Banks want provision, exposure rules relaxed to invest in stocks

The banking industry wants relaxed provisioning rules against stock investments alongside a raised ceiling for their capital market exposure before injecting fresh funds into stocks, representatives of some large banks told the Bangladesh Bank and the Bangladesh Securities and Exchange Commission (BSEC) earlier this March.

The central bank along with representatives from major banks sat with the BSEC against the backdrop that the securities regulator has been requesting banks and all other financial service firms to invest in the capital market.

At present, the majority of banks are not investing in stocks enough even though they have a big room for that.

Asked about the reasons behind their ongoing low appetite for stocks, the bankers said the industry is not finding stock investments suitable enough as the needed liquidity is not abundant for many banks right now so that they can prioritise stock investments, according to the meeting minutes drafted by the Bangladesh Bank.

Bankers also requested for excluding perpetual bonds from their capital market exposure calculation.

BSEC Chairman Professor Shibli Rubayat-Ul-Islam told The Business Standard that the securities regulator is campaigning for strengthening the institutional investor base in the capital market since it is overly dominated by unsophisticated retail investors.

"The capital market is catering to banks' demand for capital with crores of taka in the forms of equity and bonds. For that, the capital market is spending its funds, and the market deserves an equal response from banks," he continued.

Salehuddin Ahmed, former governor of the Bangladesh Bank, however, does not think it would be a good idea to use more of banks' money in the capital market awarding them any waiver from the rules that were once put in force to tame them in the stock market.

Infograph: TBS

"The repetition of the 2010 situation is unwanted and the banking industry should not be allowed to go for too much investment in stocks," he told TBS.

There might be better returns on investment in stocks, but it also involves higher risks, he observed.

Any drop in the value of the investment portfolio must be backed by full provisions for the sake of depositors' safety, he said, adding that commercial banks' key job is to efficiently lend money they collect from depositors.

Provisioning is the act of setting aside a portion of profits in proportion to incurred or potential losses.

For example, a bank invested Tk100 crore in stocks and after a price drop the market value of the portfolio came down to Tk75 crore. At the end of the very quarter, the bank must make Tk25 crore provisioning against the unrealized investment loss.

Once, if the market value again goes up from Tk75 crore, a provision equal to the increased value would be reversed to the income statement.

Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB) and managing director of Mutual Trust Bank, said the banking industry is serious about the development of the capital market as it would help release some pressure on banks regarding long-term project financing.

"But before talking about fresh investment, we must look at the root of the problems that the stock market is faced with which are not allowing the market to sustain strengths.

Waivers and relaxations might be allowed as a solution to a temporary crisis, but they should never be meant to be permanent phenomena.

In case of any regulatory relaxations, banks must behave responsibly. It is important as to where and how they are investing depositors' money.

Khodaker Golam Moazzem, research director of the Centre for Policy Dialogue (CPD), told TBS, "Previously, we saw rules were relaxed to increase banks' investment but that did not at all help the capital market gain stability because of the internal weaknesses of the market."

The market is suffering from poor initial public offerings (IPOs), a lack of transparency in beneficiary owners (BO) accounts, insufficient monitoring, and weak financial reporting, he pointed out, adding banks as institutional investors also failed to behave properly in the market.

"For all these reasons, I think pushing them to pour more of depositors' money into stocks would be nothing but risking them."

If the BSEC focuses on establishing good governance, it would be a real investment for the capital market, he observed.

The BSEC chairman said, "We are not requesting anyone to over invest in the capital market, just requesting for a fair participation of banks and other institutional investors for the sake of balance of fund flow in the market."

Faces of the low appetite

The banking industry's appetite for stock investing has apparently declined a lot over the last decade.

According to central bank sources, scheduled banks collectively left roughly half of their capital market investment opportunities unutilised, be it in their regular stock portfolios or in the concessional Tk200 crore special funds for individual banks. Of course, the scenario varies for individual banks.

In early 2020, when the stock market was in a free fall even from its multi-year low amid the Covid-19-induced panic, the Bangladesh Bank allowed each of the scheduled banks to build Tk200 crore funds for buying stocks at almost decade-low prices along with offering a big relief of not including the prescribed investment in their capital market exposure.

The stock indices of the Dhaka and Chattogram bourses doubled in 15 months since the market bottomed out in mid-2020 and are in a correction phase now that has brought down many stocks' prices again.

But nothing whetted the banking industry's appetite to utilise the offered opportunity to build the concessional special fund and take a bigger position in stocks, no matter if the stocks are undervalued or soaring.

As of early March this year, only 36 of the 61 scheduled banks have built their concessional special capital market investment fund worth Tk5,700 crore in aggregate. Out of that, the banks collectively invested less than Tk3,600 crore in the capital market instruments.

The 61 banks, however, had room for investing over Tk12,000 crore in total.

Interestingly, of the Tk3,600-crore investment, Tk1,400 crore was invested in the Beximco Green Sukuk alone, reflecting a further low appetite for stocks.

Halfway to the exposure ceiling

Banks now are allowed to invest up to 25% of their solo equity – paid up capital, share premium, retained earnings, and statutory reserves – and 50% of their consolidated equity in the capital market scrips and loans to capital market intermediaries.

Central bank sources said right now only 7-8 banks are curious about the upper ceiling and are maintaining their capital market exposure above 20%.  

The average exposure of publicly listed banks is around 18%, according to bank analysts at different brokerage firms.  

Caution or reluctance of the remaining scheduled banks has brought down the industry average capital market exposure to around 14%, while a large number of non-listed and foreign banks barely have stock investments.

The 14% exposure is worth around Tk17,000 crore in the form of direct portfolio exposure and loans to capital market intermediaries.

The banking industry also made Tk10,500 crore in cumulative investments to build their capital market subsidiaries, which remains off-exposure.

Behind the low appetite

The investment chiefs of the 11 banks present at the meeting with the BSEC said many banks right now do not have enough liquid assets that could help them prioritise stock investments, reads the meeting minutes, adding banks are preferring lending over stock investing also because of the nature of provisioning.

Loan classification and provisioning grants banks 6-9 months and the rate of provisions range from 20% to 100%. On the other hand, they have to make 100% provisions against unrealised losses in the capital market investment portfolios at the end of every quarter.

The post-2010 negative experience in the stock market has put banks' boards and top management in a dilemma regarding fresh investments in stocks nowadays.

As the banking industry is yet to heal the 2010 wounds, they had to make too much provisioning, sacrificing profit and capital strength since the market crash, banks now care the most about the stability of investment.

Capital market investment beefs up banks' risk-weighted assets and Basel-III requires more capital to be maintained against it and that is another factor discouraging banks to invest a lot in stocks.

The bankers also told the meeting that bank managers have annual profit targets and that makes them prefer short-term capital gains and in the given market context, it is really uncertain, while stocks are more an ideal asset class to hold onto over years.

Banks are too cautious in stock investing as the lending risk and stock investment risk are completely different and the second one is totally beyond control amid no collateral coverage.

Also, the investment wing officers at banks are much concerned about their professional risks in case of investment losses.

Bankers demanded a specific investment policy by the Bangladesh Bank that the bankers can follow and act professionally in the market.

Some bankers said traditional bankers lack specialised investment skills and market insights.

On the other hand, the professional investment management industry is yet to gain the banks' trust and banks feel an additional risk to depend on market intermediaries, instead of investing on their own.

Banks did not invest enough under the concessional Tk200 crore special fund, despite many waivers regarding exposure and provisioning, because of the excessive uncertainty in the stock market, said the bankers.

Citing all the problems they are facing, the bankers suggested focusing on other institutional investments alongside banks for the development of the capital market, according to the meeting minutes.