City Bank Limited, The

FINANCIAL INSTITUTIONS

CREDIT OPINION18 June 2020

Update

RATINGS

City Bank Limited, TheDomicile Bangladesh

Long Term CRR B1

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt Not Assigned

Long Term Deposit B1

Type LT Bank Deposits - FgnCurr

Outlook Negative

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Joyce Ong [email protected]

Tengfu Li [email protected]

Alex Hang +65.6398.3714Associate [email protected]

Graeme Knowd [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

City Bank Limited, TheUpdate to credit analysis

SummaryCity Bank Limited, The's (CBL) long-term deposit ratings of B1 reflect the bank's BaselineCredit Assessment (BCA) of b2 and one notch of rating uplift based on our assumptionof a moderate probability of support from the Government of Bangladesh (Ba3 stable).Our support assumption takes into consideration the bank's small market share, and thegovernment's moderate willingness and ability to support the banking system.

CBL's b2 BCA reflects the bank's relatively weak asset quality, with risks arising from itselevated exposure to rescheduled loans; moderate profitability, driven by growth in higher-yielding consumer loans; weak capitalization; and constrained funding because of its modestdomestic franchise.

Exhibit 1

Rating Scorecard - Key financial ratios

5.6% 7.4%0.7%

22.3% 22.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid BankingAssets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

City Bank Limited (BCA: b2) Median b2-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Financial Metrics

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1232296

https://www.moodys.com/credit-ratings/City-Bank-Limited-The-credit-rating-825006996

https://www.moodys.com/credit-ratings/Bangladesh-Government-of-credit-rating-806356877

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Strong retail presence as one of the leading banks in credit cards and payments

» Access to development funds provided by the central bank and development financiers, which partially offsets funding risks

Credit challenges

» Heightened asset risks and profitability erosion because of the disruptions caused by the coronavirus outbreak

» Weak capitalization compared with that of its domestic peers that we rate

» Reliance on confidence-sensitive term deposits

OutlookThe outlook on CBL's ratings is negative, reflecting our expectation that the bank's asset quality and profitability will face downwardpressure over the next 12-18 months.

Factors that could lead to an upgradeGiven the negative outlook, we are unlikely to upgrade CBL's BCA and long-term ratings over the next 12-18 months. Nevertheless, theoutlook could be revised to stable if asset quality shows signs of stabilization, with slower formation of nonperforming and rescheduledloans. An improvement in the quality of earnings, driven by lower reliance on expensive term deposits for funding or higher operationalefficiency, will also support a stable outlook.

Factors that could lead to a downgradeCBL's BCA and long-term ratings could be downgraded if there is a deterioration in the bank's asset quality. Weaker capitalization,declining profitability or a further tightening of liquidity conditions will also exert downward pressure on the bank’s BCA and ratings

Key indicators

Exhibit 2

City Bank Limited, The (Consolidated Financials) [1]

12-182 12-172 12-162 12-152 12-143 CAGR/Avg.4

Total Assets (BDT Million) 318,735.5 271,759.2 248,098.6 207,690.8 171,718.6 16.75

Total Assets (USD Million) 3,799.0 3,267.3 3,156.5 2,646.6 2,203.6 14.65

Tangible Common Equity (BDT Million) 21,198.2 20,692.8 18,360.5 16,273.2 14,002.0 10.95

Tangible Common Equity (USD Million) 252.7 248.8 233.6 207.4 179.7 8.95

Problem Loans / Gross Loans (%) 5.3 5.4 6.0 7.6 5.9 6.06

Tangible Common Equity / Risk Weighted Assets (%) 7.4 9.2 9.2 9.0 8.0 8.67

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 41.9 39.5 42.3 47.6 35.7 41.46

Net Interest Margin (%) 3.6 3.6 4.0 4.2 4.7 4.06

PPI / Average RWA (%) 2.7 3.2 4.1 3.8 2.8 3.37

Net Income / Tangible Assets (%) 0.7 1.3 1.6 1.7 1.0 1.36

Cost / Income Ratio (%) 57.9 55.2 47.9 48.3 54.8 52.86

Market Funds / Tangible Banking Assets (%) 22.3 15.3 13.7 13.0 14.8 15.86

Liquid Banking Assets / Tangible Banking Assets (%) 22.5 22.0 24.5 24.7 24.4 23.66

Gross Loans / Due to Customers (%) 118.8 109.4 102.2 103.2 105.6 107.86

[1]All figures and ratios are adjusted using Moody's standard adjustments. [2]Basel III - fully-loaded or transitional phase-in; LOCAL GAAP. [3]Basel II; LOCAL GAAP. [4]May include roundingdifferences due to scale of reported amounts. [5]Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [6]Simple average of periodspresented for the latest accounting regime. [7]Simple average of Basel III periods presented.Source: Moody's Investors Service; Company Filings

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 18 June 2020 City Bank Limited, The: Update to credit analysis


ProfileCity Bank Limited, The (CBL) was established in 1983 as a private commercial bank in Bangladesh. While the lender remains focusedon serving its corporate clients, it is also increasingly expanding its presence in retail banking, having established itself as one of theleading banks in credit cards and payments. The universal bank provides a full range of banking products and services, including Islamicbanking, investment banking and remittance services. The bank has been growing its retail and small and medium-sized enterprises(SME) segments in recent years as part of its long-term strategy to diversify its portfolio and enhance yields.

CBL operates mainly in the major cities of Dhaka and Chittagong, with a domestic franchise consisting of 132 branches and 343 ATMsas of 30 September 2019. The bank is listed on both the Dhaka Stock Exchange and the Chittagong Stock Exchange.

Detailed credit considerationsAsset quality will deteriorate because of the disruptions caused by the coronavirus outbreakWe expect the bank's asset quality to face downward pressures because of its sizable exposures to SME (22.4% of total loans as of end-September 2019) and consumer segments (18.3%), which will have limited buffers to withstand the ongoing coronavirus outbreak andthe subsequent economic downturn. We also expect downward pressure on the bank's exposures to the ready-made garment (RMG)and textile sectors (19%), manufacturing (13%), and trade (10%) which have been affected by the curtailment of export demand aswell as weakened domestic consumption.

CBL’s nonperforming loan (NPL) ratio increased to 5.7% as of 30 September 2019 from 5.3% in 2018, driven by above-average loangrowth compared with that of its peers we rate. While loan growth has moderated slightly to 14.2% (annualized) from 17.7% over thesame period, it remains significantly above the 6% average of its peers we rate. This strong growth was driven by growth in the SMEbusiness segment, which grew by 16.5% in 2019 compared with the 10.5% growth reported in 2018 as the bank ramped up its SMEsegment after the restructuring of its SME business, which saw the decentralization of risk management and the creation of a separatedivision to focus on smaller SMEs. Meanwhile, the bank's loan-loss provision coverage improved slightly to 64.9% as of the same datefrom 61.9% a year earlier.

In Bangladesh, distressed loans can be rescheduled and classified as performing, and such exposures constituted 2.9% of CBL's grossloans as of 30 September 2019. The bank does not have performing loans that are under the high court's stay order.

The bank maintains a fairly diversified loan portfolio in terms of industry sectors. As of 30 September 2019, consumer loans accountedfor the largest proportion at 15.8% of the bank's loan book, followed by the ready-made garment sector at 15.4% and loans to themanufacturing industry at 12.8%. The bank's loan exposure to the energy sector increased significantly to 9.0% of its gross loans from4.1% in 2017, along with government initiatives to improve the country's power infrastructure. CBL participates in the financing of thesepower plants through syndicated loans, and the government is usually the off-taker in these projects.

Similar to its peers in the Bangladeshi banking system, CBL has significant concentration in its large borrowers and is susceptible tolarge loan defaults. Its top 20 loan exposures accounted for 204.3% of its tangible common equity as of 30 September 2019.

The assigned Asset Risk score of b3 incorporates the above-mentioned considerations.

Capitalization will deteriorate because of profitability pressuresWe expect CBL's capitalization to deteriorate over the next 12-18 months, as internal capital generation comes under pressure becauseof higher credit costs and lower interest income amid the coronavirus outbreak. Slower loan growth will somewhat offset the strain oncapitalization caused by weaker profits.

CBL's capitalization is modest compared with that of its peers we rate. The bank’s tangible common equity/risk-weighted assets (TCEratio) increased to 8.9% as of 30 September 2019 from 7.4% as of year-end 2018 because of a reduction in cash dividend payout; thebank reduced cash dividends by half to 26.1% of net income for 2018 from 53.8% a year earlier. The ratio was also boosted by a one-time reduction in risk-weighted assets because of a regulatory change that removed the double-counting associated with the bank’sonshore Letters of Credit discounting at its offshore banking unit. RWA/total assets ratio declined to 73% as of 30 September 2019from 80% as of year-end 2018.



Beginning 2019, Bangladeshi banks are subject to fully phased-in Basel III requirements, with the minimum Common Equity Tier 1(CET1) capital ratio and the total capital requirements (including the 2.5% capital conservation buffer) at 7.0% and 12.5%, respectively.CBL's CET1 ratio was 9.3% as of September 2019.

The assigned Capital score of caa1 incorporates the above-mentioned considerations.

Higher credit costs and lower net interest margin (NIM) will weaken profitabilityCBL’s return on assets increased to 1.0% as of 30 September 2019 from 0.7% in 2018, driven by an expansion in its net interest spreadand a reduction in credit costs. The bank reported a net interest spread of 4.3% as of 30 September 2019, up from 3.8% a year earlier.The higher spread was a result of higher asset yields, as the bank has been repricing its loans and focusing on the higher-yieldingconsumer segment to offset the higher deposit costs in the banking system.

Credit costs moderated in the first nine months of 2019 as NPL formation rates stabilized. On an annualized basis, CBL's credit costs asa percentage of average gross loans decreased to 0.6% as of September 2019 from 0.9% in 2018.

Despite improved earnings in the first nine months of 2019, we expect profitability to come under pressure in 2020 from muted loangrowth, higher credit costs and contraction in NIM because of the prolonged disruption caused by the coronavirus outbreak. The NIMwill shrink because regulatory cap of 9% on the lending rate, which came into effect on 1 April 2020, and low-interest loans offered aspart of stimulus packages erode lending yields. As of 31 January 2020, the bank's weighted average lending rate was 10.7%, on par withthe 10.5% reported for its private-sector peers. In addition, its weighted average deposit rate was lower at 5.8% than the 6.4% industryaverage.

CBL's cost-to-income ratio decreased slightly to 55.9% as of 30 September 2019 from 57.9% in 2018. We expect the bank's operatingexpenses to remain high because of several ongoing initiatives, such as information technology infrastructure upgrades and theexpansion of agent banking.

The contribution of non-interest income to CBL's revenue declined to 33.9% as of 30 September 2019, down from 36.1% in 2018. Thelower contribution was driven by a decline in trading income amid depressed capital markets. Nevertheless, the bank is still generatingstrong fees and commissions, led by its credit card business.

The Profitability score of b3 reflects our expectation of a deterioration in the bank's profitability over the next 12-18 months.

Growing reliance on confidence-sensitive term deposits because of its modest domestic franchiseCBL's domestic franchise is modest, reflected by its relatively low current and savings account (CASA) ratio of 32% as of 30 September2019. Gross loans to customers' deposits ratio declined to 114% as of the end of September 2019 from 119% as of year-end 2018,as the bank reduced interbank borrowings and grew its CASA and term deposits during the first nine months of 2019. However, CBLremained reliant on confidence-sensitive term deposits which constituted 49% of non-bank deposits as of the end of September 2019,an increase from 46% as of year-end 2018. Interbank borrowings accounted for approximately 14% of total liabilities as of the endof September 2019, a decrease from 20% as of year-end 2018. Market funding risk is somewhat mitigated by the fact that one-thirdof the bank's borrowings are, development funds, provided by the central bank and development financiers that are less confidence-sensitive than commercial lenders.

The Funding score of b1 reflects the bank's reliance on confidence-sensitive deposits and constraints on deposit mobilization because ofthe bank's modest domestic franchise.

CBL maintains adequate liquidity to meet its obligations, with a liquidity coverage ratio of 148% as of 31 December 2019, up from116% as of 30 September 2019. While CBL's liquid asset ratio declined to 19.5% as of 30 September 2019 from 22.5% in 2018, weexpect the bank's stock of liquid assets to remain stable because it will try to maintain a buffer above the regulatory minimum liquidityratios. Liquidity support measures by BB will help alleviate the potential liquidity squeeze because of cash flow crunches caused by thecoronavirus outbreak.

The Liquid Resources score of b2 reflects our expectation that the bank’s liquidity buffer will remain fairly stable over the next 12-18months.



CBL's BCA is based on Bangladesh's Weak- Macro ProfileCBL operates mainly in Bangladesh, which has a Weak- Macro Profile.

Bangladesh has a moderately diversified economy, which is largely driven by exports from the ready-made garment sector. Thecountry's track record of steady growth performance is underpinned by a large remittance inflow and the role of local microfinanceinstitutions, which have promoted financial inclusion that offsets the low level of per capita income. The government’s financialposition has also been stable because it has consistently received concessional financing from the International Monetary Fund tooffset its weak revenue to finance its fiscal deficits. The country is moderately susceptible to event risks, driven by its deeply polarizeddomestic politics.

The country’s banking system is characterized by high credit concentration and a high degree of market fragmentation. The state-owned banks together accounted for 18.5% of the advances in the system as of the end of September 2019, and there is a fair degreeof competition among private commercial banks. In addition, the persistent weakness in underwriting standards and growing trend ofregulatory forbearance will lead to a further deterioration in credit conditions.

Environmental, social and governance considerationsIn line with our general view for the banking sector, CBL has a low exposure to environmental risks (see our environmental risk heatmap for further information) and moderate exposure to social risks (see our social risk heat map for further information).

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset pricedeclines are creating a severe and extensive credit shock across many sectors, regions and markets. The Bangladeshi banking systemhas been one of the sectors affected by the shock, especially given the persistent weaknesses in underwriting standards and high creditconcentrations in large domestic corporates. We regard the coronavirus outbreak as a social risk under our ESG framework, given thesubstantial implications for public health and safety.

Governance is highly relevant for CBL, as it is to all participants in the banking industry. Corporate governance weaknesses can lead toa deterioration in a bank’s credit quality, while governance strengths can benefit its credit profile. Governance risks are largely internalrather than externally driven. We do not have any particular concern around CBL's governance because the bank has an appropriate riskmanagement framework commensurate with its risk appetite. Nonetheless, corporate governance remains a key credit considerationand requires ongoing monitoring.

Support and structural considerationsGovernment support considerationsWe assess a moderate probability of government support, based on CBL's relatively low market share, balanced against thegovernment's track record of supporting the banking system. We expect the Bangladeshi government to take affirmative actions tominimize or prevent a banking contagion. CBL's deposit market share was around 2% as of 31 December 2019.

Our support assumption leads to a one-notch uplift from the bank's Adjusted BCA of b2, resulting in long-term local- and foreign-currency deposit ratings of B1.

Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails. CR Assessments are distinct fromdebt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expectedfinancial loss suffered in the event of default, and (2) apply to counterparty obligations and contractual commitments rather thandebt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractualperformance obligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.

CBL’s CR Assessment is positioned at B1(cr)/NP(cr)CBL's CR Assessment, before government support, is positioned one notch above its Adjusted BCA of b1. We then assign governmentsupport assumptions in line with our support assumptions on deposits and senior unsecured debt. Such assignments reflect our viewthat any support provided by government authorities to a bank, which benefits senior unsecured debt or deposits, is very likely tobenefit operating activities and obligations reflected by the CR Assessment. Such a view is consistent with our belief that governmentsare likely to maintain a bank's operations as a going concern to reduce contagion and preserve a bank's critical functions.


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1135665




Counterparty Risk Ratings (CRRs)Our CRRs are opinions of the ability of entities to honor the uncollateralized portion of non-debt counterparty financial liabilities(CRR liabilities) and also reflect the expected financial losses in the event that such liabilities are not honored. CRR liabilities typicallyrelate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising fromderivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs are not applicable tofunding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations,and other similar obligations that arise from a bank performing its essential operating functions.

CBL's local- and foreign-currency CRRs are positioned at B1/NPWe consider Bangladesh a nonoperational resolution regime. For nonoperational resolution regime countries, the starting point forCRRs is one notch above the bank's Adjusted BCA, to which we then typically add the same notches of government support as appliedto the CR Assessment.

Methodology and scorecardAbout Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.



Rating methodology and scorecard factors

Exhibit 3

City Bank Limited, The

Macro FactorsWeighted Macro Profile Weak - 100%

Factor HistoricRatio

InitialScore

ExpectedTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 5.6% b3 ↓↓ b3 Quality of assets

CapitalTangible Common Equity / Risk Weighted Assets(Basel III - transitional phase-in)

7.4% caa1 ↓ caa1 Expected trend

ProfitabilityNet Income / Tangible Assets 0.7% b3 ↓↓ b3 Expected trend

Combined Solvency Score b3 b3LiquidityFunding StructureMarket Funds / Tangible Banking Assets 22.3% b2 ←→ b1 Extent of market

funding relianceLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 22.5% b2 ←→ b2 Stock of liquid assets

Combined Liquidity Score b2 b1Financial Profile b2Qualitative Adjustments Adjustment

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint Ba3BCA Scorecard-indicated Outcome - Range b1 - b3Assigned BCA b2Affiliate Support notching 0Adjusted BCA b2

Instrument Class Loss GivenFailure notching

Additionalnotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Rating 1 0 b1 0 B1 B1Counterparty Risk Assessment 1 0 b1 (cr) 0 B1(cr)Deposits 0 0 b2 1 B1 B1[1]Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody’s Investors Service



Ratings

Exhibit 4

Category Moody's RatingCITY BANK LIMITED, THE

Outlook NegativeCounterparty Risk Rating B1/NPBank Deposits B1/NPBaseline Credit Assessment b2Adjusted Baseline Credit Assessment b2Counterparty Risk Assessment B1(cr)/NP(cr)Issuer Rating B1ST Issuer Rating NP

Source: Moody's Investors Service



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