Commercial Banks; Too Pricey on your Pockets? See Latest PE Ratio of 'A' Class Banks

As the stock market experiences continuous declines, the share prices of commercial banks have followed suit, reaching their lowest point since the start of dividend distribution. However, certain banks offering robust dividend prospects remain attractive to investors.

In the current financial landscape, the stock market has been characterized by persistent volatility, impacting the valuation of commercial banks. Despite the NEPSE Index maintaining stability on a year-to-year basis, the Banking Index has exhibited a noteworthy decline of 5%, or 65.60 points. A year ago, the Banking Index stood at 1310.91 points, but it has since retreated to 1245.31 points.

Dividend Potential:

Reviewing the financial statements from the previous fiscal year, it is evident that commercial banks, on average, have the capacity to distribute dividends exceeding 11%. However, it's important to note that, according to the raw financial data, two commercial banks find themselves unable to distribute dividends. In stark contrast, Everest Bank stands out as a top performer in this regard, boasting the capability to disburse an impressive 40% dividend.

Further analysis, based on the fourth quarterly report of FY 2079/80, reveals that eight banks have a distributable profit per share exceeding 10 rupees, thereby enabling them to distribute dividends exceeding 10%.

In the wake of mergers within the banking sector during the previous fiscal year, certain banks now hold significant reserves, allowing them to issue dividend to investors.

Note: The dividend potential may vary after the audit so it's not the final data. In addition, the banks hold sole discretion to payout dividends or not.

Dividend Leaders:

Delving into specifics, Everest Bank emerges as the leader in dividend distribution potential, with the capacity to distribute a substantial 40.50% dividend from earnings in the last fiscal year. Meanwhile, NIC Asia Bank, despite not distributing dividends for the past two years, demonstrates the potential to disburse an impressive 31.99% in dividends. Standard Chartered Bank also remains an attractive prospect with the ability to offer a 28.99% dividend, and Sanima Bank follows closely behind with the capacity to distribute a 17.73% dividend.

PE Ratios:

The Price-to-Earnings (PE) ratio is a crucial indicator, reflecting the perceived risk associated with a company's share price. In the context of commercial banks, Kumari Bank and Nabil Bank lead the pack with PE ratios of 20 times. NIC Asia and Everest Bank follow closely with a PE ratio of 19 times, while Laxmi Sunrise Bank boasts a 17 times ratio.  

In conclusion, the turbulent stock market has had a notable impact on commercial banks' share prices. However, investors seeking dividend income can find solace in banks with strong dividend potential, with Everest Bank, NIC Asia Bank, Standard Chartered Bank, and Sanima Bank emerging as promising options. Additionally, PE ratios serve as a useful metric to gauge the risk associated with investing in these banks.

*Note that the LTP is taken as of September 10, 2023