Last week, I had the pleasure of meeting an uncle of mine who has been investing in Nepal’s stock market for nearly 20 years. He has seen booms and busts, and has lived through multiple ups and downs. While chatting, we randomly landed on the topic of banking. As soon as it came up, uncle’s tone changed and he said:

“Babu, banks ko ahile khasai ramro chaina… you won’t generate much returns in banking. Float dherai vako le no one will look after it. Ahile ta je chha hydropower mai chha. Banking ko investment long term investment, safe huncha vanthe… bought SCB at 3000, EBL at 3800… ani jati nai ramro bank vayeni I’m still suffering. Kunai bela NICA 900 maa kiniyo.”

From one point of view, his reasoning sounds solid, it does seem to back up the idea that banking stocks are value destroyers. But I always feel the need to put on my analyst hat and really dissect whether what he’s saying holds true for banking stocks at current valuations. That led to a few questions popping up in my mind: Are all banks overvalued? Is the whole sector really in trouble? How long will these issues continue? Will banks in Nepal perpetually destroy shareholder value in the long run? Or is the problem just the high float, and people simply aren’t paying attention to anything else?

So, I decided to dig into it. In this (not so long) article, I’ll share the findings and the thought process I have right now regarding banking stocks. These are entirely my own views, and you’re more than welcome to argue with them or bring a counterpoint.

The Cyclical Nature of Banking – “Cinderella Time”

Are banking stocks truly perpetual value destroyers, or are they simply misunderstood because of their cyclical nature? This is a hard question and if we can answer it well, we are halfway to winning the investing game.

Uday Kotak, the former Managing Director of Kotak Mahindra Bank, once described certain boom periods in banking as “Cinderella time.” If you remember the fairy tale, Cinderella has to leave the party before the clock strikes midnight. In Kotak’s metaphor, “Cinderella time” refers to the magical hours when everything in banking appears perfect.. strong credit growth, high profits until the clock inevitably strikes midnight and the illusion vanishes. In the context of banking, this perfectly captures the industry’s nature: periods of optimism and easy profits can quickly give way to more challenging times as the credit cycle turns. Like Cinderella’s fleeting night at the party, banks experience phases of exuberance that are always temporary, the cycle moves from boom to bust and back again.

This phenomenon of cyclicality is not unique to banking; it’s a feature of many industries tied to credit, liquidity, and economic growth. Understanding this “Cinderella time” is crucial. It reminds us that while banks may periodically face downturns and rising bad loans, these periods are part of a larger cycle which is often followed by recovery and mean reversion. In other words, rather than concluding that banks are perpetual value destroyers, we should view them as cyclical businesses whose performance rises and falls with the broader economic cycle. The key for investors is to understand which part of the cycle we’re in and make investment decisions accordingly.

During the “good times” of the cycle, banks can look like money-making machines. Credit is growing, defaults are low, and profits soar. But these sweet spots never last forever. As Kotak warned, “at some point of time, the clock does strike midnight” in the credit cycle. When the cycle turns due to rising interest rates, economic slowdown, or simply overextension of credit.. banks face rising non-performing loans (NPLs), thinning margins, and a hit to profits. Thus, what might seem like a value-destroying industry in the down cycle may have been a value creator in the preceding up cycle, and vice versa. It’s all about timing and cycle awareness.

Not Perpetual Destroyers – Just Bad Timing and Bad Decisions?

So, why do many investors (like my uncle) feel banks have destroyed value? The answer often lies in timing and strategy. If you invest in a bank during the height of a boom – when valuations are high and optimism is rampant, the subsequent downturn can indeed leave you with losses for a long time. Nepal’s stock market has seen exactly this. A decade ago, banking stocks were the darlings of the market and traded at lofty prices. For instance, shares of Standard Chartered Bank Nepal (SCB) once traded around NPR 3000-4000 at their peak (before adjustments), and Everest Bank (EBL) at around NPR 3800. Many enthusiastic investors bought at those highs, believing banks were “safe long-term investments.” But then came regulatory changes and economic cycles that knocked these prices down. Today, after years of bonus share dilution and downturns, those stocks trade at only a fraction of their peak price. So indeed, those investors are “still suffering,” as my uncle put it.

However, it’s crucial to distinguish value destruction from cyclicality. Banks as businesses are not designed to burn shareholder value endlessly. In fact, if managed prudently, they can create substantial value over the long run. Warren Buffett famously noted that “banking is a very good business if you don’t do anything dumb”. The trouble is, banks often do dumb things during the boom phase: they make bad loans at the best of times, chasing growth when credit is easy. It’s a banking truism that “the worst loans are made at the best of times,” as euphoric lenders loosen standards. 

Buffett put it pointedly after the 1990s banking crises: when banks operate with assets at 20x their equity, even small mistakes can wipe out a lot of value, and “mistakes have been the rule rather than the exception at many major banks. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.”

In other words, banks tend to herd into the same risky behavior, expanding loans aggressively when everyone else is..which leads to trouble when the cycle turns. This isn’t a permanent condition; it’s a cycle of folly and recovery.

Jamie Dimon, the long-tenured CEO of JPMorgan Chase, also stresses the importance of understanding cycles. He cautions that newer investors or bankers who haven’t seen a full downturn can be complacent. As Dimon said recently, “I think that people who haven’t been through major downturns are missing the point about what can happen in credit.” When times are good, it’s easy to underestimate how bad loans can sour. But veteran bankers like Dimon prepare for the inevitable rainy day, maintaining what he calls a “fortress balance sheet” i.e, strong capital and reserves to withstand the storm when midnight strikes.

The takeaway is that banks are not inherently value destroyers. Instead, they create or destroy value for investors depending on where we stand in the credit cycle and how wisely the bank is managed. The sector’s reputation suffers because many people have experienced buying at the wrong time (peak optimism) or banks doing “dumb things” with loans that later blew up. 

If you flip the perspective, those who invest when banks are out of favor during a downturn and when pessimism is priced in, can gain significant value when the cycle improves. We have seen this internationally: for example, India’s banking sector went through a brutal NPA (non-performing asset) cycle in 2015–2018, but after recognizing losses and recapitalizing, today Indian banks are thriving with record low NPA ratios (~2.6% as of 2024) and record profits. An investor who bought Indian bank stocks in the dark days of 2018 would be sitting on multi-fold gains by 2023. Cycles turn, and banks mean-revert.

The Case of Nepali Banks: High Float and Shifting Sentiment

What about Nepal’s banks specifically? The concerns my uncle raised are quite valid in context. Nepali banks went through a major period of capital raising and dilution in the past decade. In 2015, Nepal Rastra Bank (NRB) shocked the industry by raising the minimum paid-up capital requirement for commercial banks to NPR 8 billion (from NPR 2 billion) by 2017 – a fourfold increase. Banks had basically two ways to achieve this: issue lots of new shares (rights issues and bonus shares) or merge with other banks. Most followed the first option. Nepalese investors would happily grab those bonus and rights shares since they could get them at par value (Rs 100) even if market prices were far higher. And indeed, banks doled out generous bonus shares; investors initially cheered “free” shares, and stock prices even rallied in anticipation.

However, the result was that the “float” (number of shares outstanding) exploded for all banks. A stock that was Rs 3000 pre-dilution might end up with, say, 5x more shares and naturally an adjusted market price one-fifth of that. Many early investors didn’t anticipate how this mathematically dilutes the price. For example, Standard Chartered Nepal (SCB) gave 100% bonus shares at one point, effectively halving its stock price, and has maintained high dividend payouts instead of rapid growth. Investors like my uncle who bought SCB at Rs. 3000 (perhaps before dilution) saw the price drop to the Rs. 500-600 range in subsequent years; a painful experience even though the underlying bank remained stable and paid dividends. In his eyes, the bank “destroyed value,” but in reality a chunk of that was the result of paying premium valuation at the time of the euphoria and dilution effect of mandatory capital increases, not just poor performance.

Moreover, investor sentiment in Nepal shifted to new darlings; notably the hydropower sector. A few years ago, banking and finance companies made up the vast majority of Nepal’s stock market. But recently, hydropower companies have surged in number and popularity. To put this in perspective: as of FY2081/82 (2024), 91 hydropower firms are listed on NEPSE, comprising about one-third of all listed companies. Meanwhile, the financial sector’s dominance in market capitalization has been waning. In simple terms, “ahile ta je chha hydropower mai chha” – right now everything (excitement, liquidity) is indeed in hydropower. Many Nepali investors, especially newcomers, find the growth story of hydros more exciting than the stodgy banks. Thus, bank stocks have languished with low trading interest, further depressing their prices. It’s a cycle of fashion: a decade ago, banks were the only game in town; today they’re seen as yesterday’s news while everyone chases the hot sector (hydro, and tomorrow it might be something else).

So, are Nepali banks overvalued? By traditional metrics, most are actually trading at modest valuations now. Many bank stocks in Nepal hover around book value (P/B ~1.5 or even below). Years back, these same banks traded at 2–3 times book in bull markets. Price-to-earnings (P/E) ratios are also in single-digits for several banks. This doesn’t scream overvaluation rather the opposite. The entire sector is out of favor, priced for the risks and the pain of asset quality they are currently facing. 

And what are those risks? Let’s delve into the real issues banks are grappling with, which will tell us if the whole sector is in trouble or just certain banks.

Four Crucial Factors for Analyzing Banks

To truly understand whether banks “perpetually destroy value” or are worth holding long-term, we need to look below the surface. Banking is often called a “book value game” meaning, you learn a lot by analyzing the balance sheet (loans, deposits, capital, asset quality) and not just the income statement. By the time bad decisions show up as losses in the Profit & Loss (P&L), the damage is done. A savvy investor looks for signs in the books early. Here are five key dimensions to examine:

1. Asset Quality: Non-Performing Loans (NPLs) and Non-Banking Assets (NBAs) – This is priority number one. Banks primarily make money by lending, so if those loans go bad, shareholder value erodes quickly. Non-Performing Loans (loans in default or close to it) as a percentage of total loans is a critical metric. High NPL means future losses and less money for dividends or growth. Nepali banks have seen NPLs creep up in recent years as economic conditions tightened. By Q3 FY2024/25, NPL ratios in some Nepali banks reached as high as 8%, and 9 banks had NPL above 5%, a big jump from the low NPL days during the 2021 liquidity boom. For context, two banks (Standard Chartered, Everest) still kept NPLs at or below 2%, showing stronger credit management while others like NIC Asia, Nepal Investment Mega Bank, Kumari, etc., were well above 5%. A wide gap in asset quality is emerging between conservative and aggressive lenders.

In analyzing asset quality, one must also look at Non-Banking Assets (NBA) on the balance sheet. NBAs are properties or assets that banks have seized from defaulting borrowers (collateral takeover). NBAs tie up capital and signal investors that the bank had significant credit failures while the bankers take this as prudent risk management practices. Recent data shows Nepal’s commercial banks hold over NPR 38.4 billion in NBAs collectively (as of Chaitra 2081). Tellingly, the banks with the largest NBAs are Global IME Bank (NPR 5.99 billion), Himalayan Bank (5.14 billion), and NIC Asia Bank (4.58 billion). These three are among the bigger, more aggressive lenders, so it tracks that they’ve accumulated the most seized assets. By contrast, more cautious institutions like Standard Chartered Bank Nepal reported zero NBAs, meaning they haven’t had to foreclose and hold any property which might be an indicator of either very prudent lending or effective resolution of bad loans. Always check both NPL and NBA figures to get the full picture of problem assets.

2. Capital Adequacy and Share Dilution

Banks are required to maintain healthy capital buffers to absorb losses and grow sustainably. The Capital Adequacy Ratio (CAR)  essentially the ratio of a bank’s capital to its risk-weighted assets is a critical safety metric. Nepal’s central bank mandates a minimum 11% CAR (8.5% Tier-1 capital). As of mid-2024, Nepali commercial banks on average had a CAR of about 12.8%, just above the required threshold. That sounds adequate, but NRB has warned that rising bad loans are pressuring banks’ capital and that a “heavy depletion of asset quality” in some banks could threaten their stability if not addressed. In other words, a few banks might see their capital ratios fall dangerously low if they don’t shore up capital or improve loan quality. This is a space to watch, if a bank’s CAR falls below regulatory norms, it may be forced to raise capital (again via new shares or retention of earnings), which can hurt existing shareholders.

On the flip side, Nepali banks overall went through a one-time massive capital increase (to Rs 8b) by 2017, as discussed earlier. This was painful for investors then (all the dilution and rights issues) but also means banks today are generally better capitalized than they were a decade ago. They carry more equity relative to loans, which should make them safer and less likely to go belly-up in a downturn. But the question arises; issuing rights shares/bonus shares and excessive paid-up capitalization was the only way to remain better capitalized given the increasing credit portfolio ?. The consolidation from 32 commercial banks down to 20 through mergers has also improved average capital strength and economies of scale.

From an investment standpoint, pay attention to a bank’s future capital needs. Is the bank growing so fast that it will need to continuously retain the capital or do they have the enough capital headroom for the future growth? 

3. Management Strategy: Growth vs Prudence (Cycle Positioning) 

Not all banks are equal. Some are “growth-at-all-cost” oriented, while others are conservative “steady Eddies.” In Nepal, for example, NIC Asia Bank (NICA) is known for its aggressive expansion, it grew its loan book rapidly and grabbed market share, earning a reputation as a go-getter. In contrast, Standard Chartered Bank Nepal (SCB) has been almost the opposite, very selective in lending, focused on blue-chip clients, and not chasing market share. Each strategy has pros and cons depending on the cycle. 

During boom years, NIC Asia’s approach would yield higher earnings growth than SCB’s, and its stock might outperform. But when the cycle turns, NIC’s higher-risk bets can result in more NPLs (which we did observe, as NIC Asia’s NPL ratio jumped above 5%, among the highest in the industry. Since the pain in Banking businesses is always backended, NICA is suffering now. SCB, on the other hand, sailed relatively smoothly with one of the lowest NPL levels and even no NBAs on its books, because it avoided the riskiest loans. 

Which is better for shareholders long-term? It’s a delicate balance. A bank that never grows will not create much new value (and may actually shrink in real terms). But a bank that grows recklessly will eventually implode and destroy value. The ideal management navigates the cycle, lending aggressively when prudent (and prices/terms are good), but tightening standards when the market overheats. As an investor, look at management’s commentary and track record. Do they acknowledge cyclicality? For instance, are they increasing credit reserves in good times (as a buffer)? Jamie Dimon often emphasizes always keeping an eye on the storm clouds even when it’s sunny, a lesson some banks fail to heed. Also, consider governance and integrity: banking is a business where lapses in ethics (bad loan approvals, fraud) can wreck value. A hint of scandal or consistently poor governance is a huge red flag and the “surprise” losses often pop up later.

4. Valuation and Investor Sentiment Cycles

Finally, even if a bank’s fundamentals are sound, the return for investors depends on the price you pay. The banking sector, being cyclical, also goes through valuation cycles. In exuberant times, bank stocks might trade at high multiples (e.g., price-to-book well above 2, or P/E above 25) which bakes in a lot of optimism. In down times, the same bank might trade below book value and a single-digit P/E, reflecting extreme pessimism. A long-term investor can actually turn the cyclical nature to their advantage by buying when the sector is out-of-favor and valuations are cheap, much like how value investors approach any industry.

Right now in Nepal, valuations appear low for many banks (P/B ~1.5 or under is common), which as mentioned is generally considered a favorable valuation if the bank is fundamentally sound. This suggests that the market has quite a bit of pessimism priced in, perhaps due to the current higher NPLs and the allure of other sectors. If one believes that Nepal’s economy will recover and credit cycles will improve (as they historically do), these valuations could be an opportunity rather than a value trap. It’s essential, though, to be selective: a poorly managed bank at 0.5x book can still be a trap if that book value is eroding from bad debts! But a well-managed bank at 1.2-1.5x book with sustainable ROE can be a steal. (Read that Again !)

Also, consider dividend yield and long-term dilution. Nepali banks traditionally paid a chunk of profit as dividends (often stock dividends). If profits normalize in a few years and you’re buying at a low price now, the dividend yield on cost could become attractive. Many banks currently have depressed earnings due to high provisions… Once those normalize, earnings and dividends could leap, rewarding patient shareholders.

In terms of sentiment, keep an eye on macro indicators: interest rates, liquidity, and credit demand. Banks tend to do well when interest rate spreads (difference between lending and deposit rates) are healthy and credit demand is growing. Nepal went through a liquidity crunch and high interest rate phase in 2022–2023, which hurt banks’ stock performance. As of 2024–25, interest rates have eased and liquidity is improving, but loan demand is still tepid. Eventually, as the economy picks up, credit growth should return (remember, Nepal’s historical private sector credit growth averaged ~18% annually before the recent slump). When it does, banks may enter another “Cinderella” phase of low defaults and decent growth which is a recipe for PE Rerating and stock outperformance. The savvy investor tries to get in before the clock strikes midnight for the next party, i.e., during the downturn.

Conclusion: 

To circle back to the conversation with my uncle: from his vantage point, banks have been disappointing, and it’s easy to see why. He invested at a time of high optimism (and high prices) and then witnessed dilution, regulatory changes, and a cyclical downturn eat away returns. His conclusion was to avoid banks and chase whatever is shiny (today hydropower stocks). But as we’ve discussed, that’s only one side of the story. Banks are cyclical creatures, not outright “value destroyers” by nature. They go through Cinderella moments of magic and inevitable midnights of reckoning. Investors who don’t understand this may get hurt but those who do can profit by being contrarian to the cycle.

If one were to look at banking stocks with truly long-term glasses (say 15–20 years), many well-run banks do create value: they pay dividends, they increase earnings (albeit in a jagged line with cycles), and they support the economy’s growth (which in turn raises their franchise value). The caveat is that you must choose the right banks and get the timing roughly right. Avoid buying in euphoria; consider buying when everyone hates banks. Focus on banks with strong fundamentals: good asset quality, honest provisioning, sufficient capital, and prudent management (with maybe a dash of growth ambition at the right time).

As Uday Kotak hinted, even in the sweetest part of the cycle, always ask “what time of day is it in Cinderella time?” i.e., how close are we to midnight? And as Buffett would say, don’t do anything dumb. Banks that avoid the egregious mistakes, over-lending at the top of the cycle, funding long-term loans with short-term hot money, or venturing into things they don’t understand can reward shareholders handsomely over time. Those that don’t will indeed destroy value.

Nepal’s banking sector today faces challenges: rising NPLs, a pile of NBAs, and competitive pressure from an over-banked market. The central bank itself flagged increasing NPLs and NBAs as major challenges to financial stability, urging banks to strengthen risk management and capital. This means we might see a couple of rough years as banks clean up, possibly a merger or two more for weaker players, and slower profit growth as provisions eat into earnings. However, beyond that, there is a good chance of mean reversion. Credit cycles turn, the economy will find its feet, and banks that have weathered the storm will emerge into the next boom healthier (having learned lessons, we hope!). Investors who position before that turn could find that banks which are often dubbed boring may offer quite exciting returns.

In summary, banking stocks are not a sure path to riches at all times, nor are they automatic value destroyers. They require homework and patience. For general investors, the lesson is to look beyond the headlines (“banks doing bad, avoid!”) and do a bit of analysis. Sometimes the negativity is overdone, and that’s when opportunity knocks. And if you decide to invest in this sector, keep your eyes open to the cycle and remember: in banking, midnight will strike eventually, so plan accordingly. But after midnight, the clock also resets for a new day and the cycle begins anew.

Keywords: Bank, Banking, SCB, EBL, SANIMA, NICA, GBIME