The banking sector has experienced annual erosion of stocks' market capitalization to the economic volatility at a higher rate than the overall market, with the newly-listed Union Bank and Global Islami bank excluded from the scene.
The Dhaka Stock Exchange's equity dropped 11 per cent or Tk 578 billion in the 12 months through December 13, 2022 while the banking sector has its market valuation reduced by more than 12 per cent.
Union Bank was listed with the prime bourse in January through the biggest initial public offering (IPO) among the listed banks while Global Islami Bank entered the market in November via the second highest IPO.
The two banks have been kept out of the calculation since the period under consideration is short to judge the performance of the stocks, with the imposition of the floor price during the time.
Minus the two, the listed 32 other banks are feared to lose its market value further if the price movement restriction is lifted.
Investors have been turning away from bank stocks as the sector has been smeared by financial scams, increasing bad loans, and liquidity crunch.
The latest media reports on a loan scam in Islami Bank Bangladesh dented investors' confidence further.
While customers are lining up to withdraw their deposits from the Shariah-based bank, stock investors are mounting pressure to sell-off their holdings.
The irony is that bank stocks have the lowest overall price-to-earnings (P/E) ratio -- 7.50 per cent. Low P/E ratio means stock price is low compared to the company's earnings or that investors are paying less for every one taka income of the company.
Most banks usually provide 10 per cent to 15 per cent dividends every year. To get dividends, investors usually start buying shares in December, but the trend is reverse this year, insiders say.
And the manipulators do not put bets on bank stocks for their larger size of equity in the speculation-driven market, said Prof Abu Ahmed, a capital market analyst.
Some of the listed banks have quality assets and they are transparent when it comes to declaring non-performing loans and the money set aside for provisioning, he added.
Despite good dividends, prices of bank stocks stay low because investors get panicked by the scams.
The stock prices of 30 banks fell up to 40 per cent in the past one year while 28 banks have been stuck at floor in the last few weeks, according to the DSE.
Seven banks are traded below the face value, including the two newly-listed banks.
Referring to the lack of investors' confidence, Mr Ahmed, a former chairman at the economics department of the University of Dhaka, said, "The integrity of many bank owners in Bangladesh is questionable. Sometimes they themselves are involved in irregularities."
The overall stock market has been depressing due to global economic uncertainties, raging inflation and the volatile foreign exchange market, said an asset manager, "but bank stocks are now facing their worst time and are unable to attract investors."
Investors distinguish the bank assets as very poor in quality, he added.
Even Global Islami Bank failed to attract investors on the debut trading a month ago, which resulted in its shares falling below the face value on the day.
Meanwhile, the Bangladesh Bank on Monday re-appointed an observer at Islami Bank and deployed an observer for the first time at First Security Islami Bank (FSIBL). Chattogram-based business giant S Alam Group has major stakes in both the Shariah-based lenders.
The central bank is now carrying out an investigation into Islami Bank for authorising Tk 72.46 billion in loans to nine companies in recent weeks in violation of the banking rules. Most of the companies filled in fake addresses in their loan application forms.
As of September, non-performing loans rose to a whopping Tk 1343.96 billion, which is 9.36 per cent of the total outstanding loans in the banking sector.
Another sign of the weak health of the sector is capital shortfall.
Eleven banks collectively faced a capital shortfall of Tk 326.06 billion in September, caused by years of irregularities. Among them, three are listed--Rupali Bank, National Bank, and ICB Islamic Bank.
Banks have to set aside a large amount of provisioning against defaulted loans, which impact their capital base.
"Investors are concerned about the sector's future as they believe the profits posted by many banks and other financial institutions do not paint the true picture," the asset manager said.
For example, once a highly-profitable-non-bank listed financial institution, People's Leasing and Financial Services, turned into a failed organisation after a scam. It could not repay depositors.
Some of its directors, including Prashanta Kumar Halder, a former managing director of NRB Global Bank, swindled more than Tk 10 billion by submitting fake documents in 2013-14.
The trading of the stock has remained suspended since July 2019.
Retail investors held 68 per cent of the NBFI's stock and they stand to lose about Tk 1.84 billion.
Moreover, about 15 banks and NBFIs have Tk 8.50 billion invested in Peoples Leasing.
"Negative sentiment is now hanging over the market and it has an impact on the stocks' performance too," said Md Sajedul Islam, senior vice-president of the DSE Brokers Association of Bangladesh.