Nepal’s Commercial Banks Struggle as Core Business Weakens Despite Marginal Profit Rise

Kathmandu: The third-quarter financial reports of Nepal’s 20 commercial banks reveal a concerning trend: while net profits rose by a marginal 1.4%, the growth is largely attributed to reduced loan loss provisions rather than real business performance.

Key Highlights:

• Net Profit Marginally Up, Not Business-Driven:
  Banks posted a total net profit of Rs 41.25 billion for the first nine months of FY 2080/81, up slightly from Rs 40.68 billion in the same period last year. However, this rise is not due to increased earnings but due to a relaxation in provisioning rules by Nepal Rastra Bank (NRB).

• Provisioning Eased by NRB:

  • NRB recently reduced provisioning for performing loans from 1.1% to 1%.

  • A new directive also allows construction-sector loans to be restructured if 10% interest is paid, requiring only 5% provisioning.

  • These moves have artificially cushioned profits.

• Core Business Weakening:

  • Net interest income dropped by 2.59% to Rs 139.89 billion, down from Rs 143.62 billion year-on-year.

  • Banks are grappling with rising deposit costs, while excess liquidity has led to fierce lending competition, driving down average spread rates to around 3.5% from 4%.

• Non-Performing Loans (NPLs) Spike:

  • Average NPL ratio across the 20 banks surged to 4.82%, up from 3.65% last year.

  • Himalayan Bank has the highest NPL ratio at 7.68%, and 9 banks have NPLs exceeding 5%.

  • Analysts warn that NPLs could rise further once temporary regulatory relief to the construction sector expires.

• Earnings Per Share (EPS) Disparity:

  • Highest EPS: Everest Bank (Rs 35)

  • Lowest: NIC Asia and Kumari Bank (< Rs 2)

Broader Economic Context:

Despite the national GDP growth of 5.1% in the second quarter, the banks’ performance suggests that the real economy has yet to recover fully. With declining interest income and rising defaults, profit growth remains unsustainable unless recovery and credit quality improve significantly.

“Non-performing assets haven’t improved yet. In fact, they could worsen next quarter,” said Nabil Bank’s Acting CEO, Manoj Gyawali, noting that temporary loan restructuring has merely delayed stress recognition.