Foreign banks made hay from dollar crisis

While banks around the world are incurring losses from investments amid rising interest rates, Bangladesh's dollar crisis offered a great opportunity for foreign banks to turn significant profits from their Dhaka branch operations.

Some foreign banks experienced up to 700% profit growth last year riding on exchange gains from greenback sales in the volatile forex market.

Foreign banks made such hefty profits at a time when the country was suffering from faster depletion of forex reserves amid a severe scarcity of dollars.

Annual balance sheets of foreign banks for the year 2022 show that exchange income mostly contributed to more than double their profits during the global crisis as income growth from dollar sales was far higher than interest earnings, the core banking income for banks.

The growth of exchange income of foreign banks was up to 477% last year when the country was in the midst of a high inflation triggered mostly by rising dollar prices.

As of now, nine foreign banks are operating in Bangladesh and five of them published their annual reports for Bangladesh branches till the filing of this report.

The Business Standard has analysed these reports to understand the sources of high-profit growth.

For instance, Citibank NA reported an exchange gain of Tk350.33 crore last year from selling the US dollar, which was 477% higher than Tk60.70 crore in the previous year.

Meanwhile, income growth from core banking operations, such as interest income, was only 90% during the same period. The interest income from loans for the bank was Tk116.67 crore during the last year, up from Tk61.34 crore in the previous year.

The unusual income growth from dollar selling gave a big push in its net profit which grew by 713% to Tk249 crore last year from Tk30.60 crore a year ago.

Citibank NA, which has the fifth highest exposure in Dhaka among the nine foreign banks operating here, made such a huge profit with its loan size of Tk1,880 crore, according to the central bank data.

Standard Chartered, the largest foreign bank in Bangladesh in terms of book size of Tk24,600 crore, gained Tk554 crore from dollar dealings last year which was 65.65% higher compared to the previous year, according to its balance sheet.

However, its interest income growth was only 14% last year.

The net profit of the bank doubled to Tk1,655 crore in 2022 from Tk758 crore a year ago, thanks to huge profits from dollar sales. 

Commercial Bank of Ceylon posted a 218% growth in exchange income last year when its core banking interest income grew by a paltry 10.67%, according to the bank's annual report for Bangladesh branches. 

The bank's income from dollar sales was Tk257.57 crore in 2022 which was Tk81 crore in the previous year.

The interest income of the bank increased to Tk342 crore last year from Tk309 crore in 2021. 

High growth in exchange income helped the bank log a 58.51% growth to Tk265 crore in net profit last year, according to its balance sheet. 

The total book size of Commercial Bank of Ceylon was Tk5,214 crore as of December last year. 

The exchange income of Woori Bank grew 68% year-on-year to Tk132.40 crore last year. 

The bank saw its net profit rise to Tk146 crore last year from Tk64 crore in the previous year, thanks to a huge income from dollar dealings. 

State Bank of India experienced a 76.47% profit growth from its Bangladesh branches in the last year when its exchange gain grew by 24%, its balance sheet shows.

The total net profit of the bank was Tk180 crore from its Bangladesh operation last year, which was Tk102 crore in the previous year. 

The book size of the bank was Tk3,000 crore as of December last year, central bank data shows. 

What experts say

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), terms such profit as "windfall gain" saying that it is not illegal.

This windfall gain is a worldwide phenomenon. For instance, global oil companies made record profits amid rising fuel prices when many countries are suffering from high fuel prices, he said. 

In Bangladesh, the dollar crisis was not created by banks but it was the  result of the government's economic management, he added. 

He also said had the devaluation been done gradually from long back, such a crisis would not have arisen and banks would not have made such windfall gains.

However, the government will get a 40% tax from the foreign banks' profit, he noted, adding that the government may think of imposing a windfall gain tax. 

He, however, said that this is not an ideal situation to impose windfall gain tax on banks as the health of the overall banking sector is not good. 

Banks could not make profits from core banking business for various reasons, he added.  

How was the dollar price movement last year?

The huge exchange gains came from the faster devaluation of the taka last year. 

The Bangladesh Bank devalued the taka by 25% against the greenback in the last one year – highest depreciation among its trading partner countries. 

The dollar price shot up to Tk107 at the end of December last year from Tk85.80 at the beginning of January the same year, according to the Bangladesh Bank. 

The dollar price for import LC (letter of credit) shot up to above Tk110 in July last year amid a severe dollar crisis as banks made an artificial crisis by holding dollars to make high profits. 

In such a volatile market, some banks made an exchange gain of more than Tk5 per dollar, further intensifying the dollar crisis.

Many banks which bought dollars at Tk85 per dollar previously sold at above Tk100 amid the dollar crisis, making huge profits.

Federation of Bangladesh Chamber of Commerce and Industries (FBCCI) President Jashim Uddin last year claimed that banks were making a profit of Tk10 for every dollar they were selling.

The severe dollar crisis forced the central bank to sell dollars to banks, causing a sharp decline in foreign exchange reserves last year.

The foreign exchange reserves declined by $12 billion last year, central bank data shows.

The excessive profit tendency of banks prompted the central bank to take stern action against some treasury officials of local banks.

The central bank removed six treasury heads of private banks from their positions in August last year on charges of making excessive profits from the volatile dollar prices. However, in the following month, they were allowed to return to their lost positions at the condition of spending half of profits made from volatile dollar price for corporate social responsibilities.

The Bangladesh Bank also set a maximum gap of Tk1 between buying and selling rates of dollars for banks to stabilise the forex market.

While frowning at the commercial banks for their market activities with the dollar, the Bangladesh Bank itself made a profit of nearly Tk26,300 crore from foreign currency revaluation in the last fiscal year.

The huge exchange gains came in the form of a faster devaluation of the taka, which pushed its total profit up to Tk29,247 crore in FY22 – more than five times higher than the Tk5,777 crore in FY21, according to the Bangladesh's Bank annual report for the last fiscal year.

The central bank built up the country's foreign exchange reserve by buying dollars from banks at a rate of Tk78-84 previously, which was sold back at Tk87 to the banks in the last fiscal year amid a dollar scarcity, causing huge exchange gains for the authorities.

The gain from foreign currency revaluation was only Tk2,605 crore in FY21, central bank data show.