Stock prices down 35% in eight months

myrepublica.com, 14-Apr-09
MILAN MANI SHARMA

If the drop in the prices of stocks indicates anything, people who invested on shares in the secondary market have lost 35 percent of their money over the past eight months.

Nepal Stock Exchange (NEPSE) figures show, the floating index -- which portrays the picture of stock prices -- has presently dropped to 64.58 points from 100 of eight months ago due to protracted gloom in the stock market.

And a sharp rise in the supply of shares as against lowered purchases has dragged the value of even the most sought-after companies’ shares down to half over this period. A NEPSE official said only the people who bet their money on companies that issued rights and bonus shraes have been saved and the rest have lost as much as 65 percent.

What this means is people who invested on shares of companies and banks like Standard Chartered Bank and Nabil Bank that issued bonus and rights shares got value for their money.

But those who put their money on the stocks of companies like the Bank of Kathmandu (BoK) and Nepal Investment Bank (NIB) have suffered losses, for the share price of BOK has dropped to Rs 1,450 from Rs 2,649 and NIB’s to 1,170 from Rs 3,281 during the period.

“Mainly those who bought the shares at bloated prices earlier this fiscal year have lost the money,” said Nanda Kishore Mundada, president of Nepal Stock Brokers’ Association.

Stock brokers mainly blame the lack of clear vision of the government, dramatic changes in policy, enforcement of Voluntary Declaration of Income Scheme (VDIS) and rumors of government digging out income sources of stock transactions for the present deserted outlook of the stock market.

“Insensible and irresponsible statements by the finance minister against the stock market and its players also left a grave impact,” said Mundada.

As a result of the gloom, stock market has performed dismally over the first nine months of the fiscal year.

For instance, turnover of stock trading has presently dropped to Rs 34 million a day, whereas it had averaged Rs 100 million a day last fiscal year. And NEPSE, which initially projected transactions to cross over Rs 34 billion and after six months revised the projection down to Rs 25 billion, says that it could miss even this revised target.

Breakdown of NEPSE trading shows, the market was vibrant even till the first five months of the fiscal year that ended mid-December 2008. As people rushed to buy shares of some banks and financial institutions anticipating bonus and right shares, 14.1 million units of shares were traded at Rs 12.30 billion during that period.

NEPSE index too had swollen to 1175.38 points in August 2008.

In the later four months from mid-December 2008 to mid-April 2009, however, only 7.9 million units of shares were transacted and the turnover totaled Rs 4.63 billion.

Apart from the people, the government is also set to miss its collection target from the market. In the budget statement, the government had projected to collect Rs 1.50 billion in capital gain tax alone while raising the tax to 15 percent from 10 percent. But with nine months gone the collection is not even Rs 900 million.

And given the transaction trend, revenue collection will remain short of target, a NEPSE official said.

But stock analysts noted that the current decline in prices has also created a new opportunity for investors. “If prudently invested, the people could reap sound returns on the shares when share prices rise in the early quarter of the next fiscal year,” said Mundada.

Banking on real estate

Banking on real estate
NepaliTimes, Issue #46 (10-Apr-09 to 16-Apr-09)

When the real estate bubble bursts, it shouldn't take banks down with it

Banks in Nepal seem to be thriving. According to Nepal Rastra Bank, Nepali commercial banks hold close to Rs 470 billion in deposits, but for banks to be profitable they have to put this deposit to work.

Given the poor business climate and soaring property prices, it is a fair guess? this cash is feeding the real estate bubble. Such a bubble driven by excess credit fueled liquidity is exactly what brought many US banks to their knees, and there is a good lesson there for us.

As property prices went up, banks in the US found increasing their real estate loan portfolio an easy way to boost earnings. They not only kept loans in their own balance sheet, but packaged them into securities which were sold to investors worldwide, further increasing the demand for mortgage loans. Borrowers were approved for loans they were not capable of paying and many jumped on the bandwagon assuming that real estate prices could only go up.

What initially started as a problem in the subprime loans or loans made to risky borrowers, has spread to prime loans as decreasing real estate prices and increasing unemployment rate are putting even credit worthy borrowers at risk. As a result, banks are now stuck with hundreds of billions of dollars in real estate loans, some of which are practically worthless, and are thus forced to book billions of dollars in losses. The massive loans are threatening the solvency of some US banks. The FDIC has seized more than 21 failing banks so far in 2009 alone.

We are inside a real estate bubble in Nepal, and this bubble could burst. Among other things, the excess cash available to drive prices higher may not be there in the future. The global economic slowdown is already impacting on the remittance flow into Nepal which will reduce the liquidity in the banking sector and the money chasing real
estate assets.

When the bubble bursts, not only will many Nepalis feel much poorer from reduced property prices, but their deposits in banks could also be at risk if banks that are overexposed to real estate lending face defaults, threatening their ability to meet obligations to depositors. The margin of error for Nepali financial institutions, and the public, is very small. Unlike most other countries, there is no established deposit insurance program in Nepal and it is questionable that Nepal Rastra Bank has the ability to manage a run on the banks.

Outstanding loans of commercial banks to the real estate sector grew at a staggering rate to Rs 17.9 billion in February from Rs 6.6 billion just a year earlier. The questions to ask the banks are: what percentage of outstanding loans is real estate related, including both direct and indirect loans where real estate asset is kept as collateral? How will the real estate price reduction affect the performance and recovery of these loans? Have the banks done a sensitivity test for the worst case scenario and are they adequately capitalised if that scenario materialises?

The government and Nepal Rastra Bank should also look into the feasibility of instituting a deposit insurance program up to a certain threshold. Such a program can be funded from the premium paid by the deposit-taking institutions and the premium should be based on the risk assessment of each participating institution.

It is not too late for Nepal, but it is time to ask tough questions to the banks and the regulator and focus on risk management so that when this real estate bubble ultimately bursts, it doesn't take the banking sector down with it.

Raju Sitaula is a banking professional based in New York.