The country's premier bourse – the Dhaka Stock Exchange – saw a sharp rally in the last three trading days, with the large capitalised banking sector that posted surprising earnings in the first quarter of this calendar year, leading this bull run.
Out of 31 listed banks, 25 disclosed the quarterly results and 18 of them reported higher profits compared to the previous year. Only six banks' profits declined and one bank incurred losses in the January-March quarter this year compared to the same period of the previous year.
Besides, in stark contrast to the Bangladesh Bank's encouragement to be conservative in disbursing cash dividend amid the pandemic, the banking sector has so far experienced a 12% increase in cash dividend payout for last year compared to a year ago.
In fact, they have disbursed higher cash dividends for the year 2020 than that of the previous year, keeping shareholders happy.
Following the surprising growth, investors are more confident to buy bank shares of capital gain optimism. Riding on investors' buying spree, the banking sector's market cap increased by 9% to Tk69,150 crore in the last three trading days.
EBL Securities in its stock market commentary said investors have taken interest in the banking sector, as confidence in the disregarded financial companies has been restored based on their earnings surprises.
Meanwhile, several top executives of different banks said in spite of the pandemic shocks, most of the banks did well in the first quarter of this year, thanks to cost management, efficient fund management, central bank's policy support and a good return from investment in stocks and bonds like government securities.
But the credit growth in the banking sector hovered around the 8% level throughout last year, while the lending rate was between 7% and 8%.
This means, there was no fresh lending and that the growth came from accrued interest from previous exposure.
Amid this situation, the only income source was investment in government bills and bonds.
Moreover, suspension of loan classification which started in January 2020 gave banks relief from provisioning expenses, helping them to show inflated profit despite not having a real income.
Ali Reza Iftekhar, managing director and chief executive officer of Eastern Bank, said at a webinar conducted by The Business Standard on 4 May that the banking sector is under pressure since the coronavirus outbreak because no one knows what will happen in future.
"Now the central bank has relaxed the loan repayment. But when the facility will be withdrawn, it will be a big challenge for us to recover loans because we do not know how the business will be in future," he added.
He further added that due to lower credit demand, the banking sector's assets have decreased.
"Besides, despite the deferral facility on repaying loans, most banks keep proper provision for future protection," he continued.
Ali Reza Iftekhar, also the chairman of the Association of Bankers, Bangladesh Limited, mentioned that most banks attained growth even after low demand for credit.
"They could manage this by reducing cost, return on investment and fund diversification."
In future, the banking sector will need alternative investment tools such as an attractive bond market and effective capital market, he added.
Interest rates on the T-bonds now range between 2.68% and 6.64%, in comparison to 7.84% and 8.99% a year ago. There are five kinds of T-bonds categorised as per their maturity periods.
The rates have declined significantly last year, as the demand for government securities in the secondary bond market has gone up in the wake of a declining trend of interest rate on deposit products offered by banks.
A majority of banks now offer 3-4% interest rate on fixed deposit schemes.
The Bangladesh Bank in its monetary policy report said it has adopted many strategies, including monetary easing, to keep the money market stable amid the ongoing Covid-19 pandemic.
It cut the cash reserve ratio (CRR) by 150 basis points from 5.5% to 4% in two phases while reducing the bank rate to 4% from 5% in July last year to rationalise the rate with the prevailing interest rate regime.