Comparative Analysis of Commercial Banks: How Much Has P/E Ratio Declined Since The All-Time High?

Another day, another falls in the stock market. These sharp declines have become the norm. When all of the sub-indices close in the red, traders and investors aren't surprised.

This is in sharp contrast to the market's status last year. In August 2021, the NEPSE had risen to almost 3200 points. Since then, it hasn't gotten any higher. Instead, 'volatile' is the perfect word to describe the market.

Whenever the bulls take the market up, the bears bring it back down again. This is how the market has been moving over the last nine months. Now the bears are in control. In market speak, we say there has been a change in sentiment. Some are even talking about a full-fledged bear market.  

More so, NEPSE has lost 10% In the last 8 trading days and today (7th June, 22) the index closed at 2,020.23 with a loss of 2.21%. Here we try to analyze the companies in the banking sector whose P/E ratio has been affected most due to the market fluctuations.

PE ratio shows the sum of money you are ready to pay for each rupee worth of the earnings of the company. With the ongoing bearish trend, the investors in the secondary market are inquisitive about various indicators such as EPS, market price, and P/E ratio of the commercial banks.

Usually, a higher P/E ratio denotes the stock is being overvalued while a lower P/E ratio denotes the undervaluation of the company’s stocks. The higher P/E ratio also means the company’s management, operation and structure deserve a better premium in the market. The lower P/E ratio further shows a company has scope for growth in comparison to its competitors.

The ranking of these banks as per the third-quarter report of the fiscal year 2078/79 in terms of the P/E ratio is provided below. Rastra Banijaya Bank(RBB) is not listed in NEPSE, therefore the analysis discards RBB. Also, Nepal Bangladesh Bank (NBB) is not considered in this analysis since its trading is halted owing to its ongoing merger procedure with Nabil Bank Limited (NABIL).

*LTP – As of 7^th June 2022

Nepal Credit And Commercial Bank Limited (NCCB) has the least P/E ratio of 11.40 among all commercial banks. It is further followed by Machapuchre Bank Limited (MBL) with a PE ratio of 12.21. Himalayan Bank Limited (HBL) whose trading has resumed from yesterday is seen with a P/E ratio of 22.58.

Companies that grow faster than average typically, have higher P/Es, such as Nabil bank in this case, whose PE ratio stands at 34.42 times. A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future. The average industry P/E ratio is 16.27 times (as of 7^th June, 22).

Likewise, if we compare the average industry P/E ratio of 18^th Aug, 21 and 7^th June, 22 the average industry P/E ratio has declined significantly. The average Industry P.E ratio as of 18^th Aug, 21 was 28.76 times.

Going through all the analysis, we can say that the market is irrational at times, but this could be a potential moment opportunity for the investors who are looking for value as warren buffet has quoted ‘Be fearful when others are greedy, be greedy when others are fearful’