March 31, 2023
Local banks await two major positive regulatory developments that would help them improve profitability, said Chartered Financial Analyst Sakib Chowdhury.
In an interview with The Business Standard recently he said, The Bangladesh Bank is expected to opt out of the cap on the banks’ lending rate and also to leave the exchange rate of Taka to the market by the middle of the year.
The two would be significant policy developments in terms of the banks’ profitability that can attract investors in the banking stocks, expected the analyst working as the deputy head of research at the top brokerage firm UCB Stock Brokerage.
The lending rate is going to be pegged with the rates of treasury bonds in a fashion so that a bank can charge its borrowers a few percentage points on top of the reference rate, as hinted by the central bank.
Higher interest rates are generally a negative factor for the stock market, he said, adding that the lending rate cap had been creating some problems in the economy and financial market and with the expected liberal interest rate system much of the pressures might be released.
The fair price of banking stocks
Before everything investors should look into listed banks’ asset quality that refers to the quality of their loan and investment portfolio, said the equity analyst.
Due to high non-performing loans and covered up weaknesses, investors have long been cautious in paying the price of Bangladeshi banking stocks.
Sakib Chowdhury said, if the return on equity of a bank was equal to the average cost of capital in the very economy the stock price should be equal to the net asset value per share (NAVPS).
For example, if the cost of capital is 13% and a bank earns the same against its return on equity (ROE) the share price is ideal at near to its NAVPS.
If the ROE is half to the cost of capital in the economy, the stock should be traded at somewhere around half to the NAVPS and vice versa, said the analyst.
In the depressed stock market, some banks have been offering lucrative dividend yields that even go as high as 7% may be good bets, believe Chowdhury who serves a group of large investors with his analysis.
The Bangladesh Bank also is expected to make the exchange rate market oriented in the middle of the year, said Sakib Chowdhury, adding that if expatriate Bangladeshis find a lucrative dollar rate they would return to the banking channels for remittance and that might raise monthly remittance earning of the country to $2 billion, nearly two thirds higher.
Exporters and remitters would help improve the balance of payment and foreign currency reserve of the country in the second half of the year.
The western crisis is not to trigger global meltdown
US Silicon Valley Bank that grew its deposits by 100% in a year with the tech industry deposits during the pandemic fell due to its liquidity mismatch and capital erosion in US Treasury bonds.
The US financial system instantly took control of the bank and stopped any major spillover.
Two more banks felt the bank-run threat where depositors lined up for their money and a bank failed to pay them back immediately. One of the two banks was rescued by the government, and another got liquidity support from a giant US bank.
Citing his US analyst friends, Sakib Chowdhury said, US depositors were pulling money from particular banks they felt unsafe and depositing the sum to other stronger banks, hence the money was still in the US banking system.
The biggest positive factor was, he said, unlike that in the 2007-08 crisis when banks were heavily holding toxic mortgage-backed securities, banks this time were holding US Treasury bonds, dubbed the safest securities in the earth and this was what the analysts were counting on.
The worst is over for Bangladesh?
The Financial system of Bangladesh is delinked enough to avert any contagion effect, said Chowdhury.
The impact of the western banking crisis is accelerating the recessionary wind that has been cooling down the commodity market and Bangladesh is set to be benefited by the developments until any recession in the west turns too deep and stubborn to hit Bangladesh’s exports there.
The worst for the Bangladesh economy might have been over for now, believed Sakib Chowdhury.
interview / banking sector in Bangladesh
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