Bank profits shrink amid high inflation

Banks are witnessing a downturn in quarterly profits amid a narrowing gap between deposit and lending rates owing to high inflationary pressure.

Moreover, a disappointing debt collection due to a surge in business expenses is also contributing to the lower profitability of banks.    

Soaring commodity prices have also put pressure on bank deposits as people barely have any money left to park in banks after meeting the increased cost of living. Some are even breaking their deposits to make ends meet. 

On top of this, banks increased spending on US dollar purchases and an upsurge in credit flows to the private sector are drying up liquidity in the banking system.

There are 33 banks listed on the Dhaka Stock Exchange (DSE), 21 of which have published their financial reports for the July-September quarter of 2022.

A review of these financial reports shows that the profits of 11 banks have decreased and the profits of the rest have slightly increased. 

Some 12 banks are suffering from a liquidity crisis and three banks have reduced cash flow. 

The remaining six banks increased net operating cash flow by monetising government securities and placement funds held by other banks.

Most of the 10 banks that saw profits rise gained from dollar trading, government securities, and the stock market.

Most banks, however, posted good profits in the April-June quarter. They showed high growth in profits mainly by taking advantage of the rising price of the greenback. Banks sold dollars they had at a high price at that time. 

Later, in the face of objections of traders, the central bank set a profit margin cap on dollar sales. There was not much profit from foreign currency sales since then.

A top official of a bank, on condition of anonymity, said, "As the deposit rate is linked to inflation, banks are forced to increase the deposit rate, which reduces the gap between the lending rate as it is fixed. As a result, profitability has come under pressure."

Banks had to subsidise to maintain the deposit rate and had to give up profits, he added.

With strong balance sheets, lenders can tackle the situation which is affecting the Performance Ratio [return on equity, return on assets]. Banks need to place more importance on liquidity management than returns, he noted.

The Bangladesh Bank held a meeting with the chief executives of banks on 12 October regarding the interest rate cap.

"The cost of everything including that of collecting bank deposits has surged because of excessive inflation in the country. The repo rate [the interest rate at which the central bank lends money to banks] and the interbank exchange rate have also been increased. Now, banks are in trouble as there is no increase in interest rates on loans," said a participant of that meeting, wishing to remain unnamed.

Participants called on the central bank to review the interest rate cap, he added.

Liquidity crunch

Bankers say that people are now preferring to keep cash money in hand than depositing in banks, considering future needs amid ever-increasing inflation, while banks also are not interested in taking deposits at higher interest rates as the central bank has imposed a 9% cap on lending rates.

To cope with the crisis, cash-strapped banks are borrowing more from the central bank.

A managing director of a bank, on condition of anonymity, said "Additional dollars are being spent due to an increase in global commodity prices and banks' increased expenditures on dollar purchases have put a dent in their liquidity." 

"In the wake of the crisis, banks are borrowing more money from the central bank," he added.

Banks' stock performance

Amid the ongoing economic crisis, bank deposits are decreasing and defaulted loans are increasing – a dilemma that has affected the share prices of banks.

The share prices of 28 out of 33 banks on DSE are stuck at the floor price.

The Bangladesh Securities and Exchange Commission set the floor price of shares on 29 July to prevent the fall of the stock market due to the economic crisis. That is, no share price can fall below this floor price.