Reading a Nepali Bank's Quarterly Report: 8 Key Numbers

Commercial banks make up a large share of NEPSE's market value, so understanding bank results is essential for almost every Nepali investor. Every quarter, banks publish unaudited financial results: a balance sheet, a profit and loss summary, and a list of key ratios. The full report has dozens of lines, but eight numbers carry most of the story.

1. Net interest income

Net interest income (NII) is the interest a bank earns on loans and investments minus the interest it pays on deposits and borrowings. It is the bank's core business.

Look at NII growth compared with the same quarter last year. A bank whose NII is growing steadily is growing its real business. A bank whose net profit is rising while NII is flat is relying on something less repeatable, such as one-off income or released provisions.

2. Net profit and annualized EPS

Quarterly reports show cumulative figures for the fiscal year to date. To compare EPS fairly between quarters, annualize it:

Annualized EPS = year-to-date EPS × 4 ÷ quarter number

A bank reporting EPS of Rs 12 at the end of the second quarter has an annualized EPS of 12 × 4 ÷ 2 = Rs 24. Many banks print an annualized figure directly, but it is worth checking the arithmetic yourself.

Use the annualized EPS to compute a current P/E: market price ÷ annualized EPS.

3. Non-performing loan (NPL) ratio

The NPL ratio is the share of a bank's loans where borrowers have stopped paying as agreed. It is the clearest single measure of loan quality.

A rising NPL ratio is an early warning. Bad loans require provisions, which reduce profit, often in later quarters. If NPL is climbing quarter after quarter, today's profit may not last.

4. Capital adequacy ratio (CAR)

CAR measures the bank's capital against its risk-weighted assets. It shows how much loss the bank can absorb before depositors are at risk. Nepal Rastra Bank sets a minimum requirement.

A bank close to the minimum has little room to grow its loans. It may need to raise capital, for example through a right issue, which dilutes existing shareholders. A comfortable buffer above the requirement gives the bank room to grow without that.

5. Credit-to-deposit (CD) ratio

The CD ratio compares a bank's loans with its deposits and other stable funding. Nepal Rastra Bank sets a ceiling on it.

A bank near the ceiling cannot lend more until it attracts more deposits. When liquidity is tight across the system, banks near the limit often compete for deposits by raising interest rates, which squeezes their margins.

6. Distributable profit

This is the number many investors miss. Before paying dividends, banks must transfer part of their profit into regulatory reserves. What remains is distributable profit, and it caps how much a bank can pay out as cash or bonus dividends.

Two banks can report similar net profit but very different distributable profit. If you invest partly for dividends, compare distributable profit, not just net profit.

7. Net worth per share

Net worth per share is the bank's equity divided by the number of shares, also called book value per share. Use it to compute the price-to-book ratio:

P/B = market price ÷ net worth per share

P/B is especially useful for banks, because their assets are mostly loans and investments recorded at close to their value. A bank trading at a much lower P/B than its peers may be cheap, or the market may doubt the quality of its loans. The NPL trend usually tells you which.

8. Interest spread and cost of funds

The interest spread is the difference between the average rate a bank earns on loans and the average rate it pays on deposits. Nepal Rastra Bank also regulates the spread banks may charge. The cost of funds shows how expensive the bank's deposits are.

A bank with a low cost of funds, usually because it has many low-interest current and savings accounts, can earn a healthy spread even when competition is fierce.

Putting it together: a worked comparison

Here is how two banks might look side by side. The figures are illustrative, not real banks:

	Bank A	Bank B
NII growth, year on year	14%	3%
Annualized EPS	Rs 24	Rs 26
NPL ratio	2.1%, falling	3.8%, rising
Capital adequacy	Comfortably above minimum	Close to minimum
Distributable profit	Most of net profit	Well below net profit
P/B	1.4	1.1

Bank B looks cheaper on EPS and P/B. But its core earnings barely grew, its bad loans are rising, it may need a right issue, and its regulatory reserves limit dividends. Bank A is the healthier business, and the market is charging a modest premium for it. That is the kind of conclusion a single ratio cannot give you.

Four habits that make the analysis reliable

• Compare like with like. Compare the same quarter year on year, since bank income has seasonal patterns.
• Compare with peers. Economic conditions affect every bank. A bank's NPL rising during a downturn means more if its peers' NPL is flat.
• Read the trend, not the snapshot. Four quarters of one number say more than one quarter of eight numbers.
• Remember the figures are unaudited. Audited annual results sometimes differ, especially for provisions.

The bottom line

You do not need to read every line of a bank's quarterly report. Track core earnings, loan quality, capital, liquidity and dividend capacity, and you will understand most of what matters. Then use price ratios to decide whether the market is pricing that fairly.

This article is for education only and is not investment advice. Regulatory limits change, so check Nepal Rastra Bank's current directives for minimum capital, CD ratio and spread requirements.