Know which is the best buy among top blue chip commercial banks? Rating wise analysis

Aakriti Thakali NEPSE (Nepal Stock Exchange) has been continuously tanking points for quite some time. In such bearish trend, there are some analyst asserting it to be the prime time to invest in the secondary market, while some feel their cash safe at bank. Whatever the speculation, there are still some scrips who are in better position than the other. Out of 28 listed commercial banks, scrips of 26 banks are tradable. The shares of Rastriya Banijya Bank (RBB) isn’t traded and the shares of Mega Bank is on hold since last one year because of the ongoing merger. Similarly even among the 26, only 6 banks’ prices are above Rs. 500. To list them down in descending order of market price per share (LTP on Chaitra 8, 2074) are Nabil Bank (NABIL), Standard Chartered Bank (SCB), Everest Bank (EBL), Nepal Investment Bank (NIB), Himalayan Bank (HBL) and Nepal SBI Bank (SBI). However, the market price per share doesn’t paint the entire picture of any institutions’ performance. Various other indicators have a significant play at determining their stand in the market. Thus each of the above mentioned banks are compared below based on various other indicators:

Indicators	EBL	HBL	NABIL	NIB	SBI	SCB
Paid-up capital	8,106,863	8,114,529	8,043,221	10,626,436	8,046,905	8,011,431
Reserve and surplus	5,190,410	4,696,545	7,855,328	9,911,933	3,692,756	4,866,031
Deposits	103,299,183	92,972,795	121,289,272	128,845,324	85,169,260	86,072,253
Loans	84,736,492	82,757,606	100,851,936	113,671,155	71,341,293	42,359,917
NPA (Non-performing Loan to total loan)	0.25%	1.32%	1.13%	1.12%	0.13%	0.17%
EPS	28.41	27.26	45.70	34.62	22.69	25.30
LTP on 2074.12.07	693	593	985	649	530	875
P/E Ratio*	24.39	21.75	21.55	18.75	23.36	34.58
Branches	80	48	62	63	68	15
Years of operation	23	24	33	31	25	30
Net worth per share	164.66	157.88	197.66	192.92	145.89	160.74
Ownership structure*	70:30	85:15	70:30	69:31	70:30	71:29

The data are taken from the statements published by respective banks on 2^nd quarter of 2074/75 and the amounts are in Rs. Thousands. *P/E ratio is determined using the LTP at Chaitra 2, 2074. *Expected dividend is taken as 80% of the annualized EPS. *Ownership structure is rounded up to the nearest decimal for ease. Paid-up capital: A house is only as strong as its foundation, and for any institution paid-up capital is the foundation that determines the amount of weight it can carry. When NRB, as the apex regulator of BFIs, introduced its mandate for commercial banks to increase their minimum paid-up capital to Rs 8 arba, most banks had to go into merger and acquisition. However, the Banks under this study didn’t have to rely on any such big steps. As you can see in the table, NIB doesn’t only meet the requirement but is well above par. So based on the figure we can rate them as:

1. NIB
2. HBL
3. EBL
4. SBI
5. NABIL
6. SCB

Reserve and Surplus: Reserves and surplus serve as a cushion of safety for institution in case there is a chance of any contingent or unprecedented events or expenses. If you’re falling on the floor, the thicker the cushion the lesser you’re hurt. In the same way, higher the reserves and surplus, better the chances at managing any unprecedented expenses. However on the other hand, higher reserves and surplus signify higher level of idle money in bank. As you can see in the table above, all the banks have a huge amount of reserve and surpluses. However, unlike paid-up capital there is a larger dispersion between values ranging from Rs 3 arba of SBI to 9 arba of NIB. So based on the figures we can rate them as:

1. NIB
2. NABIL
3. EBL
4. SCB
5. HBL
6. SBI

Deposits: Bank deposits play a significant role in the overall performance of the bank. If paid up capital is the foundation, deposits is the building blocks of it. Without deposits they will be left with no funds to mobilize and earn revenue. Generally, in Nepali market the savers choose these banks when they are seeking safety and high-quality service rather than earning via interests. As the figures on the table shows, each of these banks have been able to amass huge sums of deposits in different types of accounts. Based on these amounts we can rate them as:

1. NIB
2. NABIL
3. EBL
4. HBL
5. SCB
6. SBI

Loans: The two primary functions of a bank is to collect deposits and disburse loan, hence managing the mobilization of money in the economy. For this particular reason, there must be a rhythm between them. However, being a highly scrutinized sector there are a number of directives and mandates the bank need to comply to. Because of this, they aren’t always granted the liberty to disburse loan in equivalent quantity as the deposits. This is the reason why you are seeing a significant difference between deposits value and loan value for each bank. The loan portfolio of any bank tells a lot about their risk preference and the limit of how far they can and are willing to go. All these banks, as is general knowledge, are relatively stable banks. They have a very strict procedures for granting credit and are relatively risk averse than others. While comparing among them we can see that the variability in loan amount is catching the pattern of deposits. So based on given data we can rate them as:

1. NIB
2. NABIL
3. EBL
4. HBL
5. SBI
6. SCB

NPA: NPA is the abbreviation for Non-Performing Assets/ Loans. The given figures represent the percentage of Non-performing loans out of the total loans disbursed. NPA in general terms can also be considered as the bad debt of the bank. Higher the percentage of NPA, higher the amount of defaults happening in the bank, which of course isn’t a good indicator. So based on the percentage of NPA, we can rate the banks as follows:

1. SBI
2. SCB
3. EBL
4. NIB
5. NABIL
6. HBL

Earnings per Share (EPS): EPS is the major indicator for the shareholders of the bank and for the potential investors looking for a stable company to invest in. The amount of Dividends may vary because many times companies can retain earnings for further development and expansion, but the amount of EPS shows how well the company is earning on each unit of ownership. Higher EPS depict better profitability, which in turn points to a healthy growing organization. Based on the information, we can rate the given banks as:

1. NABIL
2. NIB
3. EBL
4. HBL
5. SCB
6. SBI

LTP on Chaitra 7, 2074: LTP stands for Last Traded Price, which refers to the market price per share of the given scrip at the end of the trading period. The market price per share is determined by the demand and supply of the scrip in the shares. The current NEPSE index is in bearish trend, where prices for almost all scrips are continuously falling, some even to their lowest price ever. Even in the streak of falling, these banks’ share price hasn’t gone below Rs. 500 yet. Based on their closing price on Chaitra 7, 2074 we can rate them as:

1. NABIL
2. SCB
3. EBL
4. NIB
5. HBL
6. SBI

P/E ratio: P/E ratio is the ratio of scrip’s market price and earning per share. A very high value of P/E ratio means the share is overvalued, whereas lower means undervalued. In case of all the banks discussed, their P/E ratio is a double digit figure, which shows over-valuation of the stocks compared to their actual earning. It means for a earning of Re 1, the investors are willing to pay higher in the market. On the other hand, higher P/E ratio isn’t always bad, it might also mean the company deserves premium for its market stature, quality of management and better kind of business model used. However, following the general rule of thumb we can consider lower the P/E ratio better. Based on this we can rate the banks as:

1. NIB
2. NABIL
3. HBL
4. SBI
5. EBL
6. SCB

Branches and years of operation: The number of branches of any bank represent the network and reach of the bank, and the years of operation signify the years of experience they have collected by growing, making mistakes, learning and getting back up again. Based on the year of incorporation, all of these banks are 20-30 years old. However, considering the number of branches a higher dispersion can be seen. Thus based on this information we can rate the banks as:

1. EBL
2. SBI
3. NIB
4. NABIL
5. HBL
6. SCB

Net worth per share: Net worth per share also called Net assets value or NAV per share refers to the fair value or the underlying value of the company entitled to one unit of share. Higher net worth represents a better status of bank’s financials and its ability to cover all the liabilities. So based on this, we can rate the banks as:

1. NABIL
2. NIB
3. EBL
4. SCB
5. HBL
6. SBI

Based on the ratings attributed to each bank in each of the field we can determine the following weighted average rating:

Indicators	EBL	HBL	NABIL	NIB	SBI	SCB
Paid-up capital	3	2	5	1	4	6
Reserve and surplus	3	5	2	1	6	4
Deposits	3	4	2	1	6	5
Loans	3	4	2	1	5	6
NPA (Non-performing Loan to total loan)	3	6	5	4	1	2
EPS	3	4	1	2	6	5
LTP on 2074.12.07	3	5	1	4	6	2
P/E Ratio*	5	3	2	1	4	6
Branches and years of operation	1	5	4	3	2	6
Net worth per share	3	5	1	2	6	4
Average rating	3	4.3	2.5	2	4.6	4.6

The above table shows where each Banks stands based on the indicators that we’ve considered in the study. However, the final calling depends upon the subjective judgement of the investor. The above analysis is based on the general shares of the bank. However an exception exists in case of Nabil bank and Investment banks’ promoter share. NABILP (Nabil bank promoter share) When NRB issued the rule that a BFI can’t have stock holding of any other BFI, NIDC development bank had to auction its promoter shares of Nabil. This enabled the promoter shares of NABILP to be publicly traded. The LTP of NABILP as on Chaitra 7, 2074 is Rs. 800 which is in fact approximately 18% lower than the general shares. NIBPO As with the case in NABILP, Rastriya Banijya Bank auctioned 15% promoter share of Nepal Investment Bank that was under its ownership. Currently, investors can buy NIBPO with just as much ease as the general shares. As on Chaitra 7, 2074 the price of NIBPO stands at Rs. 560 which is 13% lower than the price of general share on Nepal Investment Bank. This opens up an avenue for investors to buy stake at Nabil Bank and Nepal Investment Bank without paying a high price per share of Rs.985 and Rs. 649 respectively.