SECTOR REPORT: BANK

A Sector Report Prepared

On
Banking Industry of
Bangladesh
Sector Report on Banking Industry of Bangladesh
Prepared for

Mr. Avijit Mallik

Lecturer

Institute of Business Administration (IBA)

University of Dhaka

Prepared by
Ahnaf Tahmid

Batch: MBA 59E, Roll: ZR-51

Towsif Reaz

Batch: 59E, Roll: ZR-05

Course: Financial Information Analysis, MBA Program

Semester: Spring 2018

Date of Submission: 1st April 2018

Table of Contents
Chapter 1: Overview of Bangladesh Economy .............................................................................................. 4
1.1 Introduction ........................................................................................................................................ 4
1.2 GDP Growth ........................................................................................................................................ 4
1.3 Interest Rate Scenario ......................................................................................................................... 5
1.4 Inflation Scenario ................................................................................................................................ 6
1.5 Demographic Situation ....................................................................................................................... 7
1.6 Economic Progress Analysis ................................................................................................................ 9
Chapter 2: Sector Contribution in GDP: Banking Sector of Bangladesh ..................................................... 11
2.1 Banking Sector Structure .................................................................................................................. 11
2.2 Industry Performance ....................................................................................................................... 12
2.2.1 Deposit Growth: Grew at 17% CAGR over last 5 years (till 2016).............................................. 12
2.2.2 Advances Grew by 15.7% CAGR in last 5 years (till 2016)...................................................... 13
2.2.3 Interest Rate Spread (IRS) has come down below 5%............................................................... 14
2.2.4 Operating Income Grew over 9% CAGR in last 5 years (till 2016) .......................................... 15
2.3 Industry Contribution to GDP ........................................................................................................... 16
Chapter 3: Industry Analysis ....................................................................................................................... 16
3.1 Introduction ...................................................................................................................................... 16
3.2 Industry Analysis with Porter’s 5 forces Model ................................................................................ 16
3.2 Cyclicality of Industry ...................................................................................................................... 20
3.3 Banks’ Positions in Industry Life Cycle ........................................................................................... 21
Chapter 4: Key Industry Drivers .................................................................................................................. 22
4.1 Introduction ...................................................................................................................................... 22
4.2 Key Drivers for Further Growth in the Banking Industry ................................................................ 22
Chapter 5: Risk & Success Factors............................................................................................................... 24
5.1 Key Risk Factors................................................................................................................................. 24
5.2 Key Success Factors........................................................................................................................... 27
Chapter 6: Financials ................................................................................................................................... 29
6.1 Key Financials .................................................................................................................................... 29
6.2 Sectorial Contribution in Dhaka Stock Exchange .............................................................................. 29
Chapter 7: Future Performance .................................................................................................................. 31
7.1 Performance Forecast of Banking Industry....................................................................................... 31
 7.2 Government Policies Affecting Banking Sector ................................................................................ 33
Chapter 8: Interesting Industry Observations............................................................................................. 33
8.1 Asset Quality: A Concern for the Banking Sector .............................................................................. 33
8.2 Capital Base: Banks Need to Increase their Capital Base.................................................................. 34
Chapter 9: Overall Industry Assessment ..................................................................................................... 34
9.1 Assessment Summary ....................................................................................................................... 34
9.2 Recommended Investment Decision ................................................................................................ 35
References .................................................................................................................................................. 36

Table 1 Sector-wise CPI & Inflation (National Consumer Price Index (CPI) and Inflation Rate (Point to
Point) 2013-17, 2017) ................................................................................................................................... 7
Table 2 Demographic Summary of Bangladesh (Bangladesh Bureau of Statistics, 2016) ............................ 9
Table 3 Summary of Banking Sector (Lanka Bangla Research, 2017) ......................................................... 11
Table 4 Category of Banks in Bangladesh (Bangladesh Bank, 2018) .......................................................... 12
Table 5 Cyclicality of Banking Industry ....................................................................................................... 21
Table 6 Key Financials of Listed Banks (Lanka Bangla Research, 2017) ...................................................... 29
Table 7 Market Cap & Turnover of Listed Banks (DSE Data Archive, 2018) ............................................... 30
Table 8 Banking Sector's Contribution in DSE ............................................................................................. 30
Table 9 Valuation Data of Listed Banks (Lanka Bangla Research, 2017) .................................................... 32

Figure 1 GDP Growth Compared to other countries (Country Comparison: Bangladesh Vs Others, 2017). 4
Figure 2 Sectorial Contribution to GDP ......................................................................................................... 5
Figure 3 Call Money Rate .............................................................................................................................. 5
Figure 4 Treasury Rates................................................................................................................................. 6
Figure 5 Lending & Deposit Rates ................................................................................................................ 6
Figure 6 Deposit Growth of Listed Banks (Brac EPL Industry Analysis, 2017)............................................. 13
Figure 7 Loans & Advances of Listed Banks (Lanka Bangla Research, 2017) .............................................. 14
Figure 8 Lending & Deposit Rates of Bangladesh ....................................................................................... 14
Figure 9 Operating Profit of Listed Banks ................................................................................................... 15
Figure 10 Banks' Contribution to GDP (National Account Statistics, 2016) ................................................ 16
Figure 11 ROE & ROA of Listed Banks ......................................................................................................... 31
 Chapter 1: Overview of Bangladesh Economy

1.1 Introduction
Bangladesh has continued to show signs of resilience and has entered into the 7%.GDP growth trajectory.
Bangladesh is the second country in South Asia to share such performance after India (7.4% in FY16).
The per capita GDP has increased to USD 1466 in FY16 from USD 1316 in the last fiscal year. Sustained
domestic consumption was the key contributor to this impressive growth. On the other hand, headline
inflation eased further and dropped below 6% level due to lower food inflation on the back of good
harvest and declining global food prices. Besides strong external performance driven by acceleration in
export growth, rising FDI and increasing foreign exchange reserves contributed a large part to
maintaining macroeconomic stability during the period. Going forward, higher economic growth is
projected on the back of increase in infrastructure spending and improved political stability.

1.2 GDP Growth

Bangladesh's GDP growth In FY16 has crossed the 7% level exceeding the expectations from IMF and
the World Bank (6.9% and 6.3% respectively) aided by revived exports and sustained domestic
consumption. Inflation was lower than projected, while increased exports and modest imports have
resulted in a large current account surplus. A more stable political regime and lower borrowing rates have
encouraged local entrepreneurs to get into new ventures or expand their existing businesses. The
Bangladesh economy has been growing at an average rate of 6%+ for the last 10 years. Bangladesh, a
country of 160+ million people has been rising sharply with its growing middle class and rising domestic
consumption. A revision of public sector wages and the consequent rise in disposable income has driven
up private consumption. According to the Asian Development Bank, Bangladesh's economy is the third
fastest growing major economy in 2016. Going forward, higher economic growth on the back of Increase
in Infrastructure spending and improved political stability is projected.

Figure 1 GDP Growth Compared to other countries (Country Comparison: Bangladesh Vs Others, 2017)

GDP Composition: The nominal GDP of Bangladesh was USD 220.97 billion in FY16. The service
sector contributed 53.1% of GDP and noted a slight decrease in growth rate of 50bps in FY16 compared
to 53.6% in FY15. The contribution of the industrial sector grew by 1.1% in the last fiscal year, to 31.5%
while the contribution of the agricultural sector shrunk by 0.6% to end up at 15.4%. As Bangladesh
focuses more and more on the industrial and service sectors, the contribution of the agriculture sector is
going down slightly This declining trend in growth of agriculture sector can largely be attributed to
gradual loss of cultivable land, lack of invention, adoption and dissemination of new technology, lack of
sufficient support for agricultural research and training in the country, and lack of an appropriate supply
chain. The gap between the prices a consumer pays and the price that farmers receive has widened to a
great extent. The manufacturing sub-sector of industry is contributing most to the GDP in recent years.
(Bangladesh Bureau of Statistics, 2016)

Figure 2 Sectorial Contribution to GDP

1.3 Interest Rate Scenario

The money market of the country observed a significant shift in 2017 driven by massive amount of excess
liquidity but observed positive credit demand from both the private and public sector. Call money rate
plunged by more than 400 basis points during 2016 and stood only 3.64% on the end of Sep'16. The call
money rate started falling rapidly after postponement of the treasury bonds auction on May15.

Figure 3 Call Money Rate

 Figure 4 Treasury Rates

Bangladesh Bank, with the aim of cutting down the lending rates of banks, squeezed acceptance of
reverse repo bids at first and later on suspended it altogether. Instead, BB stepped up 30 day BB bill
acceptance which yields lower than reverse-repo putting further pressure on the call money rate. The repo
and reverse repo rates were fixed at 6.75% and 4.75% respectively. The banks, burdened with excess
liquidity, have shifted their focus towards the government securities. As a result the yields on these
securities have also declined quite sharply. Recovery of the private investment could be the key driver for
interest rate to rise in FY18. Accelerated activity of government’s mega projects could have a positive
influence over Interest rate.

Figure 5 Lending & Deposit Rates

1.4 Inflation Scenario

Falling commodity prices on the global market has been pushing inflation downward. The declining trend
of inflation started in 2015 and prevailed through 2016. Overall inflation stood at 5.5% in Sep'17 which
was 6.2% in the same period in 2015. Food inflation started to decrease rapidly from the starting of 2016
but formed a positive trend from June 2016.

As of Sep 2017 Point to point (P2P) inflation stood at 5.5%, the lowest since Sep'12 The decline in
average inflation is mainly attributable to the falling food prices while non- food inflation edged up
primarily because of the consumption boost in the wake of the record salary hike in the public sector. As
past evidence suggests, the private sector is likely to follow suit in a staggered fashion, putting an upward
pressure on nonfood inflation. However, the inflation rate is now in a safe zone. Bangladesh Bank expects
proactive management of market liquidity and commodity price trend would keep FY17 CPI inflation at
or close to the 5.8% target level.

Looking forward, a reversal in inflation is expected against the backdrop of a moderate rise of global
commodity prices in FY17 and a lagged effect of public sector salary hike.

Sectors 2012 2013 2014 2015 2016 2017 Avg.

Inflati
on
Food-beverage-tobacco 193.2 209.7 223.8 234.7 248.9 267.0 6.4%
4 9 7 6
Inflation 5.2% 8.6% 6.7% 4.9% 6.0% 7.3%
Non-food 166.9 176.2 186.7 200.6 209.9 216.7 6.0%
7 3 9 6 2 9
Inflation 9.2% 5.6% 6.0% 7.4% 4.6% 3.3%
Clothing-footwear 179.6 194.7 208.5 233.3 243.5 249.9 7.7%
6 7 8 6 2
Inflation 11.7% 8.4% 7.0% 11.9% 4.4% 2.6%
Rent-fuel-lighting 155.6 163.4 171.8 182.7 194.0 199.9 5.7%
1 7 4 1 8
Inflation 8.5% 5.1% 5.1% 6.4% 6.2% 3.1%
Furniture-furnishing-household- 195.3 206.1 214.4 227.3 235.8 250.0 6.1%
equipment 3 4 5 9 5 6
Inflation 11.3% 5.5% 4.0% 6.0% 3.7% 6.0%
Medical-care 159.6 164.0 180.7 199.9 206.7 208.8 5.4%
6 6 7 4 3
Inflation 4.6% 2.8% 10.2% 10.6% 3.4% 1.0%
Transport & communication 159.3 167.2 181.7 201.3 210.7 217.8 6.6%
4 8 4 8 9
Inflation 7.2% 4.9% 8.7% 10.8% 4.7% 3.4%
Recreation+entertainment+education 157.2 164.3 168.0 171.0 177.5 183.6 4.1%
+cultural-services 3 8 2 1 6 9
Inflation 8.8% 4.6% 2.2% 1.8% 3.8% 3.5%
Misc 182.5 193.7 204.2 211.6 217.5 224.4 5.3%
4 5 1 1 1 4
Inflation 10.9% 6.1% 5.4% 3.6% 2.8% 3.2%
Table 1 Sector-wise CPI & Inflation (National Consumer Price Index (CPI) and Inflation Rate (Point to Point) 2013-17, 2017)

1.5 Demographic Situation

Population: Population of Bangladesh stood at 159.9 million in 2015 according to World Bank data.
Bangladesh is the 8th largest country in terms of population, growing at the rate of 1.2% per annum. The
rate is lower than that of Nigeria (2.6%) and Pakistan (2.1%). as well as that of India (1.2%) and Vietnam
(1.1%). but higher than that of China (0.6%) and Sri Lanka (0.8%).
Demographic Dividend: Due to the scarcity of habitable land and limitation of natural resource, the
population of Bangladesh could have created adverse effects on its growth; yet, the country is preparing
itself to reap the benefits of demographic dividend. Around 66.6% of population belongs to working
peculation (age group 15-64), which is higher than that of Nigeria (53.3%) and similar to that of India
(65.6%), Sri Lanka (66.1%) and USA (66.3%). Though higher proportion of population of Vietnam and
China belong to working population that separates Bangladesh from other countries is the age of its
population. With the nation's median age at only 26.3, the population of Bangladesh is relatively younger,
compared to that of India (27.60), Vietnam (30.1) and aging population of China (37.1) and USA (37.90).
(Lanka Bangla Research, 2017)

Bangladesh can reap immense benefits from its young working age population by focusing on labor
intensive manufacturing industries. Such young population is expected to remain in the workforce for
next three decades and drive the growth of the country by making contribution to country's GDP.

Participation of Women: Participation of women in the economic activities has been a key determinant
of the economic growth of the country. Women consist of only 40.4% of the total labor force of the
country; the participation of female population to the labor force, though increased by 210 basis points
over a decade. However, the participation of women in workforce is lower than that of men. One of the
reasons could be women's involvement in household chores which is not counted as a part of formal
economic activities. Achieving gender equality and empowerment of women remains key Sustainable
Development Goal for Bangladesh.

Labor Force Growth: Labor force of the country, which is 49.6% of the population, is growing at the
rate of 2.3% per annum. The rate of unemployment of Bangladesh's labor force stood around 4.3% which
is lower than that of Sri Lanka (4.6%), Nigeria (7.5%), Pakistan (6.2%), USA (6.2%) and China (4.7%).
One of the reasons of such reduced rate could be attributed to expatriation. Over the last decade,
approximately 6.28 mn moved outside the country, partly reducing the rate of unemployment of the
country. The expatiate wage earners sent USD 14.93 bn in FY2015-16.

Indicators Data
Population (mn in 2017); (World Bank Data) 164.7
Median age (years. 2016 est.) 26.3
Population growth rate (%. 2015) 1.20%
Net migration rate (per '000. 2015 est.) 0.5
Urban population (% of total. 2014) 34.30%
Urban population growth rate (%. 2014) 3.40%
Sex ratio (male per 100 female) 100.3
Adult literacy rate (%. 2015 est.) 61.50%
Health expenditure (% of GDP, 2014) 2.80%
Physicians density (per '000. 2011) 0.4
Hospital bed density (per '000. 2011) 0.6
GDP per Capita (Nominal USD. FY16) 1385
GNI per Capita (Nominal USD, FY16) 1465
Human development index 0.6
 Unemployment rate (%. 2014) 4.30%
Electricity access (% of population) 80.0 80%
Mobile Connections (% of population. 2016) 74%
Active Internet Subscriptions (% of population. 2016) 41.50%
Poverty rate (%. 2015 est.) 24.80%
National poverty line (USD per day) 1.1
Table 2 Demographic Summary of Bangladesh (Bangladesh Bureau of Statistics, 2016)

1.6 Economic Progress Analysis

In recent years, Bangladesh’s economy has grown at a consistent, blistering rate of more than 6 percent,
making it one of the fastest growing economies in the world. Over the past nine months, that pace
accelerated to 7 percent. Today, the Bangladeshi economy stands at about $220 billion. According to the
World Bank, that will rise to $322 billion by 2021, creating many more scalable investment opportunities.

Growth is driven by the already-well-known ready-made garment industry. But it’s a more dynamic
industry than most people know. In fact, it’s a mistake to continue to think of Bangladesh as t-shirt maker
to the world. Bangladesh garment manufacturers produce high-end clothing that sells in Europe’s best
boutiques.

The garment industry has fostered more than pure economic gains. Demography has also been a winner.
Garment factories have become the great gender leveler in society. Most employees and managers are
women, which has led to their economic empowerment and rise in stature in society.

At the same time, the Bangladesh garment industry is developing an international reputation for being
smart and nimble. “Bangladesh offers ease of doing business, importing-exporting is faster. R&D on new
styles is faster as you can import fabrics in three days. In India, it would take 10 days,” Vijay Mathur, an
official with the Indian Apparel Export Promotion Council, recently told the Business Standard.

The economic success story of Bangladesh has also improved the health of its citizens. Twenty-five
years ago the average Bangladeshi could hope to live only to age 56. Today, that figure is over 70, which
is among the most notable improvements in modern history, according to the Asia Foundation. In fact,
expected longevity in Bangladesh is more than four years longer than in neighboring India and Pakistan.

Between 2000 and 2010, the number of poor in Bangladesh dropped 26 percent from 63 million to 47
million. Today, the overall rate of poverty in the country is 22 percent, down from 40 percent a decade
ago. (Bangladesh Economic Data, 2017)

The World Bank reports that labor income has risen while birth rates have dropped, leading to lower
dependency ratios and higher per capita income. The World Bank recently ranked Bangladesh as a
lower middle-income nation for the first time.

By many metrics, Bangladesh’s development trajectory is a unique success story, especially since the
1990s when democratic rule was reinstated and extensive economic reforms were made. Poverty
incidence has fallen from 60 percent to around 30 percent. Gender parity has been achieved in primary
and secondary school enrollment.
The total fertility rate has fallen from 3.4 to 2.3 (slightly above the “replacement level”), infant and
maternal mortality rates have fallen by at least half since 1990, and life expectancy has risen by 10 years
to 69 (four years more than in India in 2012). Bangladesh is one of the few developing countries that is on
target for achieving most of the Millennium Development Goals, and is considerably ahead of target on
some indicators.

Thus, although the improvement in Bangladesh’s growth rate since 1990 is impressive, it does not fully
explain the country’s extraordinary results with regard to social development. Several other countries in
South and Southeast Asia have grown at similar or higher rates than Bangladesh in the last 10 to 15 years,
including India, Bhutan, Vietnam, Cambodia, and Laos. Yet, in comparison to these countries,
Bangladesh’s social development still stands out.

Bangladesh has earned a reputation in the global market for low-cost, high-quality manufacturing
through its garments sector. The impact of this reputation was demonstrated by the fact that the exports of
readymade garments from Bangladesh rose by a sharp 19.95 percent year-on-year during the first half of
financial year 2013-14, defying various odds like image crisis and political instability prevailing during
the period. Due to recent increases in wages in China and India, it is likely that manufacturing in other
industries may also shift to Bangladesh in the next few years, including in pharmaceuticals, plastic and
ceramic goods, leather goods, shipbuilding, and light machinery (such as bicycles and batteries). An
emerging export-based IT sector will also contribute to growth.

Diversification in the country’s export profile may be complemented by increased access to major
markets in the region, including India and China. India has already offered duty-free market access to
nearly all Bangladeshi products, and China has indicated that it may expand zero-tariff facilities to 95
percent of Bangladeshi goods. The manufacturing and service industries will also be supported by robust
growth in domestic demand, which will come about as Bangladesh reaps a “demographic dividend” of
increased labor supply, lower dependency ratio, and increased savings. The major challenges seem to be
the political stability, predictability of policy environment, competent bureaucracy, and quality of
education.

The government and the people of Bangladesh have their eyes fixed on the horizon, working hard to
realize the twin dreams of eradicating extreme poverty and achieving middle-income status by 2021. The
country’s success in achieving the Millennium Development Goals has shown that this is not only
possible, but highly likely.

The following factors could predominantly drive the expected economic growth immediate future:

Higher Public Sector investment: FY17-18 budget targets stepping up spending on infrastructure to
stimulate higher economic growth. Spending on development needs such as transport and power is
targeted to increase by 31% in the latest national budget. To provide impetus to the business activities, the
government has fast tracked several large infrastructure projects. Public sector investment as percentage
of GDP has increased to 7.6% in FY16 which was 5.3% in FY11. It is assumed this public sector growth
would crowd in private sector investment in the foreseeable future. Private sector confidence is slowly but
surely on a rise.
Increasing private sector credit will continue to support higher output growth: Growth in the private
sector picked up sharply in FY16 with 16.78% growth compared to 13.19% in FY15. Private Investment
is expected to continue its increasing trend on the back of 'crowd-in effect' of public sector investment
attracting private investment through implementation of higher public sector works.

Export & Import Growth: Both exports and imports are expected to show a modest trend in FY17-18:
Export growth remains at risk in the Euro and US areas due to changing political and economic regimes.
Economists expect a higher import growth in the next fiscal year due to a lagged effect of increased
capital machinery imparts in the last few years.

Chapter 2: Sector Contribution in GDP: Banking Sector of Bangladesh

2.1 Banking Sector Structure

The Bank Industry is the most important part of the financial system of Bangladesh. The direct
contribution of the sector to GDP during FY17 was around 3.27%, but if we consider the indirect
contribution, the impact is much more significant.

The Bank industry of Bangladesh comprises of 57 scheduled banks which can be subdivided into four
categories:

 State-owned Commercial Banks (SCB)

 State-owned Specialized Banks (SBs)
 Private Commercial Banks (PCBs)
 Foreign Commercial Banks (FCBs)

Out of the 57 banks, 29 PCBs and 1 SCB are listed in both the bourses. All these banks operate under the
supervision of the Bangladesh Bank (BB) which, as the central bank, is the sole regulator of the banks in
Bangladesh.

Particulars Figures
No. of Listed Banks 30
Total Loans and Advances (Dec'16) (BDT bn) 4436.28
Total Deposits (Dec'16) (BDT bn) 5223.52
Classified Loans (Dec'16) (BDT bn) 23785
Not Profit After Tax (2016) (BDT bn) 59.18
ROE (2016) 11.81%
ROA (2016) 0.95%
Sector Total Market Cap. (BDT bn) (Dec'16) 484.07 484.07
Sector Trailing PIE Ratio (Dec'17) 8.12x 8.12x
Sector P/B Ratio (Dec'17) 0.92x 0.92x
Table 3 Summary of Banking Sector (Lanka Bangla Research, 2017)

Among the different types, the state owned banks i.e. SCBs and SBs are the poorest performers. The
reason behind this is: State-owned banks have some additional responsibilities set by the government and
have increased focus to meet the needs of poor. PCBs hold the largest market share in the industry. In
terms of performance, they are way better-off than the state-owned banks, but still slightly behind the
FCBs. FCB5 have very limited operations in Bangladesh, serving mostly the affluent class and the
corporates. Using their established brand value they earn higher interest rate spread (IRS) and receive
strong parental support. This category is also the only category that has seen several mergers in the past.

Bank Category Number of Number of

Banks Branches
State-owned Commercial Banks (SCB5) 6 3706
State•owned Specialized Banks (SBs) 2 1407
Private Commercial Banks (PCBs) 40 4280
Among which Islamic Banks 8 N/A
Foreign Commercial Banks (FCBs) 9 71
Total 57 9464
Table 4 Category of Banks in Bangladesh (Bangladesh Bank, 2018)

2.2 Industry Performance

2.2.1 Deposit Growth: Grew at 17% CAGR over last 5 years (till 2016)
During the last 5 years (2011-16), the deposit base of the listed banks grew at 17.0% CAGR, while their
last 3 year CAGR stood at 13.2% only; which indicates slower deposit growth in the recent times. The
total deposits growth of the listed banks in 2016 was 13.8% YoY, while growth as of Sep'17 stood at
12.0% YoY. Amid slower credit growth during the past few years, a huge amount of excess liquidity has
been accumulating in the banking sector. As of Oct'17, the banking sector had almost BDT 1.25 bn in
excess liquidity. Banks have cut their deposit rates in order to reduce deposits. The newly established 9
banks also took some deposits away from the listed banks amid an overall slowdown in the country's
money supply growth. The banks are shifting their focus towards lower cost CASA deposits. The CASA
ratios of the listed banks have been on an uptrend since 2013. As of Sep'17, the CASA ratio of the listed
banks stood at 31.7%. The yield on deposits is also on a declining trend since 2013. As of Oct'17, the
weighted average deposit rates of the bank industry stood at 5.29% which was 8.61% in Jul'13. (Brac EPL
Industry Analysis, 2017)
 Figure 6 Deposit Growth of Listed Banks (Brac EPL Industry Analysis, 2017)

2.2.2 Advances Grew by 15.7% CAGR in last 5 years (till 2016)

The loans and advances growth of the listed banks had been on a downtrend since 2011. Growth was
slowest in 2013 caused by a general lack of business confidence amid a very uncertain political climate.
The overall credit scenario suffered due to this, indicated by private sector credit growth which declined
significantly in the past few years. However, as the economy is on the way to recovery, private sector
credit growth has also started to revert back to the normal growth track. The private sector credit growth
of the country was 16.56% YoY in FY16, which was only 10.85% in FY13. During last 5 years (2011-
16), the loans and advances of the listed banks grew at 15.7% CAGR. In 2016, the growth of loans and
advances was 15.1% YoY, while growth as of Sep'17 stood at 15.9% YoY. The credit to deposit ratio
declined significantly from 2010 to 2013. However, the ratio improved since then. The gross CD ratio,
calculated as Credits over deposits and borrowings, as of Sep'17 stood at 81.7% against the allowable
limit of 85%. This rough calculation excludes refinance schemes which If included would bring the ratio
further down. Banks have huge amount of unutilized excess liquidity, there is room for higher credit
growth in future. The overall interest rates of the country have been on a sharp declining trend since 2013.
Local banks are currently offering loans at single digit to the reputed and financially sound corporates. As
of Oct'17, the weighted average lending rates of the bank industry stood at 9.94%, which was 13.63% in
Jul'13.
 Figure 7 Loans & Advances of Listed Banks (Lanka Bangla Research, 2017)

2.2.3 Interest Rate Spread (IRS) has come down below 5%

As mentioned earlier, both the lending and deposit rates have been on sharp declining trend since 2013. In
fact, all kinds of interest rates have decreased during this period. Huge amount of excess liquidity in the
banking system, pressure from the regulator, slower private credit growth, low public borrowing,
competition from foreign lenders, steadily low inflation, strong reserve; all these factors worked behind
this downward shift. The interest rate spread (IRS) of the bank industry has also squeezed during the past
couple of years and come down below 5% level.

IRS of the whole Bank industry stood at 4.65% as of Nov'16, spread of the PCBs was 4.77%. As of
Nov'16, BRAC BANK boasted the highest spread (8.60%) among the listed banks; followed by DUTCH
BANGLA BANK (6.45%), IFIC (5.87%), UTTARA BANK (5.43%) and ONE BANK LTD (5.43%).

Figure 8 Lending & Deposit Rates of Bangladesh

2.2.4 Operating Income Grew over 9% CAGR in last 5 years (till 2016)
Total operating income of the listed banks grew at 5 year CAGR of 9.3% during the last 5 years (2011-
16). CAGR of Net interest income and Non-interest income during that period were 10.3% and 8.5%
respectively. Operating income growth in 2016 was 6.4% only. The largest source of income, i.e. net
interest income growth has been slow since 2013 due to low credit growth amid huge rise in NPL
Investment income, the second largest source suffered sudden fall in 2011 as the stock market crashed.
However, the situation is improving. Credit growth is picking up. The capital market is also becoming
more vibrant so we can expect higher income in the coming years. Operating income growth in 9M17 was
10.4% (YoY), with 17.9% (YoY) growth in core income. The industry cost structure has deteriorated over
the years. Total operating expense (Opex) of the listed banks grew at 16.1% CAGR during 2011-16
periods. The cost to income ratio rose to 51.3% in 9M17, which was only 36.0% in 2010. This has been
putting downward pressure to operating profits. The higher Opex growth than income growth has resulted
in slow growth in operating profits. The operating profit CAGR of the listed banks during 2011-16 was
only 4.5%. However, operating profit growth is expected to pick up soon as higher growth in income is
expected in the coming years. Operating profit growth during 9M17 was 5.1% (YoY).

Figure 9 Operating Profit of Listed Banks

2.3 Industry Contribution to GDP
The Bank Industry is the most important part of the financial system of Bangladesh. The direct
contribution of the sector to GDP during FY17 was around 3.27%.

Bank's Contribution to GDP

3.27% 3.23% 3.15% 3.04% 2.94%
2.48%

2016 2015 2014 2013 2012 2011

Figure 10 Banks' Contribution to GDP (National Account Statistics, 2016)

It can be observed that the contribution% to GDP is increasing every year. However, the growth is a bit
slow in last 3 years compared to years before that. It can be attributed to the comparatively slower income
growth of the banking sector discussed above.

Chapter 3: Industry Analysis

3.1 Introduction
An Industry can be defined as a group of companies offering products or services that are close
substitutes for each other. Close substitutes here refers to products or services that satisfy the same basic
consumer needs. In order to understand an entity’s business, one needs to take a closer look at the
industry where the entity is operating. Here, the banking industry of Bangladesh will be analyzed through
the usage of two models, namely Porter’s Five Forces Model and the Industry Life Cycle Model.

3.2 Industry Analysis with Porter’s 5 forces Model

The model focuses on five forces that shape competition within an industry:

1. The Risk of New Entry by Potential Competitors

2. The Degree of Rivalry Among Established Companies Within an Industry
3. The Bargaining Power of Buyers
4. The Bargaining Power of Suppliers
5. The Threat of Substitute Products
Porter argues that the stronger each of these forces is, the more limited is the ability of established
companies to raise prices and earn greater profits. Thus, a strong competitive force can be regarded as a
threat since it depresses profit. Similarly, a weak competitive force can be viewed as opportunity, for it
allows a company to earn greater profits.

Force 1: New Potential Competitors

Potential competitors are companies that are not currently competing in an industry but have the
capability to do so if they choose. The banking industry in our country is still in its growth stage. So the
threat of potential entrants is quite high. Usually the existing companies try to deter potential competitors
by setting certain entry barriers. Barriers to entry are factors that make it costly for companies to enter an
industry. The common barriers to entry are Brand Loyalty, Absolute Cost Advantage, Economies of
Scale and Government Regulations. In Bangladesh, the question of Brand Loyalty is somewhat evident
in the banking industry. A person who is a loyal customer of a local or government owned bank usually
does not opt for an account in a multinational bank, whatever lucrative the benefits seem. This creates
barriers for new entrants. No bank enjoys an absolute cost advantage, due to the fragmented nature of the
industry. “Fragmented” industry and its attributes will be discussed in the following section. Most of the
government banks and some local banks enjoy scale of economy; due to the fact that they have been
doing business for quite a long time, and they have branches all over the country. The multinational banks
are also on the process of achieving scale of economy. The increasing number of branches supports this
statement. Government regulation is quite supportive towards the formation and operation of new banks.
So this factor is not a significant entry barrier in this sector.

Force 2: Rivalry among Established Companies

The second of Porter’s five competitive forces is the extent of rivalry among established companies
within an industry. If this rivalry is weak, companies have an opportunity to raise prices and earn greater
profits. If rivalry is weak, companies have an opportunity to raise prices and earn greater profits. The
extent of rivalry among established companies within an industry is largely a function of three factors:

a) The industry’s competitive structure

b) Demand conditions

c) The height of exit barriers in the industry

a) The Competitive Structure

Competitive structure refers to the number and size distribution of companies in an industry. Structures
vary from fragmented to consolidated and have different implications for rivalry. A fragmented industry
contains a large number of small or medium-sized companies, none of which is in a position to dominate
the industry. A consolidated industry may be dominated by a small number of large companies
(oligopoly) or in extreme cases, by just one company (a monopoly). In many countries, banking is a
consolidated industry, with a few major players in the market. But in our country, the industry is very
much consolidated, as a whole.

The prime characteristics of a fragmented industry are low entry barriers and identical product offering
from the firms. Such is the case in our banking industry. Banks operate with pre-fixed and unanimously
agreed interest rates, and their offerings are somewhat identical. The only way to differentiate product
offerings from those of the competitors is to lower prices. Such phenomenon occurs as new entrants flood
into a booming fragmented industry. This also creates excess capacity. A vicious price war is usually
followed by the situation of excess capacity. It can be expected that our banking industry will experience
severe price cuts in the following years. As a whole, a fragmented industry increases competition, and it
also depresses overall industrial profitability.

b) Demand Conditions:

An industry’s demand conditions are another determinant of the intensity of rivalry among established
companies. Growing demand from either new customers or additional purchases by existing customers
tends to moderate competition by providing greater room for expansion. Growing demand tends to reduce
the rivalry because all companies can sell more without taking market share away from other companies.
In the case of banking, the demand has been growing at a satisfactory rate, throughout the last decade.
However, it is not certain whether the trend will sustain or not.

c) Exit Barriers

Exit barriers are economic, strategic and emotional factors that keep companies in an industry even when
returns are low. If exit barriers are high, companies can become locked into an unprofitable industry in
which overall demand is static or declining. The common exit barriers are:

i. Investment in plant and equipment that have no alternative uses and cannot be sold off.

ii. High fixed costs of exit

iii. Emotional attachments to an industry

iv. Economic dependence on the industry

In order to keep up-to-date with today’s complicated banking practices, a bank needs to invest on
computers, software, secured vaults, security systems and different other controlling and monitoring
measures. Most of these assets are customized, and therefore serves the purposes of the intended
organization, only. This customization nullifies the resell value of these assets.

High fixed costs of exit can appear in the form of employee severance payments, and also in the form of
government penalties, etc.

Many local banks of our country have become part of our everyday lives. They had been there since our
ancestors were born. Thus many people, both within the government and the mass have emotional
attachments with these banks. This acts as a serious exit barrier for these banks. So, in spite of being
highly inefficient and loss bearing, some banks are still operating.

Some banks are so big that shutting any of them will give a serious blow to our foreign and domestic
trade. Such an occurrence can impact the whole economy.

Force 3: The Bargaining Power of Buyers

Bargaining power of the buyer can be viewed as a competitive threat when they are in a position to
demand lower prices from the company or when they are in a position to demand better service that can
increase operating costs. On the other hand, when buyers are weak, a company can raise its prices and
earn greater profits. For the banking industry buyer means customers who take loan from the banks. The
bargaining power of the buyers depends on the following factors:

a) Number of Loan Applicants:

There are more than 50 banks in our banking sector including multinational and nationalized banks. There
are not enough original business loan applicants in our country. Investment opportunities are not growing
as well; for lots of other factors. So, banks are setting with their idle money for giving loans; mostly in the
form of personal credits. As a result, competition for doing business is increasing day by day among
established companies.

b) Switching Cost:

Switching cost is very low in banking industry. Every bank is giving the similar types of loan at similar
interest rate. So, an individual who wants to take loan from banks can switch easily to other banks if he or
she doesn’t like the terms and conditions. Customers of HSBC bank are switching to other banks because
of low interest rate and lots of other reasons. Lower switching cost makes the industry more competitive.

c) Threat of Backward Integration:

In banking industry, there is always a chance for threat of backward integrations. Big multinational
companies or corporations can give threats to the commercial banks that they will arrange their funds by
forming another bank where the cost of fund is low compared to other banks. For this reason, giant
customers of this industry always possess more power than their banks. However, the individual non-
corporate clients do not possess this type of bargaining power.

Force 4: The Bargaining Power of Suppliers

Bargaining power of suppliers can be viewed as a threat when the suppliers are capable of forcing up the
price that a company must pay for its inputs or reduce the quality of the inputs they supply, thereby
depressing the company’s profitability. On the other hand, if suppliers are weak, this gives the company
the opportunity to force down prices and demand higher input quality. For the bank the main supplier of
fund is the depositor. Bank also gets its funds from the directors. So, the strength of the suppliers depends
on the following factors:

a) Number of Supplier:

Bargaining power of the fund suppliers is low in banking industry because there are lots of individual
savings in the economy but banks don’t have too many opportunities for investment.

b) Threat of Forward Integration:

Sometimes suppliers of funds can give threat to the bank as well. Corporations or big multinational
companies can give threat to the private bank that they will form another bank for depositing their money.
They will not supply any fund to other banks. We all know that bank makes money by investing other’s
money. So, this can lead to a higher competition in procurement of fund.
Force 5: The Threat of Substitute Products

The final force in Porter’s model is the threat of substitute products. Substitute products are those of
industries that serve consumer needs in a way that is similar to those being served by the industry being
analyzed. Loans, the major banking product, have some substitutes. All informal sources and channels of
financing are treated as viable substitutes. Some wealthy individuals, whom are often usurers as well, lend
out money at a very high interest rates. These loans do not often require securities, and also do not require
any special conditions, e.g. age, certain service time, set monthly income, etc. which makes them a very
lucrative option. However, most of these activities are illegal, and therefore bears high risk. For this
reason, most people tend to avoid these channels. Thus it appears that the threat of substitute products is
not that much prevalent in the banking sector of Bangladesh, till date.

3.2 Cyclicality of Industry

A cyclical industry is a type of industry that is sensitive to the business cycle, such that revenues are
generally higher in periods of economic prosperity and expansion and lower in periods of economic
downturn.

Now in general point of view, when the economy is in progress, people’s income will be more, people
will thus save more & invest more. So, in general point of view, Banking can be classified as a cyclic
industry. However, here we calculated co-relation coefficient to find out the cyclicality. The DSEX index
has been taken as a proxy of economic condition & the market cap of listed banks has been considered as
proxy for banking industries’ performance. 36 months’ data (from January 2015 to December 2017) has
been taken to calculate the correlation coefficient. (Historical DSE Data, 2018)

Market Cap of DSEX Index

Month
Banks (in mn BDT) Value
Dec-17 752,553 6,245
Nov-17 758,207 6,307
Oct-17 718,338 6,020
Sep-17 723,736 6,093
Aug-17 678,530 6,006
Jul-17 622,677 5,861
Jun-17 560,588 5,656
May-17 519,052 5,403
Apr-17 532,160 5,476
Mar-17 594,150 5,720
Feb-17 562,803 5,613
Jan-17 569,371 5,468
Dec-16 484,068 5,036
Nov-16 461,694 4,801
Oct-16 439,145 4,592
Sep-16 441,835 4,695
Aug-16 417,310 4,527
Jul-16 416,027 4,525
Jun-16 395,556 4,508
 May-16 375,661 4,419
Apr-16 353,142 4,196
Mar-16 374,911 4,358
Feb-16 389,110 4,512
Jan-16 402,696 4,541
Dec-15 410,958 4,605
Nov-15 410,651 4,581
Oct-15 404,641 4,564
Sep-15 412,739 4,852
Aug-15 398,238 4,769
Jul-15 378,129 4,792
Jun-15 366,072 4,583
May-15 360,402 4,587
Apr-15 320,801 4,047
Mar-15 352,558 4,530
Feb-15 412,106 4,763
Co-relation Co-efficient 0.97

Table 5 Cyclicality of Banking Industry

The 0.97 value of the co-efficient indicates strong cyclicality for banking industry. However, data for a
longer period of time would be required to conclude more concretely about cyclicality.

3.3 Banks’ Positions in Industry Life Cycle

The industry life cycle model is a useful tool for analyzing the effects of an industry’s evolution on
competitive forces. Using this model, we can identify five industry environments, each linked to a distinct
stage of an industry’s evolution. The stages are:

1. Embryonic Industry Environment

2. Growth Industry Environment
3. Shakeout Industry Environment
4. Mature Industry Environment
5. Declining Industry Environment

It is very important for a business entity to have a clear idea regarding the industry life cycle. Each stage
of the life cycle requires unique and differentiated strategy formulation. If we analyze all the
characteristics of the life cycle model, we can see that the banking industry of Bangladesh is in its growth
stage. However, the shakeout stage does not seem too far a reality. Some of the characteristics of the
shakeout stage are already evident.
In the growth stage, the demand for the industry’s product begins to take off. It is quite evident that the
demand for banking services in Bangladesh has increased gradually, throughout the years. The increasing
number of banks and their differentiated offerings bolsters this fact. Rivalry among the competing banks
is getting intense, day by day. However, the rivalry among competitors in a typical growth industry is
low. High rivalry begins at the shakeout stage. However, many authors do not distinguish between these
two stages. The justification of low rivalry among companies is that all of them keep themselves indulged
in market share building. As demand is ample and supply is comparatively low, anyone can enter the
market and get their share of the profit. Banks in our country passed through that stage, and now the
market is shrinking day by day. The growth rate has fallen, and slowly the demand is approaching the
saturation point. Most banks have prepared themselves for the intense competition which is the core
characteristic of the shakeout stage. It is expected that interest rates and service charges for the different
banking services will sharply decline in the coming years.

Chapter 4: Key Industry Drivers

4.1 Introduction
The three main paths to revenue growth in retail banking today: mergers and acquisitions, major
innovation and organic growth. The first two may appear to be the best ways to achieve rapid revenue
growth, but closer analysis shows that they rarely meet expectations and are a poor fit with the growth
needs of most banks. M&A and significant innovation are both difficult and demand substantial upfront
investments, approval from regulators, high tolerance for risk, and the capacity to take on major new
ventures while maintaining and growing the core business. For most banks, therefore, a robust plan for
organic revenue growth is essential.

4.2 Key Drivers for Further Growth in the Banking Industry

To grow organically, banks must stay current with evolving consumer behavior, a task that presents a
unique challenge today, given the fast pace of change. However, there are also more data, tools and
techniques available to banks for developing consumer insights and acting on them. Big-data analytics,
digitally enabled sales and service channels, and other “new science” tools and approaches are playing a
high-profile role in unlocking revenue growth. Banks adopting some of the steps detailed below have seen
revenue growth of 3 to 6 percent; implementing all of the steps could generate even stronger
improvements.

1. Use data to better understand customers and develop customer-centric products.

Consumer packaged goods companies use sophisticated analytics and other advanced research techniques
to generate insights into how customers perceive and react to specific products. Financial services
institutions are starting to follow suit. One consumer lending firm discovered through analytics that its
customers (particularly those who use cards to revolve) were generally unhappy with their borrowing
experience. The bank found that a customer’s choice of product for revolving is frequently linked to
specific occasions, such as home renovations or travel. Based on this insight, the bank decided to more
closely align its credit offerings with those events.
2. Use big data insights to map the customer journey.
Analytical tools can help banks connect millions of customer touch points that span multiple channels.
Banks can then identify key decision points in critical customer experiences, such as the initial sales
process, problem resolution, and loan renewal experiences. Mapping the customer journey and identifying
flashpoints for customer leakage and opportunities for service enhancements can have a powerful impact,
generating up to 20 percent increases in customer satisfaction, 10 to 15 percent improvements in revenue
metrics (such as churn rates, upselling and customer acquisitions) and substantial improvements in
employee engagement.

3. Uncover niche market opportunities through micro-segmentation.

U.S. retail bank profit pools will likely grow at a modest 3 to 6 percent annually over the next five years.
In this environment of modest growth banks need tools to pinpoint pockets of opportunity in their existing
markets. Advanced data analytics can cross-examine revenue and profit data along multiple dimensions,
including demographic, geographic, product, channel and even third-party data. Banks can then reallocate
marketing and other resources to areas of high potential that were previously unrecognized.

4. Adopt intelligence-driven pricing.

Banks can fine-tune pricing and build market share by using price elasticity information derived from
transactional data and competitive analyses that use Web-crawling techniques. The latest front-line and
management dashboards are also effective for identifying price leakages. For example, a U.S. auto lender
had based its pricing on gross margins and made price decisions according to anecdotal information on
competitors’ pricing. The lender subsequently did a market-wide scan of product profitability and used it
to build elasticity-based pricing models that have multiple levels to reflect risk scores and geography. The
resulting dealer price sheets produced net margin improvements of about 50 bps within three months.

5. Boost sales performance with data-driven management tools.

Most banks use sales effectiveness programs with some success, but results usually erode with time.
Accelerating and sustaining these programs can be three to four times more effective than common front-
line transformation programs. The key is to leverage new tools to identify the unique skills, practices and
mindsets that define top performers. Armed with such information, managers can construct programs that
teach those specific Driving Revenue Growth in Retail Banking U.S. retail bank profit pools will likely
grow at a modest 3 to 6 percent annual rate during the next five years. In this environment banks need
tools to pinpoint pockets of opportunity in their existing markets. 4 skills and mindsets. They can also
develop metrics, dashboards and other tools (e.g., game theory) to shift mindsets and reinforce desired
sales behaviors. One large retail bank pursued such a program and found its biggest driver of sales
performance is collaboration—their best performers are particularly effective at partnering and drawing
upon the knowledge of specialists in other areas of the bank. So they introduced a program that reinforces
existing sales capabilities while focusing on collaboration skills. They also realigned their incentive
program to encourage partnering between bankers and specialists. Sales grew 15 percent during the next
12 months and have remained at the new level for two years.

6. Exploit new customer insights to improve affluent business models.

The affluent segment continues to present attractive sales opportunities for many banks. For some, it
represents more than 40 percent of projected profits. Banks large and small are consequently targeting this
segment. How can a bank stand out from its rivals and ultimately succeed in this segment? McKinsey’s
research finds that two attributes drive success here. First, banks must develop a deeper understanding of
the affluent segment and identify its most promising sub-segments. Next, they need to construct value
propositions and offerings that are more relevant, flexible and supportive of affluent customers who
prefer a largely remote oriented interaction model. One North American retail bank recently designed a
remote advisory model that supports holders of small accounts and affluent customers who prefer to bank
remotely. The results were significant, with remote financial advisors reporting strengthened client
relationships and increased sales despite carrying larger customer loads than those of traditional branch-
based advisors.

7. Perfect the small business sales and service model.

Small businesses are another compelling segment for banks. The Economic Advisory Committee of the
American Bankers Association believes that business lending will grow at nearly double-digit rates
during the next few years. This growth could well become a significant source of bank revenue. In
addition to capturing lending wallet shares, banks should also use new-science tools to more deeply mine
this segment. As with other segments, new-science tools can help find pockets of customers offering
strong profit potential, create innovative customer-centric products, and align sales staff more closely
with marketplace opportunities.

8. Rethink the traditional care center as a source of needs-based solutions for customers.
Retail banks can make revenue improvements of 5 to 10 percent by rethinking the traditional care center
model. Care centers have traditionally been structured around the “first in first out” model, which leads to
sub-optimal utilization of a pool of agents. Advances in real-time analytics offer opportunities for a new
approach. Interactive voice response, for instance, can analyze and assign calls to those agents whose
skills best match the customer’s need (e.g., strength in explaining and closing on products; high customer
satisfaction scores related to problem resolution). Driving Revenue Growth in Retail Banking The
affluent segment continues to present attractive sales opportunities for many banks. For some, it
represents more than 40 percent of projected profits. 5 Banks can then refine this routing engine by
applying analytics to capture successful pairings between callers and agents. Banks taking this new care
center approach have improved revenue through increased sales conversion, retention and cross-selling,
and have realized cost savings through decreased call times, fraud reduction and higher first-call issue
resolution.

Chapter 5: Risk & Success Factors

5.1 Key Risk Factors
Overview: Global financial system, as a whole, has been facing complex and interrelated challenges. The
advancement of technology, the accelerating pace of business, globalization, increasing financial
sophistication and immoral practice in financing are enhancing the frequency and complexity of risks.
These factors are affecting business environment quite frequently which are exposing Financial
Institutions (FIs) to newer risk. In order to face the ongoing challenges of increased competition and
expansion of diversified financial business of FIs, Bangladesh Bank (BB) has issued several prudential
guidelines and directives on risk management. Since early 2000s, with the compulsion of implementing
the Basel Accord, BB has been undertaking a paradigm shift in its supervision strategies from traditional
to risk based approach. As part of this process, the concept of risk weighted asset was first introduced in
2003 for the FIs in Bangladesh. Since then BB has issued five core risk management guidelines, namely
Asset‐Liability Management (2005), Credit Risk Management (2005), Internal Control and Compliance
Framework (2005), ICT Security (2010), and Prevention of Money Laundering and Terrorist Financing
(2012). A guideline on Environmental Risk Management was also issued for FIs in 2012. Along with
these, Prudential Guidelines on Capital Adequacy and Market Discipline for Financial Institutions (2011),
Stress Testing (2012) and Guidelines on Products and Services of Financial Institutions in Bangladesh
(2013) were also issued as tools to analyze risks with different aspects. With a view to address and
manage all the risks in more prudent and organized way, BB issued DFIM circular no‐01/2013 where FIs
are instructed to prepare and submit a comprehensive risk management paper on monthly basis

Credit Risk : Credit risk is undoubtedly one of the most crucial issues in the field of financial risk
management. It can be defined as a potential loss arises when a debtor or financial instrument issuer is
unwilling or unable to meet its contractual obligation to repay the debt according to the agreed terms with
the lenders or financial institutions. It can occur when the counterpart either defaulting or making late
payments of interest or principal.

Credit Risk Management (CRM): The effective management of credit risk is a critical component of a
comprehensive approach to risk management. It is essential for long‐term success of any FI. The goal of
credit risk management is to maximize an FI’s risk‐adjusted rate of return by maintaining credit risk
exposure within acceptable parameters. FIs need to manage the credit risk inherent in the entire portfolio
as well as the risk in individual credits or transactions. Credit risk management is a continuous effort of
identifying, measuring, monitoring and mitigating the credit risk in both pre‐sanction stage as well as
post‐sanction stage.

Credit Risk Policy (CRP) Every FI must have a credit risk policy as part of its overall credit risk
management framework and get it approved by the board. This policy should clearly outline the FI's view
of business development priorities and the terms & conditions that should be applicable for credits to be
approved. It should at least include:

a. Detailed and formalized credit evaluation/appraisal process;

b. Credit origination, administration and documentation procedures;

c. Formal credit approval process;

d. Approval procedure of credit extension beyond prescribed limits and other exceptions to the CRP ;

e. Risk identification, measurement, monitoring and control techniques;

f. Internal rating (risk grading) systems including definition of each risk grade and clear demarcation for
each risk grade in line with BB regulations and policies;

Credit Origination: FIs should meticulously conduct credit and risk assessment before granting any
credit facility. The results of this assessment should be presented in credit proposal that will be originated
by respective relationship manager. This will be further reviewed by the CRMD for identification of risk
and probable mitigation. Relationship manager will also be primarily responsible for ensuring the
accuracy and authenticity of the information provided for credit proposal. For this purpose, he/she must
be familiar with the FI’s Lending Guidelines and should conduct due diligence including Know Your
Customer (KYC) and other relevant issues on new borrowers, principals, and guarantors.

Credit Approval: FIs’ credit approval process should establish accountability in the process of
approving as well as altering the credit structure. A potential area of exploitation arises from granting
credit to connected and related parties, sometimes called “insiders” that include an FI’s promoters, major
shareholders, subsidiaries, affiliate companies, directors, and executives. The relationship includes the
ability to exert control over or influence an FI’s policies and decision‐making, especially concerning
credit decisions. It is crucial for an FI to systematically identify and track extensions of credit to insiders.
It is important to ensure whether credit granting decisions are made rationally and according to approved
policies and procedures. In no case should a loan be granted to a related party with terms and conditions
more favorable to the borrower than on a similar loan to an unrelated party. Terms and conditions include
amount of the loan, interest rate, amount and type of collateral required, repayment schedule, origination
fee, and the possibility of extension or rescheduling.

Credit Monitoring: FIs need to articulate a system that enables them to monitor quality of the credit
portfolio on a regular basis and take remedial measures as and when any deterioration occurs. These
procedures need to define criteria for identifying and reporting potential problem credits and other
transactions to ensure that they are subject to more frequent monitoring as well as possible corrective
action, classification and/or provisioning. Establishing an efficient and effective credit monitoring system
would help senior management to monitor the overall quality of the total credit portfolio & its trends. It
would also help to reassess credit strategy/policy accordingly before encountering any major setback.

Credit Risk Grading (CRG): Credit Risk Grading (CRG) is an important tool for credit risk
management as it helps the FIs to understand various dimensions of risk involved in different credit
transactions. The aggregation of such grading across the borrowers, activities and the lines of business
can provide better assessment of the quality of credit portfolio of an FI. CRG is vital to take decisions
both at the pre‐sanction and post‐sanction stages.

Internal Risk Rating System: Along with the CRG or any other methodology prescribed by BB, FIs
may also deploy their own credit risk rating methodology at this pre‐sanctioned stage. This necessitates
that FIs should simultaneously use their internal resources to know their customers to such extent and in
such a manner, which help them to effectively and efficiently manage their portfolios. Such rating should
be aligned with FIs’ own strategies and derived from the historical credit data of that FI or the industry as
a whole.

Micro‐level Analysis: FIs should also establish an internal credit rating system for each loan/lease
account so that it can track the risk associated with a particular obligor in continuous basis.

Credit Concentration Risk: Concentration risk arises when an FI invests its most or all of the assets to a
single or few individuals or entities or sectors or products. That means when any FI fails to diversify its
loan and investment portfolios, concentration risk emerges.
Managing Problem: Credit FIs should establish a system that helps identifying a problem credit ahead
of time, when there may be more options available for remedial measures. Once the credit is identified as
a problem, it should be managed under a dedicated remedial process. FIs credit risk policies should
clearly set out how the FIs will manage problem credits. Responsibility for problem credits may be
assigned to the originating business function, a specialized workout section, or a combination of both,
depending upon the size and nature of the credit and the reason for its problems. When an FI has
significant credit‐related problems, it is important to segregate the workout function from the credit
origination function. The additional resources, expertise and more concerted focus of a specialized
workout section normally improve collection results. In such case, the Recovery Unit (RU), as a separate
unit, shall manage accounts with sustained deterioration (a risk rating of sub‐ standard or worse).

5.2 Key Success Factors

Market Position

The analysis includes comprehensive assessments of the bank’s market shares and sizes in key business
lines or sectors as well as its future prospect, the bank’s existing products, future products, market
expansion, and other real advantages resulting from the bank’s market position (pricing power vs. funding
base) either in national market, regional market, or in specific segment/sector. The vulnerability of the
bank’s market position is also considered by comparing its competitive advantages against its peers.

Infrastructure and Quality of Service

The analysis covers detailed assessments on the bank’s distribution network such as branches, ATM, and
IT capabilities to support its daily banking operation in an effort to provide better and integrated products
and give better services to its customers. The bank’s quality of service is also diligently assessed, as it is
considered as an important factor for a retail bank to attract customers and support the bank’s sustainable
growth, particularly in the intense business competition. Other factors that are also assessed are
employees’ capabilities in providing banking services and handling complaints from customers, speed of
services, accessibility, timeliness, etc.

Diversification

The analysis covers thorough assessments on the bank’s business network/base with regard to
geographical/location spread, business lines, products, revenue structures, customer base of funding and
lending, credit risk as well as economic diversity of the bank’s market.

Management and Human Resources

The analysis includes detailed assessments on the bank’s quality and credibility of the management and
key personnel, the bank’s management strategies to maintain sustainable growths, the bank’s quality in
financial planning and strategy, the bank’s organizational structure, the bank’s quality of business, which
are generally measured from its underwriting criteria, process of credit approval, delegation of credit
approval and authorities, collateral valuations, monitoring of credit exposures, internal rating/scoring
system, tools or system to identify potential problem exposures as well as roles and reliabilities of internal
audit and compliance department, and the bank’s managerial efficiency and effectiveness. The
implementation of good corporate governance, particularly accountability of the management and
transparency of its financial statement, is also reviewed.

Financial Risk Assessment

Capitalization

The analysis includes diligent assessments on the bank’s capital composition, the bank’s capital position
with respect to the central bank requirements, level of Capital Adequacy Ratio, dividend payout ratio,
internal growth rate of capital, ability to get external sources of capital, capital in comparison with assets,
as well as management philosophy and strategy on leveraging its capital.

Assets Quality

The analysis includes intensive assessments on the bank’s nonperforming loans broken down by category,
the bank’s credit portfolio by economic sector, size, and currency, concentration on credit risks,
settlements on problem loans, and the bank’s loan loss reserve policy and adequacy. In addition, through
analysis is also conducted on the qualitative aspects on assets quality such as whether the bank fully
identifies and discloses its problematic loans, the bank’s write off policy and whether the bank
implements it rightly, and other credit judgment that can provide clues about the bank’s credit culture,
policy, and procedures and the effects into its asset quality.

Profitability

The analysis includes thorough assessments on the bank’s net interest income and margin, non interest
income, quality of earnings, ability to price risks into various products, operating profits, and net income.
The bank’s cost structure, cost to income ratio, and management strategy to control operational expenses
and improve fee based income are also diligently assessed.

Liquidity and Financial Flexibility

The analysis covers the assessments on current market condition and its effect on bank’s liquidity,
examination on the bank’s liquidity management, and ability to earn immediate cash flow and its
contingency plans to support its liquidity demand. The examination on the bank’s interest rate and
maturity mismatches, net open position, and loan to deposit ratio and evaluation on the proportion of the
bank’s liquid assets as compared to its short term liabilities are also incorporated in the assessments.
Analysis on financial flexibility y includes careful assessments on the bank’s ability to access various
funding markets and raise capital from public or private sources as well as the likelihood of supports from
the government, particularly under distress conditions.
 Chapter 6: Financials

6.1 Key Financials

Some Key Financials of Listed banks are as below: (till Dec 2016)

Table 6 Key Financials of Listed Banks (Lanka Bangla Research, 2017)

6.2 Sectorial Contribution in Dhaka Stock Exchange

The 30 Listed Banks contribute 14.4% of total Market Capitalization of Dhaka Stock Exchange. In terms
of Turnover, it is 8.3%. The latest turn over data, Market cap data has been extracted from DSE Website.

2017 Gross
Market Cap
Sl no. Bank Name Turnover (in mn
(in mn BDT)
BDT)
1 Brac Bank Limited 83,398 12,310
2 Islami Bank Bangladesh Ltd. 43,953 25,435
3 The City Bank Ltd. 36,507 7,219
4 Eastern Bank Limited 29,668 5,819
5 National Bank Ltd. 26,786 2,439
6 Al Arafah Islami Bank Ltd. 23,466 8,978
7 Pubali Bank Ltd. 23,009 7,731
8 Dutch Bangla Bank Limited 22,800 10,998
9 Trust Bank Ltd. 22,167 5,320
10 Shahjalal Islami Bank Ltd. 20,983 4,320
11 Prime Bank Ltd. 20,484 4,739
12 Exim Bank Ltd. 19,065 5,883
United Commercial Bank
13 Ltd. 18,764 8,579
14 Bank Asia Ltd. 18,457 5,432
15 IFIC Bank Ltd. 17,810 5,212
16 Mercantile Bank Ltd. 16,609 3,286
17 South East Bank Ltd. 16,598 3,518
18 Mutual Trust Bank Ltd. 15,392 4,011
19 Rupali Bank Ltd. 14,666 3,466
20 Social Islami Bank Ltd. 14,545 6,933
21 One Bank Ltd. 14,090 4,823
22 NCC Bank Ltd. 13,513 4,432
23 AB Bank Limited 11,978 3,074
24 Dhaka Bank Limited 11,918 3,377
25 Jamuna Bank Ltd. 11,239 2,966
26 Uttara Bank Ltd. 10,602 4,120
27 Standard Bank Ltd. 9,818 3,054
28 Premier Bank Ltd. 9,114 3,791
First Security Islami Bank
29 Ltd. 8,554 7,932
30 ICB Islami Bank Ltd. 3,589 11
Table 7 Market Cap & Turnover of Listed Banks (DSE Data Archive, 2018)

Figures (in
Particulars mn BDT)
Total Market Cap of Listed Banks 609,542
Total Gross Turnover of Listed Banks
(2017) 179,206
Total Market Cap of DSE 4,228,945
Total Turnover of DSE (2017) 2,169,597

Banks' Composition in DSE Market Cap 14.4%

Banks' Composition in Turnover of DSE 8.3%
Table 8 Banking Sector's Contribution in DSE
 Chapter 7: Future Performance

7.1 Performance Forecast of Banking Industry

Profitability of the country's banking sector decreased significantly over the past few years. Listed banks'
ROE and ROA stood at 11.80% and 0.95% respectively in 2016, against the last 5 years average of
13.16% and 1.13% respectively.

 Profitability wise FCBs are in good position with 2016 ROE and ROA of 13.82% and 2.68%
respectively according to BB's latest quarterly report. PCBs are in the second position with 2016
ROE and ROA of 10.60% and 0.73% respectively. SCBs are in a realty bad position reporting net
loss since 2014.
 Among the Listed banks. DUTCH BANGLA had the highest (19.32%) ROE in 2016, followed
by ONE BANK LTD (18.27%), MTB (17.40%), TRUST BANK (16.83%), and UCB (16.67%).
 In terms of 2016 ROA. CITY BANK (1.84%) was at the top. followed by NBL (1.44%), UCB
(1.44%). ONE BANK LTD (1.36%) and DUTCH BANGLA BANK (1.31%). (Intehaj, 2017)

27.97%
ROE & ROA of Listed Banks

18.16%

ROE
11.65% 11.95% 12.25% 11.80% ROA

2.36% 1.69% 1.01% 0.95%

0.99% 1%

2011 2012 2013 2014 2015 2016

Figure 11 ROE & ROA of Listed Banks

We think that the profitability of the banking sector, especially the PCBs, has bottomed out.
Considering the future business potential of the private banks, we think, ROE and ROA cannot go
below the current levels. We are expecting profitability to bounce back from this point.

Also, in terms of valuation data, the banks seem to be undervalued in their prices.
 Trailing
Bank Name P/NAV P/E
AB BANK 0.64x 7.07x
AL ARAFA ISLAMI BANK 0.90x 5.55x
BANK ASIA 0.84x 8.51x
BRAC BANK 2.26x 13.94x
CITY BANK 0.97x 6.42x
DHAKA BANK 0.90x 5.34x
DUTCH BANGLA BANK 1.39x 8.38x
EBL 0.98x 8.70x
EXIM BANK 0.66x 5.55x
FIRST SECURITY ISLAMI 0.97x 6.23x
BANK
ICB ISLAMI BANK -0.35x n/m
IFIC 0.95x 8.91x
ISLAMI BANK 1.01x 13.94x
JAMUNA BANK 0.61x 5.59x
MERCANTILE BANK 0.72x 5.00x
MTB 1.15x 7.21x
NBL 0.60x 4.21x
NCC BANK 0.71x 7.88x
ONE BANK LTD 1.12x 5.94x
PREMIER BANK 0.65x 6.38x
PRIME BANK 0.69x n/m
PUBALI BANK 0.87x 10.86x
RUPALI BANK 0.59x n/m
SHAHJALAL ISLAMI BANK 0.90x 7.98x
SOCIAL ISLAMI BANK 1.05x 5.82x
SOUTHEAST BANK 0.63x 5.70x
STANDARD BANK 0.78x 5.36x
TRUST BANK 1.22x 7.00x
UCB 0.87x 6.36x
UTTARA BANK 0.75x 6.82x
Consolidated 0.92x 8.12x
Table 9 Valuation Data of Listed Banks (Lanka Bangla Research, 2017)

Banks are currently quite undervalued with trailing P/E of 8.12x and P/B of 0.92x. So we are forecasting
overall price increase in this industry in future.
7.2 Government Policies Affecting Banking Sector
 Interest Rate Controlling: Bangladesh Bank (BB) often takes measures to control interest rates
indirectly to implement their policies.
Example: Bangladesh Bank, with the aim of cutting down the lending rates of banks, squeezed
acceptance of reverse repo bids at first and later on suspended it altogether. Instead, BB stepped
up 30 day BB bill acceptance which yields lower than reverse-repo putting further pressure on the
call money rate.
 Loan Related Regulations: BB implements policies to improve asset quality etc. to improve
performances of banks.
Example: Bangladesh Bank, in order to give banks more time to improve their asset quality,
changed and relaxed the loan rescheduling regulations once in Dec'13 and then again in Dec'14.
BB also issued a policy in 2015 to recover large bad loans through loan restructuring. PCBs fully
utilize this policy easing.
 Policy/Framework Regulations: BB takes measures to implement standard banking procedures
to maintain performances of banks.
Example: Bangladesh Bank has formulated an action plan/road map to implement Basel III in
Bangladesh. The first phase of the plan commenced in 2015 with the aim to achieve full
implementation by 2020. Judging from the current position, most of the listed banks will soon
need to pursue wider capital base to support higher credit growth and remain compliant with the
road-map in the coming years.

Chapter 8: Interesting Industry Observations

8.1 Asset Quality: A Concern for the Banking Sector
Asset quality is a major indicator of financial health of the Bank industry. Non-performing loans (NPL)
followed a declining trend during 2006-11, but in 2012 it experienced a sharp increase due to stringent
loan classification policy and discoveries of some large loan scams. Since then high NPL has become the
biggest problem in the Bangladesh banking industry. Higher NPLs decrease interest income and increase
provisioning charge, ultimately damaging the bottom line. Bangladesh Bank, in order to give banks more
time to improve their asset quality, changed and relaxed the loan rescheduling regulations once in Dec'13
and then again in Dec'14. BB also issued a policy in 2015 to recover large bad loans through loan
restructuring. PCBs fully utilize this policy easing. As a result, every year we see a decline in the sectors
NPL ratio in the last quarter. However, the underlying problem is yet to be solved. As of Sep'16, the NPL
ratio of the PCBs stood at 5.90%, 19 basis points below than that in Sep'15. However, the Dec'15 data
showed 4.85% NPL ratio for the PCBs. So, evidently, the asset quality of the industry has actually
deteriorated further during 2016. During 9M'17 the total provision expenses of listed banks increased by
8.5% (YoY). The banks have been provisioning heavily for their non-performing loans for the last few
years. As of Dec'16, the NPL and provision coverage ratio of the listed banks stood at 5.36% and 63.14%
respectively. (Brac EPL Industry Analysis, 2017) However, among the listed banks, some have quite
high provision coverage, which makes them safer than the others. We can expect the banks with
comparatively lower NPL and higher coverage to show better earnings in the coming years.
8.2 Capital Base: Banks Need to Increase their Capital Base
Capital base of the listed banks grew at CAGR of 13.6% during last 5 years (2011-16), while last 3 year
CAGR was 12.0%. The amount of equity in the funding mix has been declining continuously since 2010.
As of Sep'17, equity contributed 7.4% to the total assets. (Huq, 2017)

Capital adequacy wise PCBs and FCBs are on the safe side, while the state-owned banks are in critical
condition. As of Sep'17, the overall industry capital adequacy ratio (CAR) stood at 10.31%, down from
10.84% in Dec'15. The rising trend in classified loans has weakened the capital base and pushed down the
overall CAR of the industry. The CAR of the listed banks as of Dec'16 stood at 11.72% (with 8.93% in
tier-1 capital) against the regulatory minimum requirement of 10% (with 5.0% in tier 1 capital). Among
the total 30 listed banks, only 3 banks (ICBI BANK, PREMIER BANK, and RUPALI BANK) had CAR
below the regulatory minimum requirement. The listed banks with the highest CAR as of Dec'16 are
ALARA BANK (15.30%), EBL (13.92%), DUTCH BANGLA BANK (13.68%), CITY BANK (13.42%)
and NCC BANK (13.28%). (Huq, 2017)

Bangladesh Bank has formulated an action plan/road map to implement Basel III in Bangladesh. The first
phase of the plan commenced in 2015 with the aim to achieve full implementation by 2020. Judging from
the current position, most of the listed banks will soon need to pursue wider capital base to support higher
credit growth and remain compliant with the road-map in the coming years.

Chapter 9: Overall Industry Assessment

9.1 Assessment Summary

Bank is the integral part in the financial system of Bangladesh. With 57 scheduled and 4 non-scheduled
banks in the country, majority of our financial activities are carried out through banks. Still our bank
penetration rate is very low compared to the peers, which indicates huge potential for future growth.
Bangladesh is one of the fastest growing economies in the world with last 10 years' average real GDP
growth of 6.24%. This growth momentum is expected to continue for the next decade. This kind of
sustained growth must be backed by continuous investments.

 During 2011-2016, loans and advances of the listed banks grew at 15.4% CAGR against average
private sector credit growth of 14.8%.
 Due to political instability, a depressed investment scenario was present in the economy for the
last few years. As a result, huge amount of excess liquidity accumulated in the banking system
(BDT 1,209.79 bn as of Dec'16).
 Market interest rates have fallen to very low level and are expected to remain low in the coming
years. The inflation level has also come down within a fairly comfortable range. This is a very
investment friendly situation.
 After 3 subdued years, private credit growth picked up again in 2016. As of Nov'16. the total
private credit of the country posted 15.2% growth YoY. We can safely expect private credit
growth to hover around 15% level during the next decade.
 As the biggest source of financing, banks will capitalize on this growth potential. Profitability of
the sector has been low for the past three years. ROE of listed banks in 2016 was 11.8% only,
 which was 23.4% just five years ago. The two major reasons behind this drastic fall are - the
stock market crash of 2010-11 periods and the rise of non-performing loans (NPL) since 2012.
 Although the stock market is poised to become vibrant again, the banks are yet to recover from
the burden of NPLs and the subsequent provisioning expenses. Both the regulator and the banks
are working diligently towards solving this problem. Several guidelines and monitoring facilities
have been put into place. Bangladesh has also started towards a gradual implementation of the
Basel 3 framework.
 The low interest rates are also expected to help in achieving higher growth and better asset
quality. So, the more proficient banks are expected to get out of this slump very shortly.
 Once the NPL problem is sorted out, the bank sector will surely get back to its feet.

9.2 Recommended Investment Decision

In addition of favorable overall business environment discussed throughout this report, Valuation wise,
banks are currently quite undervalued with trailing P/E of 8.12x and P/B of 0.92x. We believe there is
lucrative return potential in this sector in 2018 onwards. While looking at the sector for investment
purposes, one must be cautious and invest only in the banks which are at a comparatively better position
in terms of asset quality as well as core business activity.
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