Banks’ poor performance weakens capital market

Banks’ scrips have become poor performing instruments due to lack of confidence of share investors for spread of negative impression about the sector following a series of large loan-scams in the aftermath of the much-talked bubble in 2010 that led to a huge catastrophe.

Loan-scams, rise of non-performing loan (NPL), and low income of banks together have resulted in low or no-dividend for shareholders in recent years that drew less attention of investors on banks’ scrips, reports the Daily Sun.

dse cseBangladesh Bank data shows the banks’ low income was mainly from low demand of the private sector over last few years. Out of total 30 banking companies listed on the bourses, prices of scrips of only three banks are above Net Asset Value (NAV) while shares of other banks are being traded below the NAV, according to data of the Dhaka Stock Exchange.

Ahasanul Islam Titu, a former DSE president who is now Managing Director of Mona Financial Consultancy and Securities Ltd, stated that the situation caused from multiple reasons including banks’ continued poor performance and a regulatory initiative with regard to raising paid-up capital that narrowed banks’ profitability.

“How banks’ scrips would attract good price when performance is not good. The major reason banks are performing poor is loss of confidence of clients after large loan scams discovered and rare punitive actions taken against perpetrators,” Islam said.

He said the burden of bad-loan at banks has escalated non-performing loans at historic high. According to central bank data, the NPL stands at around Tk 55,000 crore, as of June 2015.

Islam said there is also a co-relation between rising paid-up capital and year-end profit of banks.

According to him, the profit is higher when a bank’s paid-up capital is less. And, in reverse, the profit lessened when a bank’s paid-up capital is higher. Increased paid-up capital has relegates banks’ profitability.

“A bank couldn’t go for awarding fair or higher dividend to shareholders when profit is narrowed. And, without dividend, scrips of banks won’t do well in the capital market, naturally,” he added.

He also said banks’ scrips have been the major instrument for investors in the capital market and the market won’t be stimulated unless performance of banks improves.

Meanwhile, the capital market is repeatedly experiencing fluctuation and each case is leading to eroding up capital of small investors amid controversial traps laid by big investors taking the advantage out of creating volatility in the market.

Millions of small individual investors who invested in banks’ scrips have been trapped for years as prices goes down abnormally. Banks also couldn’t raise their investment due to ceiling of the regulator, which was mainly aimed at preventing further bubble.

According to DSE, prices of scrips of only three banks found higher than NAV. Price of one unit share of Dutch-Bangla Bank stood Tk. 72.59 against Tk 86.70 NAV, that of Brac Bank stood Tk 38.50 against Tk 27.16 NAV and that of Trust Bank closed at Tk 21.70 against NAV of Tk. 19.85, as of Thursday last.

The DSE data also shows that scrips of all other listed banking companies are being traded below the NAV.

Nine new generation private banking companies, however, are not acquainted to the capital market.