Why BD Finance earnings drop despite each businesses’ high growth

Bangladesh Finance Ltd has had a very good year in 2021 as all of its lending, merchant banking and brokerage business entities thrived, while the soaring capital market helped them increase their income from investments.

No wonder the parent entity BD Finance Ltd, its merchant banking subsidiary BD Finance Capital Holdings and brokerage subsidiary separately posted 19%, 235% and 397% annual growth in net profits for the booming year.

But the surprise is the non-bank financial institution (NBFI) posted a 14.98% drop in its consolidated annual earnings per share (EPS) that came down to Tk1.44 from Tk1.69.

Consolidated figures include the same ones of subsidiary companies, while a company is treated as a subsidiary if there is a majority shareholding by the parent company.

The consolidated earnings dropped in 2021 because of the high inter-company dividends from the two capital market subsidiaries which need to be discarded from consolidated profit to satisfy accounting standards, said Md Kyser Hamid, managing director and chief executive officer of the publicly listed firm.

The two subsidiaries gave around Tk29 crore in total dividends to its parent in 2021 and if it were not an intercompany dividend, the total figure would be included in the consolidated EPS, he said.

Having a great year in capital market businesses, the transforming lender appeared to have best utilised the chance to further strengthen its balance sheet through more than adequate provisioning in 2021.

Kyser Hamid said, "Considering any post-pandemic uncertainty in the lending business, we have maximised our shock absorption capacity through provisioning in 2021, and that would enable us to chase even bigger growth in coming years."

Lenders have to set aside profits against their risk of potential losses in loans or investments, while inadequate provision weakens a firm to operate confidently and vice versa, he explained.  

BD Finance and its subsidiaries made total provisioning of Tk31.5 crore in 2021, not opting for the opportunity to make a much lower mandatory provision in deferred phases up to the end of 2023, as offered by the securities regulator to the two  capital market subsidiaries.

It also suspended all the doubtful interest income by not showing them in the income statement and transferring them to interest suspense accounts. Any income that comes later from the suspense account pocket will be added to the income statement, the CEO said.

Improving in almost all the indicators, the non-bank financial institution (NBFI), on a solo basis, posted a 56% annual growth in its operating income, and a 69% growth in operating profits.

With a single-digit annual growth in its loan portfolio, the lender reduced its non-performing loans to 2.54% at the end of 2021 which was 3.22% a year ago and 4.84% in 2019, according to its CEO.