Originally posted in The Daily Star on 14 August 2023
Why foreign banks shun stock market
Nine foreign banks operating in Bangladesh hardly invest in the stock market owing largely to irregularities, speculation-driven investments and an inadequate number of well-performing companies that have gone public.
They also don’t feel confident about the stock market and trust the financial reports of the listed companies.
Thus, multinational banks’ combined investment in the capital market stood at Tk 4.25 crore in 2022, which accounted for 0.02 percent of the total holdings in the stock market of the entire banking sector.
On the other hand, 43 local banks for which data were available invested Tk 16,314 crore collectively in the market, which put the average investment figure at around Tk 380 crore.
“The foreign banks are generating profits at a higher rate from their core business, so they have stuck to that,” said Asif Khan, a stock market analyst and fund manager.
“Multinational banks do not want to take additional risks by investing in the stock market as their core business is paying back well.”
Profits of the foreign banks surged 102 percent year-on-year to Tk 3,156 crore in 2022, according to their financial reports.
Khan, also the chairman of Edge Asset Management, however, said that local banks are also aggressive in their core business and they are investing in the stock market in order to diversify their investments.
Standard Chartered Bangladesh invested Tk 1.8 crore in listed stocks, the highest among the foreign lenders.
Four banks — Bank Alfalah, HBL Bangladesh, Woori Bank, and National Bank of Pakistan — have no investment in the capital market of Bangladesh.
Commercial Bank of Ceylon and State Bank of India invested Tk 0.94 crore and Tk 0.31 crore respectively in the stock market, their financial statements showed.
Citibank NA and HSBC Bangladesh had investments of Tk 0.60 crore each.
When asked for comments on why HSBC is not investing heavily in the share market of Bangladesh, the world’s largest trade finance bank said in an email reply: “For over 26 years, HSBC Bangladesh has strategically positioned international connectivity and global supply chain integration at the core of its operations.”
“HSBC’s multifaceted approach encompasses wholesale, retail and market and securities custody and clearing services, harnessing its vast global network and international expertise in the country.”
Selim Barkat, country manager of HBL Bangladesh, says the stock market in the country is usually considered riskier based on associated market volatility and liquidity in smaller bourses.
This is also true in the developed markets where proprietary investments in equity portfolios come mainly from institutional investors such as mutual funds, pension funds and asset managers aside from retail investors, he said, adding that HBL does not have the plan to invest in the stock market.
Barkat also said banks generally don’t have the expertise to make investments in the stock market of Bangladesh.
“So, banks don’t want to deploy depositors’ money in the stock market.”
Officials of Citibank NA and Standard Chartered Bangladesh declined to make any comments.
Toufic Ahmad Choudhury, a financial market analyst, says foreign banks prefer to invest in government securities to meet their requirement related to the statutory liquidity ratio.
“Stock market investment involves risks, so they don’t want to invest there and they always avoid putting depositors’ funds at risk.”
In the financial system of Bangladesh, banks are disproportionately large, so all stakeholders see them as long-term investors in the stock market.
“Most investors trade in the market on a daily basis, but this is not expected,” said Choudhury, who is the director-general of the Bangladesh Academy for Securities Market.
Worldwide, the insurance market plays a significant role by pouring funds into the long-run investment tools, but the non-depository financial institutions are still at a nascent level in Bangladesh.
They either keep their funds at banks as fixed deposits or buy assets, so their contribution to the stock market remains at a low level.
Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue, says the capital market lacks well-performing companies and it is suffering from structural weakness.
“So, foreign banks consider their investment in the market is highly risky.”
Analysts have long pinpointed the weaknesses facing the stock market, but those weaknesses have been hardly addressed.
One of the weaknesses is manipulators are not punished in proportion to their crimes even though manipulation is rampant.
“The quality of financial reports of the listed companies is not up to the mark. As a result, most investors don’t trust them,” the economist said.
“The market is volatile due to the absence of a true market stabilisation mechanism while institutional investors behave like day traders,” he said, adding that the supervision of the exchanges and the stock market regulator against the firms that exist merely in names is weak as well.
Another tendency that keeps multinational banks at bay is the dominance of weak firms when it comes to trading.
So, when an investor sees that “z” category companies or low-performing firms top the gainers’ list or the turnover list, the confidence level of general investors receives a jolt.
“Until the government resolves all of the structural problems, foreign banks will not be interested to invest,” Moazzem added.
A merchant banker thinks banks should not come to the stock market because they deal with short-term deposits while stocks are long-term investment tools.
“If banks want to invest in the stock market, they need to gain proper expertise. So, it would be better for them if they invest through a fund manager.”
He urged mutual funds, pension funds, insurance companies, and provident funds to invest in the stock market.