Fourth Quarter Reports of Commercial Banks – Diminishing Returns

Despite the increase in profits, the capacity of commercial banks to distribute substantial dividends has diminished due to a 26 percent drop in distributable profit.

the HRM
When the commercial banks released their third-quarter report in mid-April of this year, there was an anticipation that non-performing loans (NPLs) would experience further growth and that net profit would be significantly impacted. However, the fourth-quarter report from these banks has caught many by surprise.

The unaudited financial statements for the fourth quarter of the fiscal year 2022/23 indicate a substantial increase of 25.03 percent in the net profit of commercial banks. Additionally, NPLs remained at a level lower than three percent, despite the initial projection by the Nepal Rastra Bank suggesting a possible rise to as much as five percent by the end of FY 2022/23.

The distributable profits of commercial banks declined by 26 percent as they have to set aside significant amounts for regulatory adjustments. Although the total profit of the banks reached Rs 70.17 billion, their distributable profit is only Rs 31.90 billion.

However, the distributable profits of commercial banks have diminished by 26 percent due to the necessity of earmarking substantial funds for regulatory adjustments. Despite the banks achieving a profit of Rs 70.11 billion according to the unaudited financial statement, the amount that can be distributed to shareholders as distributable profit stands at just Rs 31.90 billion.

Consequently, the average dividend ratio for commercial banks has declined by 2.88 percentage points to 11.77 percent. This is in contrast to the 14.65 percent in FY 2021/22. Notably, both Kumari Bank and Himalayan Bank are unable to distribute dividends to their shareholders for the preceding fiscal year due to their negative distributable profits.

Amongst the commercial banks, Everest Bank stands out with the capacity to offer the most substantial dividend payout derived from the earnings of the previous fiscal year. It has the potential to allocate dividends of up to 40.5 percent to its shareholders.

Of the 20 banks that have disclosed their unaudited financial statements, 18 have recorded an upswing in their earnings in the last fiscal year. However, Kumari Bank and Prime Commercial Bank have experienced a reduction in their profits.

When the HRM asked bankers whether commercial banks performed exceptionally well in the preceding fiscal year, their response was a straightforward “No!”

Former banker Bhuwan Kumar Dahal pointed out that the profits of commercial banks have not seen an increment; in fact, they have diminished. He noted that the data presented is based on unaudited financial statements and even upon closer scrutiny, the profit is unlikely to reach the claimed 25 percent growth.

During FY 2021/22, a total of 26 commercial banks were in operation, and following the completion of the final audit, their recorded profit amounted to Rs 66.25 billion. Additionally, their profit prior to the audit was Rs 74.80 billion. In the subsequent fiscal year, which is 2022/23, six banks have either undergone mergers or acquisitions, resulting in a reduction of the overall count to 20 banks.

Juxtaposing the unaudited profits of FY 2022/23 with those of FY 2021/22, a decrease of 6.18 percent in the banks’ profits can be seen. Furthermore, in the event of a comparison between the unaudited profits of FY 2022/23 and the audited profits of FY 2021/22, there is an observed increase of 5.93 percent in the profits.

Sanima Bank’s CEO, Nischal Raj Pandey, also noted that the profit of banks hasn’t surged significantly, as some reports suggest. “When you meticulously compare the figures, the growth has, in fact, been relatively gradual,” remarked Pandey.

the HRM compared the numbers of merged and acquired banks. During the previous fiscal year, Himalayan Bank acquired Civil Bank. In FY 2022/23, Himalayan Bank declared a profit of Rs 3.26 billion. Before the acquisition of Civil Bank, Himalayan Bank had recorded a profit of Rs 2.36 billion in FY 2021/22. Upon analyzing these figures, it appears that Himalayan Bank’s profit has risen by 37.96 percent. However, if we combine Civil Bank’s profit of Rs 1 billion from FY 2021/22 with Himalayan Bank’s profit of the same fiscal year (Rs 2.36 billion), the combined profit would be Rs 3.36 billion. This perspective reveals that the bank has actually incurred a loss of 3.03 percent.

The same narrative holds true for Kumari Bank. In the fiscal year 2021/2022, Kumari Bank generated a profit of Rs 2.57 billion. However, in FY 2022/23, after the merger with NCC Bank, Kumari’s profit decreased by 24.14 percent. Meanwhile, NCC Bank achieved a profit of Rs 1.67 billion in FY 2021/22. If the profits of both banks from FY 2021/22 are aggregated, the total would be Rs 4.25 billion. Consequently, this indicates that post-merger, the profit has contracted by 54 percent.

If we compute the profits of the banks that have chosen to merge as explained earlier, it’s evident that their profits have suffered a decline. The profits of Global IME Bank, Laxmi Sunrise Bank, Nepal Investment Mega Bank, and Prabhu Bank have each experienced decreases of 0.38 percent, 34 percent, 27 percent, and 3.2 percent, respectively.

“If we dissect the figures and analyze them individually, the totals wouldn’t appear as substantial. With that being said, it’s important to acknowledge that profits have indeed been generated. This can be attributed to the increased spread rate witnessed in the previous fiscal year,” Dahal commented.

Surge in NPLs
In the last fiscal year, banks also encountered a significant upswing in their NPLs. This surge was mainly driven by the challenges stemming from the economic downturn, a decrease in loan recuperation, and difficulties in meeting debt obligations.

The unaudited financial reports of 20 banks reveal that their NPLs have reached 2.8 percent, marking a staggering increase of 115.07 percent compared to FY 2021/22. The NPL of commercial banks stood at 1.26 percent in FY 2021/22. Throughout the last fiscal year, the banks grappled with an escalating number of bad loans.

Bankers attribute the increase in non-performing loans (NPLs) to the deceleration of economic activities, compounded by elevated interest rates, and the reduced capacity of borrowers to settle their debts. Sanima Bank’s CEO, Pandey, highlighted that there has been a degree of recovery in the banking sector, with economic activities gaining momentum in the final quarter. “Borrowers typically repay their loans during this period, as banks also encourage them to do so. Additionally, the NRB has granted permission for banks to restructure and reschedule loans for specific sectors that have been severely impacted by the economic downturn,” said Pandey.

With a substantial surge in the rate of non-performing loans, banks were compelled to set aside a significant sum for provisioning. The statistics of the NRB show commercial banks’ lending in the last fiscal year stood at Rs 4,285 billion. Consequently, the non-performing loans (at a rate of 2.80 percent) amount to Rs 119 billion. The provisioning amount escalated by an astonishing 94 percent in FY 2022/23.

In FY 2021/22, banks had set aside Rs 13.34 billion for provisioning. This has increased to Rs 25.93 billion in FY 2022/23. The amount is expected to increase further following the final audit.

According to NRB’s directives, banks are required to allocate one percent when a loan is overdue for up to one month, five percent when overdue for up to three months, 25 percent when overdue for up to six months, and 50 percent when overdue for up to one year. Moreover, if a loan remains overdue for more than one year, banks need to allocate 100 percent as per the guidelines.

Nabil tops the chart
As per the unaudited financial report of the fourth quarter, the profit of two banks crossed the Rs 7 billion mark, while three other banks earned above Rs 4 billion in profit in the last fiscal year. There are seven other banks whose profit has crossed the Rs 3 billion mark in FY 2022/23.

Nabil Bank has topped the chart as the bank’s profit grew by a whopping 76.94 percent in the last fiscal to Rs 7.52 billion. The Global IME Bank is second on the list with a profit of Rs 7.25 billion, an increment of 46.17 percent followed by Rastriya Banijya Bank (RBB) which has reported a profit of Rs 4.91 billion. However, RBB’s profit grew by 14.45 percent in the last fiscal.

Kumari Bank reported a 24.12 percent decline in its net profit as the bank managed to earn Rs 1.95 billion in FY 2022/23 compared to a profit of Rs 2.57 billion in FY 2021/22. Prime Commercial Bank’s net profit plunged by 18.60 percent to Rs 2.26 billion in the last fiscal year.

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