Banking stocks suffer despite higher dividends
Most banks are announcing higher dividends for 2020 than a year ago although they were plagued by the coronavirus pandemic for most of the year and had to do with a lower interest rate regime.
However, this could do little to enable banking stocks to attract investors as apprehensions prevail over the asset quality and a likely increase in non-performing loans, according to analysts.
So, the prices of these stocks have stayed relatively low in context to all the sectors in the market.
Among the 27 listed banks, 10 declared higher dividends, 11 the same, and seven lower.
Md Abdul Halim Chowdhury, former managing director of Pubali Bank, said the stock market was in a better position last year that positively impacted their profits.
When the market did turn bullish, banks generated higher profits and had to keep a reduced amount in provisioning in the portfolio compared to that a year earlier, he said.
"So, our profits were impacted positively in two ways," he said.
The Bangladesh Bank also ordered banks not to classify loans in 2020. As a result, lenders did not require to set aside a higher amount of funds in provisioning.
A moratorium on bank loan payments was offered in March last year after the economy started suffering from the effects of the pandemic.
The support was initially expected to last until the end of June. But, later, it was extended up to December as the crisis showed no signs of abating.
In 2020, banks were able to provide much higher dividends. But many banks retained some of their profits as safekeeping for the coming years, Chowdhury said, adding that the banks were apprehensive of what was to come in the coming months.
According to the banker, it was not normal for banking stocks to trade at lower prices because the central bank strictly monitored banks. As a result, they fared comparatively better than many other companies.
The price-to-earnings (P/E) ratio of the banking sector is the lowest among all the sectors, giving some explanation as to why the prices of the stocks in the sector were the lowest despite the generation of higher profits.
The P/E ratio of the banking sector is 6.9, whereas, for fuel and power, it is 11.8, pharmaceuticals 18 and textile 18.8, according to data of the Dhaka Stock Exchange (DSE).
Apart from this, the stock price of 21 banks was less than Tk 20, and for some, it is hovering around the face value of Tk 10.
"Stock prices are not reliant on dividends; rather, future profitability is the main influencer," said Arif Khan, vice-chairman of Shanta Asset Management.
Investors have a common perception that most banks failed to get back what they had loaned out in the past year, so there would be an impact on the balance sheet in the coming years.
"Investors fear that the bad loan portfolio of banks will be larger in the coming years, thus their provisioning requirements will increase," said Khan, also a former commissioner of the Bangladesh Securities and Exchange Commission.
The second wave of infections might also have an impact on the banking sector in the coming months, he added.
Non-performing loans stood at Tk 88,734 crore last year, which was 7.66 per cent of the outstanding loans of Tk 11,58,775 crore as of December, showed data from the Bangladesh Bank.
The higher profits of banks were not expected due to the lower interest rate regime and the pandemic plaguing the economy, said stock investor Abdur Rahim.
From April 1 of last year, the lending rate was capped at 9 per cent, for which the interest income of banks dropped.
The stocks of banks are not preferable for investment because the asset quality is not good, while they also have a huge amount of non-performing loans, the investor added.