Poor operating profit hits hard on banking stability

Lenin Rahman:

The operating profit of most of the banks declined almost 25 percent in the first half (January to June) of the current year 2023 due to multifarious reasons including dollar shortage, default loans, poor return from the capital market, raising cost of doing business and fund.

The banking sector is facing the challenge of a dollar shortage since the beginning of the Russia-Ukraine war, affecting the operating profit of banks, mentioned the bankers.

The skyrocketing volume of defaulted loan amounts is also another hindrance to gaining higher operating profit in the first half of the current year, they also opined.

According to the bankers, still, banks are facing the crisis of dollar shortage, posing a hardship to settle the Letter of Credits (LCs). The local banks are allowed to charge 20-25 percent of the LC amount.

Out of the state-owned commercial banks, Sonali Bank earned Tk1,679 crore in operating profits in January-June of 2023 while it was Tk1,045 crore in the same period in 2022, according to available media reports.

Rupali Bank followed with the highest jump, earning Tk57 crore in operating profit last year, but earning Tk340 crore in this year’s first half.

Out of the Private Commercial Banks, Pubali Bank earned Tk694 crore in the first half of this year which was Tk 649 crore during the corresponding period of the last year.

Shahjalal Islami Bank Ltd attained an operating profit worth Tk491 crore, up from Tk471 crore, while Premier Bank was next with Tk400 crore, up from Tk381 crore.

The operating profit of Mercantile Bank is Tk275 crore in the first half (January to June) of the current year 2023 while such profit amount was Tk 389 crore during the corresponding period of the last year 2022.

The operating profit of Dhaka Bank also decreased in the current year. The reputed private commercial bank earned an operating profit amount worth Tk 400 crore in the first half of the current year.

Despite facing business obstacles, the operating profit of some banks has increased. Premier Bank’s operating profit in the first half of 2022 was Tk 381 crore. In the first half of this year, the bank achieved an operating profit of Tk 400 crore.

Talking to Daily Tribunal, Jubo Economist Forum President Mirza Walid Shipon told that a major part of banks’ income comes from foreign trade.

In the first half of the current year, the source of profit for almost all the banks of the country has been reduced mainly by the dollar crisis.

During the first half, the banks also failed to gain adequate profit from investing in the capital market, explained Mirza.

On the contrary, the cost of funds of the banks increased compared to earlier due to the liquidity crisis. At the same time, the amount of defaulted loans also increased, he mentioned.

The banking sector is holding over Tk1 trillion defaulted loan amount which is also impeding to gain a higher profit, the economist blamed.

“The operating profit is not the net profit of the bank.  From this profit, provision is made against defaulted loans and other assets, and taxes are paid to the government. Profit after provisioning and tax is the actual or net profit of a bank” noted Mirza.

“The banking sector is the nerve of the economy. Under such a hostile business atmosphere, it would be tough to maintain the financial stability of the banking sector and economy as well”,

Against this backdrop, the banks closed on June 27 last to mark Eid-ul-Azha, and for this, still many banks are preparing their operating profit sheet.

However, the top executives of the bank mentioned that it was not possible to open import letters of credit (LC) due to the dollar crisis.

The cost of fund management of the bank has increased mainly for the liquidity crisis of the banks. The maximum interest rate on loans was 9 percent.

On the other hand, almost all banks’ defaulted loans have increased in the last six months. The banks could not make any profit from the investment in the capital market which also effect on the operating profit of the banks.

According to the data of Bangladesh Bank, the import of the country declined by 14.44 percent in the first 10 months (July-April) of the just concluded fiscal year 2022-23.

During this period, the new LC opening on imports fell by more than 26 percent. And in the first 11 months of the fiscal year, the export growth has been 7.11 percent. Remittance growth for the entire fiscal year (July-June) was less than 3 percent. Bankers said that these issues have mainly affected the operating profit of the banks.

Dhaka Bank Limited Managing Director Emranul Haque said that they reviewed the operating profit of the country’s top 28 banks till May this year.

“I witness that the operating profit of the banks has decreased by 25 percent on average”, he added. Despite facing obstacles, the operating profit of some banks increased, he also mentioned.

Talking about his bank, he said that Dhaka Bank is conducting foreign trade-related activities on a priority basis. Due to the dollar crisis, Dhaka Bank failed to settle the expected level of the LCs during the last six months.

Masrur Arefin, Managing Director of The City Bank mentioned that the last six months were not favorable for the banking sector.

The income from foreign trade has also decreased mainly for the dollar crisis in the country, posing a threat to the operating profit of the banks, he explained.

According to the banking sources, the target of credit growth in the private sector was fixed at 14.1 percent, but only 11 percent has been achieved till June.

Meanwhile, the central bank has reduced the target of credit growth in the private sector till next December and the growth is estimated to be 10.9 percent till December.

Although the private sector loans did not increase, the amount of default loans increased at an unusual rate during this period. At the end of December 2022, the amount of defaulted loans of banks was Tk1.20 lac crore.

Just after 3 months, the amount of defaulted loans stood at Tk 1.31 lac crore, and the bankers predicted that such an amount may increase in the next quarter.

Meanwhile, various policy relaxations to repay the outstanding loan amount affected the operating profit of the banks.