Know which commercial banks’ stocks to buy in this decreasing market (Exclusive Study)

In just a matter of 20 days, NEPSE has fallen by 240 points. The index, which started at 1749.12 after the festival season, has gone under a continuous downfall to close at 1510.16 yesterday. Panic selling among investors has been seen as one of the major contributing factors for this bearish trend. In this environment, it is necessary to know the health of the company one is investing on than to go after the rumors and get rid of stocks by bearing loss. In this bearish market, investing in commercial banks is still the safest option.

Market Price of Commercial Banks down by as much as 25 Percent

In this 20-day period, Civil Bank has lost over 25% of its opening market price. Laxmi Bank has lost 20%. On the flip side, Nabil Bank has only lost 5.7%. A comparison of the market prices has been shown in the table below:

Need for informed decision and patience among investors necessary for market stability

Issuing a press release yesterday, NEPSE has also urged all the investors to not go after rumors and take the company’s present financial condition and profit-making capacity into account to reap the maximum benefit from this bearish market. ShareSansar has analyzed the top indicators of all the 27 listed commercial banks to help investors decide which companies to invest on. For this, major parameters (Annualized EPS, P/E Ratio, Net Worth Per Share) of these commercial banks as of the first quarter of FY 2073/74 were compared with that of the corresponding quarter of the last fiscal year FY 2072/73.

Earnings Per Share

Earnings Per Share (EPS) is one of the major indicators that shows a company’s financial health. EPS is the portion of the net profit of a company that has been allocated to each share. A company with high (and positive) EPS shows that the company has the ability to provide good profit to its shareholders as dividend. Higher the EPS, higher the DPS (dividend per share). In this review period, 13 banks have had positive EPS growth. Everest Bank’s annualized EPS stands at Rs. 74, which is the highest. This means that Everest Bank has the capacity to provide up to 74% dividend to its shareholders. This not only shows that the bank is in good financial health, but can also provide a good portion of its net profit as dividends. In a fitting example, Everest Bank did propose 70% bonus to its shareholders recently. Other commercial banks with high EPS are Nepal Bank, Nabil Bank and Standard Chartered Bank. Civil Bank’s EPS is the lowest at Rs. 2.22. Its financial statement for the first quarter of FY 2073/74 showed a 71% decrease in its net profit and at an operating loss of Rs. 13 Crore.

Net Worth Per Share

Net Worth Per Share is fundamentally a security signal of a company and it is the portion of the core capital for each issued share of the company. It shows the amount of cash reserve a company has and is the measurement of the net worth of the company for each outstanding share. In the context of Nepal, Rs. 100 is the base net worth for all the commercial banks. If the net worth per share of a commercial bank is negative (below Rs. 100 per share), it might be a bad signal that the bank is losing its ability to pay off its liabilities. If the net worth per share is high and positive (greater than Rs. 100), it is a good sign that the bank has reduced its liabilities.

Price To Earnings Ratio (P/E Ratio)

P/E Ratio signals how much an investor is willing to pay for one rupees earnings of the company. As such, a stock with a high P/E ratio is better for short term benefit. P/E ratio above 20 might signal that the stock price is inflated in proportion to its earnings and is risky to buy. For example, the P/E ratio of Civil Bank is at 115 times. The sole reason for this is its low EPS (which is at only Rs. 2.22 per share). Short-term investors may benefit from this heightened market price, but it is risky nonetheless. In this review period, the P/E ratio of Nepal Bank is lowest (6 times). Commercial Banks with high P/E ratio as of this quarter are Standard Chartered Bank, Everest Bank and Nepal SBI Bank. Conclusion: Market and company analysis is crucial to minimize loss and capitalize on this bearish market. * Trading for Janata Bank, NCC Bank and Prabhu Bank have been suspended following their respective mergers and acquisitions with other banks Also read: See which commercial banks are superior than industry as of Q1 of FY 2073/74; and how NMB leads the industry on major indicators