Stock  Taking

Corporate Scorecard

All the other sectors may be complaining of decline or sluggishness in their business. But the banking industry continues to show bullish trend in the performance. Out of 17 commercial banks, no single bank has decreased the operating profit during the third quarter in the current fiscal year 2003-04 over the previous quarter, though Nepal Bangladesh Bank (NBB), Rastriya Banijya Bank (RBB) and Lumbini Bank (LuBL) have decreased their performance in terms of operating profit during the nine months period of the current fiscal year over the same period in the previous fiscal year 2002-03.

Most of the commercial banks increased their operating profit by more than 50% during the third quarter over previous quarter. The average profit increase of the banks during the period is 63.77%. RBB has the highest growth 5030% during the quarter and Nepal Bank Ltd. (NBL) has recorded the second highest growth due to their small profit base or loss in the previous quarter. RBB, in the previous quarter, was in Rs. 2 million profit whereas in this quarter this profit has increased to Rs. 103 million. Similarly, NBL had a loss of Rs. 10 million in the previous quarter and this quarter it has earned an operating profit Rs. 127 million. Both banks were in loss in the first nine months periods of the previous year.

Similarly, NBL reported the highest growth (60.06%) in the total income and the overall growth of the banks in total income over previous quarter is 54.44%. The growth rates of NBB, NBL, Kumari Bank Ltd. (KBL), Machhapuchhre Bank Ltd. (MBL), Laxmi Bank Ltd. (LBL), Siddharth Bank Ltd. (SBL), Nepal Credit and Commerce Bank Ltd. (NCC)  are above the average and the rest are below average.

On the other hand, keeping all other things constant, all the banks have increased their total expenses over previous quarter but NABIL, Nepal SBI Bank Ltd. (NSBI), NBL, RBB, LuBL, Standard Chartered Bank Nepal Ltd. (SCBNL) and HBL have decreased total expenditure over the same period in the previous year. The main reason for the increased profit even in the situation of increasing expenditure is more than proportionate increase in revenue compared to the increase in total expenditure.

The total investment of most of the banks has decreased during the period. NSBI, NBB, NIC, NBL, RBB, EBL, NBL, LuBL, HBL decreased their investment over previous quarter. Except NBL and HBL, all the banks have increased their deposits. The increasing deposits have resulted in continuous decline in the interest rate offered by the banks to the depositors.

Despite the prevailing unfavorable situation for investment, Nepali banking industry seems continuously growing.

Ride The Winning Stock
Make Tons of Money

The concept of earning power of a stock has a definite and important place in investment theory. It shows the actual earnings over a period of years with a reasonable expectation that these will be approximated in the future unless extraordinary condition supervene. However, while measuring the future earnings of a stock the record must cover a number of years because of two specified reasons. First, a continued or repeated performance is always more indulgent and impressive than a single occurrence and secondly, the average thus taken from a longer period will tend to absorb and hence automatically equalize the distorting influences of the business cycle. Moreover, for versatile lookout, a distinction must be drawn between assortment of disconnected figures and an average which is normal relative to the final results which proliferate a general tendency to approximate the average. This past record in an average should precede towards calculating the compound rate at which the stock’s earning is growing, a reliable basis for projecting the future earnings, a method commonly implemented. Earning growth rate [GR] once established can nevertheless foretell future prices of the stock based on the prevailing market trend despite its obvious loopholes and weaknesses.

EPS = Earning Per Share
PE = Price Earning

Assuming Everest Bank Limited [EBL] stock to be purchased at its valuation, Rs. 479 [Nubiz, May 2004] the question now arises as to what happens to the stock pertaining the opportunity and challenges faced by the stock in a given number of years considered as holding period, nonetheless, what shall be the final monetary benefit the investor can reap. Grossly either of three things will happen: buy price of Rs. 479 will remain stagnant or it will deplete to less amount or it will take a buoyant rise. If the first two eventuality are presumed the stock is categorized as erroneous investment, however, comparing its potentials with other good stock of the same nature, we can fairly reason that the chances of advancing to higher price level is better perceived. We shall now look at it through the window of arithmetic marvels and find out what investor coolly collects spending few years of patience and perseverance, exclusively based on earning power of EBL stock.

By and large, the process consists simply of calculating past compounding earning growth rate [GR], then using the result to project the future earnings of the company [EBL] and then finally determining stocks’ future market price.

The company is growing at a compounding rate of 17.5 percent per annum however, adjusted heretofore un-channeled market consequences derived through unequivocal earning statement. Earning power is the key to predictability and once it is established [EBL: 17.5%] it will lead to ascertaining future earning potential and will get converted into ongoing market price through EPS route.

Add three yrs dividend of Rs. 60 [Rs. 20/yr] to the last market price and look for the return one would have on an investment of Rs. 479 held up for 3 years. It is 75% corresponding to 20.5% compounding per annum.

779 + 60 - 479 / 479 x [100] = 75%

75% 3yr Period = 20.5% [compounding table]

With all the parameters put together we can say now that by using per share annual growth rate we can project future year's per share earnings and then project the stock's price. If we know the stock's future price, the price we paid for it, and the number of years the investment is held, then we can project annual compounding rate of return the investment will give us. In EBL case it is 20.5% on most conservative outlay.

The story of EBL stock does not nevertheless conclude here altogether. There are number of events which may influence EBL stock on theoretical grounds, hence the stock market may revalue the stock to a higher price multiple [market dynamics] than projected and in the process increase the fortune above anybody's expectation.

Misunderstanding that the price of EBL stock declines by increasing the number of shares [bonus issue] shall prove futile since the underlying fundamentals of the stock is exquisitely absorbent for temporary price hassle, recent picture of HBL stock proved this truth. With good management score, sustainability and portentousness all explain allegorically that lots of value is yet to emerge, and therefore the stock is all set to promote itself to the group of banks with Rs. 600-1000 price range where HBL, NABIL and NIB stocks belong so far, leaving way behind its previous companions [BBL, SBI, BOK] relative to market price tag [Rs. 200-500].  This incredible increment of the stock means profound satisfaction for stock watchers and writers as well. Not the least, it may be prudent to add here not to forget that rampage of the Bull is in the offing whence market cycle comes towards completion during the last leg of the year 2062. All these revitalizing events are bound to hit EBL stock towards its historical upliftment and hence bestow stockholders in the process, admittedly however, minimum risk quantum is inherently attached with.

A review of EBL stock indicates that stock business can never be appeased by indulgence in "spontaneously becoming richer" idea. However, the bottom line is 'gain from prospectiveness whose future is very much mapped where opportunity to expand exist for a longer period to come.' This objective, and quantifiable method easily available to every investor, is not guided by whims, fancies and rumors. The final decisions are to be made on the basis of analysis and reasoning. With example of EBL stock, similar procedure may be applied to filter best amongst the herds of floating stocks in and around the marketplace.

Riding a winning horse is possible in consistent manner when prospective investing attitude is adopted which is not difficult to learn either, but it does take some effort to master. Once mastered it will be very rewarding.

(Basnet is one of the prominent active participants in Nepali stock market as an investor as well as stock analyst)

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