Banks’ net profit growth slows

KATHMANDU, MAY 18 - Net profits of commercial banks grew at a slower pace in the third quarter as interest income took a beating.

The banks’ net profits grew 12.32 percent to Rs 14.49 billion, while the interest income grew just 5.64 percent to Rs 32.73 billion. In same period a year ago, the net profits had jumped 42.26 percent and interest earnings increased 41.36 percent.

Bankers said the profit and interest income growth was affected due to central bank’s directives to maintain 5 percent interest spread rate. Nepal Rastra Bank (NRB) has directed commercial banks to bring down the interest spread to 5 percent by the end of the current fiscal year.

“If we maintain 5 percent spread rate as per the central bank’s formula, the actual spread rate will be less than 5 percent because 20 percent of the funds cannot be used for interest earning,” said Sanima Bank CEO Bhuvan Dahal. “As interest income contributes around 80 percent to the total earning of banks, shrinking of this component will affect the profitability.”

The average spread rate of commercial banks has come down to 5.37 percent as of the third quarter from 5.64 percent of the second. According to the third-quarter results, eight banks brought

down their spread rate below 5 percent, while 22 still have higher spread rate.

Agriculture Development Bank, Standard Chartered Bank and Nabil Bank are the top three banks in terms of the higher spread. Nepal Credit and Commerce Bank has the lowest spread rate of 3.21 percent.

Nabil Bank, Nepal Investment Bank, Rastriya Banijya Bank and Everest Bank recorded net profits more than Rs 1 billion in the third quarter.

As the central bank’s spread rate provision hits commercial banks’ profits, investors’ interest in commercial bank shares has also declined in recent days, analysts say. “Investors are concerned that the spread rate provision may shrink banks’ profitability,” said analyst Rabindra Bhattarai.

Lately, stocks of insurance companies, hotels and hydropower have surged considerably, while the banking sector has witnessed a modest growth. “There is a feeling among investors that banks have failed to earn profits against the capital increment,” he said.

According to the third-quarter results, return on equity (RoE) of the banks stood at 15.46 percent, slightly higher compared to 14.33 percent in the same period last fiscal. Bankers, however, say the RoE growth is low given the inflation threatening to hit double digits.

NMB Bank CEO Upendra Poudel said the RoE at the range of 20-25 percent is good for a healthy profit growth when the inflation is in double digits.

There are six banks having RoE above 20 percent, seven with RoE between 15-20 percent and eight with 10-15 percent. Rest of the banks have below 10 percent RoE. Nepal Bank has the highest RoE of 99.49 percent, which is due to its low capital level compared to earnings, according to Dahal. Everet Bank, Nabil Bank, Standard Chartered and SBI bank are the top five banks in terms of the RoE as of the third quarter.