Banks find their income in a different way

Provisioning deferment and high returns on investment in government securities helped private banks recover income loss in the third quarter of the current year, offering a ray of hope that they will end the year having their balance sheet in the black.

Banks posted up to 460% year-on-year increase in earnings per share (EPS) in the July-September period of this year, after most of them had counted losses in the previous two quarters.

The suspension of loan classification from January to December facilitated the lenders to save provisioning costs as there were no new default loans. Helped by the decline in provisioning requirement, banks could show inflated earnings in the third quarter.

A loan loss provision is an expense set aside from profit to cover up losses if loans are not performing.

Even though interest income – the core earning of banks – fell drastically due to non-payment by borrowers amid the pandemic, income from investment in government securities saw a sharp rise.

As private sector credit growth tumbled to 8% level after the outbreak of the novel coronavirus in March amid stagnant business expansion, banks preferred investing in risk-free tools – government treasury bills.

The interest rate of government treasury bills picked up to above 8% in June amid high borrowing by the government from banks when the interest rate of risky private-sector loans was 9%.

The high interest rate paid by the government contributed to banks' earnings.

Among all banks, Al-Arafah Islami Bank saw the highest 463% jump in EPS in the July-September quarter compared to the same period a year ago.

The bank's EPS stood at Tk0.50 in the third quarter of this year, up from negative Tk0.27 in the corresponding period last year.

The bank in its disclosure explained that a Tk181.33 crore decline in provisioning during the third quarter helped it recover income losses.

Even though banks have started to recover pandemic induced income losses, the picture of cash flow remains gloomy due to no loan recovery coupled with a rise in fresh lending. This will ultimately put the banking sector in big trouble in the coming days, experts say.

Moreover, the interest rate of government treasury bills plummeted to less than 1% in October due to slowdown in government borrowings, causing a piling up of excess liquidity in banks. Excess liquidity in the banking system reached a record Tk1.70 trillion in August this year.

Al-Arafah Islami Bank saw a substantial decline in cash flow during the July-September quarter due to an increase in investment and loan disbursement of Tk587 crore, according to its disclosure posted on the Dhaka Stock Exchange (DSE).

The net cash flow of the bank declined to Tk4.21 per share in the third quarter of this year from Tk10.72 in the corresponding quarter a year ago, according to the DSE.

The erosion of cash flow is because of no recovery of loans, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

This is not a matter of concern for now because banks have enough liquidity, but it will weaken banks' capacity to repay depositors' money in the long run, he observed.

Moreover, when the demand for credit will rebound, the erosion of cash flow will create a liquidity crunch, he expressed his apprehension.

For now, private sector credit growth is rebounding too slowly, even though banks are offering loans at cheap rates amid huge excess liquidity. Investors are still sticking to survival strategies instead of going for expansions after the reopening of the economy.

The provisional data of the Bangladesh Bank show that private sector credit growth improved slightly to 9.48% in September this year from 9.36% in the previous month. But the growth rate was far below the monetary target of 14.8% set by the central bank for this fiscal year.

Meanwhile, Fitch Solutions warned of rising post moratorium non-performing loans (NPLs), which will weigh on banks' profitability.

In a recent report titled "Covid-19 Woes Perpetuating Weakness of the Bangladesh Banking Sector", Fitch said banks' profitability will further worsen as soon as the instalment deferment facility expires, as the lenders will have to keep aside a huge amount from their earnings as a provision against defaulted loans.

The report also said that NPLs will increase after the expiry of the deferment facility given by the Bangladesh Bank, especially when it comes to a weak economic environment.

Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI), said most of the banks that are declaring higher earnings are not making adequate provisioning, taking advantage of the Bangladesh Bank's regulatory easing amid the Covid-19 situation.

Every bank, if properly weighing their risks, will have lower income this year compared to last year. But they are calculating on the risks on an accrual basis even if borrowers do not pay. This kind of fiction will bring in bigger troubles down the line, he added.

 Returns on risk-free investment inflates earnings

Banks preferred investing in risk-free government treasury bills since the beginning of the year amid pressure of bringing down the lending rate to a single digit.

Most of the banks' investment in government instruments increased substantially in the first nine months of the current year which was the only major source of income for banks.

For instance, Trust Bank's investment in government instruments more than doubled to around Tk8,000 crore in September this year from that of December last year, according to the bank's quarterly statement.

The gain from government bills and bond investment of Trust bank increased by 148% to Tk449.71 crore in the January-September period of this year. At the same time, provision decreased by 35%, according to the DSE.

These two factors helped the bank post a 59% year-on-year increase in its EPS in the July-September quarter of this year.

On the other hand, many banks cut staff salaries to reduce expenses during the pandemic, which started to reflect in their earnings from July.

For instance, income from government investment of One Bank rose by 74% to Tk220 crore in January to September compared to the same period of the last year.

At the same time, the bank saw a 17% fall in salary expenses during the third quarter, according to the bank.

The bank got relief from provisioning of Tk42.23 crore in the first nine months of this year.

All these factors inflated the bank's profit, increasing its EPS by 86% in the July-September quarter of this year compared to the corresponding quarter of last year.