Bank Shares Carry the Lowest Price-Earnings Ratio, Yet Investors Still Stay Away

The price-earnings ratio, known as the PE ratio, is the indicator most commonly used to judge investment risk in the stock market. The lower a company's share price is compared with its earnings, the less risky that share is generally considered to be. By that measure, bank shares currently stand as the least risky in the country's stock market, because the banking sector's average PE ratio is now the lowest of any sector.

At the end of last week, the average PE ratio of bank shares stood at 5.27. Hearing that figure, one might expect bank shares to be at the centre of investor interest. The reality is the opposite. Despite this low-risk calculation, both institutional and individual investors are showing little interest in buying bank shares.

Market participants say the main reason is a deficit of confidence. Because of past experience, investors harbour doubts about the published financial information of most banks, apart from a handful. As a result, even though the PE ratio looks low on paper, the question of how credible those earnings figures are looms large in investment decisions.

Another reason lies in the nature of the banks' income. The profits of some banks have grown significantly in recent years, but a large part of that growth has come from earnings on investments in government treasury bills and bonds. Income from the banks' core business has not risen in the same way. Market participants regard treasury bill and bond profits as temporary, so questions remain about whether sustainable growth can be maintained.

There are currently 36 banks listed on the stock market. Trading in five of them, which are in the process of being merged, is suspended, and the value of those banks' shares has already been declared zero. In addition, updated PE ratios were not published for seven banks that are in heavy losses amid defaulted loans and various irregularities.

PE ratios based on regular earnings were calculated for 24 banks. The Dhaka Stock Exchange (DSE) published the figures based on the banks' latest financial reports. Jamuna Bank has the lowest PE ratio on that list, at 2.88. Shahjalal Islami Bank is second, with a PE ratio of 3.23.

Southeast Bank is third, with a PE ratio of 3.45. NCC Bank is fourth at 3.51, and Prime Bank is fifth at 4.14. According to the DSE figures, 11 of those 24 banks have PE ratios below 5. In numerical terms, the list of banks with low PE ratios is not a short one.

It is also important to understand how the PE ratio is calculated. Listed companies publish earnings figures four times a year. Of those, only the annual earnings figure is audited; the other three financial reports are generally unaudited. A company's PE ratio changes on the basis of those reports and earnings.

The PE ratio is considered not only in investment decisions but also in lending. Many investors take loans against their shares, and lending institutions look at this ratio when disbursing such loans. However, market participants also note that the earnings per share, or EPS, on which the PE ratio is based is itself of questionable credibility for most companies.

Faruk Ahmed Siddiqui, a former chairman of the market regulator BSEC, said it is generally said that the lower a company's PE ratio, the lower the risk of investing in it. But there are big questions about the credibility of the profit figures the banks provide. Given the overall situation in the banking sector, investor interest in the sector remains low despite the low PE ratios, he said.

Siddiqui pointed to another factor as well. In his words, 70 to 80 percent of investors in the country's market are more interested in regular trading than in long-term investment. As a result, they are drawn to shares whose prices rise quickly. The comparatively steady bank shares fall behind in that race.

There is also the question of dividends. Bank profits have grown in recent years, but dividend rates have not risen in proportion, because a large part of the profits has to be kept as provisioning against bad loans. As a result, even as profits rise, stock market investors receive less of the benefit, which market participants see as another reason for the lack of interest.

Taken together, the picture is clear: in numerical terms, bank shares are now the least risky in the market, but confidence, the nature of earnings and the reality of dividends are preventing that number from turning into investment. Participants say the advantage of the low PE ratio will become meaningful to investors only when doubts about the banking sector's overall situation and the credibility of its financial reports are dispelled.