Even the most profitable Bank can take away your hard earned money in Nepal Stock Market. Here is the Proof.

We have done a research on two most profitable commercial banks of Nepal and results are interesting and contrarian. 

Nabil bank is the first commercial bank of Nepal who’s paid up capital now stands at Rs 8.043 arba and Nepal Bank Limited is the first Government Bank of Nepal with current paid-up capital of 8.042 arba.

The total profit earned by Nabil Bank and Nepal bank from last two fiscal years till the 3^rd quarter of 2074/2075 stands at Rs 9.22 arba and 8.36 arba. They are two most profitable commercial banks in Nepal right now.

Nepal bank earned major chuck of money during last 2 years from selling their assets (land and shares) and still NBL was in retained loss of Rs.2 billion during the end of FY 2073/74. This means investors still need to wait 1 year for expecting dividend.

It’s been 21 years since NBL had last distributed dividend to its shareholders due to its huge loss whereas NABIL bank is continuously distributing dividend to its shareholders.

So the question is,

Are they profitable also for the Shareholders?

Graph below shows the comparative study of these two banks in last two and half years.

The graph shows that Nabil bank (purple) has lost 57.66% and Nepal Bank (blue) has gained 29.63%  in the last two and half years. Nabil bank’s 57% loss is just a decline in its price; it is not the real loss. We will calculate real profit/loss of Nabil Bank by including its paid dividends and bonus in last two and half years.

Investors usually assume dividends paying company is better than non-paying one but the case here is different.

In the begining of 2016, Nabil Bank and Nepal Bank were traded at Rs.2,350 and Rs 270. If you had 100 shares of both  companies at that time, then your investment on Nabil Bank and Nepal Bank would had been Rs 2,35,000 and  Rs 27,000 at that time.

Nabil bank has distributed a cash dividend of 15% and bonus share of 30% from FY 2072/73’s profit and cash dividend of 18% and bonus share of 30% from 2073/74’s profit.

In total Nabil bank has distributed Rs 3,840 as cash and 69 shares as bonus on your 100 shares in last two and half years.

The price of Nabil Bank on 23^rd May 2018 was Rs 995 and today your investment amount would have been Rs 1,68,155 causing you a loss of 26.81%. Shareholders are losing money in Nabil Bank even though Bank is generating huge profit consistently year after year. So even the most profitable and reputed company can take away your hard earned money in the stock market.

Despite the strong bear market, Nepal bank limited had increased shareholder’s investment by 29%, without paying any dividend and bonus. In Nepal almost every investor gets attracted by large dividend declarations & profit and buys that stock at any price without analyzing their worth.

For investing, it is important to choose a profitable company but it’s more important to buy it at reasonable price considering its net worth.

How to find an undervalued company?

We can find undervalued stock by Graham number.

The product of price to earnings ratio and price to book value ratio is called Graham’s number which is named after the “father of value investing”, Benjamin Graham.  According to him, if the product of two is below 22.5, the stock is said to be undervalued. Benjamin Graham was the mentor of Warren Buffet, who doesn’t need any introduction. Many successful investors use Graham’s number for the selecting a Stock.

Two and half years back when the bull market was at its peak, Graham number for Nepal Bank limited was 44.71 and for Nabil bank was 355.46, which means Nabil Bank was enormously overpriced. During bull market investors usually buy stock at overprice and when bull market ends it causes them huge loss.

Following are the financial Highlights of Nabil Bank and Nepal Bank in Q3 of 2074/2075.

"It's extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn't take at all. It's like an inoculation. If it doesn't grab a person right away, I find you can talk to him for years and show him records, and it doesn't make any difference.” Warren Buffet

Being Successful in market is all about buying 1 Rupee valued stock in 40 Paisa.