SCBs should be allowed to float shares
Saturday, 16 January 2010
A. F. M. Mainul Ahsan
STATE-owned commercial banks (SCBs), Sonali, Janata and Agrani Bank, are likely to go public as part of their efforts to raise capital to be adequate in meeting the requirement of Basel-II accord. The three SCBs would have a total capital deficit of Tk 12 billion from the capital required as per the Basel-II. This was reported in the Financial Express on September 29, 2009.
According to a Bangladesh Bank assessment, all the SCBs remained far behind the capital requirement as they need a cumulative risk weighted asset of Tk 18 billion to comply with the Basel-II accord while private banks will require Tk 40 billion. Another report in the same newspaper on December 08, 2009 shows that Janata Bank was supposed to submit its prospectus to the securities regulator by December 10, 2009 seeking the green signal to go for IPO. Janata bank was planning to offer 10 million shares for subscription under its IPO placement in the stock market.
However, on January 10, 2010, after a meeting with the officials of the central bank and three SCBs, the finance minister, AMA Muhith, denied the idea of floating shares of the SCBs on the capital market now. Mr. Muhith was quoted as saying, "We are not going to allow any SCB to float share right now as their financial barometres are not strong." The government has to provide funds for their capitalisation and in this situation it would not be wise to float their shares, he added. He also said, "The SCBs will float shares when they become strong banks." Are his claims acceptable? Are there any other motives behind the decision to decline listing?
At present, there are 49 banks and 29 non-banking financial institutions in the country. In 2007, with more than US$ 32 billion in assets, banks dominated the country's financial sector, making up nearly 50 per cent of the country's GDP. Currently, the SCBs have 3389 branches out of total 7019 bank branches across the country. Even though state-owned banks had about 50 per cent of bank branches, they together controlled only 30 per cent of deposits as of June 30, 2008. According to a Bangladesh Bank (BB) publication, SCBs' share in deposits stood at about 27 per cent while that in lending at just about 23 per cent. On the contrary, the private commercial banks (PCBs) hold about 60 per cent, and nearly 64 per cent shares of total deposit and lending respectively. Certainly, private banks have dwarfed the SCBs by delivering better and prompt services to their clients compared to their competitors in the public sector. To regain market share, the SCBs need to restructure themselves as the private sector banks are overtaking them in terms of doing business.
One might claim that corruption, poor service, inefficiency and lack of appropriate policy led SCBs to lose their market share. This writer believes that lack of good government intention is the main reason why SCBs' balance sheet remains much worse compared to the private banks. The government did not protect SCBs from political vandalism and always used the SCBs as a political instrument. Though any positive result is hardly realised, SCBs have spent millions on different projects to improve their competence. In a report published on October 29, 2009, IMF says that strategic guidance and robust decisions, based on business principles at the board and management level, remain critical to further promote SCBs' soundness. However, getting listed on a stock exchange will improve the SCBs' performance in the long run.
As listed firms, SCBs will be subject to intense rules and regulations by different government agencies like SEC, as well as by the shareholders. When a company moves from private ownership to public, much information must be disclosed. For instance, salaries, transactions with management, sales, profits, competitive position, mode of operation and other material information must be made public. This increased disclosure could be a blessing for our SCBs since it raises transparency within state-owned commercial banks. Greater transparency increases the willingness of international and local investors to commit capital. Moreover, the enhanced transparency may influence value of the SCBs through pure cash-flow effects by reducing agency costs. For instance, transparency reduces the potential diversion of a SCBs' cash flows to managers or union leaders, and, as a result, increases value of the firm. Therefore, the higher the agency cost, the more the potential benefit from disclosure. Since agency cost is much higher in the state-owned commercial banks, benefits from being listed on the stock exchange will also be higher for those banks as compared to PCBs.
According to Bangladesh Bank, during January-September, 2009, the Sonali Bank recovered 13 per cent of default loans from their top 20 defaulters, while the Janata Bank realised 38 per cent of such loans. During the same period, Agrani Bank recovered only 7.0 per cent of the loans from its top 20 defaulters while the Rupali bank realised 46 per cent of the loans. This indicates that a listing could boost performance of the SCBs. Rupali Bank is already listed on the stock exchange. The main reason why other SCBs failed to recover significant portion of their bad debt is the inappropriate government intervention in the decision making and implementation. SCBs will perform much better if they get listed in the stock market because a listing will reduce unnecessary government intervention and political vandalism. The government also won't be able to use SCBs as a political weapon.
Lack of economic integration and also lack of opportunity to use derivatives to hedge against risk worked as the safeguard against the recent world-wide financial meltdown. Recently Bangladesh Bank has conducted a "stress test" to assess the strength as well as the vulnerability of Bangladeshi banks. The result of the test shows that our banking industry is largely risk-free. In addition, to catch up with Basel-II accord, Bangladesh government will have to contribute huge pile of capital into those SCBs which will surely come from the tax revenue. Don't we have other lucrative projects to spend tax money? Since share market can provide necessary capital for those SCBs, why should the government divert public money to state-owned commercial banks?
The stock market is currently overpriced. There is tremendous demand for good stocks in the market. Shares of SCBs, to some extent, will offset appetite of quality shares. Those three SCBs, Sonali, Janata and Agrani Bank, have been serving Bangladesh since the inception of the country. How long should we need to wait to improve the financials of those SCBs? We have already tried to improve their financials for the last 39 years. If we wait for several more years to get financials better in those banks, definitely we are just making rooms for more corruption and inefficiency in those banks. Let's try it differently: take those SCBs to the stock market, and reform them, if necessary. So, why does the finance minister want to stop SCBs to get listed in the market? Doesn't the decision to cancel floating shares of SCBs raises questions about motives? Mr. Muhith should explore all the opportunities to make country's stock markets vibrant and efficient as soon as possible. It's time to allow SCBs to float shares.
(The writer is a PhD student, Texas Tech University and can be reached at e-mail: mainul.ahsan@ttu.edu)
STATE-owned commercial banks (SCBs), Sonali, Janata and Agrani Bank, are likely to go public as part of their efforts to raise capital to be adequate in meeting the requirement of Basel-II accord. The three SCBs would have a total capital deficit of Tk 12 billion from the capital required as per the Basel-II. This was reported in the Financial Express on September 29, 2009.
According to a Bangladesh Bank assessment, all the SCBs remained far behind the capital requirement as they need a cumulative risk weighted asset of Tk 18 billion to comply with the Basel-II accord while private banks will require Tk 40 billion. Another report in the same newspaper on December 08, 2009 shows that Janata Bank was supposed to submit its prospectus to the securities regulator by December 10, 2009 seeking the green signal to go for IPO. Janata bank was planning to offer 10 million shares for subscription under its IPO placement in the stock market.
However, on January 10, 2010, after a meeting with the officials of the central bank and three SCBs, the finance minister, AMA Muhith, denied the idea of floating shares of the SCBs on the capital market now. Mr. Muhith was quoted as saying, "We are not going to allow any SCB to float share right now as their financial barometres are not strong." The government has to provide funds for their capitalisation and in this situation it would not be wise to float their shares, he added. He also said, "The SCBs will float shares when they become strong banks." Are his claims acceptable? Are there any other motives behind the decision to decline listing?
At present, there are 49 banks and 29 non-banking financial institutions in the country. In 2007, with more than US$ 32 billion in assets, banks dominated the country's financial sector, making up nearly 50 per cent of the country's GDP. Currently, the SCBs have 3389 branches out of total 7019 bank branches across the country. Even though state-owned banks had about 50 per cent of bank branches, they together controlled only 30 per cent of deposits as of June 30, 2008. According to a Bangladesh Bank (BB) publication, SCBs' share in deposits stood at about 27 per cent while that in lending at just about 23 per cent. On the contrary, the private commercial banks (PCBs) hold about 60 per cent, and nearly 64 per cent shares of total deposit and lending respectively. Certainly, private banks have dwarfed the SCBs by delivering better and prompt services to their clients compared to their competitors in the public sector. To regain market share, the SCBs need to restructure themselves as the private sector banks are overtaking them in terms of doing business.
One might claim that corruption, poor service, inefficiency and lack of appropriate policy led SCBs to lose their market share. This writer believes that lack of good government intention is the main reason why SCBs' balance sheet remains much worse compared to the private banks. The government did not protect SCBs from political vandalism and always used the SCBs as a political instrument. Though any positive result is hardly realised, SCBs have spent millions on different projects to improve their competence. In a report published on October 29, 2009, IMF says that strategic guidance and robust decisions, based on business principles at the board and management level, remain critical to further promote SCBs' soundness. However, getting listed on a stock exchange will improve the SCBs' performance in the long run.
As listed firms, SCBs will be subject to intense rules and regulations by different government agencies like SEC, as well as by the shareholders. When a company moves from private ownership to public, much information must be disclosed. For instance, salaries, transactions with management, sales, profits, competitive position, mode of operation and other material information must be made public. This increased disclosure could be a blessing for our SCBs since it raises transparency within state-owned commercial banks. Greater transparency increases the willingness of international and local investors to commit capital. Moreover, the enhanced transparency may influence value of the SCBs through pure cash-flow effects by reducing agency costs. For instance, transparency reduces the potential diversion of a SCBs' cash flows to managers or union leaders, and, as a result, increases value of the firm. Therefore, the higher the agency cost, the more the potential benefit from disclosure. Since agency cost is much higher in the state-owned commercial banks, benefits from being listed on the stock exchange will also be higher for those banks as compared to PCBs.
According to Bangladesh Bank, during January-September, 2009, the Sonali Bank recovered 13 per cent of default loans from their top 20 defaulters, while the Janata Bank realised 38 per cent of such loans. During the same period, Agrani Bank recovered only 7.0 per cent of the loans from its top 20 defaulters while the Rupali bank realised 46 per cent of the loans. This indicates that a listing could boost performance of the SCBs. Rupali Bank is already listed on the stock exchange. The main reason why other SCBs failed to recover significant portion of their bad debt is the inappropriate government intervention in the decision making and implementation. SCBs will perform much better if they get listed in the stock market because a listing will reduce unnecessary government intervention and political vandalism. The government also won't be able to use SCBs as a political weapon.
Lack of economic integration and also lack of opportunity to use derivatives to hedge against risk worked as the safeguard against the recent world-wide financial meltdown. Recently Bangladesh Bank has conducted a "stress test" to assess the strength as well as the vulnerability of Bangladeshi banks. The result of the test shows that our banking industry is largely risk-free. In addition, to catch up with Basel-II accord, Bangladesh government will have to contribute huge pile of capital into those SCBs which will surely come from the tax revenue. Don't we have other lucrative projects to spend tax money? Since share market can provide necessary capital for those SCBs, why should the government divert public money to state-owned commercial banks?
The stock market is currently overpriced. There is tremendous demand for good stocks in the market. Shares of SCBs, to some extent, will offset appetite of quality shares. Those three SCBs, Sonali, Janata and Agrani Bank, have been serving Bangladesh since the inception of the country. How long should we need to wait to improve the financials of those SCBs? We have already tried to improve their financials for the last 39 years. If we wait for several more years to get financials better in those banks, definitely we are just making rooms for more corruption and inefficiency in those banks. Let's try it differently: take those SCBs to the stock market, and reform them, if necessary. So, why does the finance minister want to stop SCBs to get listed in the market? Doesn't the decision to cancel floating shares of SCBs raises questions about motives? Mr. Muhith should explore all the opportunities to make country's stock markets vibrant and efficient as soon as possible. It's time to allow SCBs to float shares.
(The writer is a PhD student, Texas Tech University and can be reached at e-mail: mainul.ahsan@ttu.edu)