The government has decided to offload shares of five state-owned banks in the capital market this year without giving an explanation on how this will improve efficiency and reduce the large number of nonperforming loans that affect the profitability of the banks.
Profit matters for a company, especially listed ones, because investors put their money in shares of firms that have high growth prospects, and withdraw investments from ones that perform poorly.
Investment bankers have already questioned the deadline. They appreciated the move but have raised questions about the health of the banks.
Of the five banks, Rupali Bank Ltd – the only listed government bank – is going to offload more shares, while Bangladesh Development Bank Ltd, Agrani Bank Ltd and Janata Bank Ltd will be listed by October this year, according to Finance Minister AHM Mustafa Kamal.
Sonali Bank Ltd will also be listed, but that will take more time, he said.
"Rupali Bank will offload more shares immediately," Kamal told a press briefing at his ministry on Sunday after a meeting with the central bank, the securities regulator and representatives of all state-owned financial entities, including the Investment Corporation of Bangladesh.
The government, in consultation with a committee formed to handle these matters, will determine the supply and number of phases to offload shares based on market demand, he added.
Bangladesh Development Bank, Agrani Bank and Janata Bank will go public one after another by October.
"Sonali Bank will take more time than the others because it deals with a lot of treasury functions," the finance minister said.
All the entities were ordered to complete their asset revaluation within two months, said sources at the meeting and who are also entitled to be in the committee for coordinating the offloading programme.
The Investment Corporation of Bangladesh will be at the centre of execution of the listing plan, and will coordinate among the ministry, the issuer banks, and the capital market.
ICB's investment banking arm ICB Capital Management will work as the issue manager for the planned listing and offloading of shares, while the five banks' own investment banking subsidiaries will support them.
Why the listing?
Experts have long been saying that the Bangladesh government can reduce fiscal deficit by offloading some of its shares in state-owned enterprises, as is done in many other developing countries, including India.
They said such a move would help the government and the market as well.
The finance minister told the briefing that the capital market is in need of good shares.
"The five government banks are profitable now. The government did not have to provide fresh capital to them. The government is the owner of the banks and appears as a guarantor in case of any adversity," he said.
Welcoming the government's move, Md Sayadur Rahman, president of the Bangladesh Merchant Bankers Association, told The Business Standard, "Capital market stakeholders have been demanding the listing of profitable government companies, and we appreciate that the government is acting accordingly."
How the banks are performing
The five state-owned banks are huge in terms of capital base, but their comparatively low net profit after taxes is not enough yet to post robust earnings per share – a key indicator that stock market investors look for.
"But they are rich in financial and non-financial assets. They have a large capital base and operation scale. On top of these, government protection adds to their strength. These are all good for shareholders," said Md Sohel Rahman, chief executive officer of ICB Capital Management Ltd.
As of December 2018, there was more than 17 percent nonperforming loans at Agrani, 19 percent at Rupali, 26 percent at Sonali and 41 percent at Janata.
Bangladesh Development Bank, a specialised bank which emerged through the merger of two sick industrial lenders a decade ago, is sinking because of a devastating 46 percent nonperforming loans.
The IMF says that non-performing loans in the banking industry should not exceed 17 percent. Bangladesh Bank's official data claims that non-performing loans are near 10 percent in the entire banking sector. Given the benchmark, the percentage of non-performing loans at state owned banks is a scary matter for capital market investors.
Call for improved efficiency and governance
Dr AB Mirza Azizul Islam, finance advisor to a former caretaker government, led the process of transforming the state-owned banks into limited liability companies more than a decade ago.
He emphasised the need for the banks to improve efficiency and governance because they were suffering from an abnormally high volume of nonperforming loans.
"However, it is good news that the banks are profitable now and the government is offloading some shares," he said.
Timing and deadline for listing
"The overall banking sector's outlook is not attractive enough because of mounting nonperforming loans and slow loan growth in the private sector. That is the key reason why investor confidence in bank stocks is deteriorating," said Azizul.
He believes the October deadline offers enough time for the banks to go public if everyone works seriously.
Many investment bankers, on the other hand, have expressed concern. They said it would be great if the deadline could be met, but previous examples were not allowing them to hold their breath.
Last year, the finance minister ordered the non-listed insurance companies to go public within three months. Half of over two dozen companies only secured the contract for services from investment bankers to go public, and four of the insurers are awaiting the securities regulator's nod.
At the beginning of this month, the finance minister declared that the government will offload more shares of two listed state-owned energy companies – Titas Gas Transmission and Distribution Company Ltd and the Power Grid Company of Bangladesh.
The declaration also included initial public offerings of five other power companies – North-West Power Generation Company, Electricity Generation Company of Bangladesh, Ashuganj Power Station Company, B-R Powergen, and Gas Transmission Company.
Can the market absorb all the supply?
The stock market is struggling to avert a further slide after the indices dropped by more than 25 percent in the last two years.
And investors and experts are questioning whether the market can absorb all the supplies the finance ministry is planning.
"The market is in an undervalued situation, and the planned public offers should bring fresh investments," said Md Sayadur Rahman, president of the Bangladesh Merchant Bankers Association.
He said government intervention is needed to help increase demand in the capital market.
The finance minister also expressed confidence on Sunday that foreign investors as well as the general people would also opt in to secure stakes in the profitable state-owned companies.