Wednesday, March 21, 2012

Banks' share price correction fails to lure investors

The banking sector that is the key player in the share market in terms of volume and returns till date, is correctly priced, if one goes by the average price-to-earnings ratio (PE ratio) of the listed banks, though they might not be able to pay the return compared to last few years.
The average PE Ratio — that measures the price paid for a unit of share relative to the annual net income or profit earned by the company per unit — of the listed 25 banks stands at 17.60 times, which is the correct pricing. "It stood at 19.55 times in the second quarter of the last fiscal year."
Similarly, the PE ratio under 10 means the stocks are underpriced. "But the current average PE ratio that stands at 17.60 times means that the banks shares are correctly priced but they may not be able to pay dividend cheque, compared to last few years as other indicators do not support," said share market analyst Rabindra Bhattarai.
The investors should buy the stocks that have high return on assets and low price-to-earnings (PE) ratio, he added.
Return on assets (RoA) — that reveals how profitable a company's assets are in generating revenue — has come down to 1.21 per cent in the second quarter of the current fiscal year from last fiscal year's same period's 1.75 per cent.
Similarly, the low PE ratio has not been able to make the investors feel comfortable as other key indicators of the listed banks' like earning per share, return on equity, capital adequacy ratio, cost of fund and non performing assets could not ensure equal dividend cheque compared to the last fiscal year.
The measuring rod of the rate of return on shareholders' equity of the common share holders, return on equity (RoE) has also come down to 11.54 per cent this fiscal year's second quarter from last year's same period's 17.17 per cent. It also revealed banks' efficiency at generating profits from every unit of shareholders' equity.
Similarly, the earning per share — that is the amount of earnings per unit share — came down to an average of Rs 19.68 per unit in the second quarter of the current fiscal year compared to Rs 25.98 per unit in the same period of the last fiscal year, which means the shares could not earn as much as they earned thus the investors will also get less return.
Similarly, the non performing assets (NPA) — that compels banks to make loan loss provisioning hitting their profits — has increased to 3.24 per cent from last fiscal year's second quarter's 2.49 per cent, which means the investors will get less dividend next year. Some banks non performing assets have reached to the highest accepted level by the central bank, which will ban the banks to open new branches after they cross the minimum NPA level.
However, the capital adequacy ratio (CAR) has seen increase to 14.04 per cent from the last fiscal year's second quarter's 13.59 per cent. The increase in capital adequacy ratio — that is a ratio of a bank's capital to its risk to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements — shows further growth possibility of the banks through lending, which has contracted lately.
The central bank data revealed that the banks have Rs 29 billion liquidity till March 12. The high interest rate has made the private sector shy away from borrowing despite banks sitting on surplus liquidity.
The banks have been unable to lower the interest on lending due to high cost of fund, which has increased to 8.38 per cent from last year's same period's 7.39 per cent. The cost of fund that is interest paid on deposits has also forced the banks to lower new deposit rates.
The industry average not only helps the investors to take informed decision while buying shares but also help compare the players within the sector on where they stand.

Listed banks’ indicators
Indicators — Unit — This Year Six Months — Last Year Six Months
Cost of Fund — per cent — 8.38 — 7.93
CAR — per cent — 14.04 — 13.59
RoE — per cent — 11.54 — 17.17
RoA — per cent — 1.21 — 1.75
NPA — per cent — 3.24 — 2.49
EPS — Rupees — 19.68 — 25.98
PE Ration — times — 17.60 — 19.55*
(*Machhapuchhchhre Bank (150 times), Kist Bank (84 times) and Sanima Bank (84 times) are omitted while calculating PE Ratio as their much higher PE Ratio could distort the overall PE Ratio average. The indicators are an average of 25 listed banks only. Source: SRCS)

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