Banks dive into Treasury bills, bonds as interest income falls
Listed banks increased their investment in government and corporate bonds, securities and stocks in the second quarter of 2020 to offset the loss in interest income due to the ceiling on lending rates.
Their investment in bonds and other securities rose 8.84 % to Tk 314,747 crore as on 30 June. Investment income surged Tk 842 core, or 49 %, to Tk 2,546 crore in the quarter.
The info was calculated predicated on the half-yearly financial statements of 25 out of 30 banks listed on the Dhaka STOCK MARKET. The reports of Al-Arafah, Brac, ICB Islamic, Standard and United Commercial Bank are not on their websites.
"As the interest of Treasury bills and bonds was high and banks did not have to keep provisions against the investment, it had been easier to invest into these instruments," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
The federal government capped the lending rate at 9 % and the deposit rate at 6 % on 1 April. As banks experienced to comply, the web interest income of lenders plunged 39 % to Tk 3,095 crore in the second quarter.
The spread, the difference between the lending rate and the deposit rate, fell to 2.5 per cent to 2.75 % in the April-June quarter as a result of single-digit lending rate.
"So, the interest income was likely to get a major blow," Rahman said.
Although the lending rate transpired to 9 %, a lot of the banks could not lower the deposit rate to 6 per cent. One bank continues to be offering deposits at 7.5 per cent, according to Rahman.
As Bangladesh's trade with the rest of the world plummeted through the quarter due to the coronavirus pandemic, banks' earnings from commissions and charges also fell.
The commission and charge income dropped 24 % year-on-year to Tk 1,110 crore. The gains declined 35 % to Tk 1,263.97 crore in the next quarter due to the lower interest income and commission on their services.
Bangladesh's export earnings plunged 16.93 % to $33.67 billion in the just-concluded fiscal year, the lowest in five years, as the pandemic brought global trade to its knees.
"Some banks will try to improve their investment in Treasury bills and bonds to create profits but they will have to expand their loan books because the interest rate on government bills and bonds was already cut," Rahman said.
The interest on Treasury bills and bonds came right down to 8.1 % from 9 %.
The existing half of the entire year would be more challenging as both quarters are affected from the situation of the lower interest income, Rahman said, adding that banks saw an increased interest income in the first quarter.
"Moreover, the united states has been afflicted by floods and we still have no idea when the pandemic will pass."
The banking sector's future will also hinge on the orders the garment sector would receive in the spring.
A high official of another bank, which includes increased investment in bonds and securities significantly, said as the outbreak of coronavirus was getting away from control during the second quarter, there were no other options but to improve investment in bonds, securities plus some other safe instruments.
"The majority of the banks did this."
Of the 25, 19 banks bought more bonds and securities, but this did not spare them from losses.
"We didn't halt the profit fall during the period. Profits of a bank can not be ensured from these investments alone," the banker said.
The stock market had not been the beneficiary during the period either.
DSEX, the benchmark index of the Dhaka STOCK MARKET, dropped 0.47 per cent to 3,989 on 30 June weighed against 25 March.
"The currency markets was riskier, so we weren't interested in buying the speculative market. However now we are putting some cash into the market," the banker said.
