The unaudited operating profit of the country's private commercial banks (PCBs) showed a mixed trend in the first quarter (Q1) this year.

Four major PCBs, having a larger market share, in terms of both deposits and credits, showed a lower rate of growth in their operating profits in Q1 of 2012 over the corresponding period of last calendar year.

Furthermore, a good number of primary dealer (PD) banks, out of a total of 12, experienced tough times in their operational performance because of liquidity constraints on account of their holding of a large chunk of government securities. This constrained their ability to extend interest-earning fresh credits during the period under report.

An additional concern for most PCBs is the increase of default loans in their portfolio during January-March period of 2012 -- a situation which, according to some bankers, is likely to worsen further in Q2 of 2012.

However, prudent fund management, along with earnings of higher interest income because of higher lending rate and increased spread, on the part of those PCBs, having surplus funds for investment in Q1 of 2012, led to a somewhat improved position about their profit earnings.

Fifteen PCBs, out of a total of 30, earned about Tk 15.50 billion, in aggregate terms, as the operating profit during the January-March period of 2012 against Tk 14.11 billion during the corresponding period of the last year, sources in the banking sector said.

The figures indicate that the operating profits of PCBs increased by nearly Tk 1.39 billion while such profits of four PCBs declined during the period

under review compared to their situation during the same period of the previous calendar year, mainly due to their liquidity problems.

The un-audited operating profit, however, does not indicate the actual financial position of a bank. The banks have to leave aside funds, on account of provisioning for their bad debts and also for payment of taxes to the government.

"The average credit-deposit ratio (CDR) of the commercial banks is almost stable in the recent months and this indicates a prudent fund management by them," a senior official of the Bangladesh Bank (BB) told the FE Saturday.

He also said the CDR ranges now between 80 per cent and 81 per cent as the BB is monitoring closely the situation to help minimise assets-liability mismatch of the banks.

The central bank earlier set CDR at 85 per cent for the conventional banks while it remains at 90 per cent for the Sharia-based Islamic banks.

The overall credit growth of the country's banking system witnessed a rising trend in the recent months because of higher investments by a number of PCBs in different sectors including rental power plants, telecommunications, and textiles, besides credits given for import of fertilisers, the bankers added.

The deposit growth, however, saw a slight fall during the same period due to higher inflationary pressures, squeezing the scope for keeping deposits with banks.

Credit growth particularly in private sector rose to 17.05 per cent or Tk 3,804.54 billion as on April 12 from 14.44 per cent or Tk 3,625.33 billion on January 5.

The central banker said many commercial banks have lent more with risks to increase their profit by the end of this June.

The bank deposit growth came down to 19.10 per cent or Tk 4,635.12 billion from 20.03 per cent or Tk 4,427.64 billion, according to the central bank statistics.

The weighted average spread between lending and deposit rates, offered by the commercial banks, rose to 5.68 per cent in February from 5.63 per cent in the previous month, the BB officials said, adding that the spread came down to 5.58 per cent in March.

In March 2011, the spread was 5.15 per cent, the BB data showed.

Talking to the FE, a senior official of a leading PCB said the spread in the banking sector increased slightly in the recent months as the commercial banks hiked their lending rates to help reduce the gap between their return on credits and their cost of funds.

The weighted average rate on lending stood at 13.69 per cent in the month of March this year while the interest rate on deposits averaged at 8.11 per cent.

In March 2011, the average lending rate was on 12.82 per cent and the average deposit rate, 7.67 per cent, according to the central bank statistics.

The spread reached 5.68 per cent level in February last after the central bank lifted the cap on lending rate in all but two sectors -- agriculture and export.

"The banks have increased lending rates in different sectors including those related to food items for reducing the gap between their interest earnings on lending operations and interest payments to depositors that largely reflected their cost of funds," the private banker said while explaining the reason for the rising trend of the spread in the recent months.

Earlier on January 4 last, the BB withdrew the cap on lending rate for all sectors and items, barring only two -- agriculture and export -- to facilitate the country's overall economic growth through boosting investments in different fields.

"We're working to bring down the interest rate spread to less than 5.0 per cent for credits to all areas of the economy, barring credit card and small and medium enterprises (SMEs)," the central banker said.

The PCBs, particularly primary dealer (PD) banks, faced liquidity problems due to higher borrowing from the country's banking system by the government to finance its budget deficit for the current fiscal year that would end in June.

The cost of fund for the PD banks has increased in the recent months because there is a correlation between inter-bank call money rate and interest rates on deposit, another PCB official said.

"The average yield on the government approved securities that the PDs are now holding, varies between 9.40 per cent and 9.60 per cent while they have to pay interest rates raging between 15 per cent and 17 per cent for borrowing a part of their funds from the inter-bank call money market," the PCB official noted.

The amount of non-performing loans (NPLs) increased by 11.68 per cent to Tk 26.45 billion in the first quarter of the current calendar year due to a sluggish trend in business, they added.

The banks had default loans worth Tk 252.98 billion or 6.57 per cent of their outstanding loans on March 30 this year, up from Tk 226.44 billion or 6.12 per cent on December 31, 2011, according to the central bank statistics.

"There is a double-effect of default loans in the banking system," the private banker said, adding that the banks will have to add the profit of default loans in their interest suspense account, instead of profit account. Besides, the banks will have to ensure provisioning against total default loans from their profits, he added.

The bankers also feared that the rising trend of classified loans in the banking system might affect their profitability by the end of second quarter of the current calendar year.

The central bank earlier selected 15 PDs -- 12 banks and three non-banking financial institutions (NBFIs) -- to deal with government securities in the secondary market.

Financial Express/ Bangladesh/ 27-May-2012