Addiction to banking shares
By Rabindra Bhattarai
To what extent are the Nepali investors addicted to banking shares is indicated by the price movement of two troubled commercial banks as shown by the figures in the table. Both banks have negative net worth in the fiscal year 2005/06 —this is a technically insolvent situation and shows the banks’ inability to discharge their liabilities by selling their assets. In such a situation, the shareholders get nothing if the company is liquidated.
However, the market price of these banks is on an increasing trend and the rate of price appreciation in both shares is higher than shown in the Nepse index. Nepse returns were 35.76 per cent during 16 th July 2006 to 21 st June 2007 whereas Lumbini Bank’s and NCC bank’s returns are 120.93 and 208.51 per cent respectively. To curb this rally in the prices not backed by the fundamentals of the companies, Nepse had to use circuit breaker several times in the stocks of these companies.
Financial indicators of LuBL and NCC bank in the fiscal year 2005/06
Particulars |
LuBL |
NCC |
Profit margin |
(203.63) |
(183.82) |
Return on assets (ROA) |
(18.92) |
(7.72) |
Return on equity (ROE) |
(161.21) |
(125.62) |
Earning per share (EPS) |
(161.21) |
(125.62) |
Net worth per share (NWPS) |
(145.59) |
(53.37) |
Per employee operating income |
1269673 |
1371247 |
Non performing assets (NPA) |
19.32 |
21.87 |
Core capital ratio (CCR) |
(15.11) |
(5.05) |
Capital adequacy ratio (CAR) |
(13.93) |
(3.46) |
Market price per share (MPS) |
Rs172 |
Rs 94 |
on 16 July, 2006 |
|
|
Nepse Index on 16 July, 2006 |
386.83 |
386.83 |
MPS on June 21, 2007 |
380 |
290 |
Nepse Index on 21 June, 2007 |
525.15 |
525.15 |
Price appreciation |
120.93 |
208.51 |
Nepse Index increase (market return) |
35.76 |
35.76 |
Source: Bank’s reports and Nepse |
|
There are several reasons behind the investors’ craze for these stocks. One is the present market situation which can be termed known as “price pull”. When the price of a stock goes up people think that this stock is a good one to buy. Moreover, if the shares of a particular company in a group appreciate in market price, people rush to grab shares in other companies of the same group. This is more pronounced in the commercial banking sector shares. Second, myriad rumours (such as these banks are merging with other healthier banks) are pulling investors to these shares. Most important is the right share mania among the investors. Both banks have announced a plan to issue right shares.
Most of the figures of the two banks are negative - profit margin ratio, return on asset or return on investment and EPS. Non performing asset (NPA) of both banks is higher not only from the normal international standard of 5 per cent, it is the highest among the private sector banks.
NRB directives require a 12 per cent capital adequacy ratio (CAR) and 6 per cent core capital to risk weighted assets ratio (CCR) but both banks are unable to meet these requirements.
In the near future, both banks are going to issue right shares to improve their CAR and meet the statutory requirement. However, the banks will have to face problems to invest the increased capital profitably.
Techniques to Expand
Nepali Securities Market
By Janardan Dev Pant
Financial services companies dominate the Nepali stock market with over 90 percent of the shares. Here are ways to dilute this single sector concentration.
Presently, around 72% of financial claims in the Nepali stock exchange are from commercial banking, 7.8% from development banking, 7.9% from finance companies, 3% from insurance and 9.3% from hydro power, trading, manufacturing and others. In this situation, following remedies are needed to be administered to improve the market efficiency.
Taking Government Enterprises Public
Government enterprises such as Nepal Airlines Corporation, Nepal Telecommunication and Nepal Electricity Authority must go public upto at least 30% of their paid up capital. This will dilute the dominance of the financial sector in the stock exchange. The people will also have more direct control over these enterprises making the enterprise more directly accountable to the people and this will reduce corruption in them.
Making Hydropower Companies Public
The government should have a policy to encourage hydropower companies with more than 1 MW capacity to issue minimum 30% of their paid up capital to the general people. This will bring positive impact on distribution of benefits from national resources to a larger group of people.
Overdue Directives from Security Board
New Securities Act was introduced on January 14, 2007 . However, the Securities Board has not yet issued rules and regulations regarding Mutual Funds (MF), one of the major investment products contemplated in the Act. An MF buys investments with money it gets from selling shares in the fund, and manages its portfolio to meet its financial goals. Most financial professionals agree that it is smarter to own a variety of stocks and bonds than to gamble on the successful performance of just a few. A couple of MFs will provide people good alternative avenues to invest their savings. If the Security Board has technical barriers regarding the MF, it may outsource the job to prepare reports and draft the directives.
Reducing Brokerage Commission
The existing rates of brokerage commission (e.g. in an average 1% of value traded) are extremely high – probably the highest in the world. This rate applies to both purchases and sales and is fixed by the Nepal Stock Exchange. Revenue of the stock exchange will increase if new products are introduced and number of listings is increased. Therefore, it is suggested that the commission fees be revised downward, immediately.
Margin Loans
Nepali investors cannot take margin loans from their brokerage companies to finance their stock purchase. Regulators should allow this as it helps to automatically control the market. When the market overheats, the margin requirements can be raised to 100% and when the market cools down, it may by lowered accordingly.
Double Taxation Treaties
Nepal need to encourage securities investment to and from overseas. For this there needs to be double taxation treaties with countries around the world.
(The author can be contacted at: janardanpant@hotmail.com)
