Banks' stock market investment 7% higher in 2022

The capital market investment of banks, on a consolidated basis, increased by 7% year-on-year in 2022, according to the financial stability report of Bangladesh Bank.

Consolidated figures include those of all the subsidiaries of the banks.

According to Bangladesh Bank rules, banks can invest up to 50% of their equity in the capital market on a consolidated basis. By the close of 2022, the stock market investment of banks, including all their subsidiaries, stood at 27.3%.

On a solo basis, banks' stock market investment increased by 4.45% year-on-year and stood at 16.4% of their equity at the end of 2022. As per central bank rules, on a solo basis, banks' maximum capital market exposure limit is 25% of their equity.

In its financial stability report for 2022, the Bangladesh Bank stated that although banks' stock market exposure increased in 2022 on both solo and consolidated bases, the exposure is still way below the statutory limit. This implies that an immediate stability issue arising from a stock price shock may not greatly impact the banking industry.

However, from a different perspective, the performance of listed banks, particularly in terms of capital reserve adequacy ratio, non-performing loans, and return on assets, could significantly affect the overall performance of the stock market. This is mainly because most of the private commercial banks are publicly listed, and the banking sector constitutes a major prime segment of the market.

According to the report, banks' solo-basis investment in the capital market includes investment in shares, mutual funds, bonds, debentures, and placements.

Furthermore, loans to their own subsidiaries in the capital market, as well as to others for merchant banking and brokerage activities, and loans to stock dealers are also factored in when calculating banks' solo-basis investment exposures.

For consolidated exposure, investment in the capital market and margin loans by subsidiary companies of the banks are taken into account.

Generally, dividends, interest income, and capital gains constitute the main earnings for the banks from such investments, albeit at the cost of bearing equity price risk. Therefore, the performance of the capital market could significantly impact the banks, as they might incur losses from their investment exposures. The risk could be substantial for higher exposure in the capital market, the central bank added in its financial stability report.

At present, 35 banks are listed on the Dhaka Stock Exchange (DSE). The banking sector contributed 14.9% of the total DSE market capitalisation.