Banking stocks lose grace for high defaulted loans

The Daily Star April 22, 2021

Once known to many for their attractive stocks, banks are a long way from raising adequate interest among stock market investors as confidence has been sunk by high amounts of non-performing loans and low asset value.

Among the listed 31 banks, 21 are witnessing their stocks of a face value of Tk 10 being traded at less than Tk 20.

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Stocks of AB Bank, First Security Islami Bank, ICB Islamic Bank, National Bank and Standard Bank even traded below the face value.

“Investors are not buying banking shares for mainly two reasons. One is for the vulnerability of the sector,” said Prof MA Baqui Khalily, a former director of Dhaka Stock Exchange (DSE).

“Meanwhile some investors do not want to invest in stocks of banks that offer interest on deposit. So they only go for Shariah-based banks,” he said.

On the vulnerability, Khalily, former chairman of the Department of Finance at the University of Dhaka, said, “The non-performing loans are the main reasons for the vulnerability.”

Default loans stood at Tk 88,734 crore last year, which was 7.66 per cent of the outstanding loans at that time, showed data from Bangladesh Bank.

The borrowers got an opportunity of not having to repay loans for one year considering the fact that business has been hampered during the pandemic but this may lead to the creation of a default culture, he said.

On the other hand, the loans will be accumulating in the coming years, so their burden will rise, which again leaves a risk of higher default loans, he said.

The moratorium on bank loan repayments was introduced in mid-March 2020. It was extended up to December last year as the crisis persists.

Answering a question, the financial sector analyst said the banking sector was not healthy. Moreover, big companies are now not keeping any collaterals against their loans, he said.

Banks are giving loan on the basis of their relationships with clients; if the businesses become defaulters, banks will not be able to get the money back, said Khalily.

This type of banking is increasing the risks of the banking sector.

The government should take up prudent policies to make the banking sector healthy, he said.

Moreover, considering the low price-to-earnings (P/E) ratio, investors can invest in some banks, the analyst added.

The P/E ratio refers to a company’s share price compared to its earnings per share.

The P/E ratio of banks is much lower than that of other listed companies. Of the 31 listed banks, 22 have had their P/E ratio in the past 12 months ranging from 4 to 8, according to the DSE data.

The P/E ratio of most companies range from 15 to 25, shows the data. If the P/E ratio is lower than 15, the stocks are considered to be much lucrative.

The DSE data shows that the average P/E ratio for the banking sector is 8.13, the lowest among all the sectors. Ratios closest to it are of the fuel and power and textile sectors, 11.93 per cent and 17.93 per cent respectively.

Mir Ariful Islam, head of research of Prime Finance Asset Management Company, said investors have very little confidence on the banking sector due to their high amounts of non-performing loans and low asset quality.

So they are not buying bank shares although those come to provide handsome dividends, he said.

Almost all the listed banks are paying over 10 per cent dividend every year.

For 2020, 15 banks have declared dividends. Of them, two declared less than 10 per cent, four 10 per cent to 14 per cent, four from 15 per cent to 19 per cent and three from 20 per cent to 29 per cent. Two are going to provide over 29 per cent.

However, stock investor Md Jakir Hossain expressed his frustration, saying that he bought many banks’ shares on seeing that they had a low P/E ratio but the stock price was eroding month after month.

“I invested in some banks at least four years earlier but the share prices of the banks are still lower than that of my buying price,” he said. He however acknowledged that they were paying dividends.

Banks’ share prices have remained bullish over the last few years. Furthermore, many of the stocks have been downed to less than the face value, Hossain added.

Ali Reza Iftekhar, chairman of the Association of Bankers, Bangladesh (ABB), acknowledged that the share prices of many banks were low because of high non-performing loans or high deferral of provision or low cash reserve ratio in the banks.

High deferral of provision comes about for banks which, facing a shortage of provision, secure permission from the central bank to declare a dividend on condition of keeping that provision for the next few years, he said.

But there are also some banks with good performance records which are paying high amounts of dividends and with no deferral of provision, for which their stock prices also remain high, said Iftekhar, also managing director of Eastern Bank.

The veteran banker cited his bank as an example, saying that they were providing good dividend year after year and so its share price was also pretty good and had remained almost at a standard level.

Sometimes high paid-up capital is also a reason of share prices going low, he said, adding that investors would regain confidence in the banking sector if the non-performing loans decrease and the lenders steadily start to perform well.

“This is a matter of investors’ confidence,” he said.