Bangladesh Stock Market: October 2010

Thursday, October 28

DSE calculates index as per int'l standard now

FE Report (October 27, 2010)

The Dhaka Stock Exchange (DSE) is now calculating its index in line with the instruction of the securities regulator and international standard, officials said Wednesday.

Presently, the bourse is adjusting its index taking into account the tradable shares of a company but total shares, including locking shares, are added to the market capitalisation.

Previously, it was taking total shares of a company to calculate the index.

Asked whether it has taken permission from the Securities and Exchange Commission (SEC) prior to applying the new method in calculating the index, an official said, "We have maintained all the rules."

The DSE has calculated its index by adjusting the tradable shares of 24 companies in accordance with a decision taken at a meeting with the SEC Member Mansur Alam in the chair on June 2 at the SEC, he said.

The meeting was also attended by four SEC executive directors and one SEC director, DSE Chief Executive Officer (CEO) Satipati Moitra and Chittagong Stock Exchange CEO Mohammad Abdullah Mamun.

"I attended the meeting which discussed index calculation," Mohammad Abdullah Mamun said.

The FE obtained a copy of minutes of the meeting.

The second decision of the minutes, signed by Mansur Alam, noted that only the free-float or tradable shares of a security should be taken into account to calculate the index, not considering the total non-tradable shares under lock-in.

"The proposed uniform index should be calculated in line with the recommendations of the IOSCO's technical committee and international standards," the first decision of the minutes said.

A DSE letter sent to the SEC chairman on August 5 said, "Please note that the second decision of the said minutes applies to shares already incorporated about three months back as those companies' sponsor shares are still locked-in.

Bangladesh's rising stock market

FE Report (October 27, 2010)

An unprecedented event took place the other day in Bangladesh; the chiefs of the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) held a joint press conference to warn investors about the over-valuation of equities in the Bangladesh. The bourse chiefs stated that the current valuation of stocks in the Bangladesh capital market is irrational and cannot be justified by the expected earnings of the companies concerned. As a student of Finance, I was dumbfounded by the event because I know of no such event ever taking place in any country of the world since stocks and bonds began to trade publicly almost 300 years ago. One of the reasons why the bourse chiefs took this unprecedented step was probably to warn and protect uninformed small investors from a disaster that is imminent. History tells us that whenever the stock market crashes, it is the small and uninformed investor who is hurt the most. People have even committed suicide after they lost their wealth in the stock market.

The Securities and Exchange Commission (SEC) is the regulatory body that is responsible for the enforcement of laws and regulations so that investors can trade with confidence and not become victims of any malpractice or fraud. The SEC is responsible to ensure that listed companies make full disclosure of information that may affect the stock price. It is also the task of the SEC to ensure that company insiders do not use privileged information to benefit in the stock market at the expense of the uninformed investors. If there is any indication of irregularities or price manipulation, the SEC is the authorized body to stop the irregularity and initiate appropriate legal and administrative action. The news conference of the bourse chiefs therefore raises the question as to why the SEC hasn't made any public statement on this matter as yet. Do the bourse chiefs know something that the SEC is not willing to admit or is it that they simply don't know? After all, it is the members of the stock exchange who are on the trading floor. These traders observe and know many things that are not reported in the financial press.

We should remember that in the stock market crash of the mid-nineties, the SEC was unable to detect on time the price manipulation by certain rogue traders. Furthermore, the SEC was unable to successfully prosecute the perpetrators of the crash. Are we on the verge of another crash that the SEC will be unable to detect and control in a timely manner? After all, the caution was not sounded by an immature journalist who does not understand the complexities of the capital market. It was sounded by the two chiefs of the two stock markets in Bangladesh.

In mature markets, many analysts follow the market as well as individual companies. It is not uncommon for several analysts to give conflicting opinions about the same stock or the future of the market. Market participants have access to these opinions and they base their trading decisions on all the information available to them. Analysts whose predictions are borne out by the price movements are stars and those who make wrong predictions usually don't last too long and they eventually find their livelihood elsewhere. What is interesting is that none of the analysts' reports on the local market that I have come across mention anything along the lines that bourse chiefs stated in their press briefing. Why is that? Are the analysts' missing something or are they not revealing the truth because revealing the truth may jeopardize their livelihood?

Valuation of stocks is more of an art than science. Different analysts use different models to value stocks. Professors William Sharpe and Harry Markowitz won the Nobel Prize in Economics in the eighties for their seminal work on the valuation of stocks. Their work gave us the discounted cash flow model for the valuation of stocks. Briefly, their work showed that the value of a stock is simply the present value of future cash flows (dividends) discounted at a rate that is consistent with the riskiness of the stock. The challenge is to determine the riskiness of the stock based on the volatility of the stock price.

A simpler model is the price earnings ratio (P/E) which is simply the price of the stock divided by the earnings per share. A high P/E ratio signifies that the market values the earnings of the company favourably and is willing to pay a high price for the ownership of that stock. Low P/E ratios signify poor valuation. Corollary to this would be that if an investor goes by the principle 'buy low sell high', then investors should buy stocks when the P/E ratio is low and sell when the P/E ratio is high.

P/E ratios have been studied extensively by researchers who follow the stock market. Their findings show that historically P/E ratios of the very best companies have hovered around 14-16. This is true for America as much as it is true for European markets or Asian markets.

What is the P/E profile of Bangladeshi stocks? The mid range of P/E of the most actively traded stock is currently hovering around 40 and the P/E of the most favorite ones are in excess of 100. This suggests that these Bangladesh companies have better earnings prospect than the very best companies of the world. Can this be true?

Finally, did the market participants pay any heed to the caution sounded by the bourse chiefs? It doesn't seem so. Immediately after the press conference, the market had a 4.0% drop the next day following the press conference and thereafter the market has been on the rise thereafter. It seems the warning of the bourse chiefs has fallen on deaf years.

E-mail : qayyum.khan@bd.bureauveritas.com

BB increases provisioning requirement for stock loans

FE Report (October 27, 2010)

In an apparent bid to put a leash on a volatile stock market and minimize banks' risks, the central bank Wednesday increased the rate of general provisioning requirement for unclassified loans extended against shares.

In a circular, the Bangladesh Bank asked the banks to maintain a 2.0 per cent general provision, instead of the previous rate of 1.0 per cent, for unclassified loans to brokerage houses, merchant banks, stock dealers and individuals against shares. Merchant banks would also include the separate subsidiaries formed by the banks for stock trading.

"We've taken the measure with the objective of mitigating the risks by strengthening the capital base of the banks," a senior official of the Bangladesh Bank (BB) told the FE Wednesday.

He also said such general provision will be treated as supplementary capital, generally known as Tier-2.

For the purpose of supervision, bank's capital is categorised into two tiers: Tier-1 is treated as a core capital comprising the highest quality capital elements like paid up capital and reserve.

And the Tier-2 is supplementary capital that represents other elements, which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank.

Bankers, however, said the measure would have a negative impact on the profitability of banks, thus, reducing their capacity to offer dividends to the shareholders.

"Banks announce their dividends after maintaining provisions in line with the BB's rules and regulations. It will certainly curtail the banks' capacity of offering dividends to the shareholders," a chief executive of a leading private commercial bank told the FE, preferring anonymity.

The central bank in the circular instructed the chief executives of all scheduled banks to maintain the general provision on unclassified loans against shares properly.

"We want to strengthen the capital base of the commercial banks and minimising risks," another BB official said while explaining the main objective of the new provisions.

The central bank's latest instruction came against the backdrop of over- exposure of 10 private commercial banks to securities market until September last.

"We expect that the banks would able to bring down their holdings and exposure within the prescribed limit by the end of next month," the BB official said, adding that it would be possible to comply with the rules and regulations without disturbing the share market.

Under the new provisions, banks will be allowed to invest not more than 10 per cent of their total liabilities in the capital market.

Besides, the banks will have to ensure holding of shares in line with the existing Bank Companies Act, the BB officials said.

Under the existing act, no bank company shall be empowered to hold shares of other companies whether as pledge or mortgage or as exclusive owner of an amount exceeding (a) thirty per cent of the total amount of the paid-up capital and reserve of the said company and (b) thirty per cent of the paid-up capital of the said company.

Tuesday, October 26

Banking caught in cheque chaos

Star (October 26, 2010)

Enamul Haque deposited a Tk 6 lakh cheque to the Shyamoli branch of Southeast Bank on Wednesday. As it was another bank's cheque, it must be cleared at the central bank's clearinghouse. Also, the same day it was supposed to be credited, but it did not happen until Sunday. Consequently, Haque could not pay his client in time.

So were the experiences of hundreds of bank clients in the past three days. The culprit behind the dislocation is a technical glitch in the automated cheque clearinghouse of Bangladesh Bank.

Not only clients, banks have also gone through a huge pain.

“We have sent 1,200 cheques to the central bank clearinghouse on Sunday, but not a single one was settled. All the clients have suffered and we faced a lot of hassles,” said an official of Dutch-Bangla Bank's Motijheel branch. He said the first working day of the week is a busy time for the banks as the cheques of Thursday and a few of Saturday are processed on Sunday for settlement.

Many bankers said the central bank informed them of a problem with the server of its clearinghouse at 6pm on Sunday and instructed them to send cheques manually for settlement. As a result, many had to work through midnight.

The automated clearinghouse came to a halt -- three weeks into its launch -- due to technical faults. The system, formally introduced on October 7, is aimed at settling payments among 1,100 branches of all 47 scheduled banks in Dhaka, initially.

Bankers blamed the central bank's inadequacy in back-up support for the debacle. They also pointed out that Bangladesh Bank adopted the new technology without sufficient technical know-how and manpower.

The central bank, however, turned down the allegation of poor management, saying that such a technical fault is nothing unusual.

“We faced a problem for the first time after we launched the service formally on October 7. We had no problem till October 24,” said Das Gupta Asim Kumar, BB's executive director.

The BB will take some measures to avert such problems in future, he said.

“We are thinking of deploying people round the clock in the server room,” said Asim Kumar. The situation could be avoided if a person was there at that night when the chilling system of the air conditioner was overheated and went out of order, he said.

The chilling system is under open sky. A shed will be built to guard the system on an emergency basis, the BB high official said.

Asim Kumar said the service of the clearinghouse resumed late yesterday.

He, however, admitted to the complaints from banks on a sloth in the clearinghouse's communication link.

“We are talking to the vender to get the problem fixed.”

Taxman goes tough on United Airways

Star (October 26, 2010)

The Income Tax Department requested the Civil Aviation Authority of Bangladesh (CAAB) to suspend United Airways' flight permission for its failure to pay the government travel taxes.

Income Tax Zone One wrote the letter to the chairman of CAAB last week, seeking the agency's help in realising Tk 2 crore in pending taxes.

"To date, we have issued four letters, along with one final warning letter, to United Airways. But the company did not respond to any. We are compelled to take the legal step for their tendency to avoid paying taxes," said MA Kader Sarker, income tax commissioner.

The company has been realising the travel taxes from passengers, but not paying the government its dues since May.

United Airways Deputy Manager (marketing and communication) Md Kamrul Islam said the company has been operating smoothly for the last two years, paying all the taxes. "There might have been some lapses in payment lately, but we will soon pay the pending money."

Best Airways, another private airline, defaulted on payments worth Tk 2 crore in travel taxes and suspended operations.

Sarker said the tax office will adopt steps to realise the pending tax money from other airlines.

"United Airways happens to be the biggest defaulter. We will follow the same procedure for the other airlines, if they fail to pay up government dues regularly."

The National Board of Revenue (NBR) collected Tk 99.45 crore in travel taxes in the three months to September, up from Tk 91 crore in the same period last year.

The government is planning to make some changes in the travel tax law, so that NBR can directly take legal action against defaulters.

"We are planning to streamline the existing travel tax law, to ensure that every private airline is bound to pay government travel taxes, immediately after it is realised from the passengers," said an NBR member.

NBR is thinking about transferring the responsibility of collecting the travel tax to the civil aviation department instead of the airline operators from next fiscal year.

According to the travel tax law 2003, all airline operators must deposit the travel taxes collected against each ticket every month along with the number of travellers. The NBR can impose a penalty of 2 percent every month for any delay in depositing the taxes.

The law empowers the revenue board to freeze the bank accounts of the airline operators and suspend their flight permission through CAAB.

NBR failed to achieve its target of travel tax collection last year. It set a target to collect Tk 469 crore in travel taxes this fiscal year.