Dhaka stocks to get bond fillip
Bonds/Equities State-owned agency plans to prop up slumping Bangladesh sharesBY DANIEL STANTONBangladesh’s state-owned
investment agency is planning
to take the unusual step of
issuing bonds so that it can use
the proceeds to support the
local stock market.
The INVESTMENT CORPORATION OF
BANGLADESH is readying a Tk20bn
(US$239m) subordinated
bond offering to help fund its
investments in local stocks,
which, like most emerging and
frontier equities, have fallen
this year.
The bonds have an initial
tenor of five years, but the
issuer can extend it by a further
two years. The coupon is 9%
for the first five years, rising
by a further 2% for the final
two years if not called. The
offer is open to individuals and
institutions.
ICB, which is rated AAA by
Argus Credit Rating Services,
was established in 1976 with
the objective of developing the
country’s capital markets and
mobilising savings. In the 2016-
17 financial year, which ended
on June 30, it invested Tk120bn
in capital markets, up 34% from
the same period a year earlier.
ICB said it tries to address
imbalances in the capital
market, whether shares are
undervalued or have risen too
far beyond their fundamentals.
“In each case, ICB uses its funds
and portfolios responsibly in an
effort to stabilise the situation,”
it wrote in its annual report.
The government of
Bangladesh owns a 27% stake
in ICB, while state-owned
commercial banks and
insurance companies held a
further 60.72% in aggregate of
the shares as of June 30 last
year. The public held a 1.63%
stake.
The proposed ICB bonds
offer a healthy pick-up
over Bangladesh’s onshore
government bonds, which yield
5.48% for five years, according
to Refinitiv data.The Dhaka Stock Exchange’s
DSE 30 index has dropped 16%
this year and the Chittagong
Stock Exchange’s CASPI index
is down 14%, compared with
drops of 2%, 7% and 9% for
indices in Pakistan, Vietnam
and Sri Lanka, but Bangladesh’svaluations are strong compared
with other countries.
“The market in general is
pretty expensive, and it is
quite difficult to find value but
recently some of the consumer
names we like have become
more attractively valued,” said
Thomas Hugger, CEO of Asia
Frontier Capital. Bangladesh
is the second-biggest holding
in the firm’s AFC Asia Frontier
Fund, after Vietnam.
“The index is trading at
around 17x price-to-earnings,but a lot of insurance
companies, leasing companies
and banks are trading at 6x–7x,
so the financials are dragging
down the index. Some non-
financial stocks are trading
at 25x–30x. From a valuation
point of view, stocks don’treally need any extra help, with
the exception of banks.”
Daily trading turnover is
around US$225m–$250m,
which is fairly liquid. ICB is
understood to be planning
to invest around US$180m
in Bangladeshi stocks, so
depending on whether it makes
the stock purchases on one day
or over a period of time it could
have a substantial impact on
prices.
“If they invest a lot at once,
it could move some of the bluechips,” said Hugger.
The equity market is
dominated by locals. Setting
up a custody account for stocks
is a lengthy and cumbersome
process, and foreign stock
investors are subject to a 15%
capital gains tax.
“The market is very retail-
driven, and the other big
market participants are banks,”
said Hugger. “A lot of banks’
earnings are driven by the stock
market, which is very volatile.”
When the Dhaka market
slumped 40% between the peak
of December 2010 and February
2011, 18 financial institutions
were found to have invested
more than 25% of their total
liabilities in the stock market,
and eight of those had invested
more than 50%, according to a
central bank report cited by the
World Bank.
Under the capital market
exposure rule, Bangladesh
Bank does not allow banks to
invest more than 25% of their
capital in the stock market.
On October 9, Bangladesh
Bank announced that banks’
investments in the ICB bond
would not count towards their
capital market exposure limit.News
“The index is trading at around 17x price-to-
earnings, but a lot of insurance companies,
leasing companies and banks are trading at
6x–7x, so the financials are dragging down the
index. Some non-financial stocks are trading
at 25x–30x. From a valuation point of view,
stocks don’t really need any extra help, with the
exception of banks.”