2022 will be a challenging year for the banking sector

Banks will face several challenges in recovering stimulus loans next year, especially from the small and medium segment. Default loans are already on the rise, signalling a non-recovery of loans, and survival will be difficult for banks if bad loans continue to rise.

Ali Reza Iftekhar, managing director and CEO of Eastern Bank, one of the top performing banks in the country, made the observation in an interview with The Business Standard. 

He talked about the challenges the banking industry will face in the coming days. He also discussed how his bank posted positive growth and performed well even in the pandemic. 

TBS: Eastern Bank continued its good performance even in a pandemic situation. What business strategy helped the bank to remain a market leader during the crisis?

Ali Reza Iftekhar: Year 2020 was a challenging year for EBL on many fronts. Covid-19 pandemic put everything on hold. We are still under its sway. 

The first major blow came in the form of a regulatory mandate in lending that banks cannot lend at more than 9 percent, and then in unison almost, came the first wave of Covid-19 pandemic that resulted in the shut down of the economy for straight four months. 

At that moment what we did was prudential balance sheet management. One major strategic move during the trying times was to rein in our operating cost, keeping the cost at the level of the previous year. Gradually, we brought down our deposit cost to 3 percent from 8 percent.  In other words, we continued to strike a balance between liquidity, profitability and solvency to post a positive growth in 2020 and keep the momentum going in the year 2021 as well. For the year 2020, we have made an operating profit of 769cr and PAT 410cr.

Our return on asset (ROA) improved to 1.40 per cent in the first half of this year from 0.92 percent a year before while return on equity (ROE) rose to 16.29 per cent from 11.78 per cent. EPS rose to Tk2.56 in the first half of 2021 from Tk1.65 in the same period of 2020. Our strong focus on asset quality was a key driver for us to achieve low non-performing loans (NPLs) of 3.60% (Net NPL ratio was 1.27%) at the end of June 2021.

EBL complied with major regulatory liquidity ratios in the first half of 2021. Liquidity coverage ratio (LCR) of the bank was 143.10 per cent as against minimum requirement of 100 per cent in H1 of 2021. EBL maintained an excess of CRR of Tk397 crore on bi-weekly basis and excess of statutory liquidity reserve (SLR) of Tk2,311 crore against regulatory requirement, which indicates its strength in liquidity position.

The credit rating agency CRISL has also reaffirmed the Long Term rating "AA+" and Short Term rating "ST-1" of EBL with "stable" outlook. The international credit rating agency Moody's also assigned "B1" rating to EBL with "stable" outlook.

However, the new challenge that has come our way is the regulatory cap on deposit rate (3 months or more FDR), which cannot go below the inflation rate.   

We are a great believer of relationship banking and during the pandemic we nurtured our existing relationship and all our business wings worked as a team to contribute to the bottom line. We kept our recovery effort on. These factors contributed greatly to close the year 2020 with a lot of positives and keep us going strong still despite all odds. 

I agree that our asset quality has slightly deteriorated lately. Our NPL (non-performing loans) is little over 3, till June, when the NPL of private commercial banks is hovering around 6.5. We are trying our best to bring it down to 3 by December.  

How will you evaluate the banking sector performance during the pandemic?

Iftekhar: In one word, good. 

There were government stimulus packages, relaxation policy for repayment, other regulatory support for borrowers and on top of all these, there was close regulatory monitoring. Bangladesh 

GDP during the pandemic was one of the best among 23 economies, according to the IMF. We, the banking sector, played our part, working closely with Bangladesh Bank. 

At EBL we have done our due diligence and served all stakeholder segments very well. We have taken unprecedented health and safety measures for employees in all our premises. We have ensured efficient roster management and work-from home facility and also ensured daily Covid-19 monitoring. 

We have paid all our dues to national exchequer on time and we have paid the highest level of allowable dividend to our shareholders. Holistically considering, meeting all stakeholders expectations, I would say we have done our job pretty well for 2020.

What are the challenges you see for banks after the imposition of deposit cap?  

Iftekhar: I don't see any challenge for good lenders. Confidence and trust are core assets of a financial institution. When we lowered our deposit rate to 3 percent, we had no difficulty in getting deposits. 

There are banks who have posted positive deposit growth even after offering a deposit rate as low as 2.5 percent. On the other hand, there are banks who fail to attract deposits even after offering whopping 6-7% interest. 

The pandemic has forced us to go for digital solutions for customers and find new ways to stay connected with them. I would also like to mention here that during this pandemic, EBL is possibly the only bank which has not gone for any job or pay cuts nor resorted to any staff benefit reduction. Interestingly enough, we have increased our number of employees by 3%. 

Loan recovery is likely to emerge as a big challenge for banks in the coming days, after payment pause is lifted. What is your view in this regard?

Iftekhar: Overall, the banking industry will perform well this year. But going forward, particularly in 2022, loan recovery will be a big challenge because a lot of our customers are now on payment pause, under central bank's directions to ease off the pandemic shock on businesses. 

When the payment pause holiday will be lifted, the banking industry will face its biggest challenge. Then there is a new borrower psyche developing that they can defer repayment of loan installment for as many months as they can. As a bank we deal with depositors' money and we are also accountable to our shareholders and other stakeholders. We are constantly communicating with our customers. There is no shortcut to post disbursement monitoring.

Banking sector passed a year of lending rate cap. What is your observation about the outcome of the lending rate cap?

Iftekhar: In spirit, I support the regulator putting a cap on our lending rate to bring down the cost of doing business and improving our Ease of Doing Business metrics. However, academicians are of the opinion that lending rate cap is contradictory to the spirit of free market economy and financial cost is not the only cost to the businesses. Also, in this present scenario, there is no other alternative but to efficiently handle customer deposit, cash management and maintain a reasonably good spread.

You are the longest serving managing director of the country and have been serving EBL as chief executive officer since 2007. Tell us about your journey. 

Iftekhar: Well, it has been a long and rewarding journey for me. I don't believe in switching banks frequently. In fact, having an extraordinarily efficient staff and extremely supportive board around, the idea of moving to another bank never occurred to me. I believe in creating value for my organisation and turning it into a true professional institution, I reckon, is my main task.  

If you ask me, three years' time is not enough to contribute meaningfully to an organisation. If a CEO has to worry about his renewal more than anything else, how can he contribute to the transformation of an organisation? 

On the banking front, the industry has witnessed transition from analogue to digital and the pandemic has put the transition to digital banking to first gear. 

On the national front, Bangladesh witnessed double graduated from lower middle income country to middle income country and from LDC. All these have happened during my career. So, I think I am fortunate. 

On the personal front, in my 14 years stint with EBL as CEO, I could inspire EBL to emerge as the most valuable financial brand of the country. 

What do you like to do, beyond your banking profession, in your leisure time?

Iftekhar: I listen to music, mostly Bangla, sometimes English and very little Hindi. I watch movies, but I am very selective. I love to spend time with friends, friends with whom I can strike a chord with.  

Photography is my passion. Currently to rekindle my passion, I am taking photography lessons from a young photographer. And I am loving it.