Investor confidence in bank stocks rises
KATHMANDU,JUNE 21:
Despite the constant plunge in the index, the confidence of investors on bank stocks seems to have grown as shown by the appreciation in the Price-to-Earning Ratio (P/E Ratio) in the third quarter of the current fiscal year.
The P/E Ratio of the 25 listed commercial banks stood at 17.43 — which is the industry average — in the third quarter of the current fiscal year, against 14.75 in the same period last fiscal year.
Among the 25 listed banks that have published the P/E Ratio in their financials, the ratio of 10 commercial banks is above the industry average meaning overvalued, while the ratio of 13 commercial banks is less than the average, meaning undervalued.
The P/E Ratio indicates what investors are willing to pay for the company’s earnings. If a stock has a P/E of 15, that means the market is willing to pay 15 times its earnings for the stock. The P/E Ratio is simply a company’s stock price divided by its earnings per share for the last 12 months. The ratio shows whether the price of a company’s stock currently being traded is overpriced, underpriced or rightly priced.
“The P/E Ratio is a reliable indicator for investors to follow before purchasing shares,” said share analyst Rabindra Bhattarai. “However, it is not enough to gauge the share prices. Other factors such as growth prospects of the company and corporate governance should also be taken into consideration,” analyst Bhattarai cautioned.
Generally, the stock price of companies with P/E Ratio less than 10 is considered to be undervalued, those between 10-15 is taken as rightly valued and those above 25 is taken as overvalued. “If the P/E Ratio exceeds 25, the stock price of the company is considered to be highly speculated, if the growth prospects of the company are average,” pointed out Bhattarai who is also the chairman of Securities Research Center and Services.
Agriculture Development Bank Ltd (ADBL)’s P/E Ratio stood at 3.02 — the lowest among the banks and Machchhapuchhre Bank has the highest P/E Ratio at 195. “If the corporate governance of the company is under scanner then investors tend to undervalue the share prices like in the cases of ADBL and Nepal Telecom whose P/E Ratio is way below 10,” he added.
In 2007-08, when the share prices were riding high, the P/E Ratio of a few companies were incredulously high at 300-400.
In the last one year, the banking subgroup’s market capitalisation has come down by about seven per cent by the third quarter to Rs 150 million from Rs 162 million as stocks are not doing well. But with the surge in optimism in the stock market in the last one and a half months, market capitalisation has also gone up to about Rs 175 million. There are more than 417 million units of shares belonging to 25 commercial banks with paid up value of Rs 41.78 billion listed at Nepse .
The banking subgroup is the most popular among investors among the nine subgroups of Nepal Stock Exchange covering more than 70 per cent of the total market capitalisation at the stock market.
Source: THT
