Banking subindex: Half full or half empty?

In the past six weeks, NEPSE has shown some positive signs. The index was unwilling to sink below 1,110 and instead moved north from 25 November 2019. Now, it is expe­riencing a tough call at 1,170, while still managing to stay above 1,150. The positive rally is mainly sup­ported by the non-banking scrips. As discussed in my last column, the Nepali bourse is dominated mainly by the banking and financial institu­tions-related sub-indices. Only if the banking sub-index wakes up from its protracted bearish nightmare will the current positive rally test further highs.

Since mid-September, the banking sub-index is moving in a ranged zone with a narrow gap of just 50 points. Its movement is restricted within 1,010 points, working as the sup­port, and 1,060 points, working as the resistance. Its inability to break the resistance at 1,060 paints a bleak picture for the bourse’s northbound movement. Still, its unwillingness to go below 1,010 points gives an opti­mistic view of the sub-index already testing its troughs. As long as this non-trending situation continues in the banking sub-index, the overall market will not get a clear direction.

On 23 July 2015, the new Gover­nor of Nepal Rastra Bank Chiranjibi Nepal unveiled his first monetary policy—announcing 300 percent increment in the minimum paid-up capital requirement for commercial banks. The same policy asked the development banks to raise their paid-up capital by 2,300 percent. The new policy required the com­mercial banks to raise their paid-up capital from Rs 2 billion to Rs 8 bil­lion. National-level development banks needed to raise it from Rs 640 million to Rs 2.5 billion. They were given two years to achieve this target. The underlying objective was to encourage them to go for mergers and acquisitions and reduce the number of commercial and devel­opment banks.

But as the majority of commercial banks were not in favor of mergers and acquisitions, only a few went for it. The majority decided to utilize the two years’ time to raise paid-up capital by issuing bonus and right shares. Promising net earnings of commercial banks coupled with the certainty of multiplication in the shareholdings encouraged people to invest in such scrip. The demand exceeded the supply and the bank­ing sub-index saw continued high­er-highs in its trading charts.

The dominance of the banking sub-index swayed the bourse in favorable territory and NEPSE saw a bullish run till August 2016. While the expectations of future return fuelled the Bull Run, the actual real­ization of the return in bonus and right issuance resulted in a glut in the market. Existing demand was unable to absorb the ever-increasing supply. In addition, the increasing supply started diluting the earn­ings. The blue-chip scrip of Standard Chartered Bank alone saw a decline in earnings per share from Rs 67.47 in Fiscal Year 2070/71 to Rs 31.15 in the Fiscal Year 2075/76. This is attributed to a massive increase in capital. Of course, all of these com­panies are working hard to maintain their previous earning levels but this requires time.

The second quarter of Fiscal Year 2076/77 is almost ending. Now, everyone is eagerly waiting to review the quarterly reports for signs of earning rebound. If the reports show better earnings compared to pre­vious fiscal, the investors will get more bullish. Each quarter report (of different banks) showing positive growth in net income (compared to the same quarter of previous year) will fuel interest to accumulate their stock. As soon as we see this in finan­cial reports, we can also witness breakouts at multiple resistance levels in the technical charts. In next one month, the mystery will start to unravel and people will have better information to take their positions.