Overall Analysis of Commercial Banks in Nepal

This study attempts to analyze the commercial banking sector listed in NEPSE primarily
based on the reports of banks. The various key financial ratios have been presented,
compared and analyzed.

Commercial Banks in Nepal: The Overview

There are currently 20 listed commercial banks in Nepal. In Nepal, Financial institutions are
subject to regulation by the Nepal Rastra Bank and must follow to the provisions of the
Bank and Financial Institution Act, 2073(2017). Compliance with these regulations is
mandatory for such institutions. This ensures that they operate within the legal framework,
thereby promoting financial stability and protecting consumers. The minimum paid-up
capital requirement is 8 Arba which has been complied by the commercial Banks.

Functions of Commercial Banks

Commercial banks perform a variety of functions, including:

Accepting deposits: Banks accept deposits from individuals and businesses, which can be
withdrawn as needed.

Providing loans: Banks lend money to individuals and businesses, which must be repaid
with interest.

Facilitating payments: Banks help customers make payments and transfer money through
services such as checks, debit cards, and online banking.

Issuing credit cards: Banks issue credit cards to customers, allowing them to borrow money
up to a certain limit.

Providing financial advice: Banks offer financial advice to customers on topics such as
investing, saving, and budgeting.

Offering insurance products: Some banks also offer insurance products such as life
insurance, health insurance, and car insurance.

Overall, commercial banks play an important role in the economy by providing financial
services to individuals and businesses.
Market Price of stocks

Based on the latest market data, the LTP ranges between Rs. 693 and RS. 166. NICA is the
most expensive banking stock followed by NABIL whereas PRVU is the cheapest Banking
stock followed by the Kumari Bank.

The majority of banking stocks are trading between RS. 165-400.

LTP

693
582
499.8
481
251.9

302
232.1
218.5
217.3

250
180.5

230
227
170.8

194
181
179
176
168
166

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Fig: Stock-Wise Price

The Balance Sheet Analysis

Analyzing a balance sheet of banks give the overview of financial positions in the industry.
Commercial banks are required to maintain certain levels of capital and reserves to ensure
their solvency and ability to absorb losses. Capital represents the funds contributed by the
bank's owners and is used to absorb losses, while reserves are set aside for specific
purposes such as loan losses. Analyzing a bank's capital and reserve levels can provide
insight into its financial strength and risk profile.

Financial Position of Commercial Banks

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35000000000
30000000000
25000000000
20000000000
15000000000
10000000000
5000000000
0
E B IL k U k al k k al k B L ank ICA ank EB L BL ank ank SCB
B IM IM AB Ban R V B an erci Ban Ban on Ban AD a B N iB M IB B
G N N i P n m l ti a e
ar ya M
B pa na
r ht i m xm S B nris
um al com N Ne nte har n La l
pa Su
K m I d Sa
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Pr Ba
en
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Paid Up Capital Reserves

Fig: Balance Sheet Items as of Q2 reports, 2079/80

Reserve and surplus

Industry Average: Rs. 10.75 Arba

Bank with Highest Reserve: Nabil Bank Limited (NABIL) 25.57 Arba

Banks with reserve above the industry average (ranked): NABIL, NIMB, NBL, GBIME, NICA,
KBL

Nabil Bank Limited (NABIL) has the highest reserve with a reserve of 25.57 Arba followed by
NIMB and NBL. The high reserve is the indication of a strong financial position and the
company can withstand times of crisis as well as of the dividend stocks like NABIL the good
reserve is the signal that the company could keep up the momentum in terms of its
dividend distribution.
Paid up capital

Nepal Rastra Bank is promoting Mergers and Acquisitions within financial institutions,
particularly commercial banks. Companies with substantial paid-up capital may have an
advantage, while those with lower capital may need to seek mergers and acquisitions with
other companies. This may have both positive and negative implications specific to each
company. If a company is unable to produce returns that correspond with its capital, it
could be perceived negatively by investors.

 GBIME has the highest paid-up capital with 35.77 Arba which is followed by the NIMB Bank
recently with 34.12 Arba. The bank with lowest paid-up capital is SCB with 9.42 Arba.

Commercial Banks: Loans & Deposit

Loans and Deposits

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300000000000.00
200000000000.00
100000000000.00
0.00
E B IL A k U k k k L k L al al k L k k k B
B IM IM AB NIC Ban R V Ban B an Ban EB B an ADB erci on B an MB Ban Ban B an SC
N N i P l n ti i I
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um N ep arh NM al om nte ani Lax al S unr
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Ne
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loans and advances total deposit

Fig: Balance Sheet Items based on Q2 reports, 2079/80

Business Model of Banks

Collect deposits: Pay lower interest.

Issue loans: Charge higher interest.

In other words, banks give loans, earn interest (revenue). Accept deposits, pay interest
(cost). Earned interest minus paid interest is profit. Therefore, to analyze the banking
stocks it is vital to analyze the key parameters: Loans and Deposits.
The industry average loans to customers and deposits to customers based on Q2 in 1.9
kharba and 2.03 Kharba respectively.

 Bank with the highest loan issued amount: GBIME

 Bank with the highest deposits collected: GBIME

This is followed by NIMB and NABIL

 Banks above the industry average loans to the customers (ranked): GBIME, NIMB,
NABIL, KBL, NICA, PRVU
 Banks above the industry average deposits collected from customers (ranked):
GBIME, NIMB, NABIL, NICA, KBL, PRVU, NBL, SBL

Income Statement Analysis based on Q2, 2079/80

Financial Performance of Commercial Banks

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8000000000
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5000000000
4000000000
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L k k A k L E l k l k L k k k B k B L
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N ir I a G P e i a ti l a B n N e
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Net Income Net Income

Fig: Income Statement Items based on Q2 report, 2079/80

NABIL, GBIME and NICA record the highest core revenue as well as highest net profits for
the commercial banks. When viewed relatively the income and interest income generated
on the total capital utilized NICA seems to be outperforming the overall banking sector.
Some Ratios as per the NRB Directives

Ideally, the low cost of funds and high spread rate is favorable for the banks’ profitability.

The cost of fund ranges as per industry average is 8.59% and the spread rate ranges

between 4-5%. The huge cost of fund results in an increased spread rate.

SCB has the lowest cost of funds. On the other side, NABIL & KBL has the highest interest

spread.

Cost of Fund and Spread rate %

10
9
8
7
6
5
4
3
2
1
0
IL k k A k L E U l k l k L k k k B nk B L
B an B an NIC Ban EB B IM RV ia an ona Ban MB Ban Ban B an SC ADB
rc IM B a
NA i B
BI a P e
m xmi rna
B ti l a N
ar G pa ht
B an is e
m lS ni
m m
La Inte Ne ar N M a ly nr
Ku p a
S a co h m S u
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Pr Ba
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cost of funds spread rate

Fig: Ratios based on Q2 reports, 2079/80

Credit to Deposit Ratio (CD Ratio)

CD ratio
92
90
88
86
84
82
80
78
76
74
72
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B
SC Ban Ban Ban NIC
A BL nk B k
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Fig: Ratios based on Q2 reports, 2079/80

CD ratio helps in assessing a bank's liquidity and indicates its health - if the ratio is too low,
banks may not be earning as much as they could be. If the ratio is too high, it means that
banks might not have enough liquidity to cover any unforeseen fund requirements, which
may affect capital adequacy and asset-liability mismatch. A very high ratio could have
implications at the systemic level.

 The average CD ratio for the banks is 86.13%. The NRB's threshold for the CD ratio is
90%.

 Commercial Banks with highest CD ratio is Kumari Bank followed by GBIME and
NABIL.

The Profitability Ratios and the Management Effectiveness

We will be reviewing DPS, ROE and EPS as the management effectiveness ratios. 

 NICA, SCB, EBL & NABIL has the highest EPS (annualized) indicating the companies
have better profitability as compared to other companies in the same sector.
 Overall, a higher EPS can be a positive sign for a company and can lead to increased
investor interest, higher stock prices, and greater opportunities for future growth
and reinvestment.
 Likewise, SCB, EBL & SANIMA has the highest Distributable Profit per Share (DPS).
Generally, good dividends can be expected from companies with good DPS.
 Similarly, NICA, SCB & EBL has the highest ROE among the banks indicating the
greater management efficiency.

70

60

50

40

30

20

10

0
A B L L k k k L k l k k E k k B l k U L
IC SC EB BI an an an MB Ban rcia Ban Ban IM B an B an IM ona Ban RV DB
-10 N NA B I B B B a B i e
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NM ani Lax com harh Ne al u te Kum
-20 p S m S In
Ne e dd Hi nk
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Distributable Profit Per Share EPS

Fig: Profitability ratios based on Q2 reports, 2079/80

 Return on Equity
25

20

15

10

0
l l
BL ank VU IMB ank ank na nk E nk nk ia BI
L BL L k
EB B an Ban Ban
k k B
SC NIC
A
AD l B PR N B i B ti o B a B IM Ba i Ba erc NA M I
pa is e ar rna lyan G a
ht axm mm SB
B
m
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S K I im d e e p S
nk H i d N
S im
Ba Pr
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Fig: Ratio analysis based on Q2 reports, 2079/80

Search for the undervalued stock (PE & PB)

Valuation Ratios
35
30
25
20
15
10
5
0
l l
B L ank VU IMB ank ank na nk E nk nk ia BI
L BL L k
EB B an Ban B an
k k B
SC NIC
A
AD l B PR N B i B ti o B a BIM Ba i Ba erc NA M I
pa is e ar na lyan G a
ht axm mm SB
B
m
a
Ne unr um
nt er a har L co al NM ani
S K I im d e p S
nk H S i d
im Ne
Ba Pr
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tiz
Ci

Price/Book P/E

Fig: Ratio analysis based on Q2 reports, 2079/80

 It is important to note that these valuation ratios take net profit into accounts and doesn’t
take account of the types of earning and whether the earnings are recurring. Therefore, it
is important to analyze from various standpoints to find the best scripts . Since, P/E under
15 and P/B under 1.5 is considered as idle undervalued stock.

Commercial banks with undervalued stocks on the basis of P/E and P/B ratio are: GBIME,
NBL, MBL, LBL

Graham Fair Value

Graham Fair Value is a method of calculating the intrinsic value of a stock based on its
financial fundamentals. It is calculated by taking the company's earnings per share and
multiplying it by a factor derived from the company's price-to-earnings ratio and its
expected growth rate. Graham Fair Value is a useful tool for investors who want to
determine whether a stock is overvalued or undervalued based on its underlying financials.

Commercial banks available for fair value price are: GBIME, NIMB, PRVU, NBL

Graham Fair Value

800
700
600
500
400
300
200
100
0
B L L k k k L k k k l E k k B k l L
CA SC EB BI an Ban Ban MB Ban Ban Ban rcia IM B an B an IM Ban ona R V
U
DB
NI NA B e B N i ti P A
S BI pa
l B a
m axm rht
i a m G is e
ya
n ar rn
a
l Ne NM ni a om nr al m te
pa S a L h c S u m K u In
Ne dd me Hi nk
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Pr Ba
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Graham Fair Value current price

Fig: Graham value based on Q2 reports, 2079/80

Top Highlights
  NBA Decides to Lower Interest Rates to Single Digits for the Month of Baishakh

 Until the month of Falgun the commercial banks generated the profit of Rs 48 Arba

83 crore and 30 lakhs.

Causes for Concern in the Banking Sector

 A saturated market and cut-throat competition in the BFIs limiting the business
growth.

 Likewise, the regulatory body is pushing the banks into mergers. Although M & A
could be good in some aspect like synergy; however, as the BFI's business size
increase, the business growth could further be limited.
 Changing regulatory landscapes could affect growth and economies of scale.
 The stock market return from the majority of the banking stocks has
underperformed the returns from other sectors leading to a decreased
interest/confidence of investors in the sector. Lesser confidence corresponds to
decreased demands, especially in the short runs.