Worried or thinking about investment in commercial banks? Know what the P/E ratio of commercial banks will look like once the paid up capital is met by all banks

• Dheerusha Tiwari

For a minute or so, put yourself on the shoe of one of those investors eyeing out for the next big catch in the trading floor. What would you consider in your first thought? EPS! But once you realize the return, you will probably try to find out the cost of your next big catch. The market price! Finally, you start looking into your pocket. Here comes the role of PE ratio! 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. However, not all banks have reached the mark of Rs 8 arba as their paid up capital, so, the second quarter report does not show the relative position of each commercial bank clearly. In order to understand the impact on EPS and market price, once every commercial bank reach Rs 8 arba, please go through the article “Worried about your investment in commercial banks? Know what the EPS of commercial banks will look like once the paid up capital is met by all banks.” However, this article aims to provide a tentative estimate on what will be the impact on P/E ratio of commercial banks after each of them meet the paid up capital requirement. Brief description on P/E ratio: P/E ratio is a ratio of a company’s stock’s market price and earning per share. 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 company’s management, operation and structure deserves a better premium in the market. The lower P/E ratio further shows a company has scope for growth in comparison to its competitors. Yet, the general rule of thumb in finance presupposes lower P/E ratio as better. Sharesansar has come up with a video on P/E ratio. Please watch the video to have a better understanding on P/E Ratio: https://content.sharesansar.com/photos/wp-content/uploads/2018/03/PE-Ratio.mp4   Before attaining the paid up capital requirement: The ranking of these banks as per the second quarter report of fiscal year 2074/75 in terms of P/E ratio is provided below. Rastra Banijaya Bank is not listed in NEPSE, therefore the analysis discards RBB. Nepal bank Limited has the least P/E ratio of 7.51 among all commercial banks. It is further followed by Siddhartha Bank Limited (SBL) with a PE ratio of 12.89. Mega Bank limited (MEGA) who’s trading has been currently halted is seen with the highest PE ratio i.e. 42.04. If we discard MEGA bank, Standard Chartered Bank provides the highest PE ratio of 34.58. The ranking also implies that although NBL has an EPS of Rs 40.76 while SCB has an EPS of Rs 25.30, the P/E ratio and market price of SCB is much higher than NBL. The table below provides the ranking of these banks as per the second quarter report of fiscal year 2074/75 in terms of P/E ratio. The provided table has been made on the basis of market price as of 21^st March, 2018 and EPS as of second quarter. The banks highlighted in grey such as NMB Bank Limited (NMB), Siddhartha Bank (SBL), Prabhu Bank (PRVU), Bank of Kathmandu (BOKL), Kumari Bank (KBL), Nepal Credit and Commercial Bank (NCCB), Mega Bank (MEGA), Century Commercial Bank (CCBL) and Civil bank (CBL) have not attained the mark of Rs 8 arba. After attaining the paid up capital requirement: Once all the commercial banks will attain the paid up capital requirement, the listed shares are likely to increase. This will lead to decline in EPS and market price of these banks but increase in P/E ratio. The rate of increment might however differ from one bank to another.  The attached table shows the adjusted paid up capital, reserve, EPS, market price and tentative P/E ratio of the commercial banks which are in the process of attaining the mark of Rs 8 arba. Note: The mentioned capital plan is not a full picture of the commercial banks. For instance, BOKL only proposed 13.50% bonus share, and it will not meet up paid-up capital of Rs 8 arba this year. CBL has already floated 40% right share but has not disclosed the 11% bonus share proposal. CCBL has already endorsed both its 5% bonus and 5% cash dividend from its AGM. MEGA bank has already announced its 9.45% bonus share and is in process of merger with TDBL. NMB is in its final stage for the FPO approval and has not announced the 6% bonus share. NCCB has already received ICRA grading for 50% right share and is yet to disclose the 14% bonus share. PRVU has already undergone the process of 40% right share. Finally, SBL has announced and floated its 10% right share and 14% bonus share. With the adjusted P/E ratio of these commercial banks after attaining paid up capital; the ranking of these commercial banks on the basis of P/E ratio will be as follows: Has the ranking been changed? With the adjusted paid up capital, the P/E ratio of these banks might increase and hence, might not provide the same valuation as the second quarter report. A tentative ranking comparing before and after adjustment of paid up capital has been established below: Hence, the article provides an insight regarding the impact on PE ratio of the commercial banks within the same range of paid up capital. With the market’s decreasing trend, do you believe it is a good time to build your portfolio with commercial banks? Please provide your views in the comment section.

This article has been written as a response to the suggestion kept forward by one of our esteemed readers Dilip Sharma in the article “Worried about your investment in commercial banks? Know what the EPS of commercial banks will look like once the paid up capital is met by all banks.” If you also have some similar suggestions of topics to be covered, do write to us in comment section below.

(Disclaimer:  Any kind of information that is provided in the article should not be used as a sole advice or recommendation by investors in order to design their investment portfolio. So, before taking steps for any kind of the information, the investors are required to base their judgment on their own financial analysis, appropriateness of the information and seek independent financial advice. The information of the company has been taken from the authorized sources such as website of the company, NEPSE, financial reports and press releases of the companies so, any changes not updated in these may differ in the analysis.)