Banks dive into Treasury bills, bonds as interest income falls
Listed banks increased their investment in government and corporate bonds, securities and stocks in the second quarter of 2020 to offset the loss in interest income caused by the ceiling on lending rates.
Their investment in bonds and other securities rose 8.84 per cent to Tk 314,747 crore as on 30 June. Investment income surged Tk 842 core, or 49 per cent, to Tk 2,546 crore in the quarter.
The data was calculated based on the half-yearly financial statements of 25 out of 30 banks listed on the Dhaka Stock Exchange. The reports of Al-Arafah, Brac, ICB Islamic, Standard and United Commercial Bank are not available on their websites.
"As the interest rate of Treasury bills and bonds was high and banks did not need to keep provisions against the investment, it was better to invest into these instruments," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
The government capped the lending rate at 9 per cent and the deposit rate at 6 per cent on 1 April. As banks have had to comply, the net interest income of the lenders plunged 39 per cent to Tk 3,095 crore in the second quarter.
The spread, the difference between the lending rate and the deposit rate, fell to 2.5 per cent to 2.75 per cent in the April-June quarter due to the single-digit lending rate.
"So, the interest income was expected to receive a major blow," Rahman said.
Although the lending rate went down to 9 per cent, many of the banks could not bring down the deposit rate to 6 per cent. One bank is still offering deposits at 7.5 per cent, according to Rahman.
As Bangladesh's trade with the rest of the world plummeted during the quarter because of the coronavirus pandemic, banks' earnings from commissions and charges also fell.
The commission and charge income dropped 24 per cent year-on-year to Tk 1,110 crore. The profits declined 35 per cent to Tk 1,263.97 crore in the second quarter due to the lower interest income and commission on their services.
Bangladesh's export earnings plunged 16.93 per cent to $33.67 billion in the just-concluded fiscal year, the lowest in five years, as the pandemic brought global trade to its knees.
"Some banks will try to increase their investment in Treasury bills and bonds to make profits but they will have to expand their loan books because the interest rate on government bills and bonds has already been cut," Rahman said.
The interest rate on Treasury bills and bonds came down to 8.1 per cent from 9 per cent.
The current half of the year would be more challenging as the two quarters will suffer from the problem of the lower interest income, Rahman said, adding that banks saw a higher interest income in the first quarter.
"Moreover, the country has been affected by floods and we still don't know when the pandemic will pass."
The banking sector's future will also hinge on the orders the garment sector would receive in the spring.
A top official of another bank, which has increased investment in bonds and securities significantly, said as the outbreak of coronavirus was getting out of control during the second quarter, there were no other options but to raise investment in bonds, securities and some other safe instruments.
"Most of the banks did this."
Of the 25, 19 banks bought more bonds and securities, but this did not spare them from losses.
"We failed to halt the profit fall during the period. Profits of a bank can't be ensured from these investments alone," the banker said.
The stock market was not the beneficiary during the period either.
DSEX, the benchmark index of the Dhaka Stock Exchange, dropped 0.47 per cent to 3,989 on 30 June compared with 25 March.
"The stock market was riskier, so we were not interested in investing in the speculative market. But now we are putting some money into the market," the banker said.