BRACBANK’s Spread and ROE to Improve Following Implementation of Market Based Dynamic Ceiling on Lending Rate

Following the implementation of dynamic market based ceiling on lending rate, according to reputed daily newspapers, BRACBANK increased its average lending rate on SME loan to 10.1% from earlier 8.1% (200 bps upward revision). They also increased lending rate on housing loan and credit card loan by 160 bps and 300 bps respectively.

Considering this upward revision and its impact on BRACBANK’s spread in 2nd half of CY23 and our estimation of gradual rise in treasury bill rates continuing in CY24, we estimate that BRAC BD’s yield on loan will improve by 200 bps in CY23 and 280 bps in CY24 from CY22 level.

Meanwhile, we also estimate that BRACBANK’s cost of fund will increase, however, we view that the extent of upward revision in cost of fund will be less than that of yield on loan as BRACBANK has stronger brand recognition than most other banks and the bank has greater negotiation power and higher low cost deposit mix, CASA ratio ~50.0%. We estimate that BRACBANK’s cost of fund will increase by 60 bps in CY23 and 90 bps in CY24 from CY22 level assuming CASA remaining stable.

With these assumptions, we anticipate that BRACBANK’s (Solo) spread will improve by 130 bps in CY23 and 180 bps in CY24 from CY22 level. And keeping all other things constant, we view that ROE of BRACBANK solo will improve by 380 bps in CY23 (14.0%) and 540 bps in CY24 (15.6%) from CY22 level.

Summary of the Recent Change in Lending Rate Ceiling:

BB introduced market-driven reference lending rate for all types of bank loans, replacing the earlier imposed lending rate cap. The central bank fixed six month moving average rate of 182 Day T-bill as reference rate which currently stands at 7.1%.

Using this as reference rate, banks and NBFIs can charge margin of up to 3.0% and 5.0% respectively. Considering current 182 T-Bill 6-month average yield of 7.1%, maximum lending rate banks and NBFIs can charge is 10.1% and  12.1% respectively. Banks and NBFIs can also add up to 1.0% to cover supervision costs on loans disbursed as consumer and CMSME loans. Moreover, there will not be any ceiling for interest on credit card loans as it was before.

Now the ceiling on lending rates will be dynamic and subject to changing interest rate scenario in the treasury market.