The Analyst, December, 2018, Vol 1, Issue 3

Transcription

1 THE ANALYST MARKET UPDATE During the review period (Mid-August to Mid-November) the NEPSE Index closed at 1,205.58, 4.74 points lower as compared to previous review period, a decline of 0.39%. Hydro Power companies were the biggest losers with few of companies trading below face value; Hydropower sub index in total lost 10.42% during the review period. While at the other end, Trading sub index gained 13.59% - the most among 11 sub-indices. Out of 179 traded companies during the period, 122 closed lower, 54 companies price closed higher while 3 remained unchanged. Average daily transaction volume experienced an increase of 28% to NPR 375,206,847 as compared to previous review period (Mid-May to Mid-August) of NPR 296,532,243. DECEMBER, 2018 Vol. 1, Issue3. This year Banks and Financial Institutions have experienced shortage of lendable funds similar to last 2 FYs. To avoid fluctuations in interest rates while trying to attract new deposits, Commercial Banks have had a commitment amongst themselves to fix their offer rates in Fixed Deposits to 10% and 9% for individuals and institutions respectively. The maximum interest rate to be offered in Saving Accounts is 7%. As the companies are convening towards their Annual General Meeting, they have started to declare the dividends from last year s profits. With yield on cash dividend less than the ongoing bank deposit rates companies have witnessed decline in prices during the review period. The unaudited financial statements of listed companies for the first quarter of FY 18/19 showed mixed results 1. Commercial banks exhibited 31% growth in their net profit after regulatory adjustments on YoY basis. The unaudited financials revealed a growth of 7.38% in their loans and advances since the beginning of current fiscal year i.e. Mid- July Such growth was 3.84% during the same period last year. Development banks and Microfinances presented growth of 64.56% and 37.06% respectively in net profit during the first quarter. However Non-Life Insurance sector saw a dent of 13.24% in their first quarter profits. The increasing trade deficit has had an adverse impact on the overall Balance of Payments (BOP) situation despite growth in remittance by 33.4%. For the first two months of FY 18/19, trade deficit widened by 41.2% to NPR billion. Current Account deficit stretched from NPR 19.7 billion during the same period last year to NPR 35.6 billion this year. Similarly BOP recorded deficit of NPR 25.4 billion as compared to NPR 5.9 billion. 2 The month of November 2018 marked the implementation of NEPSE Online Trading System (NOTS) which came online in 6 th November. However, investors have had to wait to get access to the new system as certain aspects of the system are yet to be completed. This uncertainty about the usage curbed the reach of NOTS to limited participants. Table 1: Changes in major indices during the quarter Sub-Index 16 th August th November 2018 Change Banking 1, , % Dev. Bank 1, , % Finance % Microfinance 1, , % Life Insurance 5, , % Non-Life Insurance 5, , % Hydropower 1, , % Hotels 1, , % Trading % Manu. & Pro. 2, , % Others % NMBCL UPDATES Issuance of Right Shares of Nagbeli Laghubitta Bikas Bank Ltd. Issue Open date: July 20, 2018 August 23, Issuance of Right Shares of Swarojgar Laghu Bitta Bikas Bank Ltd. Issue Open date: July 29, 2018 September 2, Issuance of Right Shares of Naya Nepal Laghubitta Bikas Bank Ltd. Issue Open date: August 12, 2018 September 16, Auction held for Right Shares of Siddhartha Insurance Ltd. Auction Open date: October 5, 2018 October 12, 2018 Auction held for Right Shares of Swarojgar Laghu Bitta Bikas Bank Ltd. Auction Open date: November 14, 2018 November 20, Based on financial published till 16 th November Nepal Rastra Bank (2018). Current macroeconomic and financial situation of Nepal: Based on two months data of 2018/19. Retrieved from

2 INTEREST RATES The Weighted Average Interbank rate over the review period was 1.71%, which was 3.02% in the previous review period. This rate stood at 1.32% over the same period last year. With an objective to stabilize short term interest rates within a narrow band Nepal Rastra Bank (NRB) implemented the Interest Rate Corridor (IRC) Policy 3 in FY 16/17. The floor of the IRC has been fixed at 3.5% 4 while its ceiling is at 5%. For most of time during the review period the Interbank Rate has been below the floor of IRC as illustrated in Figure 1. Although no measures had been taken under IRC policy, NPR billion were mopped up during the review period through regular reverse repo which were issued with 7 days of maturity. 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 5.25% 3.71% 1.72% 1.17% 0.30% Weighted Average Interbank Rate Lower band Upper band Same Period Previous Year Figure 1: Weighted average interbank rate (Source: NRB) The discount rates on Treasury Bills issued by NRB saw a declining trend in the review period. NPR billion worth of Treasury Bills were renewed throughout the review quarter. At the end of 4.5% 4.0% 3.5% 3.0% review quarter, the discount rates on the treasury bills maturing in % 2.5% 28 days, 91 days, 182 days and 364 days stood at %, % 2.0% %, % and % respectively as shown in the Figure 2. Government of Nepal (GoN) has proposed to raise NPR % 1.0% % billion through domestic borrowing with issuance of Treasury Bills 0.5% and Government Bonds 5. In the last FY, GoN had raised NPR 0.0% % billion 6 in domestic borrowing throughout the year which 28 days 91 days 182 days 365 days contributed in pushing 364 days Treasury Bills rate above 6%. Figure 2: Discount rates of treasury bills over the review period (Source: NRB) While last year up to the review period, NRB has raised NPR 105 billion worth of Treasury, this year NRB hasn t raised any amount and is yet to release the bond issuance calendar. As large amount of funds allocated for development expenditure remain unspent and raising funds at this point may exert further pressure on the money market rates, for these reasons the issuance of government bonds might have been delayed this year. Figure 3 below shows average interest rates offered by commercial banks on fixed deposits of different tenure ranging from 3 months to 10 years. The average rate offered for fixed deposit of 3 months was 9.0% while the rate was 9.4% for tenure of 10 years. On an average, commercial banks were offering 10.0% interest on fixed deposit of 1 year tenure. The dotted line shows average fixed deposit rates for respective tenure during mid-august Interest rates for longer tenure have risen significantly higher compared to previous review period as commercial bank have tried to secure long term funding sources to meet their longer term obligations. Meanwhile rates on 1 year FD fell as a result of the agreement amongst banks to fix ceiling on deposit rates. 10% 9.5% 10.0% 9.7% 9.6% 9.5% 9.5% 9.4% 9.4% 9.4% 9.4% 9.4% 9% 9.0% 8% 7% 3 months 6 months 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year Mid-November Mid-August Figure 3: Average interest rates offered by commercial banks in fixed deposits of different tenure 3 Nepal Rastra Bank (2017). Interest rate corridor procedure Retrieved from 4 Nepal Rastra Bank (2018). Monetary policy for 2018/19. Retrieved from new.pdf 5 Nepal Rastra Bank (2018).Budget speech of fiscal year 2018/19.Retrieved from 6 Nepal Rastra Bank (2018). Annual report of PDMD 2017/18. Retrieved from

3 NEPSE TECHNICAL ANALYSIS Figure 4: Daily chart of NEPSE NEPSE (1, %) marked a high of 1,280 and a low of 1,172 during the review period where the benchmark index lost 4.74 points as compared to end of previous review period. The index made a new low on close basis in the longer term downturn which initiated in July 2016, after which a short bounce was seen in the Index during August. Early signs were offered for this correction by bullish diverges in RSI which we had mentioned in our previous issue. The correction that initiated from mid-august followed a short term uptrend which can be observed in Figure 4, enclosed by two channel lines, which continued to Fibonacci retracement level of 38.2% at 1,280 in September 25. As the index began to slide from 1,280, one can observe a head and shoulder pattern being formed with neckline at 1,210-1,215; shoulders at 1,245-1,250 and head at 1,280. This bearish head and shoulder pattern witnessed its breakout from the neck line at the end of the review period. The breakout marked a breakout from multiple supports which enhanced the significance of this breakout. The channel support and the support of 60 day moving average appeared weak as the index slipped below 1,210. Moving averages have turned bearish as the 8 day moving average (Color: Green) is trading below 20 day moving average (Color: Red) as shown in Figure 5 and is likely to close below 60 day moving average as well. The 20 day moving average which is also the mid band of Bollinger band 7, acted as a resistance during late October after which index experienced a sharp fall that eventually completed the head and shoulder pattern. The technical oscillator RSI 8 is trending downward mirroring NEPSE. RSI currently stands at and is inconclusive as of now. MACD 9 which saw bearish crossover when index was at 1,270s has now entered into negative territory which shows rising selling participants in the market. Transaction volume as the review period came to an end has declined significantly as compared to the month of September. Transaction volume historically has almost always declined as index has dropped points. The formation and breakout of head and shoulder pattern shall likely give direction to the index in days to come. Breakout from the pattern gives the index early target Figure 5: Daily chart of NEPSE with indicators of approximately 1,180-1,185 and 1,150-1,155 as another target. However, as the breakout denotes invalidation of multiple supports, the later target looks more likely. In days to come, the channel support and the neck line shall resist any move to upward direction. All in all market remains in the bearish territory with limited signs of reversal till date. 7 No. of periods = 20, Width = 4 times the Standard Deviation 8 No. of periods = 14 9 Periods of 12, 26, 9 is taken for Fast average, Slow average and Signal Average respectively

4 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 CREDIT CRUNCH, INTEREST RATE AND STOCK PRICES The most popular words these days in newspapers, news headlines and on the trading floor of all stock brokerages are the words Credit Crunch and Liquidity Crunch. This article attempts to explain how the current scenario developed and what implications it has on our stock market. Though they sound similar, Credit crunch and Liquidity crunch are quite different. Credit Crunch refers to shrinkage in the amount of funds available to Banks and other financial institutions to lend to their borrowers. Whereas, Liquidity Crunch refers to shrinkage of amount of money to service the liabilities like paying the bank s depositors and to carry out day to day operation etc. The current problem faced by the BFIs is a problem of Credit Crunch. The amount of money that BFIs can lend to its borrower is restricted by Nepal Rastra Bank to 80% of total core capital and LCY deposits 10. The amount of credit dispersed by BFIs as compared to core capital and local currency deposits is gauged by the CCD (Credit to Core Capital and Deposit) ratio. NRB has now allowed debentures issued by banks to be taken into account while calculating this ratio 11. This ratio has cemented its place near the regulatory threshold of 80% for more than two years now as shown in the Figure 6. In other words, BFIs are facing lack of fund to disperse credit to their clients. The amount banks can lend is directly linked with amount of deposit they collected. Banks have to increase their deposits (in higher proportion) if they intend to disburse fresh loans. However in recent years growth in credit has outpaced growth in deposit. Recently from FY 15/16 up to FY 17/18 banks had infused additional capital by 4 folds and as result their appetite for risk increased. Consequently banks 5% 3% 80% 77% 74% 71% started to increase their size and amount of 1% lending to meet the new targets and justify the return on fresh capital. Figure 6 plots monthly growth on deposits and monthly growth in Credit since Mid-September 2015 till Mid- -1% 68% 65% Growth in Deposit Growth in Credit September The dots above and below Months where Credit outpaced Deposit Months where Deposit outpaced Credit indicates the months where growth of Credit CCD Regulatory Threshold for CCD outpaced growth in Deposits and vice versa. Out of those 37 months, 24 months saw Credit Figure 6: Monthly growth of Credits and Deposits since Mid-September 2015 with CCD Ratio (Source: NRB) rising beyond rise of Deposits. This is the root cause of problem BFIs are facing right now. The decline in growth of remittance the major source of deposits for BFIs- and the widening trade deficit has curbed the deposit growth necessary for higher credit expansion. The current crisis hence is a crisis of loanable funds and not 14% 1, % 1,820 crisis of liquidity and the implications of credit availability to 12% 12.3% 1,700 market participants are significant as they directly affect the 10% 1,500 stock prices. Lower interest rates mean cheaper money. 8% 8.6% 1,300 Whenever there is abundance of credit, the credit easily flows to 1,245 the different sectors of the economy with stock market not 6% 5.0% 1, % being an exception. The easily available credit helps to increase 4% 900 the demand in stock market. The required return on an 3.3% 2% 2.9% 700 investment declines with decreasing interest rates hence, 550 0% 500 increasing the valuation of the stock. Lower interest rates encourage people to borrow more leading to more money flooding into the stock market. This was exactly what happened Increasing lending rate Decreasing lending rate NRB's Relaxtion on CCD Deposit Rate in our stock market as interest rates declined from 2012 until Lending Rate NEPSE Figure 7: Monthly NEPSE and interest rates over the years Figure 7 plots mid-monthly weighted average lending and deposit rates offered by commercial banks since September 2013 along with it the benchmark NEPSE Index. The first half of 2016 marked the regime with lowest interest rate which is depicted by the Figure 7. The weighted average rate on deposit offered by commercial bank fell as low as 2.94% during mid While on the other hand, weighted average lending rate of commercial banks 10 Nepal Rastra Bank (2018). Unified directives Retrieved from 11 Nepal Rastra Bank (2018). Monetary policy for 2018/19. Retrieved from

5 also fell to 8.62%. Stock valuations rose higher with lower interest rate. The banking index which constitutes almost half the total market capitalization of NEPSE- which were being valued at times their annualized earnings post the disastrous earthquake of April 2015 were being valued at 38 times of their annualized earnings at the peak in July 2016 (See Figure 8). Similar was the case with microfinance sector and insurance sector. During the same time, BFIs were sitting at a pile of loanable funds. (CCD was below 70% as shown in Figure 6 during the same period). Stock market soared with cheap money and NEPSE shot to record high of 1,881. During the latter half of 2016, the lagging growth of deposit gradually started to have its impact in the stock market as well. BFIs which were flush with deposit were now finding difficulty to collect deposit to service the increasing demand of credit. Interest rates bottomed and credit was becoming dearer and scarce as opportunity cost of money increased. Investors started bargaining on the stock price to counter balance the increasing cost of capital and previous valuation done at lower interest rates were just not sustainable. Valuation of stock declined with increased required rate of return. Meanwhile some drifted to bank deposit whose returns had now became lucrative as compared to returns of equity which inherited higher risk. As a result, stock market took bearish turn and lost more than 30% of its value in seven months post the all-time record high of 1,881. Midst the sudden rise in CCD, NRB intervened by temporarily allowing Banks to discount 50% of credit lent to productive sectors, deprived sectors and other sectors while calculating CCD ratio till the end of FY 16/ This provision created more than NRP 100 billion worth of loanable funds in Commercial Banks alone. Commercial Banks had dispersed NPR 226 billion worth of credit to productive sectors defined by NRB at the end of FY 15/ This ease in credit market delivered relief to borrowers including borrower of stock markets. BFIs gave out credits bursting CCD (calculated without accounting for the relaxation granted by NRB) beyond the regulatory threshold of 80% which can be seen in Figure 6. This relief in credit flow helped the benchmark index NEPSE jump more than 35% in just couple of months. The temporary measure was never meant to last long, as relaxation terminated, credit market saw the same fate as it was before the relaxation after which stock prices resumed their decline. This kind of impact of interest rate change in stock market is common in others parts of the world as well. Uddin and Alam (2009) 14 studied about the relationship between interest rate and stock price for fifteen developed and developing countries- Australia, Bangladesh, Canada, Chile, Colombia, Germany, Italy, Jamaica, Japan, Malaysia, Mexico, Philippines, S. Africa, Spain, and Venezuela using data from 1988 to They concluded that except for Philippines there was significant negative relationship, either interest rates with stock price or changes of interest rate with changes of share price or both. The negative impact of interest rates had been evidently noticed in the past as well. Zordan (2005) 15 found the inverse relationship between interest rate and stock prices in the 1877 to 1906 cycle, the 1906 to 1920 cycle, the 1920 to 1929 cycle, the 1929 to 1949 cycle, and the 1949 to 1966 cycle. Value of any asset is the sum of all the future cash flow from the asset discounted to present. The discount rate has direct relationship with interest rate. Thus higher the interest rate, lower the value of an asset. Like any other country, since NEPAL is currently experiencing regime of higher interest rates, NEPSE the overall stock market indicator - is facing a bearish tide which has brought the stocks valued during low interest rate regime to lower valuation to account for the increased interest rate and scarce credit. The banking index which had been valued at 38 times their annual earnings at the peak has lost almost 38% of their value till date. The sector s valuation dropped from 38X to 16X of their annualized earnings as average lending rates spiked from 8.6% to 12.3%. Though interest rate has significant part to play in stock prices, interest rate isn t the sole decider. There are other determinants of stock prices as well. Company s management, corporate governance, book value multiples, earning per share, price-earnings ratio and dividend yield have significant association with their stock prices (Malhotra & Tandon, 2013) 16. Apart from these, factors like previous years stock prices, company s size and also macroeconomic variables such as real GDP growth rate and financial development considerably impact stock prices (Mehr-un-Nisa & Nishat, 2012) Aug-08, 49.8 Jun-11, 9.6 May-15, 19.2 Jul-16, 37.8 Oct-18, 16.4 Figure 8: Weighted Average Price to Earnings Ratio of Commercial Banks over the last 12 years 12 Nepal Rastra Bank (2017). Monetary Policy 16/17 Mid Term Review. Retrieved from 13 Nepal Rastra Bank (2017). Banking Supervision Report Retrieved from Annual_Bank_Supervision_Report_2016.pdf 14 Alam, M., &Uddin, G. S. (2009). Relationship between interest rate and stock price: Empirical evidence from developed and developing countries. Journal of Business and Management, 4(3), Zordan, D. (2005). Stock prices, interest rates, investment survival. Econometrica 16 Malhotra, N.,&Tandon, K. (2013). Determinants of stock prices: Empirical evidence from NSE 100 companies. IRACST- International Journal of Research in Management & Technology (IJRMT), 3(3), Mehr-un-Nisa, &Nishat, M. (2012). The determinants of stock prices in Pakistan.Asian Economic and Financial Review,1(40),

6 CHART OF THE QUARTER 100% 4.5% Hydro power, 4.5% 23.1% Others, 22.9% 9.5% Finance, 10.4% 2.4% Insurance, 2.6% 0.3% Trading, 0.3% 1.0% Hotel, 1.2% 1.7% Manu. & Pro, 1.9% 5.2% Development Bank, 6.3% 50.1% Commercial Bank, 52.3% 0% Figure 9: Breakdown of NEPSE s Market Capitalization over the last 10 years There are 199 companies (excluding Mutual Fund Schemes) listed in NEPSE which are divided into 11 sub category thus forming 11 sub indicies. The market capitalizaton of all of these sub sectors sums up to total market capitalzation of NEPSE index as a whole. As of 1 st October 2018, Banking, Insurance and Developement Bank contitute 54.2%, 13.9% and 11.8% respectively. Figure 9 shows the change in weight of market capitalization of each 9 sub sectors 18 to the overall market capitalization. As, NEPSE is a value weighted index, the influence of sub sectors to NEPSE is dependent upon the weight of each of their market capitalization to NEPSE s market capitalization. Banking index has always been the largest contributor over the review priod 19. The sector having second largest weight in NEPSE has changed over the years. Till the early 2014, Others sectors held a significant weight but during the bull run, Others failed to keep up with other growing sub indices like Insurance and Development Bank. sd ;do / ljz]if1tf s;/l ug{] nufgl? Joj;flos Joj:yfkg :jtgq cg';gwfg / lgikif ;Nnfx cg'kfng / kf/blz{tf nufgl Joj:yfkg ;]jfx? ljljwtf u'0f:t/ nufgl o:t} pq/x?sf] nflu PgPdla Soflk6n. nufgl ug]{ cj;/ Vff]lh/xg' epsf] 5? &]ufgfm gfukf]v/l 1, sf&df*f}+ kmf]gm Od]n pms@nmbcl.com.np j]am 18 Microfinance Companies were segregated from Development bank index from November 2017 and Insurance Index was divided into Life Insurance Index and Non Life Insurance Index in July However, this segregation has been neglected during the study. 19 November 2008 to October 2018

7 NMB Capital Limited RTS List S. No Symbol Company Sector 1 BHBL Bhargav Bikash Bank Ltd. Development Bank 2 BPCL Butwal Power Company Limited Hydropower 3 CBBL Chhimek Laghubitta Bikas Bank Limited Microfinance 4 CFCL Central Finance Co. Ltd Finance 5 EIC Everest Insurance Co. Ltd. Non-Life Insurance 6 GLICL Gurans Life Insurance Company Ltd. Life Insurance 7 HGI Himalayan General Insurance Co. Ltd Non-Life Insurance 8 KMCDB Kalika Laghubitta Bittiya Sanstha Ltd. Microfinance 9 KSBBL Kamana Sewa Bikas Bank Limited Development Bank 10 NBBL Nagbeli Laghubitta Bikas Bank Ltd. Microfinance 11 NNLB Naya Nepal Laghubitta Bikas Bank Ltd. Microfinance 12 NHDL Nepal Hydro Developer Ltd. Hydropower 13 NMB NMB Bank Limited Commercial Bank 14 NMBMF NMB Microfinance Bittiya Sanstha Ltd. Microfinance 15 PICL Prudential Insurance Co. Ltd. Non-Life Insurance 16 SKDBL Saptakoshi Development Bank Ltd. Development Bank 17 SIL Siddhartha Insurance Ltd. Non-Life Insurance 18 SLBBL Swarojgar Laghu Bitta Bikas Bank Ltd. Microfinance 19 NSEWA Nepal Seva Laghubitta Bittiya Sanstha Ltd. Microfinance 20 NTC Nepal Doorsanchar Company Limited 20 Others 21 NMBSF1 NMB Sulav Investment Fund-I Mutual Fund Scheme 22 NMBHF1 NMB Hybrid Fund L-I Mutual Fund Scheme Disclaimer: This is a promotional document and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by NMB Capital Ltd. for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views NMB Capital Ltd. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, NMB Capital Ltd. s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. CONTACT US Nagpokhari-1, Naxal Kathmandu, Nepal Call Us: : (PMS) Fax: info@nmbcl.com.np Website: OUR SERVICES Issue Management Underwriting Registrar to Securities Depository Participant Fund Manager Portfolio Management Depository Advisory 20 Cash Dividend Distribution Only