Experts question motives behind BAB, ABB stock-boosting steps

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Mohammad Mufazzal Private banks' lukewarm attitude towards translating promise into actions has caused fresh trust-deficit in the stock market, triggering new protests by retail investors and denting hopes for a much-needed recovery, experts said Thursday. Two associations representing the owners and the chief executive officers (CEOs) of the country's private banks respectively 'pledged' to inject liquidity a substantial amount of money into the flagging stocks in the past eight days in an effort prop up the moribund market. Association of Bankers, Bangladesh (ABB)), representing bank CEOs, said on October 20 the lenders were ready to inject fresh cash to the market, in view of an average PE ratio of 14 for some listed stocks which should be attractive for making new investments in the market. The Bangladesh Association of Banks (BAB), which represents the owners, followed suit by unveiling an ambitious plan to set up a Tk50 billion market stabilisation fund to be operated by an independent asset management firm. The flurry of "good news" stopped the slide momentarily, sending key indices seven per cent high in two days and bolstering confidence that the share market, which has lost more than 35 per cent this year, has finally bottomed out. Trade volume also crossed Tk 6.00 billion for the first time in six months. But only a few days after the two associations made such announcements, real financial difficulties of many banks did not permit them to make fresh investment in the market. Some experts have already raised questions about the motives behind this "game". However, some insiders in private commercial banks (PCBs) have a different view on the matter. They cite a number of factors that are unfavoursble for banks to invest more funds in the stock market at this stage. These factors include: de facto liquidity constraints, existing level exposure of some banks to the stock market and their requirement for provisioning on account of losses already sustained in areas of investments in stock market under its present depressed situation, the volatility of the market as reflected in erratic price movements of most stocks and the investment risks associated with it, the future requirement for provisioning on account of margin loan accounts of loans given earlier to them, the first quarter profitability during the current fiscal (FY) picture of many private commercial banks, their own fund requirements to settle letters of credits in differed import letters of credits, the disconcerting signals about new troubled loans etc. In this context, the promises made by ADB and BAB about making substantial amounts of funds afresh from the banks to the stock market have raised many critical questions about the real motive about the same. However, ex-chairman of Securities and Exchange Commission (SEC) Faruk Ahmed Siddiqi said: "The BAB and ABB should have kept their promises. They made big statements about making new investment but did not walk the talk." "No promise should been made that cannot be implemented. I have doubts whether BAB has the right to make such an announcement. Does it have the authority? I am sure a lot of investors also have similar doubts," he said. Siddiqi said a week after the ABB's announcement there was no significant reflection of private banks' trading activities in the market. "Many investors bought shares after the ABB's announcement that banks will enter the market again. They thought recovery was round the corner. But as soon as they found out that banks didn't come forward, the market tumbled," he said. Professor Salahuddin Ahmed Khan who teaches finance at Dhaka University called the latest initiatives of the banks as part of a wider "game" by a handful of people to defraud the investors. "Can you believe that the BAB has made the announcement about launching a market stabilisation fund without taking into account the legal aspects of such kind of a fund. The whole thing looks like a hoax," Mr. Khan said. "The authorities should investigate their motive. In my opinion, some people are still trying to manipulate the market like they did last year. They should stop this game," said Khan. Khan slammed the BAB for making unlawful announcement that 29 banks have planned to sponsor the market stabilisation fund. "Without taking approval from its board of directors, a bank cannot make an announcement of contributing to a mutual fund as a sponsor. It's beyond its jurisdiction," he said. "Any company which intends to be a part of a mutual fund must secure its board's permission and then post the decision on the DSE website within half an hour. But no banks have done that so far," Khan added. Another observer said on condition of anonymity that no responsible member of the Board of Directors of any bank "can support" risking banks' funds in the stock market at this stage. "Such are mostly their depositors' money. The Directors will be held responsible legally and morally both by the depositors' of banks and their shareholders for making decisions that run afoul of the financial situation of banks under the prevailing situation, though that may suit the political interests of some cronies and their masters," he added. Another analyst said that the banks would themselves be in a difficult position to declare dividends to any reasonable level this year to their shareholders. If the dividend rate on the shares of banks and non-banking financial institutions become too meager or nil for reasons of very low level of profits, that will have more adverse effect on the capital market when the banks close their books of accounts on December 31st and also on the tax revenues of the government, he pointed out. ABB President K Mahmood Sattar and BAB President Nazrul Islam Mazumder could not be reached Thursday for comments, despite repeated attempts.