CRAB Ratings Banks

Rating Report

Dhaka Bank Ltd.

Ratings 1. RATIONALE
Long Term : A1 Credit Rating Agency of Bangladesh
Short Term : ST–2 (CRAB) Limited has awarded A1 (Single A
Date of Rating : March 07, 2010 one) rating in the long term and ST-2
Valid till : June, 2011 rating in the short term to The Dhaka
Bank Limited, based on audited financials
Previous Ratings of 31 December 2009 and other relevant
information.
Year Long Term Short Term

2007 A1 ST–2 Commercial Banks rated A1 in the long

2006 A1 ST–2 term belong to “strong capacity” cohort.
Banks rated “A1” have strong capacity to
Analysts: meet their financial commitments but are
Shahtaj Noor somewhat more susceptible to the
Financial Analyst adverse effects of changes in
Shahtaj.noor@crab.com.bd circumstances and economic conditions
Tahmina Islam than Commercial Banks in higher-rated
Sr. Financial Analyst categories. Such Banks judged to be of
high quality and are subject to low credit
Exhibit 1: Financial Highlights risk.

Particulars 2009 2008

Commercial Banks rated in the short term
ROAA (After Tax) 2.87% 2.90%
‘ST-2” category are considered to have
Return on Average RWA 2.12% 2.20%
strong capacity for timely repayment of
ROAE(After Tax) 47.64% 52.32% obligations. Commercial Banks rated in
Cost to Income Ratio 33.64% 34.82% this category are characterized with
RWCAR 11.31% 11.84% commendable position in terms of
Gross NPL Ratio 5.57% 3.84% liquidity, internal fund generation, and
Loans to Deposit Ratio 86.85% 87.21% access to alternative sources of funds.

Net Profit and Return on Avg RWA Dhaka Bank Ltd. commenced its operation
1200 3% in July, 1995 and the paid up capital
1000 2% reached BDT 2,127.68 million as of 31
BDT Million

800 2% December 2009. In 2009 DBL had opened

600 2%
400 2%
6 new branches 6 SME business centers
200 2% and 1 Capital market Services to provide
0 2% service.
2005 2006 2007 2008 2009
Year
CRAB assigned A1 in the Long Term to the
Profit After Tax Return on Average RWA
Dhaka Bank Limited in March 27, 2008.

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CRAB Ratings Banks
Based on the financials of 2009, CRAB retained the rating in spite of Year on year low
revenue growth (Revenue reached at BDT 4,234.78 million in 2009 from BDT 3,886.36
million in 2008, registering a growth of 8.97% which was 22.62% in the previous year); low
asset growth (Growth in 2009 was only 9.32% compared to previous year 23.84% growth);
deterioration in asset quality (Gross NPL reached 5.57% in 2009 compared to 3.84% in
2008) and marginally affected profitability level.

Analyzing the revenue segment of Dhaka Bank in 2009, it has negative growth of 1.50% in
earning segment of commission, fees, exchange and brokerage which constituted around
25.0% of the revenue and resulted in low growth of revenue thereby affected the
profitability level which declined marginally (NIM: 3.56% in 2009 compared to 3.83% in
2008; ROAA: 2.87% in 2009 compared to 2.90% in 2008).

Due to low recovery ( Cash Recovery in 2009 was only BDT 3.87 million which was BDT
461.50 million in 2008 and BDT 523.40 million in 2007), the gross NPL increased to BDT
2,946.14 million in 2009 from BDT 1,908.21 million in 2008, which was 5.57% of loan
portfolio in 2009 as against 3.84% in 2008. However, net NPL reached BDT 838.81 million
in 2009. CRAB views that low recovery was the outcome of weak monitoring process of the
bank and world economic meltdown.

CRAB views that the performance of the bank affected by world economic meltdown and
general economic condition of the country to some extent. The global financial crisis and
economic slowdown impacted Bangladesh mainly through the export channel, causing
demand decline and price decline; new investment activities for export manufacture also
slowed down as a consequence. Due to both of these reasons industrial sector growth
(especially growth of manufacturing sub-sector) somewhat slowed down at 5.9% in 2009
compared to 6.8% growth over 2008. Though intra-year output growth estimates are
unavailable for the Bangladesh economy, the growth prospect of real sector output in 2010
is expected to remain healthy based on the assumption that the initial process of recovery
of world economy from the impact of the financial crisis will speed up during the period. On
the other hand, robust domestic demand supported by growing workers’ remittance inflows
and budgetary stimulus packages and higher social safety net spending also contributed to
the high growth expectation of the industrial sector in response to growing domestic
demand.

Developments in Bangladesh economy in the second quarter of 2010 (Oct-Dec 09) unfolded
largely as expected. The liquidity overhang in the money market dwindled, used up in credit
growth to private sector (7.5% in Q2 over Q1, 19.2% year on year), with pick up in new
investments and import LC opening. The weighted average overnight interbank interest rate
exceeded four percent, from the near zero levels at the beginning of 2010.

Demand pressure in the money market remained moderate however; with government’s
bank borrowing kept in negative (despite increased expenditure for stimulus packages,
higher government salary scales, and higher social safety net payments to larger beneficiary
groups) by high growth in revenue receipts and in non-bank and foreign financing (50.8%

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revenue growth, nearly fourfold and threefold increase respectively in net NSD instrument
sales and in foreign financing year on year in Q2 2010). Workers’ remittance inflows
maintained robust growth (4.3% over preceding quarter, 30.5% year on year), but
continued demand slack in markets abroad kept exports weak (1.7% y-o-y growth in Q2,
but 12.0% decline from preceding quarter), increasing uncertainty about the prospect of
2010 export performance matching preceding year’s double digit growth.

With pickup in economic activities including new investments in Q2 2010 supported by

robust domestic demand, the economy remains on track for 2010 real GDP growth of
around six percent projected earlier. The pace of export recovery has remained slower than
expected, but strong growth rebound in two major advanced economies (USA, Japan) in the
Oct-Dec quarter of 2009, if sustained, will help export growth of Bangladesh in H2 2010.

During Q4 2009, the disbursement of term lending by banks and NBFIs increased by
21.85% and stood at Tk. 67.96 billion which was Tk.55.78 billion in Q4 2008. Between Q4
2008 and Q4 2009, term lending by PCBs increased from Tk.38.63 billion to Tk.48.12 billion
due to their higher activities to increased industry share in lending, SCBs term lending
increased also from Tk. 2.10 billion to Tk. 3.17 billion, while term lending by FCBs increased
moderately from Tk. 7.51 billion to Tk. 8.12 billion. Term lending by NBFIs also increased
moderately from Tk.6.72 billion to Tk. 7.12 billion.

Going forward, CRAB views that outlook of the banking sector is positive in 2010 and
performance deterioration of Dhaka Bank was not warranted to downgrade the rating at this
time. However, inability to manage growth effectively could have a material adverse effect
on business and future financial performance. Moreover, decline in capital adequacy ratio
could restrict its further business growth. Besides, the sustainability of the rating also
depends on quality of loan and investment portfolios which could be ensured through careful
targeting of its customer base, a comprehensive risk assessment process and diligent risk
monitoring and remediation procedures that may reduce the present non-performing status.

As per Basel I, the RWCAR of the bank as on 31 December 2009 was 11.31% against the
regulatory requirement of Minimum Capital Requirement (MCR) of 10.0%. However under
Basel II regime, the RWCAR declined to 7.39% against MCR of 10.0%. However,
Bangladesh Bank on 10 March 2010 relaxed guidelines on risk based capital adequacy for
banks considering the overall financial position in the country’s banking sector. Under the
amended guidelines, banks will have to comply with the minimum capital required (MCR) at
8.0% from June 30, 2010, instead of January 1, 2010, while a rate of 9.0% will have to be
maintained from June 30, 2011, instead of July 2010. The banks however, must comply
with the Minimum Capital Requirement (MCR) of 10.0% from July 2011 onwards. Going
forward, the loan portfolio of the bank is growing at a consistent rate (though some
variation; in recent year 2009) and is likely to maintain in the medium to long term.
Therefore, the bank will be under continuous pressure to meet the capital requirement.

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Due to slow credit growth, the liquidity position of the bank remains strong. Due to lending
rate cap imposed by the Bangladesh Bank, the asset liability maturity structure could affect
the profitability level.

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