Bank IPOs unsold for the first time as investors not confident

Infographic: TBS

Some 26% of the primary shares of Midland Bank have remained unsold despite the good financial performance of the new-generation lender, reflecting a depletion in investor confidence in bank shares that were the most lucrative stocks a decade ago.

This is the first time in the stock market history that the IPO (Initial Public Offering) of a bank company remained unsubscribed amid a series of loan scams, rising default loans, and weak share performance in the stock market. Also, it is the first time since 2006 that any IPO has remained undersubscribed.

The entire banking sector's weak performance eroded investors' confidence, affecting the IPO of Midland Bank, which had a low default loan rate of 2.79% as of December last year when the industry average default rate was 8.16%, according to the central bank data.

Bank shares are no more risk-free stocks to investors even at face value.

For example, the share price of Global Islami Bank, another new-generation bank that debuted on the Dhaka Stock Exchange (DSE) on 17 November last year, could not even touch the face value since the beginning of trading. As a result, investors who invested in IPO shares of Global Islami Bank are at a loss now. Moreover, they cannot sell these shares due to the floor price issue.

This experience kept investors away from investing in bank IPOs, said industry insiders.

Not only a new IPO, but share prices of half of the listed banks have been hovering around face value since the stock market debacle in 2010.

Out of nine new-generation banks that got licensed in 2013, only four have got listed on the stock market. The share prices of two of the four banks remained below face value, while one is trading at face value and another above face value.

The shares of Union Bank and Global Islami Bank are trading below face value when South Bangla shares are trading at face value and those of NRB Commercial Bank are trading above the face value of Tk10.

According to the Bank Company Act, a bank will have to come to the stock market within three years of starting operations. However, all nine banks could not get listed in due time because of the low confidence of investors in bank shares. Moreover, some new banks were struggling to get business in an oversaturated market and some got involved in loan scams.

The scam-hit Farmers Bank had to change its name to recover its image and public confidence. The bank, which has been rebranded as Padma Bank, is now at loss and not in compliance with the stock market rule to be listed. Though the bank is in dire need of funds to survive, it could not raise funds from the stock market due to its worse financial health.

According to the IPO subscription of Midland Bank that ended this 28 February, primary shares worth more than Tk18 crore of the bank remained unsold, while its IPO size was Tk70 crore – Tk5 crore to its own employees, Tk16.25 crore to the eligible institutional investors, and Tk48.75 crore to the general public.

IPO underwriting business is more a free launch

It is now for the first time since the mid-2000s that underwriters of an equity IPO are set to face the compulsion of buying out the unsold primary shares.

"The remaining shares, if they do not cross 35% of the total offer, will be bought out by underwriters as dictated by Public Issue Rules," said Rezaul Karim, executive director and spokesperson of the Bangladesh Securities and Exchange Commission (BSEC).

If 65% of shares are subscribed, underwriters will help the company get listed in the bourses, he added citing the rules.

Underwriters guarantee issuer companies of swallowing all the unsold shares offered and for the first time in nearly two decades, underwriting of equity IPOs proved its worth.

Since the mid-2000s, an overwhelming response to IPOs – up to 30-40 times oversubscription – had been letting underwriter firms earn some fees without facing any realised compulsion to inject their own capital into the business.

"This time it is different," said Md Sayadur Rahman, president of the Bangladesh Merchant Bankers Association.

Midland Bank did not deserve the weak response, feels the investment banker, as it only asked for the face value of Tk10 per share and, more importantly, is a better managed one compared to many of the new generation banks.

Later last year, retail investors did not fully subscribe to the shares offered by Global Islami Bank and the eligible institutional investors grasped it all to offer the new generation bank a happy ending to the IPO journey.

But, investors' weak confidence in banking stocks amid roaring questions on the sectors' governance and business performance pushed Global Islami Bank shares at the lowest allowable price in the secondary market – Tk9 apiece, while primary investors poured Tk10.

Until the Global Islami Bank event, the primary shares at face value had been hotcakes on the DSE as most soared after stock debuts regardless of the stock's long-term potential to retain the prices.

Two consecutive IPOs, the banking ones to be precise, broke the trend while some bonds and mutual funds faced under-subscription at various times.

Sayadur Rahman said if the public issue rules had not drastically reduced the quota for eligible institutional investors and increased that of the general public under-subscription might not have been there yet as institutions are comparatively rational in investment.

Both Sayadur and Rezaul, however, said the unsubscribed shares in the IPO reflect that investors are more cautious than before which is a sign of maturity in general.

Under-subscription is common in developed markets, said Chartered Financial Analyst Md Moniruzzaman, managing director of IDLC Investments Ltd.

"Sad for the bank," he said, adding, "However, it is a good sign that local investors are applying their judgement."

In a decade since the 1996 Dhaka stock crash, a number of equity IPOs, including CMC Kamal, Samata Leather, Paragon Leather, Gachihata Aquaculture, Monno Fabrics, and Daffodil Computers, were undersubscribed and underwriters bailed their way to the bourses, concluded Sayadur Rahman.