Stable interest rate, capital market, lower provision boosting banks’ profit

Stable interest rate, bullish capital market and postponed loan classification have helped banks report stellar profit growths in the second quarter of this year compared to the corresponding period a year ago.

Of the 31 banks being listed on the country's stock exchanges, only seven have disclosed their second-quarter financial results. Except for ICB Islamic Bank, other six private banks have reported massive growth in the April-June quarter.

Uttara Bank's consolidated earnings per share (EPS) grew 320%, City Bank's 290%, Mercantile Bank's 229%, Shahjalal Islami Bank's 162%, National Credit and Commerce (NCC) Bank's 151% and United Commercial Bank's (UCB) 58%.

Uttara Bank's consolidated EPS stood at Tk1.05, City Bank's at Tk1.13, Mercantile Bank's at Tk1.38, Shahjalal Islami Bank's at Tk1.10, National Credit and Commerce (NCC) Bank's at Tk0.88 and United Commercial Bank's (UCB) at Tk0.63 at the end of June this year.

But in the first quarter of this year, banks did not achieve such growth.

Following the stellar growth, the interest of investors in the stock market has increased. As a result, banks' shares have been on an upward trend on the Dhaka Stock Exchange over the past few working days.

Preferring anonymity, the managing director of a private bank told The Business Standard that bank interest rates on deposits had been higher after lowering the lending rate to the single-digit last year.

This decreased the bank spread – the difference between the interest rate that a bank charges a borrower and the interest rate a bank pays a depositor – and put the profit of the banks under a strain, said the official.  

But the bank spread edged up as interests on deposits were also lowered this year – leading to higher profit growths for the banks, he added.

According to the Bangladesh Bank, the average interest rate on bank deposits was around 5.5-6% in the first six months of last year. But the rate fell below 4.5% in the January-April period of this year – ticking up the bank spread by 1.5-2% with the 9% lending rate.

A senior officer of the Mercantile Bank, seeking anonymity, said the bank's investment in shares of IDLC Finance was higher than the limit set by the central bank. There has been a good profit by selling these extra shares. Meanwhile, there has been a good profit from the upward stock market.

He added that although the rate of disbursement of loans in the private sector is low, it is not having a negative impact on the profits of banks. With the government's encouragement, the downturn in the private sector will not last long. Banks are strengthening the capital base to increase lending capacity in the coming days.

According to the Dhaka Stock Exchange (DSE), the benchmark index DSEX jumped by 17% to 6,150 points in April to June quarter this year.

Besides, bankers said most banks have invested their excess liquidity in treasury bonds due to low demand for loans. Banks have had to keep fewer provisions against loans than usual since the loan classification was suspended in the Covid pandemic. These initiatives have been generating handsome profits.

An official of the City Bank said the bank is focusing on asset quality and capital strength. Bad debts were likely to increase due to the Covid-19 pandemic impacts, which would reduce the capital adequacy ratio (CAR). That is why the bank is strengthening capital by issuing bonds as per the Basel III requirement.

"This is because bank's lending or investment capacity will reduce if the CAR goes down," he explained.

He added that investment in agro-processing, pharmaceuticals and light engineering in the SME sector has been increased during the epidemic to keep up with the growth rate of profits.