Investing in BFIs? Research to get to the right Scrip
It is no-brainer that the recent bullish trend of the only secondary market of Nepal, NEPSE, is driven by the exceptional performance of banking and development bank sector. Avid performance of these sectors can be attributed to the Nepal Rastra Bank's (NRB) directive to increase the paid up capital within two years. Besides, these sectors announce their stock dividend around this time of the year so the NEPSE is usually high at this time than rest of the year. In another twist, the NRB has virtually barred Bank and Financial institutions (BFI) from issuing cash dividends. All these positive news mixed with the constitution promulgated on Aswin 03, 2072 has the local bourse breaking all sorts of records!
For a couple trading days the insurance sectors also rose unprecedentedly as the news broke out that the insurance board is also going to require insurance companies to raise their paid up capital. However, the insurance sector fell sharply after the investor realized the process to increase paid up capital of insurance companies is not only cumbersome but also has to jump through series of bureaucratic hoops. Thus, the insurance sector is relatively calm at least for the time being.
The shares of BFIs have been selling like a hot cake in the secondary market. The circuit break hit by the shares of Janata Bank Nepal Ltd on 31st Bhadra proves that investor are buying anything and everything thing they can get hands on when it comes to the shares of BFIs. So now the question of the moment is, is it worth to buy shares of BFIs at any cost in hope for good return?
Anil Shah, CEO of Mega Bank Ltd (MEGA,) said that there are three generations of commercial banks in Nepal. The first generation commercial banks can reach requirement of the increased paid up capital simply by issuing bonus shares. The second generation banks have to issue bonus shares as well as right shares or go for merger and acquisition process. While the third generation banks have to go for all three choices to reach the required paid up capital by the stipulated time.
The other way to reach the paid up capital could be bringing foreign partners. However, this could prove to be an uphill task at present condition. Thus, very few BFI might be able to bring in foreign partners for a joint venture.
The best way for BFI to reach the required paid up capital is by issuing bonus shares. The second option should be merger and acquisition between BFIs whose areas of operation have minimal intersection to each other. In another words the BFIs who are operational in different geographic regions should go into merger and acquisition process. This will add business as well as increase the paid up capital of the new entity emerged from merger and acquisition. This will also lessen the burden on BFIs to expand their business due to astronomical increment in paid up capital. Furthermore, the stock dividend from such entity will not be diminished.
The worst possible way to increase the paid up capital would be issuing huge amount of right shares. Issuing right shares to meet last yard of increment in paid up capital is fine but just heavily relying on it could be recipe for disaster. The BFI who rely heavily on issuance of right share might be able to meet the paid up capital demand but will have to work harder to invest it for return. Branch expansion, fierce competitions for business, and other factors will hit their bottom line. They might also end up having a lot of liquidity at hand but fewer places to invest for a return. The investor of this kind of BFI might have to wait longer for return as the BFI has to get return from investment of the capital collected from the issuance of right shares. It is likely that it would take several years for such BFIs to give returns that investors are used to now. If the similar instability that we have seen in Terai regions recently persist, it would be exponentially harder for these kinds of BFIs to perform well and meet the higher expectation of the shareholders.
As of today all the BFI have already submitted their proposal to NRB which contains their road map to reach the requirement of increased paid up capital within two years. Unless you are punter of the stock market, it would be wise to stop and think for a moment before you invest in BFI at this time. It could be the righteous time to buy stocks of BFI but only after doing a careful research and analysis on your part.
