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Moody's: Bailout of Bangladesh's Farmers Bank is credit positive

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Moody's: Bailout of Bangladesh's Farmers Bank is credit positive

Bangladesh's bailout of private-sector lender Farmers Bank Ltd. is credit positive for private-sector commercial banks as it reflects the government's willingness and ability to provide financial assistance to privately owned lenders, Moody's said.

The rating agency said May 14 that the move is also credit positive for Farmers Bank itself, as the capital injection will strengthen its balance sheet and restore depositor confidence.

The country's central bank relaxed certain rules to allow a single company to hold more than 10% of a bank's shares, paving way for government investment arm Investment Corp. of Bangladesh and state-owned banks Agrani Bank Ltd., Sonali Bank Ltd., Rupali Bank Ltd. and Janata Bank Ltd. to invest an aggregate of 7.15 billion Bangladeshi taka into Farmers Bank, or 160% of its equity as of end-2016.

The rule relaxation will allow the Bangladesh government to provide a timely capital injection into troubled banks via state-owned lenders. The exemption will not apply to other entities, to limit systemic risk by continuing to prevent crossholding of banks.

However, Moody's noted that the capital injection will also weaken state-owned banks' already-poor common equity Tier 1 capital ratios, particularly for Rupali Bank. The rating agency expects that the Bangladesh government will continue to inject capital into the four state-owned lenders on an annual basis to meet regulatory requirements on capital.

As of May 14, US$1 was equivalent to 83.66 Bangladeshi taka.