Journal of Banking & Financial Services. ISSN : 1990-5157
Vol. 5 Number 1 July 2011

Article Title: Performance Analysis of Listed Private Commercial Banks in Dhaka Stock Exchange: An Empirical Study

by

Zulfiqar Hasan
Associate Professor
Dept. of Business Administration, Bangladesh Islami University, Dhaka
Ayesha Saimoon
Assistant Professor, Dept. of Business Administration, Bangladesh Islami University, Dhaka

Abstract:

The study evaluates performance of private commercial banks listed in Dhaka Stock Exchange (DSE) in terms of Dividend policies, dividend ratios, EPS, P/E ratios  and other profitability indicators, liquidity, risk and solvency.  Financial tools and techniques are applied in measuring these performances. The study found that some commercial banks are doing well while others are somehow shown poor performance in DSE. But all commercial banks have greater opportunity to show better performance in the stock exchange.  The analysis mostly depends on secondary data. Only small investors’ views are taken from conversation and observation methods. Finally the study has recommended some policies such as to offer identical face value, identical market lot, issuing convertible preferred stock, corporate bonds, DRIP etc.  for the selected banks to do well in future in the share market.

INTRODUCTION

Almost all commercial banks in Bangladesh today are under great pressure to meet the interests of their stockholders, employees, depositors, borrowers and customers. Maximum commercial banks have grown in recent years, more and more of them have been forced to turn to the money and capital markets to raise funds by selling stocks, bonds and other financial instruments and banking products. Besides these, they have been engaging themselves in lots of non-banking activities like brokerage house function and merchant banking. As the numbers of investors in Dhaka Stock Exchange (DSE) are increasing day by day, a huge numbers of investors of share markets are showing their interest to purchase and sell the share of different commercial banks. But somehow, they are frustrated as the shares of different commercial banks are not showing better performance yet.

OBJECTIVES

Following objectives are set for this research paper:

1. To evaluate the share market performance of selected commercial banks listed in DSE.
2. To identify the missing links between small investor expectations and share market performance of commercial banks listed in DSE.
3. To identify the financial and non-financial causes of the performance of commercial banks listed in DSE.
4. To formulate some share market policies for these banks to follow in near future.

METHODOLOGY

Among the listed private commercial banks in DSE, 16 (Sixteen) banks have been selected for conducting this research. Among these 16 banks, 09 are conventional and 07 are Islamic commercial banks.  Different financial tools and techniques are used in this study. Last 06 years (2004-2009) dividend payout ratio and trend of earnings per share (EPS) are considered in evaluating the performance of the selected banks. Price earnings ratios (P/E) are considered as the opportunity to invest in this sector. Besides these, net assets value, market lots, authorized and paid up capital, bonus and rights issues, cash dividends, number of securities are also taken into consideration to evaluate the performance of the listed commercial banks. This study basically depends on the secondary data. Secondary data were collected from the banks websites, similar research works done earlier, newspapers and other online resources. Financial information was collected from the annual report during year 2004 to 2009.  The study only emphasized those financial analyses which are related to the share markets.

Selected commercial banks are:

MEANING OF BANK PERFORMANCE IN THE SHARE MARKET

Raymond F. Attner (2007) said that a commercial Bank is a profit-making corporation that accepts customers’ deposits and lends them out to businesses and individual borrowers. Rose (2005), said that in today’s world, bankers and their competitors are under great pressure to perform well all the time. But what do we mean by the word perform when it comes to banks and other financial service providers? In this case performance refers to how adequately a bank or other financial firm meets the objectives of stockholders (owners), employees, depositors, and other creditors, and borrowing customers. At the same time, these financial firms must find a way to keep government regulators satisfied so that their operating policies, loans, and investments are sound, protecting the public interest. The success or lack of success of these institutions in meeting the expectations of others is usually revealed by a careful and through analysis of their financial statements. Samad & Hassan (1998) said that the evaluation of bank performance is important for all parties: depositors, bank managers and regulators. In a competitive financial market bank performance provides signal to depositors and investors whether to invest or withdraw funds from the bank. Similarly, it flashes direction to bank managers whether to improve its deposit service or loan service or both to improve its finance. Regulator is also interested to know for its regulation purposes.  Better performance in the share market means that the banks are showing high EPS with lower P/E ratios, distributing regular dividend whether in cash or in bonus share, stable and reasonable market price of the share with lower investment risk.

PARTICIPATION OF COMMERCIAL BANKS IN DSE

Though Bangladesh have five categories of banks like: Nationalized bank, Private Commercial Banks, Private Islamic Commercial Banks, Specialized Banks and Foreign Commercial Banks, but only domestic Private Islamic and conventional commercial bankinginstitutionsstarted participation in DSE since 1983. Islami Bank Bangladesh Ltd., the largest private Islamic commercial bank in terms of profit making has been listed in Dhaka Stock Exchange in 1985. In 1998, Al-Arafa Islami Bank has been listed in DSE as the second Islami Banks. Then one after another total 29 Commercial banks have been listed in DSE.  At present, all domestic private Islamic banks are listed in DSE. Few private commercial banks are yet to be enlisted. Only one government bank name as Rupali Bank Limited listed in DSE. No specialized banks and foreign banks are listed yet now.

Following table gives some integrated information about the selected listed commercial banks in DSE:

Table 01: Integrated Information about selected commercial banks

Source: Created (based on different websites) & Annual reports

In terms of paid up capital two banks, namely Islami Bank Bangladesh Ltd. and ICB Commercial Bank Ltd are on the top position with authorized capital of Tk 10000 million.  Among the selected Commercial banks ICB Islamic Bank has the highest paid up capital. Except First Security Islami Bank Ltd and ICB Islamic Bank Ltd, all other commercial banks are in A-Category Share in DSE. The face value of the share of ICB Commercial Bank is Taka 1000 and that of all other commercial Banks are of Tk 100 face Value. But previously Islami Bank Bangladesh Ltd and Al-Arafa Islami Bank Ltd issued Tk 1000 par value share and then they have splited it into Taka 100 par.  Some banks like Social Islami Bank are going to split the share into Tk 10 par share in future. The important thing is that all listed commercial banks are the member of Central Depository Bangladesh Limited (CDBL), hence the share of these banks are in electronic or D-mat (De-materialize) format.

It is important to the investor to know the classification of ownership of the banks. Market price somehow depends on the public holdings or government and sponsor/director holdings. If the institutional participations are increased, sometimes the price of the share will be increased. The following table shows the ownership among sponsors/directors, government, institution, foreign and public investors.

Table 02: Share Percentage about selected commercial banks

Source: Created (based on different websites)

There is no significant government participation in the ownership of any commercial banks listed in DSE. Sponsor/Directors ownership is approximately 50% of all commercial banks except IBBL and SIBL.   But the public holdings of the share are huge for ISLAMIBANK, EBL, PUBALIBANK, SIBL and ABBANK Limited.  Institutional participations in the ownership of different commercial banks are also lower.

ANALYSIS OF DIVIDEND AND OTHER PAYOUTS

Dividend is the part of the earnings of a corporation that is distributed to its shareholders annually. High dividend payouts always indicate the strong financial strength of any corporation. Seven commercial banks participating in DSE are usually pay dividends in cash or in bonus share. Offering bonus share attracts the investor to purchases the share of different corporations. Table-03 shows that maximum commercial banks in DSE offered stock dividend. All most all commercial banks offered lucrative bonus share in every Year. Only First Security Banks and ICB Islamic banks did not declare and distribute any form of dividend during the period 2004-2009. Therefore, the price of these two banks went down.

Table 03: Share Dividend (Bonus Share) during 2004-2009

*NL= Not Listed, ND= Not Declared during the research period

Table 04: Cash Dividend during 2004-2009

*NL= Not Listed

Source: Collected from banks’ declarations

Most of the commercial banks are interested to offer stock dividend rather than offering cash dividend. The rate of stock dividends is lucrative for all kinds of investors. But maximum time, after the declaration of the stock dividend, the market price of the banks went down gradually, which fail to meet the expectation of the small investors. The basic reasons behind this, is to raise the paid up capital. Besley (2008) said, regular stock dividend policy decreases the market price.  But if the commercial banks frequently offer stock dividend, the negative impact such as decrease in share price, loss of goodwill, dissatisfaction of shareholders, sales of share at discount and increase in internal fund can be arisen in future:

ANALYSIS OF NET ASSET VALUE (NAV)

The total value of a bank's assets less the total value of its liabilities is its net asset value (NAV). For valuation purposes, it is common to divide net assets by the number of shares in issue to give the net assets per share. This is the value of the assets that belong to each share, in much the same way that P/E measures profit per share. NAV is useful for the valuation of shares in sectors where the value of a company comes from the assets it holds rather than the profit stream generated by the business. According to Jim Clayton (1998), “Uninformed or noise traders push prices away from NAVs following the initial price moves cause by informed traders”.

Table 05: Net Asset Value (NAV) during 2004-2009

Source: Created (based on DSE Websites)

Data show that only ICB Islamic bank has the negative Net Asset Value among the seven Commercial Banks. NAV of remaining selected commercial banks are so close to the market price of the share. So it is golden chance and time for the investor to purchase the share of different Commercial banks. 

ANALYSIS OF EARNINGS PER SHARE (EPS)

Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. To look at earnings per share (EPS) makes more sense for use as a comparison tool. An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

Data given below are the earnings per share (EPS) of selected commercial banks during 2004-2009.

Table 06: Earnings Per Share (EPS) During 2004-2009

It is observed that the EPS of all selected commercial banks have great volatility. EPS of IBBL are low in 2008 comparing to the EPS of 2007 because of the attachment of additional bonus share. The percentage change of EPS of IBBL in year 2008 is -5.03% (negative). But at the same time, Al-Arafa Islami Bank Ltd. have shown positive percentag