Banking sector under elevated stress amid politico-economic volatility

Bangladesh's banking sector faces elevated asset-quality stress amid economic and political volatility, says global rating-agency S&P and pinpoints the spots of vulnerabilities.

"Weak consumption and investment, coupled with structural reforms under the IMF program, have exposed deep-rooted fragilities in Bangladesh's banking system, particularly the scale of stressed assets. This indicates economic imbalances are high and unwinding", the S&P Global agency said Thursday.

In the meantime, the rating action follows its revision of the economic-risk score for Bangladesh's banking system to "9", near bottom of the scale 1-10.

"Our BICRA for Bangladesh is group '9', near the bottom of our 1-10 scale, with 10 being the weakest."

Tighter loan classification and renewal criteria should keep the ratio of stressed assets (nonperforming and restructured loans) above 40 per cent of systemwide loans over the next two years.

State-owned and Islamic banks accounted for a major portion of the stressed assets.

"We expect the banking sector's credit loss ratio to stay high at 2.0 per cent-2.5 per cent of total loans.

This reflects persistent asset-quality challenges and insufficient provisioning buffers.

While a new restructuring scheme may ease provisioning requirements from 2026, banks are required to maintain general provisions in 2025, limiting earnings relief in the near term.

"We expect the credit loss ratio to trend down to about 2.25 per cent in 2026 and 2.0 per cent in 2027, while still being higher than the five-year long-term average of about 1.0 per cent," the report says.

"We expect the sector's profitability to remain subdued over the next one to two years. We project a return on assets of about 0.10 per cent in 2025, 0.20 per cent in 2026, and about 0.4 per cent in 2027, compared with 0.43% in 2024, as elevated credit costs persist."

The agency views that sustained reform momentum, especially after elections in 2026, will be critical for addressing weak supervision and governance in the banking sector. Banking sector capitalisation is critically low, with a capital adequacy ratio (CAR) of about 3.1 per cent on average for the banking sector as of end-December 2024, far below the regulatory minimum of 10 per cent.

"A successful merger of five troubled Islamic banks to create Sammilito Islami Bank could help restore some confidence in the banking system", it mentioned.

It says stronger remittances and steady export receipts support the banking system's dollar liquidity.

The sector's funding situation shows early signs of stabilisation, barring some troubled entities.

"This is because of likely tepid loan growth, reflecting weaker economic activity and healthy deposit growth amid elevated interest rates. That said, we note that stronger private sector banks with better governance structures are increasingly benefiting from a flight to quality".

Support from the Bangladesh central bank remains critical for some of the banks facing liquidity challenges.

"This has mainly taken the form of open-market operations, along with special liquidity facilities and credit guarantee schemes".

This reflects the very high economic and industry risks to which the Bangladesh banking sector is exposed.

In the meantime, Bangladesh's economic-risk trend is stable, in S&P view.

Economic growth should be supported by labour markets and exports.

However, political uncertainty may limit policy predictability.

"Credit growth is likely to remain subdued due to high interest rates and inflation, while elevated nonperforming loans will keep credit costs above historical levels. A stable post-election environment could improve sentiment and support long-term reforms."

jasimharoon@yahoo.com