Last week was big for Nepalese investors. After a long gap, the investors got the opportunity to gain from an IPO listing in the form of Janata Bank IPO shares. Going by the trend in Nepal, the IPO shares are expected to at least double once the shares get listed in the share market, i.e. in two months time. This was enough for most of the Nepalese investors. The IPO shares were subscribed 3 times the allocated shares of 60 million.
Even though my friends were busy filling the IPO share forms, I was stubborn on not participating in this IPO. The reasons were purely based on my financial analysis of the bank rather than anything else. The main reasons were:-
1) Too much of leverage:
In its two year of existence, Janata Bank had used a huge level of leverage (87%) to gain rapid growth. But with rapid growth came risky approach. As per Janata Bank statements, they thought a significant number of employees would be appropriately used after the IPOs. This means these employees are currently either under-performing or not needed by the company. The 60 billion Janata Bank raised from IPOs will reduce the leverage to 80%. This is a ceiling for many banks in the world. So, seeing the future, it will be very hard for Janata Bank to gain quick extra money to continue its rapid growth. All it can do for few years is to consolidate its growth.
2) Uneven distribution of Provisions for Bad loans in the past two quarters:
If you compare the income statements of last two quarters just before Janata Bank opened the IPOs, there seems significantly uneven distribution of Provisions for Bad loans. In the quarter ending 30.09.2068, the provisions is in the amount of about 60 million and in the quarter ending 30.12.2068, i.e. just before the IPOs were opened, the provisions is just for 23 million. Not surprisingly, the quarter ending 30.09.2068 has net loss of about 6 million, while the next quarter has net income of about 43 million. This could be a strategy of the bank to set a large portion of bad loans in the previous quarter, so that the statement just before the IPOs are very attractive to the potential investors.
3) Increase in exposure to real estate loans:
As all other banks in the country are trying to reduce their exposure to real estate loans, Janata Bank has increased the real estate loans by more than 3 times. This is a very scary thing to do in the current scenario when the real estate prices are sliding down.
Although the IPOs "may" give to 10-40% gain in 2 months time, Janata Bank shares may not be ideal for long term investments.
Well this is just my thought. You can post in yours.
Even though my friends were busy filling the IPO share forms, I was stubborn on not participating in this IPO. The reasons were purely based on my financial analysis of the bank rather than anything else. The main reasons were:-
1) Too much of leverage:
In its two year of existence, Janata Bank had used a huge level of leverage (87%) to gain rapid growth. But with rapid growth came risky approach. As per Janata Bank statements, they thought a significant number of employees would be appropriately used after the IPOs. This means these employees are currently either under-performing or not needed by the company. The 60 billion Janata Bank raised from IPOs will reduce the leverage to 80%. This is a ceiling for many banks in the world. So, seeing the future, it will be very hard for Janata Bank to gain quick extra money to continue its rapid growth. All it can do for few years is to consolidate its growth.
2) Uneven distribution of Provisions for Bad loans in the past two quarters:
If you compare the income statements of last two quarters just before Janata Bank opened the IPOs, there seems significantly uneven distribution of Provisions for Bad loans. In the quarter ending 30.09.2068, the provisions is in the amount of about 60 million and in the quarter ending 30.12.2068, i.e. just before the IPOs were opened, the provisions is just for 23 million. Not surprisingly, the quarter ending 30.09.2068 has net loss of about 6 million, while the next quarter has net income of about 43 million. This could be a strategy of the bank to set a large portion of bad loans in the previous quarter, so that the statement just before the IPOs are very attractive to the potential investors.
3) Increase in exposure to real estate loans:
As all other banks in the country are trying to reduce their exposure to real estate loans, Janata Bank has increased the real estate loans by more than 3 times. This is a very scary thing to do in the current scenario when the real estate prices are sliding down.
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Although the IPOs "may" give to 10-40% gain in 2 months time, Janata Bank shares may not be ideal for long term investments.
Well this is just my thought. You can post in yours.
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