Stock market can no more bank on banks and the opposite is true as well

During the boom time, the stock market was a lucrative source of profit for Islami bank, the largest private bank in the country. It earned over Tk 110 crore against its portfolio investment of Tk 1,000 crore when the market was bull and the price index touched above 8,000 in 2010.

Although the portfolio investment of the bank has increased over the years, earnings have fallen drastically as the market went bear since late 2010.

The bank made a loss of around Tk8 crore last year against its portfolio investment of Tk3,800 crore, putting pressure on its profitability.

The bank which has the highest investment in the stock market almost halved its portfolio size last year from Tk 6,000 crore in the previous year in the face of a significant fall in profits.

And the year before, Islami earned only Tk1 crore from the portfolio investment.

For most banks, the picture is the same as the capital market remained sluggish due to liquidity crisis in banks and high yield from savings certificates.

As the stock market goes on a tailspin, the banking sector, a leading contributor to country’s stock market in terms of market capitalisation and turnover, remains a mere spectator as its foothold on the market has gradually eroded over the last eight years.

Industry insiders linked the banks' passivity in the capital market to continuous deterioration of their financial health since late 2010 when the market collapsed.

The banks’ share in the total market cap declined to 15 percent or Tk 55,000 crore in July this year from 29 percent or taka one lakh crore in 2010 when the market was on a boom.

Thus, the bank shares have lost 50 percent in prices during the period.

With the current situation spreading a gloom across the market, the banks are also not interested to invest in stocks through their stock investment wings.

Even, a new instrument introduced by the central bank four years back that would allow more funds available to the banks for stock investment has not taken off. The new initiative made room for at least Tk 11,000 crore more stock investment opportunities for banks, but in reality only about 1,000 crore has been invested, leaving the market starving for funds.
 
And any uptick in banks’ stocks could easily salvage the market from the current crisis but for their own liquidity crisis is exacerbated by regulations, limiting their exposure to the market.

Bank stocks have also become lacklustre because of the provision in this year’s budget that limits their stock dividend by imposing new tax.   

Although many bank stocks are selling around their face values and some even below par, there is now little interest in them despite their strong fundamentals.

Poor financial performance of banks amid spiralling non-performing loan, various loan scams, including Hallmark, Bismillah group, BASIC Bank, Farmers Bank, forced stock investors to come out of bank shares, resulting in the constant fall in prices.

Moreover, the amended Bank Company Act 2013 reduced access of banks’ exposure to the stock market from 10 percent of liabilities to 25 percent of capital.

Banks reduced their contribution to portfolio investment amid limited access in exposure to the stock market and liquidity crisis, triggered by loan scams.

As a result, the stock market is not getting support from institutional investors during free fall in price indices.
When contacted, M Khairul Hossain, chairman of Bangladesh Securities and Exchange Commission (BSEC) said banks’ contribution to the stock market has decreased gradually after 2010, due to deterioration of their financial states.

The banks’ contribution has come down below 10 percent in turnover from above 40 percent, he said.

As banks are not playing actively, the stock market is not getting institutional support during their rainy days, he said.

In 2010, banks declared a big number of dividends, but in recent years they are declaring poor dividends, mostly stock dividends, which also put negative impact on the stock market, he added.

Banks have appeared to be less interested to invest in the stock market.

For instance, in 2015, Bangladesh Bank opened up a new window of opportunity for banks to invest in the stock market by introducing special purpose vehicle (SPV) fund.

Banks were allowed to invest up to Tk200 crore in stocks through SPV.

SPV is a registered fund with the BSEC and it will invest in the stock market by collecting funds from banks.

Through this vehicle, 56 banks have opportunity to invest additional around Tk11,000 crore in the stock market beyond their regulatory exposure limit of 25 percent of capital.

But banks have invested only Tk1,000 crore through SPV so far which reflected that banks are reluctant to expanding their investment in the market.

Banks also seemed to be shrinking their portfolio size, due to loss from stock investment.
Most banks which invested in the stock market incurred losses from their portfolio investment in 2018, according to the banks’ annual report.

Of the 30 banks listed with Dhaka Stock Exchange (DSE), portfolio investment information of 20 banks were available, and all of them except four incurred losses in 2018.

Mercantile bank, another high profit maker bank in the year 2010 from portfolio investment made loss in the last year.

The bank made profit of Tk 197 crore in the year 2010 from capital market investment, which was more than seven times higher of its portfolio size of Tk 27 crore.

The gloomy market brought loss of Tk 4.59 crore for the bank against its investment of Tk 32 crore.  

The new provision of 10 percent tax on stock dividend announced in the new budget for current fiscal year will reduce dividend ratio of banks in the coming years which will weaken banks’ performance further.

The government imposed new tax provision to encourage listed companies to declare cash dividend. But it will make dividend costlier for banks as most banks are interested to pay stock dividend amid liquidity crisis.

The new tax will compel banks to declare cash dividend which will drain out more liquidity from banks.

As a result, liquidity crisis will deepen in the banking system in the coming days, making banks more reluctant towards the stock market, said industry insiders.

The policy barriers made new banks reluctant to come to the stock market.

The nine new banks started journey in 2013 and they were supposed to be listed with the DSE after three years of operation.

But they did not come in the stock market even after five years.