Is NIC Asia’s 11% Debenture worth Investing? Click here to find out

 ~Rishab Agrawal

Introduction and Synopsis

NIC Asia Bank Limited (NICA) is “A” Class Licensed Financial Institutions from Nepal Rastra Bank (NRB) and is one of the top 5 “A” Class (Commercial) banks of Nepal in terms of Deposits and loans and advances as on April 13, 2018. It was incorporated on July 21, 1998 as Nepal Industrial & Commercial Bank Ltd., later it was merged with Bank of Asia Nepal Ltd. as on June 30, 2013 and named NIC Asia Bank Limited. 93.48% of the total shareholding of the Bank is held by individual general public and 6.52% by corporate entities as on July 15, 2017; among which 51% belongs to promoter group shares and 49% belongs to general public. The market share of NIC Asia Bank in terms of deposit base is 5.89% as on Mid-April 2018 and for the loan portfolio the market share is 5.44% as on Mid-April 2018 of industry. The Bank has two wholly owned subsidiary companies operating in Nepal namely NIC Asia Capital Limited (undertake Merchant Banking activities) and NIC Asia Laghubitta Bittiya Sanstha Limited.

NIC Asia Bank is now, one of the largest private sector commercial banks in the country in terms of capital base, balance-sheet size, number of branches, ATM network and customer base. The Bank has 241 branches, 14 extension counters, 15 branch less banking and 238 ATMs across Nepal with a network covering all major financial centers of the country.

NIC Asia Bank Limited (NICA) is issuing 11% debentures with maturity period of seven years from 21^st Bhadra, 2075. The debenture is priced at Rs.1000 per unit. It is issuing 366,000 units of debentures to raise a debt worth Rs.36.60 Crore. Care Ratings Nepal has rated this issue as ‘CARE-NP A’ indicating low credit risk and having adequate degree of safety regarding timely servicing of financial obligations.

The current board of directors consists of seven members, they are:

Mr. Roshan Kumar Neupane is the Acting CEO of the bank.

Strengths and Weakness

Some of the strongest aspects of the bank are as follows:

• Strong track record, experienced promoters and management team
• Adequate capitalization and capital adequacy
• Geographical diversification through number of branches
• Consistent overall growth
• Comfortable liquidity profile

While it enjoys number of strengths, it has to focus on some of its weak aspects as well. The major weak points of the bank are as follows:

• Decreasing return on total assets
• Increasing operating expenses
• Intense industry competition

Financial Indicators

To have an idea about the financial strength of the bank and its growth history, we have compared some key indicators with their past and projected performance.

First of all, we look at the banks paid up capital and the reserves and surplus posted by the bank in the past and how it is projected to grow in the coming future. The paid up capital and reserves give the following view:

As we can see, the paid up capital currently standing at Rs.8.03 Arba is expected to grow to Rs.10.68 Arba in the next two years marking an increase of 33% in the paid up capital as compared to the current paid up capital. Similarly, reserves of the bank which currently stand at Rs.3.23 Arba are projected to go up to Rs.13.92 Arba in the next three year. A growth of roughly Rs.10.7 Arba is expected in the next three years.

A similar comparison can be done regarding the operating profit and net profit of the bank. These figures will give an idea about what the stakeholders can expect out of the bank in the coming years. They are as follows:

The operating profit of the bank currently stands at Rs.2.18 Arba while the net profit stands at Ra.1.19 Arba. In the next three years, these figures are expected to grow to Rs.11.66 Arba and Rs.7.04 Arba respectively. A growth of Rs.9.48 Arba is ecpected in the operating profits while growth of Rs.5.85 Arba is expected in the net profit in the coming years. While the projected profits are soaring high, a fall in the net profit compared to previous year 73/74 can be seen.

Next, we compare the earnings per share and net worth per share to look at the value added to the wealth of shareholders by the bank. These indicators suggest the amount of growth an investor can expect in the investment in terms of each units of share.

The EPS as on FY 74/75 was Rs.24.83 per share and net worth was Rs.140.27 per share. These figures are expected to grow immensly in the next three years. The EPS is expected to grow by 1.65 times of the current EPS while net worth per share is expected to grow roughly by 64% of the current net worth. These figures show a promising future for the banks growth, but to live up to such expectation will require great efforts from banks side.

Other Indicators

Some of the other key indicators about the financial stability of the bank are mentioned here. The EPS of the bank stands at Rs.14.83. The Price to Earnings ratio stands at 24.21 and Net worth per share is Rs.140.27. Return on Equity and Return on Asset are 10.57% and 0.69% respectively. 52 week high/low prices of the share are 382/285. The average share price of 360 Days stands at Rs.378.49 while that of 180 Days is Rs.331.17. The LTP of the shares were 359 as on 2^nd September 2018.

Dividend Payout

The dividend history of the bank has been mentioned here. The dividend history of last five years stand as follows:

As we can see, the bank has given out satisfactory amount of dividend in the form of cash dividend and bonus shares. Looking at the projected capital plan and the net profit posted by the bank, it would be safe to say that the bank will continue to give out a combination of cash dividend and bonus shares as its dividend. Although, the shareholders can expect more proportion of bonus shares rather than cash dividends as the bank is looking for a steep growth in the structure of paid up capital in the coming years.

Conclusion

If we look at the average rate on fixed deposit for one year provided by the commercial bank, it comes to roughly 10%. That means if investors opt for fixed deposit, their investment will grow by 10% annually. While the debenturs being offered here have 11% inetrest rate per annum compunded semi-anually. That means, an investment of Rs.1000 in the debenture will result in return of approximately Rs.2116 after seven years. The effective rate of interest is approximately 11.6% which is more than the rate provided by any bank on any type of account. This will surely attract investors to invest in the debentures offered.

Looking at the inidcators mentioned above, it is clear that NIC Asia is strong player in the Banking and Financial sector and is aiming for a steep growth in the coming years. There is no dobut regarding the fact that it is financally sound to issue and redeem the upcoming issue of debentures. The expected growth figures may look ambitious when compared to the posted growth figures, but by no means are they unachieveable. To achieve the expected goals, it is of utmost importance than the bank continues its smooth operation and work towards increasing its market share by improving performance in the existing sector and venturing into untapped sectors.