Analyze of prime bank’s banking system

Prime Bank: December 2003-4 bank’s loan loss provisions should remain modest in the near to medium term. Half-Yearly Results: Bangladeshi banks report extremely brief half-yearly results (which are unsuited) and therefore, their utility is somewhat limited. Even so, Prime Bank’s financial results as at June 2003 indicate that the bank continued to grow rather rapidly; loans grew by an annualized 30% since end-2002 and profits before tax were almost76% of the full years’ profit in 2002. The NPL ratio too rose slightly to 1.89%, but as mentioned elsewhere in the report, this is extremely low compared with that of most other local banks. Prospects: Size is a crucial issue in banking and Prime Bank, being a very small bank has its limitations. With an equity base of only BDT 1.5bn (USD 26mn), Prime Bank does not have the critical mass to cater to large borrowers or expand its business (including its proposed consumer banking initiatives) beyond a certain level. To be fair, the bank has so far done an excellent job in catering to the requirements of its traditional customers, the small to medium exporters, despite operating in a challenging environment. The bank has tentative plans to strengthen its equity to BDT 5bn, but the time frame is somewhat uncertain, and it is unclear whether it will be through fresh equity infusion, or through retained earnings over the years. As for all Bangladeshi private banks, Prime Bank’s shareholders are individuals, and their ability to infuse large amounts of capital is unclear. Nevertheless, in the near-term, Prime Bank should continue to perform satisfactorily, even as its high growth rate (albeit from a smaller base) is a slight concern.

However, it is difficult to comment on the longer-term prospects of the bank (three years and beyond).

Although there is some recognition amongst policy makers that there were too many (private) banks in the country, and a consolidation at some stage may be desirable, their near-term priority seems to be to address the huge asset quality problems of the state banks, and possibly privatize some of those. Therefore, consolidation amongst private banks does not appear likely over the next 23 years.

BUSINESS DESCRIPTION Prime Bank is among the best of Bangladeshi banks. Our Individual rating reflects its reasonably sound financial condition but also its relatively short history, as well as the challenging operating environment in Bangladesh.

Although it has grown rapidly since its inception, it has maintained a far healthier financial profile than the problematic state banks or other private banks.

PB has been profitable since its first year of operations. Profits were low in 1998 when the bank incurred losses on its ill-timed stock market investments, but PB has reported an average ROE of 41% (2002 ROE: 30%) between 1999 and 2002. The fact that the average inflation in Bangladesh has been around 6% during this period, the bank's real return has been strongly positive.

PB's asset quality is remarkable compared with its peers. The banking system average NPL ratio has been around 35% in recent years, and even for the private banks it has been around 20%. Prime Bank's NPL ratio in contrast was just 1.48% at end-2002 (1.89% at June 2003) and has rarely been above 2% in the past. The bank maintains higher loan loss provisions than regulatory stipulations, and its NPLs were 73% covered by specific reserves at end-2002 (more than 100% in 2001). Together with general reserves, which were nearly 1% of unclassified loans as at end-2002, total reserves covered 135% of the bank's NPLs. However, PB's NPL ratios are somewhat flattered by the dilution effect of its rapid loan growth, which has averaged about 35% between 1999 and 2002. Also, inclusive of restructured loans, the bank's NPL ratio at June 2003 may be about 2.5%, but nevertheless, extraordinarily low compared with its peers. On the negative side, nearly 72% of the bank's NPLs (which grew by 86% in absolute terms during 2002) are in the 'loss' category, but as