Rupali Bank Rating Report-final - Credit Rating Agency of Bangladesh

CRAB Ratings
Bank
RUPALI BANK LIMITED
Rating Report
Ratings
Rupali Bank Limited
Long Term : BB 1
Short Term
: ST-3
National Support (Government)
: AAA
Given Government’s ownership of Rupali Bank Limited (93.24% shares), in our opinion, the possibility
of state support would be high, which leads to assigning a Support Rating of AAA, and implies that
there is the highest probability of timely support from Government whenever necessary.
Date of Rating : 30 December 2007
Validity
: One (1) year
Financial Analyst
Mir Arif Billah
1.0 RATIONALE
Credit Rating Agency of Bangladesh Limited (CRAB) has assigned BB 1 (pronounced double B
one) rating in the long term and ST-3 rating in the short term to the Rupali Bank Limited
(RBL).
CRAB has assigned AAA (pronounced triple A) rating to Rupali Bank Limited (RBL) for
National Support (Government), recognizing substantial ownership of Bank by Government
(94.55%) which can provide necessary support, including injection of capital, as required.
RBL is a nationalised commercial bank whose operations are subject to multiple regulations
and control by the Bangladesh Bank and Government. The central bank regulations apply to
all commercial banks in Bangladesh; there are also additional regulatory requirements
incorporated in MOU with the Bangladesh Bank, which establishes important parameters
and restrictions relating to operations and performance. The MOU restricts the Bank from
providing any funded and non-funded facility (other than fully secured facilities) to any new
clients, emphasises recovery of defaulted loans and advances, and directs to decrease the
operating expenditure by 5% over previous year. Rupali Bank could not utilize its full
operational capacity as Bangladesh Bank imposed restriction in different areas of its
operation and expansion.
RBL had operated under administered credit regime in the past playing an important role in
lending in accordance with the policies and priorities set by Government (long-term loan for
industrial investment, preferential loan to export, agriculture, micro-finance etc.) like other
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CRAB Ratings
Bank
NCBs. RBL also carries a large portfolio of loan to public sector corporations for which
Government has issued bonds and guarantees or implicit guarantees. Much of the portfolio
of loan to the state enterprises is non-performing but protected by the above mentioned
bonds and guarantees.
RBL is presently under process of privatisation, as the government shares (67%) of the
Bank will be handed over to private investor/s. The process of sale has protracted for a long
time, and the uncertainty over the ownership and consequent management change has
affected the performance of the Bank. The management of the Bank deserves the credit of
keeping the bank operational with success in liquidity management and loan recovery in
spite of the uncertainties, restriction on business growth and expenditure, and human
resources constraints. Because of these diverse constraints, the Bank’s operation fell below
its potential.
Exhibit 1: Key Financial Indicators
(Amount in Million BDT)
Particulars FY04 FY05 FY06
Total Assets 71,579.60 75,124.00 76,240.50
Total Deposits 63,673.60 66,870.50 67,832.10
Total Loans & Advances 45,344.90 44,920.70 45,709.50
Paid Up Capital 1,250.00 1,250.00 1,250.00
Total Capital (Core & Supplementary) 2,953.60 2,953.60 2,960.60
Total Operating Income 1,682.52 2,146.10 1,770.44
Profit Before Provision & Taxes 513.44 810.81 254.70
Profit After Tax & Provision 203.44 350.81 144.70
Classified Loans (Gross NPL) 7,721.16 7,509.20 12,124.39
Net Interest Margin (%) 1.05 1.67 1.38
Net Loans To Total Deposits (%) 65.59 62.16 62.29
Net Loans & Advances To Total Assets (%) 58.35 55.33 55.42
Gross NPL Ratio (%) 11.27 11.74 22.14
Net NPL Ratio (%) 9.92 10.00 20.52
Loan Loss Reserve Coverage (%) 1.50 1.94 2.05
Net NPL / Total Assets (%) 5.79 5.53 11.37
Return On Average Assets (ROAA) (%) 0.29 0.48 0.19
Earning Per Share (BDT) 8.06 15.09 7.50
The Bank’s asset quality further deteriorated in recent years. The NPL had increased sharply
to BDT 12.12 billion in FY06 from BDT 7.51 billion in FY05 (61% growth). In FY06 RBL’s
Gross NPL ratio was 26.52% 1 , Gross NPL Ratio with adjustment Interest Suspense was
22.14% 2 and Gross NPL ratio with adjustment SMA was 26.89% 3 . These classified amounts
22% were from lending to public sector, while the rest were to private sector. There is
significant shortfall of provisioning against the loans, advances and investments and the
1
Classified Loans / Total Loans, Advance and Bills
2 (Classified Loans – Interest Suspense Account) / (Total Loans – Interest Suspense Account)
3 (Classified Loans + SMA) / Total Loans
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CRAB Ratings
Bank
deficit is increasing (yearly shortfall of provisioning for FY06 BDT 3.43 billion, accumulated
shortfall of provisioning for FY06 BDT 8.16 billion).
The overall profitability of the Bank declined last year with fall in income from both interest
and investment and increase in interest and operating expenses. Net interest income
decreased by 13% over previous year and summed to BDT 651.18 million in FY06. Income
from investment also decreased by 39% over previous year and amounted to BDT 523.26
million in FY06. Total operating income decreased to BDT 1.77 billion (decrease by 18%) in
FY06 from BDT 2.15 billion in FY05. Profit before provision and tax stood at BDT 254.70
million in FY06 from BDT 810.81 million in FY05 having a decline of 60%; profit after
provision and tax was BDT 93.76 million compared to BDT 188.65 million in FY05 (there is
huge shortfall from required provision in each year).
Bank’s shareholders equity stood at BDT 328.66 million in FY06 against paid up capital of
BDT 1.25 billion after adjustments of carried forward loss of BDT 2.60 billion. Adjustments
for provision shortfall of BDT 8.16 billion brings the net worth to a negative figure of BDT
7.81 billion. There is also a capital shortfall of BDT 1.14 billion from the required level to
maintain risk weighted capital adequacy at 9% (RBL had 6.5% risk weighted capital
adequacy).
Absolute and relative size of RBL in terms of asset and deposit is a good indication of its
strong market position and brand name. RBL with its wide network captures around 10% of
the total deposit of the country, in spite of comparatively weaker customer service than the
other private commercial banks and lower deposit yield to the savers. CRAB expects that it
is an indication of pricing power of RBL and perception of the depositors about the future
viability of the bank.
Commercial Banks rated BB 1 are adjudged to offer below average safety to its obligors,
characterised by relatively weak financials, weak business franchises, and an unstable
operating environment. This level of rating indicates below average capacity for timely
payment of financial commitments with high likeliness to be adversely affected by
foreseeable events.
Bank rated in ST-3 category are considered to have average capacity for timely repayment
of obligations, although such capacity may be impair by adverse changes in business,
economic, or financial conditions. Banks rated in this category are characterised with
satisfactory level of liquidity, internal fund generation, and access to alternative sources of
funds is outstanding in the sort term.
2.0 ECONOMIC AND OPERATING ENVIRONMENT
Increased economic activity, reflected in the GDP growth (6.5% in FY 06), is the key driver
behind the increase in the business expansion and growth of the banking industry in
Bangladesh.
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