We met with BRAC Management (CEO, CFO, Head of Retail, Head of Treasury and Head of Strategy) on 22 January to discuss their view on the rate cap and BRAC Bank’s strategy. We highlight some of the key points as follows:
- The rate cap implementation process is not clear yet – how will this cap be implemented (on a flow basis or stock basis)? Which category of loans will eventually fall under the rate cap? We need to wait for the Bangladesh Bank circular to get more clarity on this issue. On the other hand, the Bankers Association has requested the Finance Minister to consider SME exclusion, especially the small businesses, from this rate cap. No decision has been made yet in this regard.
- BRAC stance is that they are not going to make any major change in its growth strategy. They believe that the continuation of momentum is important. If it is stopped, it will take time to revive – especially the momentum of salesforce. However, they will make some necessary adjustments in the KPIs of salesforce. For example, increasing weight on deposit and reducing weight on loan disbursements etc.
- Though the cost of doing retail and SME business is generally higher, BRAC will continue its growth focus in SME and retails loan books considering the NPL perspective. According to BRAC management, NPL arising from corporate is much higher compared to NPL arising from retail and SME books.
- BRAC will continue its investment in treasury instruments as long as it offers higher yield (current yield 8.0%-9.4%) Besides, they might consider investing in the subordinated bond of other private commercial banks.
- BRAC will enhance its focus on the deposit side specifically on CASA to defend its spread. BRAC expects to lower its cost of funds to c4.0% from the current level of 5.2% (a reduction of 120bps) if this rate cap is implemented. Earlier this week, BRAC has reduced its new FDR rate to 7% and has the plan to decrease it to 6% by next February. On the other hand, BRAC bank’s current average yield on advance is 11.2% which will come down to 9.0% (a reduction of 220bps). The overall spread is likely to decrease by 100bps.
- BRAC plans to recover some of its lost earnings by increasing fees income, especially processing fees, other commission etc in retail segments and some selective areas of SME segments. Please note that it will be difficult to increase fees income from the small business due to Bangladesh Bank restriction.
- We may see some consolidation approach from many commercial banks due to this rate cap implementation. However, BRAC is not yet planning to cut its major operating expenses such as technological investment or human capital development. However, they will have a focus on cost control, wherever it is appropriate,
Analyst view: We are not clear about this interest rate cap implementation. However, we think there could be two scenarios
- Rate cap will be implemented with SME exclusion, in that case, the impact on BRAC will be minimal.
- Rate cap will be implemented for all loans, in that case, BRAC will be impacted. Our scenario analysis suggests that BRAC’s ROE (standalone) may come down to 9-10% during the rate cap period from the current level of 17% (standalone). We believe that the SME rate cap cannot continue for a long period. There is a high chance that it will be reversed in phase by a phase when the Government sees a slowdown in loan disbursement.