How Banks Made Millions From Shady Stock Transactions

Private-sector lender Premier Bank, which was recently penalized for investing in unwanted, rule-breaking stocks, saw 1,008% year-on-year growth in portfolio income from January to September 2021, according to the Bank of Canada. Bangladesh.

The bank was fined Tk 50,000 by the Bangladesh Bank for violating guidelines for stock market investments under the Special Liquidity Support Program, but made a profit of Tk 28 crore through to its investment in stocks at the end of September. year ended. The bank’s portfolio income was Tk 2.53 crore in the corresponding period a year ago.

Another private bank, NRB Bank, which was fined by the central bank last September for manipulating stock prices, recorded 15,108% growth in profits on portfolio investments in the first three quarters of last year.

The bank was fined Tk 49.50 lakh for manipulating a company’s stock price, while its equity investment income stood at around Tk 20 crore at the end of September. 2021, compared to only 13 lakh Tk during the same period of the previous year.

These two examples illustrate how banks fueled stock prices by investing aggressively and making huge profits.

The fact that some banks got involved in excessive investment and price manipulation recently caught the attention of the Bangladesh Bank, prompting the regulator to take strict action.

Bank balance sheets – which show their profit on equity investments, saw robust growth in the July-September 2021 quarter – also bear evidence of aggressive equity investing

Profits of private commercial banks from investments in the stock market jumped to Tk 481 crore in the first nine months of 2021, up 568% from the Tk 72 crore earned in the same period there. is one year old, according to the Bangladesh Bank in its July-September quarterly report of last year.

The banking sector grew 10% year-on-year from January to September of last year while its stock profits rose 267%, according to the central bank report.

The share of banks’ income from equity investments to their total non-interest income more than doubled to 7.5% in the first nine months of last year, from 3.6% in the last year. same period of the previous year, according to data from the Bangladesh Bank.

The banking sector’s overall profit in the stock market was Tk 960 crore at the end of September last year, of which Tk 514 crore was portfolio income and Tk 447 crore was dividend income. . The total profit of banks in the stock market was Tk 377 crore in the same period of the previous year.

Some private banks recorded unusually high profit growth from equity investments last year.

For example, Mercantile Bank posted a 1,48,867% growth in profits in the stock market. Its profit in this segment was Tk 44 crore in the first nine months of last year, which was a paltry lakh of Tk3 in the same period of the previous year.

Some new generation banks also made good profits on portfolio investments last year. For example, the South Bangla Agriculture Bank earned 9 crore Tk from portfolio investments in January-September last year, which was zero in the same period of the previous year.

Another new generation bank, Padma Bank, earned around Tk 6million from portfolio investments in September of last year, although it had no segment income during the same period there. is one year old.

The Bangladesh Bank recently discovered that nine banks were involved in aggressive investments in stocks, some of which were involved in manipulating the stock prices of small-cap companies.

The banks are Agrani Bank, Premier Bank, Exim Bank, NRB Bank, Southeast Bank, Eastern Bank, NRB Commercial Bank, NRB Global Bank and Union Bank. Five of these banks were sanctioned by the regulator and the rest received warnings.

Most of these banks have shown more than 100% growth in profits from their portfolio investments, according to data from the Bangladesh Bank.

Salehuddin Ahmed, former governor of the Bank of Bangladesh, told The Business Standard that monetary penalties alone are not enough to prevent banks from overinvesting in stocks.

Noting that banks, through excessive investments in stocks, put public money at risk when the profit they derive from it is not sustainable, the seasoned banker said the Bangladesh Bank can take action. drastic, such as the imposition of sanctions on refinancing, the opening of branches, the reappointment. of the managing director, which will discourage banks from overplaying on the stock market.

The central bank should also research the banks’ sources of profit before allowing them to pay dividends or withholding provisions, he added.

Bank excess contributed to unusual increases in unwanted stock prices, pushing price indexes to their highest levels in the July-September quarter.

Some banks have invested in stocks exceeding the equity investment limit of 25% of their capital set by banking law, while others have invested under the special liquidity program of Tk 200 crore for each bank, in violation of central bank guidelines.

In the past year, when overall economic activity has remained stagnant, only the stock market has been vibrant. The stock prices of 140 listed companies, mostly small-cap and low-quality companies, rose 100 to 1,200% in one year until September of last year, putting retail investors at risk.

The manipulation of stock prices in the insurance industry has been widely discussed among stock market investors.

According to the Dhaka Stock Exchange (DSE), shares of 48 of the 53 listed insurance companies have gained prices between 100% and 750% in one year until September 2021.

However, the equity market saw a massive correction after the Bangladesh Bank took strict action against banks’ overexploitation of stocks.

DSEX, the benchmark for DSE, has lost more than 500 points in the past two months, according to the exchange.

Stock market performance

The Bangladesh Bank, in its quarterly report, observes that the strong performance of the capital market continued during the July-September quarter of last year, as evidenced by the strong growth of the price indexes, the dynamism of the turnover and expansion of market capitalization.

Global developed and emerging market capital markets as measured by the MSCI index showed some correction during the quarter while the Bangladesh capital markets index rose significantly.

The key capital market indicators, the DSE DEX Broad Index and the DSE-30 Index reached their highest level of 7,329 and 2,710.5, respectively, in the quarter since their inception in 2013.

During the period July-September 2021, the DSEX index increased by 19.2% and 47.7% compared to April-June 2021 and July-September 2020, respectively.

In the third quarter of 2021, the DSE-30 index rose 22.7% and 59.8% respectively compared to April-June 2021 and July-September 2020, according to the central bank’s quarterly report.

In 2021, the Bangladesh stock market was ranked fifth in terms of returns until mid-December among Asian frontier markets, according to the latest report from Asian Frontier Capital (AFC) which invests funds in these markets. .

The Dhaka Stock Exchange, with its cumulative return of 26% since the start of the year, was only behind Mongolia, Sri Lanka, Vietnam and Kazakhstan, ahead of Iraq, Indonesia and, of course. , negative yielding markets such as the Philippines, China, Pakistan and Malaysia. .

DSEX has beaten the global averages of frontier markets and also emerging markets, which have developing economies and thriving financial markets.

Investors like AFC Frontier Fund tend to invest in blue chip companies at attractive prices.

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