Listed banks rely on govt bonds as core business stalls in Q2

Infographic: TBS

A significant number of listed banks that reported profits in the April-June quarter of 2025 did so not because of strong banking operations, but largely due to earnings from government treasury bonds.

Amid a sluggish private sector credit growth and overall economic uncertainty, many banks struggled to generate income from their core lending activities. Instead, robust investment income from government securities played a disproportionate role in supporting their bottom lines.

According to the Dhaka Stock Exchange (DSE), of the 36 listed banks, 27 have so far disclosed their second-quarter financial statements. Among them, 14 reported sharp declines in consolidated net profit, 6 managed modest profit growth, while 7 banks posted losses, indicating mounting pressure on the sector.

The data paints a troubling picture of the sector's growing dependence on risk-free government instruments instead of revenue from traditional banking activities like lending and fee-based services.

Analysts argue that while investment in government bonds is a safe strategy in uncertain times, overreliance reflects weak credit demand, poor loan disbursement performance, and risk aversion among banks – issues that, if left unaddressed, could have long-term implications for economic growth.

Of the 27 listed banks that disclosed their Q2 financials, 24 reported a decline in net interest income, highlighting the ongoing struggle in core banking operations. Only three banks managed to post growth in this segment.

According to data, BRAC Bank recorded the highest net profit in the second quarter, reaching Tk419.56 crore – a 54% increase from the same period last year. While its net interest income rose slightly to Tk406.87 crore, the real boost came from its investment in government bonds, which generated Tk1,061 crore – 62% higher year-on-year.

Following BRAC Bank, City Bank, Eastern Bank, Prime Bank, and Pubali Bank also posted profit growth in the June quarter. However, their improved earnings were largely driven by income from government securities, despite experiencing a drop in net interest income from lending activities.

The banks that witnessed a decline in profit in the second quarter are Dhaka Bank, Dutch-Bangla Bank, Jamuna Bank, ONE Bank, Mercantile Bank, Mutual Trust Bank, Uttara Bank, Shahjalal Islami Bank, United Commercial Bank, Bank Asia, NRBC Bank, Midland Bank, Rupali Bank and SBAC Bank.

Their profit dropped mainly due to the high borrowing costs and lower interest income from loan disbursement and required higher provision against loans.

Besides, First Security Islami Bank, Exim Bank, ICB Islamic Bank, IFIC Bank, Social Islami Bank and NRB Bank incurred losses during the quarter.

Sharp slowdown in private credit

A senior bank officer told TBS that private sector investment has been sluggish for the past few years. On top of that, as business conditions remain unfavourable, many borrowers are now unable to repay their loans, which is causing a rise in non-performing loans (NPLs).

He said, "Due to inflation, the government has allowed interest rates on deposits to be determined by market forces, leading to a rise in deposit rates. As a result, banks are now having to offer loans at higher interest rates, sourced from these higher-interest deposits.

Since the private sector is in a fragile state, banks consider lending to be risky at this point, said the officer. "Therefore, nearly all banks are opting for government bonds as safe investments. These bonds are currently offering double-digit interest returns. In the face of economic uncertainty, banks are viewing this as a strategic investment that is helping them offset potential financial losses and show healthy profits. The stronger banks in the country are following this strategy, whereas the troubled ones remain in distress."

He further added, "The decline in lending to the private sector is evident when you look at the banks' operating cash positions. Most banks are sitting on large amounts of idle cash, which has significantly inflated their operating cash flows."

According to Bangladesh Bank data, private sector credit growth was 6.40% in June, reflecting a sharp slowdown in lending amid high interest rates and uncertainties following the change in government.

A chief financial officer of a bank said political uncertainty, a conflict-ridden environment, and disruptions to law and order are deterring entrepreneurs from taking on new investment risks. "The banking sector itself also plays a role in this slowdown."

Extensive financial irregularities in previous years have left many banks grappling with liquidity shortages, thereby reducing their lending capacity, he said.

Besides, banks are now much more cautious in extending credit due to the immense pressure from soaring NPLs, the officer added.

A senior banker noted that the ongoing slowdown in private sector activity is clearly reflected in the declining rate of letter of credit (LC) openings.

According to Bangladesh Bank figures, LC openings in June 2025 dropped to $4.14 billion – a 24.42% decline compared to $5.47 billion in the same month of the previous fiscal year.

An analysis of the central bank's figures shows that LC openings steadily declined throughout the second half of FY25, reaching the lowest point in June. The last time LC openings fell below this level was in August 2020, when they stood at $3.7 billion.

"This steep decline in import LCs is a direct result of the prolonged slowdown in private investment," said the banker. "Many importers have scaled back significantly, citing weak demand for their products. Moreover, the implementation rate of the government's Annual Development Programme (ADP) is also quite low."

He added, "For an import-dependent country like Bangladesh, such a sharp drop in imports is concerning. It will inevitably impact government revenue as well as banks' income from trade finance and related services."