Ram Sharan Dangal

Kathmandu:

Following the restructuring of banking business in fiscal 2001 and 2002, bank shares have seen a remarkable growth.

Investment (traditional lending business) over the last two years has been increasing steadily, as a result of increase in banks’ profits. Latest quarterly figures are even more impressive which have boosted investor confidence on the stock market. It is hoped for that the political situation will improve in the near future. Interestingly, however, Nepse results over the last three years have shown that some parts of the economy can function quite independently of political upheavals.

After reigning at the top of Nepse, banking shares are bound to fall sooner rather than later,due to the high Price Earning Ratio (PE ratio), as well as high market capitalisation in relation to book value (MCap/Ceq).

Internationally accepted practices in stock markets like Nasdaq, NYSE, Frankfurt and London suggest a sound average PE ratio at 21.0 (at the peak time), while market capitalisation in relation to book value is usually pegged at three times.

However in Nepal, the practice over the last five years, has been to peg PE ratio at above 13 while MCap/Ceq at not more than three times.

Nepal is currently facing a problem of high number of commercial banks, development banks, finance and co-operatives. An early financial crisis had been averted after restructuring of loan portfolio and a massive rise in capital. This however is not enough to meet the looming problems, as Nepse still lacks enough capital to cover business risks. The only option is to reduce the number of banks and finance companies.

The reality is that some newly-established banks are only trying only to raise volume of business to grab market shares. Once the value of an entity rises, it can then opt for a merger. The country is speeding towards improved capitalism where equity culture is the only weapon to be rich.

Banks like Kumari Bank face capital crunch for speeding up its business and thus is going for a 4:1 rights issue. Its results, however, will not be be visible till the end of next fiscal year.

There is a notice from NRB to bankers to build up their paid up capital upto one billion rupees. This will give space for business but would not leave much for giving dividends to shareholders.

Growth in business often depends on help from the capital market. To pull a vehicle forward, there has to be some diesel in the tank.

(The writer is the chief executive officer at Ramsbay)