With the end of deadline set by NRB for BFI’s to reach its minimum paid-up capital, a new paradigm can be expected in NEPSE. As always, commercial banking sector with its huge market capitalization will shape the course of NEPSE. Although the share prices of most of the commercial banks are now below or around Rs.400, their enormous market capitalization is explained by the large quantity of shares outstanding that are traded in the market. After the AGMs of all banks, when all the banks have had achieved capital requirement of NPR 8 billion, the Banking Index could enter into the consolidation phase for some time which then will be followed by uptrend.

Two major reason to explain this consolidation phase in the Banking sectors are:

Huge Supply of Stock

Price is determined by demand and supply. Whenever there is excess supply, price plummets. The same is the case with the Banking stocks. In comparison to the other sectors, the banking sector has a huge quantity of shares listed in NEPSE. With a paid-up capital of Rs. 8 billion, any single commercial bank will have at least 80 million units of shares floated in NEPSE. Considering the Promoter-Public ratio of 51:49, 39 million public shares of a single commercial bank will be floated in NEPSE. Hence, this is how we have an excess supply of banking shares in market. Take the example of GBIME and NIB, these are the first two banks to meet the capital requirement of NRB and whenever, the stock prices of these banks increase by mere 5% or 10%, you would see enough investors that would sell the shares and drag down the prices to their previous levels. Furthermore, there are no market makers that can meet this excess supply.
However, the huge supply of stocks will soon be overwhelmed by the demand as the scope of capital market is increasing outside valley along with the increasing number of mutual funds entering the market.

Nepali investors love stock dividend rather than cash dividend

“The Bird in Hand Theory” is not applicable for Nepalese investors. For us, two birds in bushes are worth more than a bird in hand. It means we don’t prefer cash dividend paying companies but instead we prefer companies that retain earning and then payout in the form of stock dividends. For instance, NTC, a cash dividend paying stock, has price of NPR 700 whereas microfinance companies that pay stock dividend has prices above NPR 2000. This is because investors believe there is growth potential in stock dividend paying companies and greater possibilities for capital gain. The banks don’t have the need to increase their paid-up capital; they need to focus on strengthening their reserve funds. Most of the banks have their net worth lower than NPR 150 which means their reserves are less than half of their paid-up capital. Nevertheless, technically stock dividend is irrelevant in shareholders’ return as the funds are retained by company in the form of paid-up capital where shareholders get additional number of units and the price is adjusted in stock exchange and therefore making total value the same.

Sooner or later the market will provide return for investors. It’s just the question of when. Following are the key factors that will play vital role in market break out

Broadening of Market outside valley

The Kathmandu concentrated capital market is broadening outside the valley as well, which would enable financial market inclusion of people that currently do not have the access to the capital markets. Furthermore, thier inclusion would inject a huge volume in market. Securities and capital market investment businesses such as stock brokers and merchant bankers are opening their branches outside the valley. Eventually, it will have a positive impact in the market.

Mutual Fund Schemes in Pipeline

Another important factor to consider with regards to the market uptrend is the increasing number of mutual funds. There are already 11 mutual funds operating in the market and several more are still in the pipeline. Commercial banks are commencing investment banking business with their own subsidiary companies and therefore increasing the number of investment banking and merchant banking companies, mutual funds and portfolio management companies in operation. Recently, SEBON provided its approval for Siddhartha Equity Fund with the corpus amount of NPR 1.2 billion to start its operations, and there are 5 more mutual funds in SEBON pipeline with total corpus funds amounting to NPR 4.9 billion. These funds might soon operate by the third quarter of current Fiscal Year. With this increasing number of mutual funds in operation, they are expected to have a positive impact in market.

Online Trading

Sooner or later online trading is certain to be implemented. Basically, online trading would increase volume that would affect the market. Numerous empirical researches have been conducted that have studied the effects of online trading on stock prices and trade volume reactions on news and earnings announcement. Their findings have confirmed that the trade volume had increased drastically with the online trading. Therefore, once this development is made in NEPSE, it would make capital markets more accessible for investors which helping the market grow further.

Ease of Liquidity and decrease of interest rate

The sign of easing of liquidity in money market has already been observed. Commercial banks are launching schemes on stock (equity) loans with lower interest rate. Eventually, the market interest rate will come into equilibrium once there is ease of liquidity. The interest rates were higher in past months due to unhealthy competition among banks to attract more deposits during the liquidity crunch. The interest rate has an inverse relation with the stock market. Whenever, the interest rate falls, the cost of borrowing for stock investors also falls and opportunity cost of parking the funds in deposit accounts also increases. Therefore, investors would find value in investing in stock market if market interest rate is low.

The 8 billion paid up capital requirement for commercial banks has had an immense effect on the secondary market. This has led to a significant amount of rights issues, stock dividend and mergers and acquisition announcements made in the banking sector. The post 8 billion capital scenario for banking sectors might seem consolidated for some time but eventually market reaction toward this sector will normalize. The high supply of baking stocks along with relatively lower stock dividend figures would make investors skeptical towards banking stocks. However, ultimately the banking sector would see an uptrend as this is the most reliable and stable sector available for investing along with a few other factors such as online trading in NEPSE, increasing number of Mutual Funds, ease of liquidity with lower interest rate that will aid the growth in the capital markets in Nepal.