Economic Slowdown and Rising Cost of Funds Take a Toll on Banks’ Financial Performance

As non-performing loans (NPLs) surge, commercial banks’ profit decline in the first half of FY 2022/23

the HRM
The Nepali banking sector is currently going through a critical period with consolidation on one hand, and rising non-performing loans (NPLs) coupled with falling profits on the other hand.

Three mergers and one acquisition over the last six months have reduced the number of commercial banks to 22, which was earlier 27, making the first half of FY 2022/23 a momentous one, in terms of banking consolidation. However, as banks’ second quarter reports came, fault lines in the banking system have also become clearly visible.

Commercial banks that have enjoyed windfall profits even during the height of the Covid-19 crisis years in 2020 and 2021 have been surrounded by a severe liquidity crunch that forced them to increase interest rates and tighten credit expansion over the past year.

As the shortage of funds forced the banks to give higher interest in deposits, it increased their cost of funds. The second quarter report clearly shows this fact as banks’ interest expenses surged by a whopping 41.26 percent. The two income sources for the banks – net income fee and net trading income – both declined during this period. The net income fee went down by 11.13 percent while net trading income plunged by 39.04 percent. “Banks are going through a lot of stress lately,” said Bhuban Dahal, former CEO of Sanima Bank Limited.

The rise in NPLs has been worrying for central bank officials and people in the banking industry. Bankers say NPLs have risen mainly due to the non-recovery of debts. Currently, banks are facing difficulties to recover loans as the private sector is struggling with rising borrowing rates and a sharp slowdown in market demand. According to bankers, payments of loan installment and interest amounts have declined in this fiscal year. They say sluggish economic activities have made it difficult for borrowers to pay the principal loan amounts and interest on time.

The financial reports of the 22 commercial banks suggest there has been a significant increase in NPLs of commercial banks in the first half of the current fiscal year with their bad loans going up by a whopping 111.71 percent. The average NPL of commercial banks has increased to 2.35 percent in the first half of FY 2022/23 compared to 1.11 percent during the same period of FY 2021/22.

With NPL rising, the overall profit of commercial banks has tanked in the first half of the current fiscal year. The unaudited financial reports of commercial banks for the second quarter show their profit declined by 1.34 percent in the first six months of the current fiscal year 2022/23.

In the meantime, the deposit collection of banks has improved significantly. As per the financial reports for the second quarter, the such collection grew by 9.34 percent totaling Rs 4,647.931 billion by mid-January 2023. Nonetheless, persistently high borrowing rates and low demand for loans have affected the credit expansion of banks. Commercial banks’ extension of loans grew by only 3.45 percent in the first half of the current fiscal year.

Six banks’ profit decline, one posted loss
Of the 22 commercial banks in operation, the profits of six banks declined in the first six months of the current fiscal year compared to the corresponding period of the last fiscal year, while one bank posted a loss and 15 reported an increase in their profits.

As per the financial reports, the profits of Sunrise Bank, Citizens Bank International, Siddhartha Bank, Prime Commercial Bank, Prabhu Bank, and Nepal Bank declined. The Agricultural Development Bank posted a loss of Rs 0.128 billion in the first half of the current fiscal. The financial reports show two banks have their profits crossed the Rs 3 billion mark while three banks earned above Rs 2 billion in profit in this fiscal year. Similarly, the profits of 12 banks crossed the Rs one billion mark in the first half of FY 2022/23.

Nabil Bank records the highest profit
Nabil Bank stood at the top as it reported a profit growth of 56.67 percent in the first six months of the current fiscal year with its earnings for the six months totaling Rs 3.41 billion.

NIC Asia Bank came second in the list with a profit of Rs 3.27 billion, an increment of 36 percent followed by the Global IME Bank reporting a profit of Rs 2.78 billion. However, Global IME’s profit grew by a meager 4.42 percent in this fiscal.

In terms of percentage growth, Everest Bank reported the highest profit growth of 89.49 percent. The bank recorded a profit of Rs 1.58 billion in the first half of this fiscal compared to Rs 0.83 billion in the last fiscal. Standard Chartered Bank’s profit also grew by 61.36 percent to Rs 1.90 billion.

Meanwhile, Agricultural Development Bank Limited (ADBL) has reported a big slump of 109.06 percent in profit earnings in the first half of the current fiscal. The bank has incurred a loss of 0.128 billion in the first half of FY 2022/23 compared to a profit of 1.42 billion during the same period of FY 2021/22. The bank’s profit decreased due to an increment in the impairment charges. The bank’s NPL also increased from 2.08 percent to 4.52 percent in this fiscal. According to the bank, it has set aside Rs 2.17 billion for impairment charges, an increment of 250 percent compared to the last fiscal.

ADBL posts highest NPL
Of the 22 commercial banks that have published their second quarter report, ADBL has posted the highest NPL. The bank’s NPL has increased to 4.52 percent by mid-January compared to 2.08 percent during the same period of the last fiscal.

Himalayan Bank Limited (HBL), Sunrise Bank, Kumari Bank, Nepal Investment Bank, and Nepal Bank are the other five banks whose NPL is above 3 percent. HBL’s NPL has reached 3.77 percent in the first half of FY 2022/23 compared to 0.72 percent during the same period of FY 2021/22. Sunrise Bank’s NPL increased to 3.36 percent in mid-January 2023 from 1.40 percent in mid-January 2022. The NPL of Kumari Bank and Nepal Bank has increased to 3.15 percent and 3.11 percent, respectively.

NPL of Kumari Bank increased mainly due to the merger with NCC Bank. As the NCC Bank had a higher NPL, Kumari Bank’s overall bad loan increased after the merger.

Rastriya Banijya Bank (RBB) is the only commercial bank that has its NPL decreased in this fiscal year. The government-owned bank has been able to reduce its bad loans by 9.67 percent during the review period. The RBB’s NPL has decreased to 2.79 percent in mid-January 2023 from 3.06 percent in mid-January 2022.

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