Commercial Banks Are Approaching Their 52-Weeks Low Price; What Does this Mean for Investors In BFI-Dominated Market?

Any country’s stock market should represent both the state of the economy and its pace of expansion. That isn't the case, though, for economies in developing countries like ours, and it's mainly because of a severe dearth of diversification.

Commercial banks still hold a huge stake in the Nepal Stock Exchange (NEPSE), accounting for about 35% of its market value. Nabil Bank is responsible for 6% of the entire market capitalization. Due to their large capital, commercial banks are also considered low-risk businesses. Price activity shows that these stocks stay away from unexpected fluctuations.

Apart from commercial banks, development banks, financial institutions, microfinance groups, and other companies like insurance companies also have a good presence in the stock market.

Commercial banks, which include a broad range of institutions and are the cornerstone of our nation's financial system, will be the focus of this article rather than entire BFIs.

Of the prior 28 commercial banks in Nepal, the total number of commercial banks have reduced to 21 due to merger and acquisitions. 20 commercials as of now are publicly traded in the secondary market (NEPSE).

The total market capitalization of NEPSE as of March 22, 2023 stands at Rs. 2,793,407.21 million, out of which the total market capitalization of a commercial bank is Rs 961,590,187,906.

The NEPSE index is highly dependent on the commercial bank sector, which makes up a significant percentage of market capitalization, so the context mentioned above is crucial. 

The market has been in a bear market since the bull market of 2021, and despite reassurance from analysts, the index has fallen even further. The majority of commercial banks are currently extremely near to their 52-week low point. This is shown in the chart below:

In many banks' instances, the Last Trading Price (LTP), which is calculated as of March 22, 2023, has come very close to the 52-week low. However, we also need to take into account the reality that many banks paid out dividend using profits from the previous fiscal year - 2078/79. As a result, the LTP has been modified to apply to any bonuses shares whose Book Closure has been completed as of March 22, 23.

*The bonus dividend of only Nepal Investment Bank prior to the merger with Mega Bank has been considered for Bonus adjustment of NIMB - Nepal Investment Mega Bank. 

Even after adjustment of LTP after bonus, if we compare it with 52 weeks low, there isn't much discrepancy. Laxmi Bank almost is now at a 52-week low. Similarly, other banks like NMB, NBL, SRBL, and CZBIL are also not much higher than their lowest points.

On the positive side, when we look at the 52-week low data for commercial banks, we can see that the RSI (Relative Strength Index) is almost at 30, and the prices in the 52-week low are dropping rapidly, implying that now is the good time for investors to acquire commercial bank shares if they plan to hold them for a long period. 

*The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30.

Similarly, in the table above we can see by what percentage the prices of scrips have fallen from their 52 weeks high point.

Himalayan Bank’s price has fallen by 50%, which might be because its shares weren't traded for a long period of time due to its canceled merger with Nepal Investment Bank and later due to the process of acquiring Civil Bank.

Nonetheless, for a stable sector like commercial bank even a two digit decrement is huge and that too in short span of time.

This demonstrates that the investors who put their investment into the 2021 bull market or even during the previous fiscal year are losing money, but it also demonstrates that there are tremendous opportunities for new investors seeking to invest in the secondary market, as they say, "Buy at low, sell at high."

The indicator, which peaked at 3200 on August 18, 2021, has seen significant points drop in other sectors as well, which has had a negative impact on the values of most businesses.

The following image displays the point drop over the previous three months for each of the 13 sectors.