Investment Education: Why are bank shares that once reached 3-4 thousand now stuck at 3-4 hundred?

A common question asked by many investors in Nepal's stock market is - "Earlier, bank shares used to reach 3-4 thousand rupees, why now many bank shares are finding it difficult to go above 3-4 hundred rupees?" At first glance, it may seem that the banking sector has weakened. But the answer is not simply “Banks went weak”. Behind this, many facts like number of shares, bonus shares, right shares, paid-up capital, earnings per share, demand-supply and market valuation are added.

At the outset, one important thing must be understood—old prices and current prices are not directly comparable. Just because a bank's share was Rs 3,000 or Rs 4,000 before, it does not mean that it should reach the same level now. Meanwhile, banks have increased their paid-up capital by way of repeated bonus shares, right shares and mergers. When a company gives bonuses or incentives, the number of shares increases and the market price adjusts. So to make a real comparison between the earlier price of Rs 4,000 and the current price of Rs 400, one has to look at the bonus adjusted price.

Suppose an investor previously owned 100 shares of a bank and the price per share was Rs 4,000 at that time. His total investment value seemed to be Rs 4 lakh. Now, if the bank gives 100 percent bonus, its number of shares goes from 100 to 200 shares. But theoretically the price per share is adjusted from Rs 4,000 to around Rs 2,000. So the total value did not immediately decrease, only the number of shares increased and the price per share decreased.

If this process is repeated for several years, the per share price may be seen further down. Banks constantly gave bonuses and incentives to raise capital. The number of shares of banks, which were earlier traded in small shares, has now become very large. When the supply of shares in the market increases, the demand for the same ratio is required to increase the price. If the demand weakens, the price may stay around 3-400 for a long time even if the shares look cheap. Another main reason is the huge increase in paid-up capital. After Nepal Rastra Bank took a policy to strengthen the capital of banks and financial institutions, the paid-up capital of commercial banks increased a lot. A bank with a capital of 2 billion before had to increase its capital to 8 billion or more. For this, the banks adopted the path of bonuses, rights and mergers. Increase in capital is not bad in itself, but as the capital increases, the profit should also increase in the same proportion. Earnings per share may decline if profits do not grow at the same pace.

Earnings per share i.e. EPS is a very important indicator for share price. For example, if a bank previously earned 1 billion in profit on 2 billion in capital, earnings per share may appear high. But if the capital of the same bank reaches 10 billion and the profit is only 2 billion, even if the total profit increases, the earnings per share may decrease. The market often values ​​companies based on earnings per share, dividend potential and future growth potential. Therefore, the number of shares increased with the increase of capital, but if the profit does not increase accordingly, it will be difficult for the price to reach the same height as before.

Many investors see bonus shares as a huge benefit. But the thing to understand from an investment education point of view is that bonus shares do not immediately increase the value of the company. Bonus is the process of transferring the company's reserves to capital. This increases the number of investor shares, but adjusts the per share price. If the company's income and profits do not increase in the same proportion after the bonus, then the bonus does not guarantee to increase the value in the long run.

There was another reason why bank shares were so attractive earlier—the banking sector was in a phase of rapid expansion. Bank branches were growing, credit expansion was rapid, digital banking was expanding, and investors expected regular bonuses and dividends. The bank was viewed by the market as a “safe and growth-prone sector”. But now the banking sector is very mature. Competition has increased, profit margins are under pressure, bad debt management is challenging and regulatory provisions are strict. In such a situation, the market does not want to pay a very high premium to the bank as before.

The law of supply and demand also applies here. Previously, when a bank's share count was low, even a small amount of buying pressure could drive the price up significantly. Currently, millions of shares are in the stock market. A very large demand is required to drive up the value of a large capital bank. If the investor's focus in the market shifts from banking to hydropower, insurance, finance, hotels or other groups, bank shares may remain low for a long time even if they look cheap. Interest rates and the state of the economy also affect bank stocks. Bank profitability is linked to credit expansion, deposit costs, interest rate differentials, bad loans and economic activity. When the economy slows, businessmen borrow less, the risk of old loans may increase and banks should increase provisioning. In such a situation, profits come under pressure. Investors don't want to buy aggressively in bank stocks when profits are weak.

Similarly, the bank's dividend potential may not be as attractive as it used to be. A bank with a lot of capital needs a large profit to pay a high percentage dividend. Earlier it seemed possible to give 30-40 percent bonus or dividend on small capital. Now, to give the same percentage dividend on a large capital requires a very large sum of money. So investors should now evaluate not only on the basis of "bank gives bonus" but on the basis of "how much return the bank can give in the long run".

That's why bank shares are seen at 3-400 rupees now, it's not just a story of falling prices; This is a story of capital structure change. Share numbers have increased, bonuses have been adjusted, paid-up capital has increased, earnings per share have come under pressure, and the market has come to value the banking sector as a stable but competitive sector rather than the rapid growth sector it once was. The main lesson for investors to learn from this is that it is wrong to invest based only on past high prices of stocks. Thinking that "before it was 4,000, now it's 400, so it's cheap" can be dangerous. A proper analysis should look at bonus adjusted value, company's current earnings per share, net worth, PE ratio, dividend potential, bad debt, capital adequacy and future profit growth.

Finally, it is wrong to conclude that bank stocks are weak. The banking sector is still the mainstay of Nepal's financial system. But while investing in bank shares, investors should decide on the basis of current facts and future prospects, not on the memory of past prices. Successful investors make decisions based on facts, valuation and risk management, not on hearsay, outdated values ​​or sentiment.