US tariffs: Banks in Bangladesh to be among worst hit in Asia, says Moody's

Highlights

• Bangladesh to be hit more for its reliance on exports to US
• Higher tariffs to harm Bangladesh's competitiveness
• Protective measures may lead to lower margins for bank
• Banks likely to be credit-negative to varying degrees

Banks in Bangladesh, Vietnam, and Thailand are predicted to be the hardest hit in the Asia Pacific (APAC) region due to increased import tariffs imposed by the United States, according to a Moody's ratings report.

On 2 April, US President Donald Trump announced significant increases in import tariffs for most of its trade partners. 

Moody's assessment, published on Monday, indicates that while the impact on banks across the APAC region will be credit-negative to varying degrees, it will also lead to greater uncertainty for both investors and consumers.

The higher tariffs are more negative, on a relative basis, for banks in Vietnam, Thailand and Bangladesh because of their economies' higher reliance on exports to the US compared with other economies in the region, the report states. In these three countries, a moderation in exports to the US will hurt economic growth, straining loan growth for banks and hurting loan quality, it adds.

Bangladesh's economy is heavily reliant on ready-made garment (RMG) exports, which make up over 85% of the country's total exports, the report states. The high tariffs on US imports, including RMG, will harm its competitiveness compared to countries like India and Pakistan, which have lower additional tariffs, it reads. 

Mentioning that Bangladesh's RMG sector is already facing supply chain disruptions and labour issues since political and social unrest last year the report states that the asset quality for RMG and related sectors, which account for around 20% of banks' loans, will deteriorate.

US tariffs are now very high for exports from Vietnam, Thailand and Bangladesh and the first two are more dependent on exports to the US in terms of domestic value added in gross exports, the report states. Much higher US tariffs will lower their economic growth, with the resulting strain trickling down to banks, it notes. 

For Bangladesh, higher US tariffs will depress the already weak operating environment for banks amid a slowdown in the country's economic growth, the report states.

Elsewhere in APAC, despite significant increases in US import tariffs, the related impact on banks in China, Japan, Korea, India, Indonesia, Malaysia and Taiwan, China, will be more manageable because of either economic diversification, low exports to the US, or both, the report notes. 

However, some industries in these countries will be affected, the report states. Within the APAC region, the lowest additional US tariffs are now in Australia, New Zealand, Hong Kong SAR, China, Singapore, Mongolia and Philippines, with these economies' banks experiencing the least damage from direct tariffs, it adds.

"Although the total tariffs on most Chinese goods are now very high at 54%, we expect the negative impact on China's growth and corporate creditworthiness to be relatively moderate, as China's exports to the US were less than 3% of GDP in 2024. We expect further policy support to boost domestic consumer and business confidence and stabilize growth amid trade and geopolitical tensions," says Moody's in their report.

To counter the strain from higher US tariffs, it is likely that some central banks in APAC will begin reducing interest rates sooner than when the markets expect, or moderate the pace of their rate hikes, as in the case of Japan, the report states. These measures, if implemented, will lead to lower bank margins, it notes.

"We also expect higher government support and other measures from the central banks, including interest rate reductions and loan restructurings for borrowers in the most affected industries," adds the report.

For banks in Vietnam, Thailand and Bangladesh, the main impact on loan quality will come from small and midsize enterprises (SMEs) because they have limited financial buffers to adjust to rapidly changing economic and trade conditions, predicts Moody's.

Many SMEs are suppliers to global manufacturing companies which are now facing lower sales in the US, the report states. Banks in Thailand and Vietnam have the largest exposure to SMEs (around 20% of loans), while banks in Bangladesh are less exposed (less than 10%), it notes. Thai banks could be hit the most, as they have been grappling with the weak quality of SME loans for many years, it adds.