amount of liability and shareholders’ equity (excluding inter-bank) in 2021. Total shareholders’ equity of the banks was Tk 1093.74 billion at the end of December 2021 which was Tk 1021.14 billion in 2020.
Capital adequacy focuses on the overall position of bank’s capital and the protection of the depositors and other creditors from potential losses that a bank might incur. It helps banks to absorb possible losses due to credit default, market and other operational risks during its normal course of businesses. Under Basel-III, banks in Bangladesh are instructed to maintain the minimum capital requirement (MCR) at 10.0 percent of the risk weighted assets (RWA) or Tk 4.0 billion as capital, whichever is higher. The aggregate amount of regulatory capital of the banking sector was Tk 1395.78 billion as on 31 December 2021, which decreased to Tk 1381.09 billion at the end of June 2021.
The capital to risk weighted assets ratio (CRAR) by types of banks. It was observed that the CRAR of SCBs, PCBs and FCBs were 6.8, 13.3 and 28.5 percent respectively as on 30 June 2021. Two SBs–BKB and RAKUB–failed to maintain MCR on risk weighted assets basis. Besides, 5 SCBs and 4 PCBs could not maintain the minimum required CRAR. The CRAR of the banking industry as a whole was 11.6 percent at the end of June 2021.
The most important indicator to demonstrate the asset quality is the ratio of gross non-performing loans (NPLs) to total loans and net NPLs to net total loans. At the end of December 2021, the gross NPL ratio of the banking sector stood at 7.7 percent. FCBs had the lowest and SCBs had the highest gross NPL ratio. FCBs’ gross NPL ratio was 3.5 percent, whereas those of SCBs, PCBs and SBs were 20.9, 4.7 and 13.3 percent respectively at the end of December 2021.
Aggregate Position of NPLs to Total Loans
The ratio of gross NPLs to total loans and advances indicates a mixed trend in the banking sector during 2011-2020. NPL ratio of the sector was 6.1 percent in 2011 and after a sharp increase (10 percent) in 2012; it reduced to 8.9 percent at the end of 2013. Later, in 2014 NPL ratio again increased to 9.7 percent but further declined to 8.8 percent in 2015. Though in recent years there observed an upward trend in NPL ratio but a downward movement of NPL ratio was found since 2019.
At the end of June2021, it stood at 8.2 percent. Comparatively poor assessment and inadequate follow-up and supervision of the loans have eventually resulted into the current situation of poor asset quality of SCBs and SBs. However, various measures (i.e. strengthening of recovery unit, special recovery programme, etc.) for increasing recovery against loans have been taken by the banks. Besides, several policy initiatives have also been taken in time by BB to reduce NPLs through restructuring, rescheduling, recovery, one time exit and write-off.
The ratio of net NPLs (net of provisions and interest suspense) to net total loans (net of provisions and interest suspense) of the banking sector was negative (-1.2 percent) at the end of December, 2020. The net NPLs ratios were 0.003, 1.3, -1.5 and -0.6 percent for the SCBs, SBs, PCBs and FCBs respectively at the end of December 2020.
Available information suggests that all types of banks have experienced a declining trend of NPLs in 2021 except the SBs where the amount of NPLs remained stable. However, the amounts of NPLs in all types of banks slightly increased at the end of June 2021 except in SBs where the amount of NPLs decreased.
As of June 2021, the NPLs of the SCBs, SBs, PCBs and FCBs were Tk 438.36 billion, Tk 36.85 billion, Tk 491.91 billion and Tk 24.93 billion respectively and for the whole banking sector it was Tk 992.05 billion. The aggregate amount of NPLs, the required provision and the actual provision maintained by the banks.
It is found that although aggregate provision maintained by the banking system as a whole was higher than the required provision in 2011 and thereafter it exhibits a continuous shortfall until June 2021. In 2011, provision maintenance ratio was 103.0. The ratio showed declining trend from 2014 to 2017. In 2017 it was 84.7 percent, which improved significantly to 99.8 percent in 2021, though further declined to 92.13 percent at the end of June 2021.
It is observed that all the four types of banks, except SCBs, were able to maintain the required provision against loans in 2019. But from 2020 to June 2021 only PCBs and FCBs were able to maintain the required aggregate provision while SCBs and SBs were unable to maintain required aggregate provision.
In order to rectify an unnecessarily and artificially inflated size of the balance sheet, a uniform guideline for loan write-off was introduced in 2003. In this regard, a new policy was introduced in February 2019 through BRPD circular (no.01). Banks may now write off bad/loss loans complying with the conditions covered by the new policy guidelines. The cumulative amount of written-off loans by different bank categories is shown.
Sound management is one of the important pre-requisites for the strength and growth of any financial institution. Although there is no direct means to measure management soundness, but 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 the management soundness of a financial institution.
Besides, issues such as technical competence and leadership of mid and senior level management, compliance with banking laws and regulations, implementation of internal policies, ability to implement strategic plan and taking timely initiatives, etc. are taken into consideration to measure the quality of management.
The expenditure to total income (EI) ratio of the banking sector which was 79.2 percent at the end of December 2021. As evident from the table, the EI ratio of the SBs was 158.1 percent, the highest among the bank categories in 2021 mainly due to high operating expenses of these banks. The EI ratios of the SCBs, PCBs and FCBs were 83.2, 79.6 and 46.2 percent respectively in December 2021. The EI ratios of all bank categories showed a decreasing trendcompared to those of the last year except PCBs. The EI ratio of the banking sector stood at 80.2 percent at the end of June 2021. Increasing trend in EI ratio particularly operating expenses to total expenses had negative impacts on the net profits of the banks.
Earnings and Profitability
Although various indicators are used todetermine the earnings and profitability, the most representative and widely used ones are return on assets (ROA), return on equity (ROE) and net interest margin (NIM).
ROA of the SCBs and SBs were always less than the industry average. The ROA of SCBs improved marginally (0.1 percent) in June 2021 compared to -1.1 percent in 2021. On the other hand, after experiencing an increasing trend from 2012 to 2016, the ROA of the PCBs have declined in recent years. Though ROA of FCBs showed a decreasing trend from 2014 to 2018, it always remained at a strong position. ROA of the banking sector stood at 0.5 percent in June 2021. The ROE of the SCBs stood at -29.6 percent in 2020 which was -13.7 percent in 2019. ROE of SBs in terms of loss recovery has improved from -17.0 percent in 2020 to -13.9 percent in 2021 and ROE of PCBs decreased to 10.2 percent from 11.2 percent during the same period.
ROE of FCBs fell down to 13.1 percent in 2021 from 13.4 in 2020. Aggregate ROE of the banking sector stood at 8.3 percent in June 2021. Net interest margin (NIM) of the banking industry stood at 2.7 percent in 2021 which was 3.1 percent in 2020.
The NIM for all the types of banks (SCBs, SBs, PCBs and FCBs) dropped in 2021 as compared to those in 2020. It reveals that NIM for PCBs and FCBs were always higher than the industry average.
Aggregate Profitability in the Banking Industry
However, NIM for overall banking sector exhibited a downward trend from 2014 to 2020 except a slight increase in 2018. NIM for overall banking sector stood at 2.5 percent at the end of June 2021.
An effective liquidity management helps to ensure bank’s ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents’ behaviour. Indicators like advance-deposit ratio (ADR), statutory liquidity ratio (SLR), interbank call money rate, and repo rate show the real picture of liquidity of the banking sector. On the other hand, one can evaluate bank’s strength to survive in any liquidity stressed situation through liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).
Overall advance-deposit ratio (ADR) inthe banking sector stood at 72.7 percent in December 2020 and 71.6 percent in June 2021. The prudential limits of ADR for conventional and Islamic Shariah-based banks were 87 percent and 92 percent respectively during this period.
All scheduled banks are required to maintain cash reserve ratio (CRR) bi-weekly at 4.0 percent against their average total demand and time liabilities (ATDTL) of the preceding two months with an obligation to maintain daily minimum 3.5 percent. The statutory liquidity reserve (SLR) for the conventional banks was 13.0 percent and for the Islamic Shariah-based banks it was 5.5 percent of their ATDTL of the preceding two months. Four banks (three specialized and BDBL) are exempted from the maintenance of SLR, but those banks have to maintain CRR at the same rate like other scheduled banks.
Banks having off-shore banking operation (OBO) have to maintain CRR and SLR for the liabilities arising from that operation. However, scheduled banks having off-shore banking operation are required to maintain minimum 2.0 percent CRR on bi-weekly average basis with a provision of minimum 1.5 percent on daily basis of the average total demand and time liabilities (ATDTL) of the preceding two months.
As on 30 June 2021, the liquidity coverage ratio (LCR) of the banking sector was 211.7 percent (against minimum requirement of 100 percent), indicating that banks had a reasonable buffer of high-quality assets to cover the cash outflow for a minimum of next 30 calendar days under stressed scenario. The net stable funding ratio (NSFR) of the bankingsector, as a whole, was 109.4 percent in June 2021 indicating that banks were also more dependent on stable funding rather than volatile funding to expand their business activities.
Depending on the mode of operations (e.g. conventional and Islamic Shariah based), there are three types of banks: full-fledged conventional banks, full-fledged Islamic Shariah based banks and banks with dual operations. In FY21, among 61 licensed banks 8 PCBs operated as full-fledged Islamic banks and 22 conventional banks (including two SCBs and three FCBs) were involved in Islamic banking through their Islamic banking branches.
The Islamic banks have continued to show strong growth as reflected by their increasing market share in terms of assets, financing and deposits of the total banking system. Total deposits of the Islamic banks and Islamic banking branches of the conventional banks stood at Tk 3207.8 billion at the end of December 2020 which accounted for 22.6 percent of total deposits (Tk 14187.8 billion) of the banking sector.
On the other hand, total credit of the Islamic banks and Islamic banking branches of the conventional banks stood at Tk 2871.4 billion at the end of December 2021 which accounted for 25.9 percent of total credit (Tk 11095.6 billion) of the banking sector.
According to the road map of the phase-in arrangements, December 2019 was the final timeline for the implementation of Basel III framework by the banks. Basel III framework requires increasing the level as well as the quality of capital that banks must hold. Banks are expected to maintain a minimum total capital ratio of 10.0 percent, where 6.0 percent is to be maintained as Tier-1 capital. Besides, all banks must hold common equity tier 1 (CET1) capital (the highest quality and most loss absorbing form of capital) in an amount of at least 4.5 percent of total risk weighted assets (RWA) for all time.
Banks have been submitting capital adequacy reports/statements following new Basel III accord since the quarter ended in March 2015. It has been found that capital to risk weighted asset ratio (CRAR) of the banking industry stood at 11.6 percent at the end of June 2021 while CET1 was 7.6 percent which broadly signify fulfilment of Basel III capital adequacy requirements.
However, out of 61 scheduled banks 9 failed to maintain CET1 and 11 failed to maintain minimum capital requirements, i.e. CRAR.
Under Basel III, banks are required to build up additional capital conservation buffer (CCB). Maintenance of CCB by banking industry as a whole stood at 1.63 percent at the end of June 2020 which slightly declined to 1.57 percent at the end of June 2021. Considering individual bank level, 42 banks have already fulfilled the CCB requirements.
In order to avoid building-up excessive on and off-balance sheet leverage in the banking system, BB introduced the minimum requirement of leverage ratio at 3.0 percent which stood at 4.4 percent at the end of June 2021, where at the individual bank level, 50 banks have already fulfilled the minimum requirements.
At the beginning of the FY2013, Bangladesh Bank reformed the loan classification and provisioning policy to align with the international best practice. Bangladesh Bank also clarified the difference between “Defaulted Loans” (a legal term, which enable banks to take some specific action against the borrowers) and “Classified Loans” (an accounting term).
However, due to pandemic situation of COVID-19, BB temporarily brought some relaxations in the objective criteria of loan classification for facilitating business environment and quickly recovering economic growth. Accordingly, BB informed the banks that loan classification status existed on 01 January 2020 can’t be downgraded till 31 December 2020.
Later on, instead of further extension of the classification deferral facility, it was decided that remaining amount of the term-loan can be extended by 50.0 percent (maximum 2 years) based on banker-customer relationship. In case of continuous and demand loans only the interest servicing borrowers can be unclassified till June 2022 and December 2022 respectively.
Moreover, banks were allowed to defer its entire due till March 2021 to June 2021 based on banker-customer relationship. Bangladesh Bank also relaxed its loan classification and provisioning rules to facilitate cottage, micro and small industries of the country and to encourage participation of banks in disbursing loans to cottage, micro and small industries.
Implementation of Risk Based Supervision
The CAMELS rating system continues to be the most important supervisory tool for the evaluation of banks’ overall health. However, gradually risk-based supervision (RBS) is being accepted as a more effective supervisory framework for financial institution worldwide. Suggested by the Basel committee for Banking supervision, RBS is an international standard or framework which acts to address the risks inherent in the financial system.
To make its supervisory framework of the banking system more effective and robust, the BB is continuously adopting international best practices. In continuation, with the technical assistance of the IMF, the BB has started the process of implementing RBS to strengthen the supervisory framework. To provide working support to the IMF mission, an interdepartmental working group consistingmembers from departments related to bank regulation and supervision has been formed with the approval of governor dated 8 April 2019. To support the efforts of the working group and the IMF mission, a working cell has also been set up at the Department of Off-site Supervision. The RBS implementation exercise is being carried out on three banks selected on a pilot basis. Besides, preparation of the RBS manual is also in progress. Once implemented successfully, RBS is expected to transform the current supervisory framework into a more robust and effective one which, in turn, will contribute to maintaining the stability of the banking system.
Off-site Supervision of Banks
With a view to promoting and maintaining soundness, solvency and systematic stability of the financial sector as well as protecting the interest of depositors, BB carries out two types of supervisory activities namely (i) off-site supervision and (ii) on-site inspection.
Department of Off-site Supervision (DOS) of BB is accountable for conducting off-site supervision of banks. During FY21, the department took some innovative initiatives to strengthen banking supervision for intensive and rapid analysis of the financial health of the banks.
Risk Management Activities of Banks
BB revised six core risk management guidelines to ensure robustness, efficiency and effectiveness of risk management system for the banking sector. Besides, the guideline issued in 2012 named ‘Risk Management Guideline for Banks’ has been revised and already been put into effect to facilitate banks in adopting contemporary methods to identify, measure, monitor and control potential risks and improve their resilience capacity.
At present, BB is monitoring implementation status of various instructions according to those guidelines. BB assigns a comprehensive risk management rating for each bank on half-yearly basis based on the information of comprehensive risk management report (CRMR), minutes of executive risk management committee (ERMC) meetings and board risk management committee (BRMC) meetings, and compliance status of BB instructions as submitted by the concerned bank and other sources.
On-site Supervision of Banks
Under the continuous supervision/ surveillance system, the overall financial condition of the banks operating in Bangladesh is monitored throughout the year on the basis of periodic on-site inspections conducted by the concerned departments of Bangladesh Bank. As part of statutory obligation, currently BB’s eight departments of banking inspection (DBI) are engaged in conducting on-site supervision activities. These inspection departments mainly conduct their on-site supervision activities on SCBs, SBs, PCBs (including banks operating under Islamic Shariah), FCBs and other financial institutions including Investment Corporation of Bangladesh (ICB) and money changers. They conduct different types of on-site inspections such as (i) comprehensive/regular/traditional inspection (ii) core risks evaluation and (iii) special/surprise inspection. 5.40 The overall performance of the banks (such as capital adequacy, asset quality, liquidity, earnings, management competence, etc.) is evaluated in a comprehensive inspection and banks are rated from ‘1’ to ‘5’ scale inascending order based on the evaluation.
The on-site inspection departments also monitor the compliance of the suggestions or recommendations made in the inspection reports. Inspections are also conducted to examine the compliance of the core risk management guidelines on ‘asset liability management’, ‘credit/ investment risk management’, ‘internal control and compliance’, and ‘information systems security’ issued by the Bangladesh Bank. Special/surprise inspections are conducted for specific purposes or to investigate complaints received from the banks’ and customers.
During FY21, BB’s eight departments of banking inspection have conducted a total number of 1484 on-site inspections on various banks under their jurisdiction where total number of comprehensive inspections and special inspections were 1115 and 247 respectively. A number of head offices of the local banks and country offices of the foreign commercial banks were also taken under the core risk evaluation process in FY2021.
Moreover, BB’s inspection departments carried out a number of inspections to review accuracy of the statement of internal capital adequacy assessment (ICAAP) of banks. A summary of on-site supervision carried out by BB’s eight departments.
The Department of Foreign Exchange Inspection (DFEI) is also devoted to conduct on-site inspection on the issues related to foreign exchange transaction, foreign trade financing and foreign exchange risk management of banks. The inspection jurisdiction of this department covers the functions of off-shore banking units, exchange houses and overseas branches/operations of local banks. This department also supervises foreign exchange transactions of money changers. The inspections of this department are carried out broadly in two dimensions–’regular’ and ‘special’ which are done on both on-site and off-site basis. The inspections of DFEI are segregated in following types: comprehensive inspection on authorized dealer (AD) branches, FX risk management inspection, cash incentive inspection, inspection on money changers and special inspection on authorised dealer (AD) branches, offshore banking and money changers.
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