More than two-thirds of listed banks posted higher earnings in the first nine months of 2019 amid liquidity crunch, lower credit demand and rising bad loans in a development that has left many puzzled.
Of the listed 30 banks, the earnings of 22 lenders rose, seven saw a decline, and one incurred losses, according to their unaudited financial statements.
“I was surprised to see the balance sheets of some banks. They have shown inflated earnings by not keeping required provision against the bad loans,” said a managing director of a bank, which has kept aside around Tk 100 crore as provision against bad loans.
As per stock market rules, every listed company has to make its quarterly earnings public through the website of the Dhaka Stock Exchange (DSE). As these companies are allowed to publish the quarterly figures unaudited, they often take the opportunity and show their financials inflated or deflated based on their needs.
Of the banks, the EPS of First Security Islami Bank more than doubled to Tk 1.30 from January to September, up from Tk 0.53 year-on-year. Yet, the stock of the bank is still selling below its face-value. Yesterday, the stock traded 1.03 percent lower at Tk 9.6.
First Security Islami Bank is not alone as almost all the banking stocks are experiencing the same situation. Market analysts say investors are nonchalant about the banking sector despite the higher earnings as they know that the banks’ asset quality is poor and banks have been suffering from high amounts of default loans. So, adequate provisioning may lower profits, he said.
Recently, all the listed banks have disclosed their third quarter earnings. Despite the rise, seven banks traded below the face value of Tk 10 yesterday. Ten more lenders traded below Tk 15.
Prof Mizanur Rahman, a stock market analyst, said stock investors knew very well that banks’ underlying cash flow has not increased though the earnings rose.
In addition, banks have substantial amounts of non-performing loans (NPLs) which are not provisioned. Once they set aside adequate provision, their profits will decline, he said.
As stock investors realise the situation, the stocks of the banks did not see an upward movement in line with the higher earnings, Rahman, also a professor of the Department of the Accounting and Information Systems of the University of Dhaka.
At the end of June, the banking sector’s total defaulted loans stood at Tk 112,425 crore, which is 11.69 percent of the total outstanding loans, according to Bangladesh Bank data.
A report of the International Monetary Fund, however, said in September that the total amount of problem assets in Bangladesh’s banking sector as of June stands at Tk 240,167 crore, which is more than double the reported amount of defaulted loans.
This is because not all sources of problem assets are captured by the central bank’s definition of defaulted loans.
The banking sector has a provision shortfall of Tk 9,220 crore as of June.
A top official of an asset management company, preferring anonymity, says most investors don’t have faith in banks’ financial reports and they think that the defaulted loans are much higher than they show.
Besides, banks are suffering from cash crunch. As a result, they are afraid of investing in the banking stocks, he said, adding that the surge in the earnings amid higher defaulted loans and the liquidity crunch in the money market deepened their fear further.