One in four stocks trades below face value

One in four stocks on the Dhaka Stock Exchange (DSE) is trading below face value, due mainly to the companies behind them failing.

Banks and finance firms weighed down by bad loans dominate this group, alongside mutual funds that have lost investor confidence. There are also textile stocks in this basket.

Analysts say this weakens the overall market, making it less attractive to both local and foreign investors.

According to them, strong companies do exist, but they are few, so investors now favour only those with solid performance.

They have urged the regulator to clean up the mess by shutting down or merging the bad ones and bringing in stronger companies.

Face value is the nominal price of a share or mutual fund unit set by the regulator, which in Bangladesh is Tk 10 for all equity and mutual fund securities.

At the DSE yesterday, 397 stocks changed hands, of which 98 traded below the face value of Tk 10. Half of these slipped below Tk 5.

A breakdown shows 33 of the low-priced companies are banks or NBFIs, 35 mutual funds and 17 are textile factories. Many of the textile units have either shut down production or suffered losses for years.

Although the market index has been rising in recent months, low-priced shares have barely moved. Almost half of these low-priced stocks are classified as junk, according to DSE data.

"The huge number of companies with low share prices indicates that their performance is not good, so demand for these stocks is low, and the high number of such companies indicates that there is an abundance of low-performing companies," said Kazi Monirul Islam, chief executive of Shanta Asset Management.

The exchange lists around 400 companies, yet only 50 to 60 are considered investable for foreign and institutional investors.

"Overall, it shows that the market has a lack of good stocks," Islam said.

Among the low-priced shares, banks stand out.

Non-performing loans (NPLs) in the sector reached a record Tk 4.20 lakh crore at the end of March, accounting for nearly a quarter of all loans, according to the Bangladesh Bank. Distressed loans totalled Tk 7.56 lakh crore last year, 45 percent of all outstanding loans.

Among the listed banks, 18 commercial lenders have been barred from paying dividends because of fragile finances. Most of the banks are being traded below their face value.

"Once, the banking stocks were much in demand among investors. But their attraction dropped over the years when investors realised that many banks were impacted during the previous years," said Islam.

He added that while failing banks dragged down the sector, a handful of stronger lenders had attracted more deposits and stood out during the downturn.

"Thankfully, investors realised it and their share prices edged up," he said. "It is a good sign that investors can differentiate which banks are in good health and which are not."

NBFIs account for another major portion of low-priced shares. Most of the non-banks have been crippled by unpaid loans, with bad debt exceeding 95 percent of total lending at many firms.

The central bank has moved to liquidate nine NBFIs, eight of which are listed, but trading in their shares continues. "So, there is no reason to hold the shares of most of the NBFIs," Islam said.

Mutual funds have also lost value, due mostly to poor management in the past.

Ideally, their unit price should be close to net asset value (NAV), but most now trade at half that figure.

"Because investors do not trust the financials of the mutual funds, the question of reliability remains here," he said.

Saiful Islam, president of the DSE Brokers Association of Bangladesh (DBA), said, "A stock market having many junk stocks cannot be attractive to foreign and institutional investors."

"When we are trying to attract foreign investors and urge to ensure compliance and availability of good stocks, these huge numbers of stocks that are not performing well do not show a good indication," said Islam.

The DBA president called on the government to focus on bringing stronger companies to market and urged regulators to decide which weak firms should be delisted and which could be merged or acquired.

"The central bank announced that nine NBFIs will be closed, but their stock trading is still active in the stock exchange. At least, trading of these stocks should have been suspended," he said.

"If the regulator finds that any company has enough assets, they can be sent for merger and acquisition," said the DBA president.