How banks made millions from shady stock deals

Private sector lender Premier Bank, which was penalised recently for investing in junk shares flouting rules, saw a 1,008% growth in portfolio income year-on-year in January-September 2021, according to the Bangladesh Bank.

The bank was fined Tk50,000 by the Bangladesh Bank for breaching the guidelines on making investments in the stock market under the special liquidity support package, but it earned Tk28 crore in profit from its investment in stocks at the end of September of the just-concluded year. The portfolio income of the bank was Tk2.53 crore during the corresponding period a year ago.

Another private bank, NRB Bank, which was fined by the central bank last September for manipulating share prices, registered 15,108% growth in profit from portfolio investment in the first three quarters of last year.

The bank was fined Tk49.50 lakh for manipulating the share price of a company, while its earnings from investment in shares stood around Tk20 crore at the end of September 2021, up from merely Tk13 lakh in the same period of the previous year.  

These two instances depict how banks fuelled share prices by investing aggressively and bagged hefty profits.

That some banks got involved in excess investment and price manipulation came to the attention of the Bangladesh Bank recently, prompting the regulator to go for stringent action. 

Banks' balance sheets – which show their profit from stock investment, saw a robust growth in the July-September quarter 2021 – also bear the evidence of the aggressive stock investment  

Private commercial banks' profit from investment in the stock market surged to Tk481 crore in the first nine months of 2021, up by 568% from Tk72 crore earned in the same period a year ago, says the Bangladesh Bank in its quarterly report for July-September last year.

The banking sector registered 10% year-on-year growth during January-September last year while their profit from shares increased by 267%, according to the central bank report.

The share of banks' income from stock investment against their total non-interest income more than doubled to 7.5% in the first nine months of last year from 3.6% in the same period of the previous year, according to the Bangladesh Bank data.

The overall profit of the banking sector from the stock market stood at Tk960 crore at the end of September last year, of which Tk514 crore was portfolio income and Tk447 crore dividend income. The banks' total profit from the stock market was Tk377 crore in the same period of the previous year.

Some private banks saw unusually high growth in their profits from share investment last year.

For instance, Mercantile Bank posted 1,48,867% growth in profit from the stock market. Its profit from this segment stood at Tk44 crore in the first nine months of last year, which was a paltry Tk3 lakh in the same period of the previous year.

Some new generation banks also made good profits from portfolio investment last year. For instance, South Bangla Agriculture Bank earned Tk9 crore from portfolio investment in January-September last year, which was zero in the same period of the previous year.

Another new generation bank, Padma Bank, earned around Tk6 crore from portfolio investment as of September last year, although it did not have any income from the segment in the same period a year ago.

The Bangladesh Bank recently found nine banks to be involved in aggressive investment in stocks, of which some were involved in manipulating share prices of companies with low capital.

The banks are Agrani Bank, Premier Bank, Exim Bank, NRB Bank, Southeast Bank, Eastern Bank, NRB Commercial Bank, NRB Global Bank, and Union Bank. Five of these banks were penalised by the regulator and the remaining ones were given warnings.

Most of these banks posted over 100% growth in profit from their portfolio investment, according to the Bangladesh Bank data.

Salehuddin Ahmed, former governor of the Bangladesh Bank, told The Business Standard that only monetary penalties are not enough to thwart banks from making over investment in stocks.

Mentioning that banks, through excessive investment in stocks, put public money at risk while the profit they make from this is not sustainable, the seasoned banker said the Bangladesh Bank can go for drastic actions, such as imposing sanctions on refinance, branch opening, reappointment of managing director, which will discourage banks to overplay in the stock market.

The central bank should also look for profit sources of banks before allowing them to disburse dividend or provision forbearance, he added.

Banks's overplay has contributed to unusual hikes in prices of junk shares, taking price indices to the highest level during July-September quarter.

Some banks invested in shares exceeding the stock investment ceiling of 25% of their capital set by banking law, while some others went for investments under the Tk200 crore special liquidity package for each bank, violating the central bank's guidelines.

In the last one year when the overall economic activities remained stagnant, only the stock market was vibrant. Share prices of 140 listed companies, mostly small-cap and junk ones, increased by 100%-1200% in one year until September last year, putting retail investors at risk.

Price manipulation of the insurance sector shares was widely discussed among stock investors.

Shares of 48 out of 53 listed insurance companies gained prices between above 100% and 750% in one year until September 2021, according to the Dhaka Stock Exchange (DSE).

However, the share market saw a massive correction after the Bangladesh Bank went for strict action against banks' overplay into stocks.

DSEX, the benchmark index of the DSE, lost more than 500 points in the last two months, according to the bourse.

Stock market performance  

The Bangladesh Bank in its quarterly report observes that the robust performance in the capital market continued in the July-September quarter of last year as evidenced by strong growths in price indices, buoyancy in turnover, and expansion in market capitalisation.

The global capital markets in both developed and emerging markets measured by the MSCI index showed some correction during the quarter while the Bangladesh capital market index increased significantly.

The key indicators of the capital market, the DSE broad index DSEX and DSE-30 index reached the highest level of 7,329 and 2,710.5, respectively, during the quarter since their inception in 2013.

In the July-September period of 2021, the DSEX index grew by 19.2% and 47.7% when compared to April-June 2021 and July-September 2020, respectively.

In the third quarter of 2021, the DSE-30 index grew by 22.7% and 59.8% from that of April-June 2021 and July-September 2020, respectively, according to the central bank quarterly report.

In 2021, the Bangladesh stock market stood fifth in terms of returns till mid-December, among the Asian frontier markets, according to the latest report of Asian Frontier Capital (AFC) which invests funds in these markets.

The Dhaka bourse with its 26% year-to-date return was only behind Mongolia, Sri Lanka, Vietnam, and Kazakhstan, ahead of Iraq, Indonesia, and of course, negative return markets such as the Philippines, China, Pakistan, and Malaysia.

DSEX beat the world averages of frontier markets and also emerging markets, which have developing economies and flourishing financial markets.

Investors like AFC Frontier Fund tend to invest in blue-chip companies at attractive prices.