Financial Stability Assessment Report

Transcription

1 Quarterly Financial Stability Assessment Report July-September 206 Financial Stability Department Bangladesh Bank

2 Advisor Shitangshu Kumar Sur Chowdhury, Deputy Governor Coordinators. Ashok Kumar Dey, Executive Director 2. Debashish Chakrabortty, General Manager 3. Md. Nazrul Islam, Deputy General Manager 4. Mohammad Jamal Uddin, Deputy General Manager Team of Editors. Md. Ala Uddin, Joint Director 2. Abdul Hye, Joint Director 3. Farzana Islam, Deputy Director 4. Mohammad Arif Hasan, Deputy Director. Gazi Arafat Ali, Deputy Director 6. Laila Fatin, Assistant Director 7. Md. Harun Or Rashid, Assistant Director Data/Write-up Support. Banking Regulation and Policy Department 2. Department of Financial Institutions and Markets 3. Department of Off-site Supervision 4. Foreign Exchange Policy Department. Research Department 6. SME & Special Programmes Department 7. Statistics Department This report is based on unaudited and provisional data of banks and non-bank financial institutions available up to September 30, 206 unless stated otherwise in the relevant chapters/sections.

3 MESSAGE OF THE GOVERNOR Financial stability analysis has started to gain an increasing importance among the financial sector regulators and other supervisors across jurisdictions with a view to remaining watchful of risks which may hinder the stability of the macroeconomic and financial environments. In line with the global best practices, Bangladesh Bank continuously evaluates risks to and vulnerabilities of the financial system, by implementing macroprudential initiatives with a broad-based contingency planning framework and inter-agency coordination activities. Furthermore, Bangladesh Bank is steadily strengthening financial sector regulation and supervision towards full convergence with Basel based standards on capital, provisioning, liquidity, leverage, governance and risk management with increasing use of online reporting and real time surveillance procedures. Financial system of Bangladesh has already demonstrated strong performances attributable to prudent policies of the financial sector regulators as well as timely and efficient monetary and fiscal stances of the country. Besides, sustained growth and external sector stability have been encouraging better business environment. The impact of macroeconomic policies has also been reflected in terms of significant transformation of economic growth and stability indicators over the recent past. With digitalization of various activities across and within financial systems, our banking system is now much capable in terms of service delivery. Nevertheless, we have to remain vigilant to encounter emerging threats like cyber security risk that may impede smooth financial intermediation process and raise stability issues putting stakeholders' confidence to the financial system into question. Bangladesh Bank's main focus is to maintain safety and soundness of individual financial institution as well as the financial system as a whole. To this end, Bangladesh Bank has developed various risk management tools. Through this report, we want to aware the stakeholders of the financial system about potential risks and fragilities, both endogenous and exogenous, well ahead of time. I believe the stakeholders of the financial system would get important insights from this report which may help them to withstand any potential risks. Finally, I would like to thank the officials of Financial Stability Department for their wholehearted involvement and valuable contribution in preparation of this report. Fazle Kabir Governor Quarterly Financial Stability Assessment Report iii

4 MESSAGE OF THE DEPUTY GOVERNOR The Global economy reflects a more subdued outlook for advanced economies following the June 206 U.K. referendum in favour of Brexit and weaker-than-expected growth in the United States. These developments have put further downward pressure on global interest rates. However, financial market sentiment towards emerging market economies has improved with expectations of lower interest rates in advanced economies, reduced concern about China's near-term prospects following the policy support to growth, and some firming of commodity prices. But prospects differ sharply across countries and regions, with emerging Asia in general and India in particular, showing robust growth and sub-saharan Africa experiencing a sharp slowdown. Amid these developments in the global financial system, Bangladesh financial system remained moderately stable during July-September 206, the review quarter. Bangladesh Bank works diligently to maintain the stability of the domestic financial system. In the review quarter, a number of key macroeconomic indicators showed improving trend. Decline in inflation and import, and increase in foreign exchange reserve contributed significantly to maintaining a reasonable level of stability in the financial system. During the review quarter, several notable initiatives have been taken by Bangladesh Bank with a view to improving the macro-financial stability of the economy. For instance, Bangladesh Bank has granted permission to a new scheduled bank named Shimanto Bank Limited, issued guidelines on Commercial Papers of banks, amended guidelines on Internal Control and Compliance in banks, announced its agricultural and rural credit policy and program for the financial year 206-7, encouraged banks to disburse agricultural credit through agent banking and brought a number of changes in its foreign exchange regulations. These, along with prudent debt and fiscal management, have important bearing on stability of our macro-financial system. I anticipate that stakeholders of the financial system would get important insights from this report and will be able to position themselves in withstanding shocks, both internal and external. I value the enthusiasm of the officials of Financial Stability Department and other contributing departments of Bangladesh Bank to bring the report to light. Shitangshu Kumar Sur Chowdhury Deputy Governor iv Quarterly Financial Stability Assessment Report

5 Contents Page Acronyms viii Executive Summary Chapter Chapter 2 Chapter 3 Chapter 4 Chapter Chapter 6 Chapter 7 Chapter 8 Appendices ix Macroeconomic Developments 0. Inflation 0.2 Foreign Exchange Reserve and its Import Coverage 0.3 Wage Earners' Remittance 0.4 Industrial Production 0. Imports and Exports 02.6 Interest Rate 02.7 Exchange Rate 02.8 Credit to the Government (Gross) by the Banking System 02 Banking Sector Performance Assets Structure Asset Quality Profitability 06 Financial Institutions' Performance Sources of Funds Assets Composition Assets Quality Profitability 08 Banking Sector Liquidity and Capital Adequacy Capital Adequacy Liquidity Leverage ratio Financial Institutions' Liquidity and Capital Adequacy 3. Liquidity 3.2 Capital Adequacy 3 Stress Testing and Resilience of the Banking and FIs Sectors 6. Stress Test 6.2 Stress Test on Banks 6.2. Individual Shocks Combined Shock Liquidity Shock Stress Test on FIs 7 Capital Market Development and Corporate Bond Market 9 7. DSE Performance and Index Movement Price/Earnings (P/E) Ratio Sectoral Turnover Market Capitalization Corporate Bond Market 20 Recent Stability Initiatives of Bangladesh Bank 2 23 Quarterly Financial Stability Assessment Report v

6 List of s Page Inflation Foreign Exchange Reserves Wage Earners' Remittance Industrial Production Index (General-Manufacturing) Exports and Imports (FOB) Interest Rate Spread Exchange Rate Credit to the Govt. (Gross) by the Banking System Asset Size of the Banking Industry Asset Structure of the Banking Industry Top banks based on Assets Size Top 0 banks based on Assets Size NPL Ratio Distribution of banks by NPL ratio Banking Sector Loan Loss Provision Top Banks based on NPL Top 0 Banks based on NPL NPL Ratio of the Banking Industry Proportion of NPL Categories NPL Composition of Banks Banking Sector Return on Assets (ROA) Banking Sector Return on Equity (ROE) FIs' Sources of Fund FIs' Assets Composition FIs' Non-performing Loans and Leases FIs' ROA and ROE Banking Sector Capital to Risk-Weighted Assets Ratio Assets Share of Banks based on CRAR at End-September 206 Tier- Capital Ratio and Overall CRAR of the Banking Industry Distribution of Risk-Weighted Assets Banking sector CRR: September 206 Banking sector SLR: September 206 Banking Sector Advance-to-Deposit Ratio Leverage ratio of banks at End-September 206 FIs' CRR 4 FIs' SLR 4 Capital Adequacy Ratio of FI Sector Number of Non-compliant Banks at Different Shock Scenarios: September 206 Banking Sector CRAR at Different Shock Scenarios: September 206 DSE Performance and Index Movement Price/Earnings Ratio Sectoral Turnover (in percent) in DSE Market Capitalization and Its Growth Rate Corporate Bond Issuance vi Quarterly Financial Stability Assessment Report

7 List of s Page Stress test on the Banking Sector Based on the Data as of End-September 206 Liquidity Risk of the Banking Sector: End-September 206 Stress Testing: Zonal Position of FIs List of Appendices I II III IV V VI VII VIII IX X XI XII XIII XIV XV XVI XVII XVIII XIX XX XXI XXII XXIII XXIV XXV XXVI XXVII XXVIII XXIX XXX XXXI XXXII XXXIII XXXIV XXXV XXXVI XXXVII XXXVIII XXXIX CPI Inflation (2 month Average) Foreign Exchange Reserve Wage Earners' Remittance Industrial Production Index (General-Manufacturing) Exports and Imports Interest Rate (Weighted Average) Spread Weighted Average Exchange Rate Credit to the Government (Gross) by the Banking System Asset Structure of the Banking Industry Banking Sector Assets & NPL Concentration (September-206) Banking Sector NPL Ratio Distribution of Banks by NPL Ratio Banking Sector Loan Loss Provisions Banking Sector Classified Loans Ratios Classified Loan Composition (End-September 206) Banking Sector ROA Range Banking Sector ROE Range Banking Sector ROA and ROE FIs' Borrowing, Deposit and Capital FIs' Asset Composition FIs' Classified Loans and Leases FIs' ROA & ROE Banking Sector CAR/CRAR Banking Sector Asset Share based on CRAR as at end-sep 206 Tier- Capital Ratio and Overall CAR/CRAR of the Banking Industry Distribution of Risk Weighted Assets of the Banking Industry Banking Sector Regulatory Capital Position (Solo Basis) Banking Sector Advance-to-Deposit Ratio (ADR) Bank Cluster-wise ADR at end-sep 206 FIs' CRR & SLR Capital Adequacy Ratio of FI Sector Overall Risk-weighted Assets and Tier Capital of FI Sector Banking Sector's After Shock CRAR at Different Shock Scenarios Number of Non-complaint Banks at Different Shock Scenarios Price/Earnings Ratio of Capital Market DSE Performance: October 20 to September 206 Market Capitalization Sector-wise Turnover Performance Corporate Bond Issuance Quarterly Financial Stability Assessment Report vii

8 Acronyms ADs ADR B/L BB BBS BDT BRPD CAR CCB CP CPI CRAR CRR CY DFIs DFIM DOS DSE EZ FCBs FIs FOB FSD FSV FX FY IS JICA NPL OBU OLL PFI PCBs P/E Ratio QFSAR ROA ROE RWA SCBs SLR SME TSL USD WAR WIR Authorised Dealers Advance-to-Deposit Ratio Bad and Loss Bangladesh Bank Bangladesh Bureau of Statistics Bangladesh Taka Banking Regulation and Policy Department Capital Adequacy Ratio Capital Conservation Buffer Commercial Paper Consumer Price Index Capital to Risk-weighted Asset Ratio Cash Reserve Ratio Calendar Year Development Finance Institutions Department of Financial Institutions and Markets Department of Off-site Supervision Dhaka Stock Exchange Economic Zone Foreign Commercial Banks Financial Institutions Free on Board Financial Stability Department Forced Sale Value Foreign Exchange Financial Year Interest Suspense Japan International Cooperation Agency Non-performing Loan Off-shore Banking Unit On Lending Loan Participating Financial Institution Private Commercial Banks Price Earnings Ratio Quarterly Financial Stability Assessment Report Return on Assets Return on Equity Risk-weighted Assets State-owned Commercial Banks Statutory Liquidity Requirement Small & Medium Enterprise Two Step Loan United States Dollar Weighted Average Resilience Weighted Insolvency Ratio viii Quarterly Financial Stability Assessment Report

9 Executive Summary During the July-September quarter of calendar year 206 (CY6), the macro-financial system of Bangladesh demonstrated resilience and stability. Gross international reserves increased by 4.3 percent and inflation, in general, remained on a downward track recording a further drop compared to the preceding quarter. The interest rate spread declined further to reach at 4.7 percent. The Industrial Production Index (General-Manufacturing) decreased moderately compared to that of end-june 206 position. A decline was recorded in import payments. Besides, Government borrowing from the banking sector increased moderately (0.2 percent). The banking sector displayed a mixed performance during the review quarter. The asset size of the banking sector grew marginally and stood at 6.2 percent of gross domestic product at end-september 206. A marked improvement was recorded in key profitability indicators as both Return on Assets (ROA) and Return on Equity (ROE) increased during the review quarter. Though gross non-performing loan (NPL) ratio increased over the previous quarter, net NPL ratio remained constant owing to increased amount of maintained provisions by banks. At end-september 206, capital adequacy of the banking sector remained above the minimum regulatory requirement. Both capital to risk-weighted assets ratio (CRAR) and Tier- capital ratio remained stable compared to those of the preceding quarter. A majority of the banks were able to maintain minimum capital conservation buffer which was introduced in early 206 under Basel III framework. In terms of leverage ratio, banking sector performed well maintaining a ratio of 4.8 percent, notably higher than the minimum requirement of 3.0 percent, on solo basis. No sign of liquidity pressure was evident during the review quarter as indicated by the decline in advance-to-deposit ratio (ADR) and the maintenance of required Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by the banking sector. Financial Institutions (FIs) sector demonstrated considerable stability in the review quarter. Asset quality improved marginally registering a decline in gross NPL ratio. The key profitability indicators - ROA and ROE - also increased over the previous quarter. Though the capital adequacy ratio (CAR) decreased slightly, it still remained well above the minimum regulatory requirement. FIs did not face any significant liquidity pressure during this period as evident from their maintenance of higher CRR and SLR. Stress test on banks, based on the data as of end-september 206, indicates that default of the largest borrowers and rise in gross non-performing loan (NPL) would have major impacts on the banking sector CRAR. However, the individual banks and the banking system, as a whole, were found to be resilient against various liquidity stress scenarios. On the other hand, stress test on financial institutions (FIs) reveals that a majority of them was resilient in the event of stress scenarios as of end-september 206, though 0 out of 33 FIs displayed vulnerability to some extent at different shock events. In the review quarter, the capital market of Bangladesh continued to demonstrate a scenario of price recovery as the main indices - DSEX, DSE30, and DSES as well as the P/E ratio displayed an Quarterly Financial Stability Assessment Report ix

10 upward trend compared to those of the preceding quarter. Market capitalization increased slightly. Pertinently, no corporate bonds were issued during this quarter. Bangladesh Bank has granted permission to one new scheduled bank in addition to introducing few initiatives/changes in the review quarter. During this period, Bangladesh Bank has issued guidelines on commercial paper for banks, amended guidelines on internal control and compliance in banks, brought about several changes in foreign exchange regulations to make foreign exchange operations easier as well as more disciplined, announced Agricultural & Rural Credit Policy & Program for the financial year and encouraged banks to disburse agricultural credit through agent banking. In sum, amid mixed developments in the global economy - a subdued economic growth in the advanced economies against a robust growth in emerging market economies, Bangladesh financial system remained moderately stable during the review quarter. x Quarterly Financial Stability Assessment Report

11 Chapter- Macroeconomic Developments. Inflation 8 7 Percent 6 4. Inflation.2 Foreign Exchange Reserve and its Import Coverage At end-september 206, the gross foreign exchange reserves reached at USD 3.4 billion recording an increase of 4.3 percent, from the USD 30. billion of end-june 206. The reserve position was equivalent to more than seven months' imports of goods and services. 9. The Quantum Index of Industrial Production (General-Manufacturing) at end-september 206 dropped to 244.P compared with 32.2 of end-june 206. It is noteworthy that the QIP (manufacturing) demonstrated a fluctuating trend during the first three quarters of CY6. 3, , , , , Reserves 0,000.0 Import Coverage.3 Wage Earners' Remittance Million USD End of the quarter Source: Monthly Economic Trends, BB (various issues)..4 Industrial Production Index (General-Manufacturing) Compiled on the basis of import (shipment) data received from NBR. Source: Research Department, BB. QIP (Gen-Manufacturing).4 Industrial Production Non Food.2 Foreign Exchange Reserves.3 Wage Earners' Remittance The remittances from Bangladeshi nationals, working abroad, stood at USD 3,24.8 million during the review quarter, recording a decline of 6.2 percent compared to USD 3,87. million recorded during the preceding quarter. It is noteworthy that in the April-June quarter of 206 remittance growth was 8.4 percent compared to that of January-March quarter of 206. Food Source: Monthly Economic Trends, BB (various issues). Base =00. Number of months At end-september 206, both general and food inflation decreased to.7 and 4.6 percent from.9 and 4.9 percent respectively with respect to those of end-june 206. Whereas, non-food inflation remained the same at 7. percent. (.). General Million USD The Bangladesh economy showed mostly an improving trend during the third quarter of CY6, attributable to a decline in inflation and interest rates, an increase in foreign exchange reserves albeit a decline in wage earners' remittance, industrial production index, exports, imports and moderate increase (0.2 percent) in credit to the Government by banking sector. End of the quarter Note: Base =00. Source: BBS. Quarterly Financial Stability Assessment Report 0

12 . Imports and Exports 30 In the review quarter of CY6, aggregate import payments2 decreased by.4 percent and reached at USD 9,02.0 million as compared to USD 0,720.0 million recorded in the previous quarter. Export receipts, in contrast, decreased by 3.0 percent and reached at USD 7,909.0 million compared with USD 9,088.0 million recorded in the second quarter of CY Upto 2% 2% to <3% 3% to <4% 4% to <% % and above No. of Banks Source: Statistics Department, BB..7 Exchange Rate The value of the Bangladesh Taka, in terms of US dollar, remained unchanged at BDT per USD, in September 206, compared with that of the previous quarter Exchange Rate Import Export Source: Research Department, BB..6 Interest Rate rate (BDT/USD) Weighted Average exchange Million USD. Exports and Imports (FOB) The spread between weighted average lending and deposit rates decreased to 4.7 percent with respect to that of end-june 206; spreads of 8 out of 6 banks were above.0 percent. Out of these 8 banks, 6 were FCBs and 2 PCBs. Source: Monthly Economic Trends, BB (Various issues). In the review quarter, the weighted average lending and deposit rates were 0. and.4 percent respectively. Both the lending and deposit rates slightly declined compared with those of the preceding quarter. Credit to the Government (gross), by the banking system, increased by BDT 2.9 billion or 0.2 percent during the review quarter. In the preceding quarter, credit to the government recorded an increase of 0.6 percent compared to January-March quarter of End Period.8 Credit to the Government (Gross) by the Banking System,80.0, Lending rate Deposit rate,70.0 Billion BDT 0.0 Period Average 4.9 Spread Lending rate and deposit.8 Credit to the Govt. (Gross) by the Banking System.6 Interest Rate Spread ,700.0,60.0,600.0,0.0, On FOB basis. Note: P = provisional 02 Quarterly Financial Stability Assessment Report End of the quarter Source: Monthly Economic Trends, BB (various issues).

13 Chapter-2 Banking Sector Performance During the July-September quarter of CY6, the banking sector demonstrated a positive trend in 2. Asset Size of the Banking Industry terms of asset growth, profitability and asset Assets Structure 000 The balance sheet size of the banking sector3 grew by almost. percent and reached BDT,296.6 billion at end-september 206. Loans and advances, as a percentage of total assets, recorded a slight decline compared with that of Billion BDT quality end-june CY6. The proportion of investment also increased. It is to mention that banking sector assets-to-gdp ratio stood at 6.2 percent 4 at end-september 206. The share of loans and advances, the largest among the asset items, decreased by 30 basis 2.2 Asset Structure of the Banking Industry 2.0% 0.0% 7.7%.0% 3.6% 6.% 0.9% assets with Bangladesh Bank increased by 0 basis points and balances with other banks and At end- September 206 Cash in hand Balance with Bangladesh Bank and its Agent Bank Balance with other Banks and Financial Institutions financial institutions decreased by 40 basis points. Banks' money at call decreased by 20 Source: Compilation (Aggregate B/S account of banking industry): FSD, BB. points at end-september CY6, compared with that of end-june 206. The share of banks' Aggregate assets 9.% Money at call and short notice Investment Loans and Advances Fixed Assets Other Assets Non-Banking Assets 9.6% basis points, while the share of other assets increased by 0 basis points. However, the share of investments in government and other securities increased by 0 basis points. The asset concentration ratios of Top and Top 0.0%.2% 7.2% 6.0% 2.0% 0 banks against the total banking system 4.0%.% assets were 33.7 and 47.2 percent respectively preceding quarter. 3 Taking into account only scheduled banks. 4 GDP at current market price for the financial year Cash in hand Balance with Bangladesh Bank and its Agent Bank Balance with other Banks and Financial Institutions at end- September 206 ( 2.3 & 2.4); the proportions increased relative to that in the At end- June % 9.9% Money at call and short notice Investment Loans and Advances Fixed Assets Other Assets Non-Banking Assets Source: Compilation (Aggregate B/S account of banking industry): FSD, BB. Quarterly Financial Stability Assessment Report 03

14 2.2 Asset Quality The distribution of banks, based on their The gross NPL ratio rose to 0.3 percent at end-september 206, increasing by 20 basis points from 0. percents of end-june 206. However, non-performing loans net of specific loan loss provisions and interest suspense to total loans remained almost same to 2.8 percent as compared to that of end-june 206. Besides, non-performing loans net of specific loan loss provisions and interest suspense to regulatory capital decreased to 20.8 percent from 2. percent of end-june 206. gross NPL ratios, indicates that 6 banks came up with double-digit values in September CY6 2. NPL Ratio 40.0% 30.0% 20.0% 0.0% 0.0% 2.3 Top banks based on Assets Size NPL/TL NPL (net of LLP and is) R. Patio NPL (net of LLP and is)/r. Cap Source: BRPD, BB. 33.7% End- September 206 The 30.4% provision ratio6, maintenance at end-september 206, increased to % End-June % percent from 87.7 percent recorded at end-june 206. Pertinently, 47.7 and 64.8 percent of the Top Banks Other Banks non-performing loans were concentrated in Source: Compilation (Aggregate B/S account of banking industry): FSD, BB. 2.4 Top 0 banks based on Assets Size the Top and Top 0 banks respectively at end-september 206 (chart 2.8 & 2.9). 2.6 Distribution of banks by NPL ratio End- September % 2.8% 47.2%.8% End-June 206 Number of Banks % to <% 2% to <3% 3% to <% % to <20% 20% and above Source: BRPD, Compilation FSD. 6 Maintained provision to required provision. 04 Quarterly Financial Stability Assessment Report % to <0% Source: Compilation (Aggregate B/S account of banking industry): FSD, BB. Non-performing loan to total loan ratio. 6 0 Other Banks Upto 2% Top 0 Banks 7 4

15 The ratio of bad and loss loans to total 2.9 Top 0 Banks based on NPL classified loans stood at 82.4 percent at end-september CY6. The NPL under sub-standard and doubtful categories, in contrast, constituted.6 and.9 percent of End- September % 3.4% End-June 206 total NPLs respectively. Pertinently, the 64.6% 64.8% proportion of bad and loss loans increased by 2. percent, while the proportions of Top 0 Banks sub-standard and doubtful loans decreased by 0.2 and 2.3 percentage points from those Other Banks Source: BRPD, Compilation FSD. of the previous quarter. 2.0 NPL Ratio of the 2.7 Banking Sector Loan Banking Industry Loss Provision % % % Percent 370 Billion BDT 0.0% % 8.00% Spe Required Provision Classified Loans to Total Loans Source: BRPD, BB. Provision maintained Provision Maintenance Patio (%) Source: BRPD, BB. 2. Proportion of 2.8 Top Banks based on NPL NPL Categories 00.0% End- September % 49.8% 47.7% 40.0% 0.2% 2.29% 80.0% End-June % 0.0% Sub-standard Loans to classified Loans Doubtful Loans to classified Loans Top Banks Other Banks Source: BRPD, Compilation FSD. Bad Loans to classified Loans Source: BRPD, BB. Quarterly Financial Stability Assessment Report 0

16 2.3 Banking Sector Return 2.2 NPL Composition on Assets (ROA) of Banks.6% ROA (%).9% Sub-Standard >2.0% to 3.0% Upto 2.0% 82.4% Doubtful Loans Bad & Loss Source: BRPD, BB >3.0% to 4.0% >4.0% Source: Compilation (Aggregate P/L account of banking industry): FSD, BB. 2.4 Banking Sector Return 2.3 Profitability 7 Quarterly rations were annualized. 06 Quarterly Financial Stability Assessment Report on Equity (ROE) ROE (%) In the review quarter, profitability of the banking sector slightly increased. Return on assets (ROA) and return on equity (ROE) of the banking sector stood at 0.6 and 8.3 percents respectively recording an increment of 0.4 and.2 percentage points from the respective ratios of the preceding quarter (0.2 and 3. percent)7. Almost 87. percent of the banks' ROA was up to 2.0 percent, while 2. percent of banks' ROA was higher than 2.0 percent. On the other hand, 64.3 percent of the banks' ROE was higher than.0 percent Upto.0% >.0% to > >0.0% to > 0.0%.0% >.0% Source: Compilation (Aggregate P/L account of banking industry): FSD, BB.

17 Chapter-3 Financial Institutions' Performance Financial Institutions (FIs) showed a positive trend in the review quarter of CY6. Key 3. FIs' Sources of Fund financial soundness indicators, such as gross non-performing loans and leases ratio and At end-september % 22.7% 4.9% Borrwings profitability ratios displayed an improvement Deposits over the preceding quarter. Capital 3. Sources of Funds Other Liabilities 2.8% At End-September deposits, capital 206, and borrowings, other constituted 22.7, 2.8, 4.9 and 9.6 percent of At end-june % liabilities 23.2% 4.9% Borrwings the sources of funds of the FIs respectively. In Deposits comparison with end-june 206, the share of Capital borrowings decreased by 0 basis points Other Liabilities while the share of deposits increased by 0 basis points; share of rest of the liabilities 2.3% Source: FIs; Compilation: FSD, BB. remained almost same. 3.2 FIs' Assets Composition 3.2 Assets Composition 6.9%.% At end-september % Loans and leases constituted 74.6 percent of 3.0% Cash & Balance with Banks/Fis total assets of FIs at end-september 206. Investments Cash Loans & Leases and balances with banks/fis, investments, fixed assets and other assets Other Assets comprised 4., 3.0,. and 6.9 percent of Fixed Assets 74.6% total assets respectively. When compared with end-june %.0% At end-june % 3.4% positions, the share of loans and leases, and Cash & Balance with Banks/Fis Investments cash and balances with other banks/fis Loans & Leases increased by 40 and 80 basis points Other Assets respectively; the proportion of investments and other assets decreased by 40 and 70 basis points while the share of fixed assets 74.2% Fixed Assets Source: FIs; Compilation: FSD, BB. remained almost same. Quarterly Financial Stability Assessment Report 07

18 3.3 Asset Quality 3.3 FIs' Non-performing FIs' asset quality improved at end-september Loans and Leases loans and leases increased from BDT loans and leases decreased slightly from to 8.9 percent during the same period. Aggregate NPL 3.4 Profitability 0 Dec-4 non-performing loans and leases to total of ratio NPL Ratio Source: DFIM, BB. 3.4 FIs' ROA and ROE FIs' profitability improved in the review quarter over the June quarter of 206. The key profitability indicators - return on assets (ROA) and return on equity (ROE) stood 3% 2% % 2.3% 0% 9% 8%.% at 0.9 and 6.0 percent respectively in the 7% 6% September quarter of 206 as compared to % 4% 3% Dec-4 Mar- 0.8 and. percent respectively recorded in the preceding quarter. 2.0%.8%.3% ROE 8.0% 0.8% 0.% 0.3% 0.0% Jun- Aggregate ROE Source: FIs; Compilation: FSD, BB. 8 Here profitability indicators - ROA and ROE - have been annualized from quarterly ratios. 08 Quarterly Financial Stability Assessment Report Aggregate ROE ROA the 206, 8 30 Jun- end-september 0 Mar- billion at end-june 206 to BDT 4.6 billion at 2 Percentage 0 BDT in Billion 206. Though the amount of non-performing

19 Chapter-4 Banking Sector Liquidity and Capital Adequacy The banking sector of Bangladesh operated At end-september 206, risk-weighted assets, under Basel III capital and liquidity framework arising from credit risks, accounted for 87.2 in the review quarter. Banking Sector capital percent of the total industry's risk-weighted to risk-weighted assets ratio (CRAR) was same assets under Pillar of the Basel III capital with respect to that of the previous quarter; adequacy still the ratio was higher than the minimum market risks accounted for 8.7 and 4. regulatory requirement of 0.0 percent. A percents respectively ( 4.4). framework. Operational and majority of the banks were able to maintain minimum capital conservation buffer. 4. Banking Sector Capital However, the advance-to-deposit ratio (ADR) to Risk- Weighted decreased slightly. Assets Ratio 4. Capital Adequacy 3 32 In the review quarter, a majority of the banks were compliant to the minimum CRAR requirement, compared to end- June 206. Number of Banks Pertinently, 47 out of 6 banks were able to higher in line with Pillar of the Basel III <0% 0% to <% capital framework. Moreover, a substantial End End share of banking assets was concentrated End End accounted for nearly 62.0 percent of the total banking industry's assets at end-september 206 indicating that a significant portion of the banking sector assets are managed by the CRAR-compliant banks. At end-september 206, the banking sector aggregate CRAR did not record any change 4.2 Assets Share of Banks Asset Share (%) range of 0- percent and their assets % and + End Source: DOS, BB. Asset Share (%) (chart 4.2). CRARs of 32 banks were within the maintain their capital ratios of 0.0 percent or within the CRAR-compliant group of banks 8 7 based on CRAR at End-September from 0.3 percent of end-june 206. Tier capital ratio was also same to 7.6 percent. Still <0% 0% to <% % and + the ratio was significantly higher than the Number of Banks minimum regulatory requirement of. CRAR percent. Asset Share Source: DOS, BB. Quarterly Financial Stability Assessment Report 09

20 Core Capital to RWA (%) Overall CRAR (%) Number of core capital complians bank Number of CRAR Compliant bank Source: DOS, BB. During the review quarter of CY6, banking sector, as a whole, was able to maintain the required level of CRR0 and SLR. 00% 9% 90% 4. Banking sector CRR: September SCBs 4.4 Distribution of RiskWeighted Assets Percent 4.2 Liquidity 0.0 Number of Banks CRAR and Tier Ratio (in percent) 4.3 Tier- Capital Ratio and Overall CRAR of the Banking Industry PCBS CRR Required FCBS SDBs Islami Banks CRR Maintained Source: DOS, BB. 4.6 Banking sector SLR: September % 80% % RWA for Credit Risk RWA for Market Risk RWA for Operational Risk SCBs Source: DOS, BB. 9 Banks were required to maintain a capital conservation buffer of 0.62 percent, above the regulatory minimum capital requirement of 0.0 percent during the review quarter. 0 Quarterly Financial Stability Assessment Report SLR Required FCBS SDBs Islami Banks SLR Maintained Source: DOS, BB. 4.7 Banking Sector Advanceto-Deposit Ratio Percentage The Capital Conservation Buffer (CCB) requirement for banks has been started from early 206 and would be fully implemented by 209 in line with the Basel III framework9. Against the regulatory requirement of 0.62 percent for CY6, 44 out of 6 banks have been able to maintain the minimum required CCB on solo basis during the review quarter. On the other hand, in case of consolidated basis, 28 out of 36 banks have been able to fulfill this regulatory requirement. The aggregate CCB of banking sector, in the stated quarter, was 0.3 and 0.78 percents on solo and consolidated bases respectively. PCBS ADR Source: DOS, BB. 0 On bi-weekly average basis.

21 As evident from 4.7, ADR of the overall banking industry has decreased by 0 basis 4.8 Leverage ratio of banks at End-September 206 points at end-september 206 from that of Leverage ratio on solo basis end- June 206. In the review quarter, banking industry has Number of banks 4.3 Leverage ratio 40 been able to fulfill the leverage ratio <3 requirement of 3.0 percent, on both solo and >=3 to 0 >0 to 20 > 20 to 30 banking industry's leverage ratio was 4.8 Leverage ratio on Consolidated basis percent on solo basis; 48 out of 6 banks have hand, in case of consolidated basis, 33 out of 36 banks have been able to fulfill the Number of banks percent or higher ( 4.7). On the other >30 Range of Leverage Ratio consolidated bases. At end-september 206, successfully maintained a leverage ratio of <3 regulatory requirement of 3.0 percent. >=3 to 0 >0 Range of Leverage Ratio Source: DOS, BB. Quarterly Financial Stability Assessment Report

22 2 Quarterly Financial Stability Assessment Report

23 Chapter- Financial Institutions' Liquidity and Capital Adequacy During the review quarter, FI sector displayed. FIs' CRR a mixed trend in terms of liquidity and capital adequacy. While there was no shortfall in liquidity ratio (SLR), capital adequacy ratio 0000 slightly declined.. Liquidity Million BDT cash reserve ratio (CRR) and statutory As of end-september 206, the aggregate End Mar End Jun End Sep End Dec End Mar End Jun End Sep 20 amount of maintained CRR was BDT 6,26. million as compared to BDT,829.6 million recorded at end-june 206, scoring an Million BDT End Mar End Jun End Sep End Dec End Mar End Jun End Sep 20 In the review quarter, FIs were required to capital in line with the Basel II framework. the review quarter of CY6; slightly lower than the ratio of end-june 206. CAR and Tier- Ratio (in percent) ratio was recorded at nearly.0 percent in SLR Maintained of FI Sector 20 requirement. In addition, the Tier- capital 20.3 Capital Adequacy Ratio 2 CAR was well above the minimum regulatory 20 Source: DFIM, BB. from 6.7 percent of the June quarter of CY6 CY6. It is to mention that the maintained 20 SLR Required The CAR of the FIs sector decreased slightly to 6.3 percent in the September quarter of Capital Adequacy ratio (CAR) with at least.0 percent in Tier SLR shortfall. maintain a 0.0 percent capital adequacy 206 CRR Maintained maintained SLR was BDT 7. billion, which is review quarter, the FIs sector had no CRR and 20.2 FIs' SLR at end-september 206, the amount of maintained at end-june 206. During the 20 Source: DFIM, BB. increment of. percent. On the other hand, 2. percent higher than the amount 20 CRR Required 0 0 Mar- Jun- Core Capital to RWA (%) Jun- Overall CAR (%) Source: DFIM, BB. FIs taking term deposits are required to maintain a statutory liquidity requirement (SLR) of.0 percent of their total liabilities, inclusive of an average 2. percent cash reserve ratio (CRR) of their total term deposits. On the other hand, FIs operating without term deposits are required to maintain an SLR of 2. percent and are exempted from maintaining the CRR. Quarterly Financial Stability Assessment Report 3

24 4 Quarterly Financial Stability Assessment Report

25 Chapter-6 Stress Testing and Resilience of the Banking and FIs Sectors respectively would have been non-compliant 6. Stress Test Bangladesh Bank conducts stress tests on banks and Financial Institutions (FIs) on quarterly basis. in maintaining the minimum required CRAR. c) Fall in the Forced Sale Value (FSV) of 6.2 Stress Test on Banks2 Mortgaged Collateral: Stress test on banks is conducted through and 40 percent, then 2, 3, and 8 banks sensitivity analysis, incorporating impacts of respectively the shock scenarios of credit risk, market risk non-compliant and liquidity risk. minimum required CRAR. If FSV of mortgaged collateral declined by 0, Individual Shocks would in have maintaining been the d) Negative Shift in the NPL Categories: If Data as of end-september 206 revealed that NPL categories shifted downward by, the banking sector's capital to risk weighted 0 and percent, then 2,, and 22 asset ratio (CRAR) 3 was 0.3 percent. Out of banks respectively would have been 6, 9 banks' pre-shock CRARs were below the non-compliant minimum regulatory requirement of 0.0 minimum required CRAR. percent. Therefore, the remaining 47 banks were considered for the analyses based on end-september 206 data. The following sub-sections give details of the shocks and their associated outcomes. in maintaining the e) Increase in NPL in Highest Outstanding Sector: In the event of a minor shock, no bank would fall below the minimum regulatory requirement. However, due to moderate and major shocks, and Credit Risk banks respectively would fall below the a) minimum regulatory requirement. Increase in Non-performing Loans 4 (NPL ): If NPLs increased by 3, 9 and percent, then 6, 29 and 33 banks Market Risk to The banking industry found to be mostly maintain the minimum required CRAR resilient in the face of various shocks arising ( 6.). from market risks: respectively would have failed b) Increase in NPL due to Default of Top a) Interest Rate Risk: In the event of interest Large Borrowers: If 3, 7 and 0 largest rate shock of, 2 and 3 percents, 4, 9 and 0 borrowers of each bank in the industry banks respectively would fail to maintain the defaulted, then 2, 33 and 37 banks minimum required CRAR. 2 The analyses here are based on the data as of end-september 206 unless otherwise stated. 3 CRAR = Capital to Risk Weighted Assets Ratio =Total Eligible Capital/(Credit RWA + Market RWA + Operational RWA), where RWA = Risk-weighted assets) 4 NPL = Non-performing loans, composed of sub-standard, doubtful and bad/loss loans. Quarterly Financial Stability Assessment Report

26 6. Stress test on the Banking Sector Based on the Data as of End-September 206 Shocks Pre-shock CRAR CRAR after shock (%) Credit Risks: Increase in NPLs: Shock-: 3% Shock-2: 9% Shock-3: % Increase in NPLs due to default of top large borrowers Shock-: Top 3 borrowers Shock-2: Top 7 borrowers Shock-3: Top 0 borrowers Fall in the FSV6 of mortgaged collateral Shock-: 0% Shock-2: 20% Shock-3: 40% Negative shift in the NPL categories Shock-: % Shock-2: 0% Shock-3: % Increase in NPLs in highest outstanding sectors Sector concentration 7 (Performing loan directly downgraded to B/L8) Shock-: 3% Shock-2: 9% Shock-3: % Sector concentration 29 (Performing loan directly downgraded to B/L) Shock-: 3% Shock-2: 9% Shock-3: % Market Risks Interest rate risk (change in interest rate) Shock-: % Shock-2: 2% Shock-3: 3% Exchange rate risk (Currency appreciation/depreciation) Shock-: % Shock-2: 0% Shock-3: % Equity price risk (Fall in equity prices) Shock-: 0% Shock-2: 20% Shock-3: 40% Combined Shock Shock- Shock-2 Shock-3 Shock- = Minor, Shock-2 = Moderate, Shock-3 = Major. 6 FSV = Forced Sale Value. 7 Sector with highest outstanding. 6 Quarterly Financial Stability Assessment Report Banking Sector (%) B/L = Bad/Loss. 9 Sector with second highest outstanding.

27 b) Exchange Rate Risk: In the event of currency appreciation/ depreciation by, 0, and percent, no bank's CRAR would fall below the minimum required level. specified liquidity stress end-september 206. scenarios at 6.2 Liquidity Risk of the Banking c) Equity Price Risk: In the event of a 0, 20 and 40 percent fall in equity prices, 3, 3 and 4 banks respectively would be non-compliant in maintaining the minimum required CRAR. Liquidity Stress* Sector: End-September 206 Stress Scenarios Minor Moderate Major Day Day Combined Shock Day 3 In the event of minor, moderate and major combined shocks, 9, 32 and 38 banks respectively would be undercapitalized; CRAR in these cases would be downgraded to 7.6, 2.2, and percent respectively. Day 4 Day 20 * Consecutive working days. Note: '' indicates that the system is liquid and '0' is not liquid. Altogether, among different specified shocks, the default of the top large loan borrowers and increase in NPLs would have the most adverse impact on the banking sector CRAR. Source: FSD, BB. 6.3 Stress Test on FIs Bangladesh Bank also conducts stress tests on Liquidity Shock FIs based on a simple sensitivity analysis, in The individual banks and the banking system as a whole seemed to remain resilient against which four risk factors- credit, interest rate, equity price and liquidity - are analyzed. 6. Number of Non-compliant Banks at Different Shock Scenarios: September Minor Level Moderate Level Combined shock Equity shock Exchange rate shock Interest rate shock Increase in NPLs FSV of collateral Decrease in the NPL categories Negative shift in default of Top borrowers Increase in NPLs due to highest outstanding sector 0 Increase in NPL in the No of non-complaint Banks after shock 3 Major Level Source: FSD, BB. 20 Combined shock comprised of aggregate stress results of increase in NPLs, negative shifts in NPL categories, decrease in the FSV of the mortgaged collateral, exchange rate shock, equity price shock and interest rate shock. Quarterly Financial Stability Assessment Report 7

28 6.2 Banking Sector CRAR at Different Shock Scenarios: September Minor Level Moderate Level Combined shock Equity shock Exchange rate shock Interest rate shock Increase in NPLs FSV of collateral Decrease in the NPL categories Negative shift in default of Top borrowers Increase in NPLs due to highest outstanding sector 0.00 Increase in NPL in the CRAR (In Percent) 8.00 Major Level Source: FSD, BB. Result of the stress tests revealed that resilience of the FIs sector improved during 6.3 Stress Testing: Zonal Position of FIs the review quarter compared with that of the preceding quarter. At end-september 206, out of 33 FIs, 6, 7, and 0 FIs were positioned Quarter Green (Number of FIs) Yellow Red End-Sep ( 6.3).2 It is mentionable that the results End-Dec of stress testing, depicted here, are based on End-Mar End-Jun End-Sep in Green, Yellow, and Red zones respectively sensitivity analysis under several hypothetical assumptions. Therefore, the results should not be treated as exact materialization of shock events. Source: DFIM, BB. 2 The overall financial strength and resilience of an FI is identified by plotting its achieved ratings in a Weighted Average Resilience-Weighted Insolvency Ratio (WAR-WIR) Matrix. 8 Quarterly Financial Stability Assessment Report

29 Chapter-7 Capital Market Development and Corporate Bond Market 22 In the review quarter, the capital market in Bangladesh demonstrated a scenario of price recovery as evident from movements 7. DSE Performance and Index Movement Tk. in Million of a number of key indicators as detailed,000 20,000 4,00 below: 00,000 4,000 Index 2,000,000 20, Turnover DSEX Jul-6 Aug-6 Apr-6 May-6 Feb-6 Oct- recorded in the second quarter of CY6, Jan-6 0 billion as compared to BDT billion At end-september 206, key DSE indices 40,000,00 Exchange (DSE) turnover was BDT scoring a 4.7 percent gain in terms of volume. 60,000 2,00 In the third quarter of CY6, Dhaka Stock 80,000 3,000 Nov- and Index 7. DSE Performance Movement 3,00 DSE 30 DSEX Source: DSE; Compilation: FSD, BB. 7.2 Price/Earnings Ratio and.4 percents respectively from those of 20 end-june P/E Ratio DSEX, DSE30 and DSES - increased by 4.2, Price/Earnings (P/E) Ratio 6 4 The weighted average P/E ratio in September Jan-6 May-6 Jan- May- Sep-4 Jan-4 May-4 Sep-3 market P/E ratio displayed an upward trend in the third quarter of CY6. Jan-3 0 May-3 higher than that of June 206. The overall 2 Sep was., which was 0 basis points Source: DSE. 7.3 Sectoral Turnover (in percent) in DSE Sectoral Turnover duting April-June 206 Sectoral Turnover duting July-September 206 Travel and Leisure, 0.83 Telecommunication, 2.9 IT-Sector.66 Services & Travel and (In percent) Corporate Miscellaneous.99 Bond, 0.0 Banks, 0.6 Financial Institutions, Insurance, Realestate.38 Fuel & Power 4.44 Mutual Funds,.7 (In percent) Corporate Leisure,.38 Telecommunication,.77 IT-Sector.6 Services & Miscellaneous 6.09 Bond,Banks, Insurance, Mutual Funds, 0.70 Realestate.80 Food & Allied Fuel & Power 9.08 Product.8 Food & Allied Cement, 3.8 Product Jute, Pharmaceutic Paper & Printing Cement, 3.92 Pharmaceutic Jute, 0.6 & Chemicals Paper & Printing 0.8 Tannery, Ceramic, Engineering,6.89 & Chemicals 0.08 Tannery, Textile, 8.9 Financial Institutions, Ceramic, Engineering,3.64 Textile, Third quarter of calendar year 206. Quarterly Financial Stability Assessment Report 9

30 7.3 Sectoral Turnover 7.4 Market Capitalization In the review quarter, the highest turnover and Its Growth Rate -2% 3,000-4% Market Capitalization CY6. The financial institutions sector's contribution was 7.6 percent which was.2 percent in the previous quarter. 7.9 percent recorded in the June quarter of Jul-6-8% Aug-6 2,800-6% Apr-6 2,900 Oct- turnover was 0.7 percent, as compared to 0% 3,00 May-6 contribution of the banking sector to DSE 2% 3,200 It is mentionable that, in the review quarter, 4% Jan-6 textile sectors respectively ( 7.3). 3,300 Feb-6 positions were held by the banking and In Billion BDT sector and fuel & power sector. Next two 6% followed by pharmaceuticals & chemicals 3,400 Nov- was recorded by the engineering sector Growth of Market Capitalization Source: DSE; Compilation: FSD, BB. 7. Corporate Bond Issuance 7.4 Market Capitalization end- June 206. The growth rate of market capitalization picked up in the last month of the review quarter after a downward trend since May Corporate Bond Market 8,000 6,000 4,000 2,000 - As of quarter end No corporate bonds were issued in the third quarter of CY6. 20 Quarterly Financial Stability Assessment Report Source: DFIM, BB. which is about 3.0 percent higher than that of 0,000 capitalization stood at BDT 3,28.9 billion, market the 206, Jun- end-september Amount in million BDT 2,000 At

31 Chapter-8 Recent Stability Initiatives of Bangladesh Bank During the July-September quarter of the calendar year 206 (CY6), Bangladesh Bank (BB) has brought about few notable changes as well as new initiatives having bearing on the domestic financial system stability. Some of the important ones are as follows: 8. Scheduling of Shimanto Bank Limited During the review quarter, BB has granted permission to a new bank named Shimanto Bank Limited to operate as a scheduled bank in Bangladesh thus increasing the number to a total of 7 scheduled banks. 8.2 Guidelines on Commercial Paper for Banks Considering the rapid growth of commercial paper (CP) market, as an alternative to bank financing in Bangladesh, BB has issued "Guidelines on Commercial Paper (CP) for Banks" to set uniform and standard procedures outlining general as well as specific instructions for banks regarding their permissible activities in CP market. 8.3 Amendment of Guidelines on Internal Control & Compliance in Banks the above-mentioned subject. The amendment includes instructions to Sonali, Janata, Agrani and Rupali banks to build up separate funds and all other banks to ensure full insurance coverage of cash at vault, cash on counter, cash in transit and cash in ATM booth to avoid any unexpected risks associated with those. 8. Monitoring of Sector-wise Outstanding Loans of Banks In order to make the analysis of sector-wise loans more effective and informative, BB has revised the format of quarterly statement of sector-wise outstanding loans, which now includes a separate statement for OBU (Off-shore Banking Unit) loans and covers sector-wise loan information at more granular level. 8.6 Changes in the Foreign Exchange Regulations During the review quarter, BB has brought a number of changes in its foreign exchange regulations that are stated below: i) BB has enhanced the limit of releasable foreign exchange to private sector participants for attending seminars, conferences, workshops and training, etc. abroad on per diem basis. Now, authorized dealers (AD) may release USD 30 per diem for SAARC member countries or Myanmar, and USD 400 per diem for other countries for the stated purposes. Any amount beyond this limit will require prior approval of BB. ii) ADs have been allowed to remit abroad up to USD 2,000 (earlier USD 20,000) on behalf of IT/Software firms to meet their bona fide expenses in a calendar year. With the aim to make it more effective and realistic, BB has revised the "Guidelines on Internal Control & Compliance in Banks" by replacing/changing few sections of the same. Changes involve issues regarding internal control and compliance department (ICCD), audit plan, process and reporting. 8.4 Precautionary Measures to Ensure Safety of Bank Branch BB has amended section 3(Gha) of BRPD circular no. 07 dated 0 July 20 regarding Quarterly Financial Stability Assessment Report 2