Banks have diverted attention to risk-free treasury bonds and corporate debt securities amid the stock market volatility and liquidity crunch, which has reflected in their rising shift in income between 2021 and 2022.
Take Shahjalal Islami Bank for example.
It saw its income from government and corporate bonds jump 122 per cent to Tk 1.31 billion in 2022, compared to the previous year. At the same time, the lender had its investment returns from stocks reduced by more than 22 per cent.
The trend has continued in 2023.
Shahjalal Islami Bank's profit from debt securities jumped 78 per cent year-on-year to Tk 351.44 million in the first quarter through March this year.
On the other hand, the company's income from investments in equity-based securities plunged 99 per cent to Tk 0.706 million in the quarter ended in March, compared to the same quarter a year ago.
The returns from fixed-income securities seem to have helped overcome the loss of income from the stock market.
Capital gains from stocks have slumped as the market has remained depressed since the beginning of the Russia-Ukraine war. Moreover, assets have turned illiquid due to the floor price, the reason why Prime Bank had zero return from stocks last year; it did not sell holdings at floor prices.
The DSEX, broad index of the Dhaka Stock Exchange (DSE), shed 9.44 per cent or 647 points in 2022. During the year, investor participation was also down and the DSE recorded turnover below Tk 5 billion for many sessions.
On the other hand, the DSEX advanced 20 per cent or 1,138 points in 2021 and the daily turnover reached Tk 10 billion in many sessions.
Like Shahjalal Islami Bank, many other banks also experienced a steep growth in income from fixed-income securities between 2021 and 2022.
The City Bank's income from treasury bonds soared 80 per cent in 2022, compared to the previous year while returns from stocks fell 22.7 per cent.
"Banks were not supposed to keep their funds idle", said Ali Reza Iftekhar, managing director of Eastern Bank Ltd, when the stock market was badly hurt by economic uncertainties and the private sector credit flow shrank.
So, they took positions in government debt securities with fixed returns in 2022.
"Their decision was right and prudent and the banks were able to ensure huge returns from treasury bonds," Mr. Iftekhar said.
Many banks increased their investments in T-bonds in 2022. Mutual Trust Bank (MTB) increased its investment in such instruments by 10 per cent.
"The interest rates of government debt securities fluctuated in 2022, but the banks which could capitalize on the momentum were benefitted," said Syed Mahbubur Rahman, managing director of the MTB.
On the credit flow decline, he said the demand for loans had dwindled in 2022 because of the economic slowdown.
Banks also faced liquidity stress during the year, which was why they made risk-free investments in debt securities to avoid the cost of provisioning required for loans. They are required to keep at least 1 per cent provision against loans.
Shahjalal Islami Bank had invested around Tk 20 billion in government Islamic bonds in 2021.
In 2022, the bank injected around Tk 24 billion in government sukuk bonds issued at a coupon rate of 4.69 per cent, having withdrawn a substantial amount of investment from Islamic bonds that had offered only 1 per cent coupon rate.
"The banks had the scope of realising good returns from government sukuk in 2022," said Jafar Sadeq, chief financial officer of Shahjalal Islami Bank.
The lender also invested around Tk 1 billion in private green sukuk bonds in 2022 issued by Beximco, which were sold at a coupon rate of 11.6 per cent.
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