Attraction of Finance Companies
By Rabindra Bhattarai
Investors are being attracted to buy shares of finance companies that are upgrading themselves into development bank or commercial bank status. However, it would be prudent on the investors' part to evaluate the strategies of these companies.
During January 2007, share prices of finance company increased across the board. Though the price rise was only 5 per cent in some cases, some companies had a price rise as high as 80 percent. The result is that the shares of such companies have become really scarce. On the other hand, the market price of commercial banks changed marginally and most of the changes in this group of companies are negative. This indicates that the investors' attraction has shifted from commercial banks to finance companies.
Over the period, the market price of Kist Merchant Banking and Finance Company has increased the most (79.84 per cent) followed by IME Financial Institution Ltd.’s and Nepal Merchant Banking and Finance Company Ltd.’s.
The investors' increasing attraction toward finance companies can be attributed to the declaration by these companies that they are targeting to upgrade themselves into development and commercial banks. Some companies have already started this conversion process. Ace Finance Company Ltd. has changed its name into Ace Development Bank Ltd. in its recent AGM and started to raise capital through bonus shares and rights shares issues. The company distributed 40 per cent bonus shares for the fiscal year 2005/06 and has issued 1:1.53 rights shares amounting to Rs. 196 million to meet the Rs. 320 million paid up capital requirement to become a development bank. Similarly, Nepal Merchant Banking and Finance Company Ltd. and Development Credit Bank Ltd. have announced their plans to become commercial banks. Other companies planning to change into development banks are Kist Merchant Banking and Finance Company Ltd., Nepal Share Market and Finance Company Ltd. and World Merchant Banking and Finance Company Ltd.
One Month Return of some Commercial Banks |
Companies |
31/12/2006 |
31/01/2007 |
Change (%) |
Standard Chartered Bank Nepal Ltd. |
4650 |
4550 |
-2.15 |
Nabil Bank Ltd. |
3330 |
3355 |
0.15 |
Nepal Investment Bank Ltd. |
1210 |
1210 |
0 |
Nepal SBI Bank Ltd. |
765 |
785 |
2.61 |
Everest Bank Ltd. |
1887 |
1800 |
-4.61 |
Kumari Bank Ltd. |
750 |
776 |
3.47 |
Siddhartha Bank Ltd. |
630 |
640 |
1.59 |
Laxmi Bank Ltd. |
550 |
540 |
-1.82 |
Bank of Kathmandu Ltd. |
1078 |
1065 |
-1.21 |
Himalayan Bank Ltd. |
1220 |
1100 |
-9.84 |
One Month Return of Some Finance Companies |
Companies |
31/12/2006 |
31/01/2007 |
Change (%) |
Kist Merchant Banking & Finance Ltd. |
367 |
660 |
79.084 |
Nepal Merchant Banking & Finance Ltd. |
551 |
960 |
74.23 |
IME Financial Institution Ltd. |
120 |
211 |
75.83 |
World Merchant Banking & Finance Ltd. |
140 |
183 |
30.71 |
NIDC Capital Markets Ltd. |
260 |
322 |
23.85 |
Central Finance Ltd. |
200 |
210 |
5 |
Ace Finance Ltd. |
400 |
445 |
11.25 |
United Finance Ltd. |
166 |
243 |
46.39 |
Capital Merchant Banking & Finance Ltd. |
105 |
143 |
36.19 |
Janaki Finance Ltd. |
164 |
202 |
23.17 |
The other reason for the investors’ attraction is the lower price of these companies as compared to commercial banks. Added to it is the fact that these banks have reported better performance than some commercial banks. Many small investors are thus attracted to the low priced shares of these companies and the increasing demand has pushed their price up. In some finance companies, the promoters and employees of the respective companies are themselves buying their own companies’ shares.
For a long time, the market prices of finance companies were completely stagnant and the market was totally dominated by commercial banks. But during January, the finance companies’ index increased by over 19 percentage points whereas the banking sector index and NEPSE index decreased by 0.21 and 0.58 per cent respectively.
However, those investors who are paying higher prices to buy the shares of finance companies must be very careful because simply converting a finance company into a development bank or commercial bank will not guarantee returns. What matters more is the strategy that these finance companies are coming up with to face the growing competition in the entire financial services industry.
