Kathmandu, November 4
The return on equity (ROE) of Nepal’s commercial banks has increased by around two percentage points in the first quarter of the current fiscal year, supported by improvements in both interest and non-interest income.
The average ROE of commercial banks reached 9.139 per cent in the first quarter of the current fiscal year, up from 7.043 per cent during the same period last fiscal year.
Banks’ ROE had declined last year as they had to set aside larger amounts for loan-loss provisions and faced difficulties recovering loans. ROE is a measure of how much profit a bank generates from its shareholders’ equity.
As returns on equity fell, some investors began looking to withdraw their investments from banks. However, selling shares held by founding shareholders of banks and financial institutions is not easy. Founders have therefore been demanding greater flexibility to exit their investments.
They have complained that investing in banks offers low returns while restrictions on selling shares make it difficult to withdraw their money. At various times, they have also demanded a provision allowing founding shareholders to sell their shares 10 years after a bank or financial institution issues its initial public offering.
The declining ROE has been one of the main reasons investors have sought to exit the banking sector.
Although banks’ ROE improved in the first quarter of the current fiscal year, their capacity to distribute dividends may remain limited because of weak retained earnings. Six banks reported negative retained earnings during the period, making dividend payments to shareholders highly unlikely.
The banks with negative retained earnings include Nepal Investment Bank, Prabhu Bank, Himalayan Bank, NIC Asia Bank and Citizens Bank. Machhapuchchhre Bank, Nepal Bank and Kumari Bank reported positive retained earnings but negative distributable profits.
Based on their retained earnings and distributable profit positions, these banks are unlikely to pay dividends to shareholders this fiscal year.
Former banker Parshuram Kunwar Chhetri said an improvement in ROE did not necessarily mean investors would receive higher dividends.
“Even if a bank reports a good ROE, it may not be in a position to distribute dividends,” Chhetri said. “Investors need to carefully examine other technical and financial indicators, in addition to ROE, to assess a bank’s actual dividend-paying capacity. Banks with high ROE must also have sufficient retained earnings available for distribution.”
For instance, Kumari Bank’s ROE appears satisfactory, but its first-quarter financial statement shows retained earnings of only around Rs 147.1 million. Chhetri said a bank with limited retained earnings would not be able to distribute substantial dividends, regardless of how strong its ROE appeared.
He said investors should also consider which banks have bonds or debentures maturing within the next 12 months when assessing their dividend-paying capacity. In particular, they should examine debentures included in a bank’s regulatory capital rather than ordinary deposit-related bonds.
Banks maintain debenture redemption funds for such capital bonds. According to Chhetri, once the bonds mature, the money accumulated in these funds can become eligible for distribution as dividends.
Preference shares and bonds issued by banks also directly affect the dividends available to ordinary shareholders. Banks must first pay dividends to preference shareholders from their retained earnings. Only the remaining amount, if any, is available for distribution to ordinary shareholders.
Most preference shares issued by Nepali banks are non-cumulative and redeemable. Because they are non-cumulative, dividends must be paid from the earnings of the relevant year. If a dividend is not paid in a particular year, the obligation does not carry forward to subsequent years.
Chhetri said that, on a preliminary assessment, around a dozen banks appeared to be in a position to provide actual returns to investors this fiscal year.
He also said banks were not currently facing significant problems with bad loans. The reported improvement in ROE was partly due to higher net profits relative to total shareholders’ equity. He believes the ROE figures would be even higher if net profit were calculated against the closing equity of the previous fiscal year.
“Banks reported profits of Rs 19 billion in the first quarter of this fiscal year, mainly because loan-loss provisions declined compared with the same period last year,” he said. “Total interest income increased by only around one per cent, while non-interest income rose by 12.44 per cent to Rs 20.32 billion.”
Banks’ non-interest income stood at Rs 18.08 billion in the first quarter of the previous fiscal year.
Chhetri said rising non-interest income could indicate an increase in economic activity in the coming months. He added that banks were unlikely to face the same level of difficulties this fiscal year as they had experienced last year.
Sanima Bank reports highest ROE
Sanima Bank recorded the highest ROE among commercial banks in the first quarter of the current fiscal year, at 15.6 per cent. Its ROE during the same period last fiscal year was 7.68 per cent.
Everest Bank reported an ROE of 14.28 per cent, slightly lower than the 14.51 per cent recorded in the first quarter of the previous fiscal year.
Nabil Bank’s ROE stood at 13.99 per cent, while Global IME Bank reported 13.29 per cent.
Other banks that recorded double-digit ROE in the first quarter included Rastriya Banijya Bank, NMB Bank, Standard Chartered Bank and Prime Commercial Bank.
Agricultural Development Bank, which has government investment, reported the lowest ROE at 1.31 per cent.
