Most of the banks have failed to yield satisfactory return on equity for their investors during recent years, according to the analysts.
They said the investors therefore recorded profits at a rate lower than fixed deposit (FDR) rate, which means that if the investors had made FDR instead of investment on banks’ assets, they would have received more return.
Besides, the real picture of banks’ profit earning is even worse than they are presenting for the year 2013, the analysts observed.
They said as the loans have been rescheduled in large scale due to poor recovery under political unrest, the uncertainty over the future of those loans has not ended yet, dragging the real impact to the upcoming years.
Analysts suggested taking a holistic approach rather than comparing with only preceding year while assessing the banks’ profitability.
“Maybe, most banks’ boards do not focus on the return on held asset. But this must be changed and they should compare profits on asset and deposit,” said a former banker asking not to be named.
“However, primary dealer banks may show a little different pattern,” he added. Fourteen of the DSE listed 30 banks have a return on equity below 11% during the year 2013.
“But the real picture is even worse, given the rescheduling of bad loans. It will cast impact in future as recovery of those loans still remain uncertain,”said Shahidul Islam, CEO of VIPB Asset Management Co Ltd.
A bank’s core task is to collect money in form of deposits and lend it out to make a profit out of the difference.
If the banks fail to recover credit, their profitability is affected badly.
“The profitability must be higher than the fixed deposit rate of the banks or else there will be no justification of buying a bank stock as a long term investment instead of keeping it in the banks,” said a broker.
Considering the existing market dynamics, investors who want to minimise their downside risk and have a longer-term perspective might prefer bank stocks, given the problems in the sector will be addressed in near future, said Khairul Bashar, a banking sector analyst at Asian Tiger Capital Partners.
MD Minhaz Zia, an investment professional and a partner at AT Capital, shed some lights on the consequences of the high banking rates, which will eventually come down to match with economic reality but it is likely to take some time.
“FDR rate is already seen falling. It should continue until near to equilibrium level is achieved,” he added.
Zia said in no economy FDR rate can be higher than equity return in the long run and the adjustment is inevitable.
At a pre-budget meeting last month,bankers have urged the government to cut corporate tax to increase the profitability of the banking sectors along with cutting down its lending rate for supporting the country’s entrepreneurs and making the banking sector itself more vibrant.
Banks’ current tax rate of 42.5% needs to be lowered for the sake of the bank’s stakeholders, said AK Azad, chair of Shahjalal Islami Bank Limited.
Entrepreneurs consider the regulatory limit of 5% spread in the banking sector is irrational and higher than it should be.
“Effective tax rate exceeds 42.5% in most of the cases as provision expense is not tax deductible. Therefore the banks cannot reduce the interest spread,” said Asif Khan, Deputy Head of Research at BRAC EPL Brokerage Limited.
