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With the domestic stock market going through an extended bearish run, there has been a big decline in the income of commercial banks from share investments and trading. Banks’ income from share trading has decreased by 6.87 percent in the last fiscal year.

As per the unaudited financial reports of 20 commercial banks for the fourth quarter, they have earned Rs 6.39bn in income from share trading till mid-July of FY 2022/23, which is Rs 470m less than in the same period of 2021/22. Commercial banks had earned Rs 6.86 billion from share trading in 2021/22.

Bankers say income from share trading declined as the stock market has been in the bear territory for over the last one year. In the first half of 2021/22, the stock market had a bullish run with the Nepse Index reaching an all-time high of 3198.19 points. As the market was on an upward trend, banks managed to earn high profits by trading shares.

Only four commercial banks saw growth in their income from share trading in the last fiscal year. Agricultural Development Bank Limited (ADBL), Nepal SBI Bank, Prabhu Bank, and Machhapuchhre Bank recorded growth in their income from the capital market.

In the last fiscal year, ADBL earned the highest income from share trading. The bank had earned Rs 1.05bn from share trading in the last fiscal compared to a loss of Rs 232.35m in 2021/22.

The Standard Chartered Bank Nepal is in second place with an income of Rs 582.14m. However, the bank’s share trading income in 2022/23 decreased by 11.45 percent compared to 2021/22 in which it had earned Rs 657.43m. Likewise, Nepal Investment Mega Bank is in third place with Rs 507.63m, a decline of 23.92 percent compared to the previous fiscal.

Likewise, the income of Machhapuchhre Bank from share trading has increased by 37.62 percent in the last fiscal. The bank earned Rs 298.17m in 2022/23 compared to Rs 216.65 in 2021/22.

Nepal SBI Bank’s income has also increased by 26.34 percent. The bank which earned Rs 264.28m from share trading in 2021/22, earned Rs 333.89m in 2022/23.

The Nepal Rastra Bank (NRB) has given the facility to the banks to invest one percent of its paid-up capital in the stock market. Banks should show the investment made in the stock market through this facility in net trading income. Apart from the share investments, the banks keep the income earned by share trading as other operating profit.

In 2020/21, the banks’ income from share trading hit a record high of Rs 11.4bn. However, commercial banks’ income from share trading started to decline after the central bank tightened the margin lending as well as the rules for banks and financial institutions to invest in the stock market. By issuing a directive in May 2021, the central bank said banks would not be allowed to buy and sell shares of listed companies in the secondary market for the short term. The central bank barred the banks from selling the listed shares and debentures within a year of buying them. 

The price of gold has dropped by Rs 700 per tola in the domestic market on Thursday.

According to the Federation of Nepal Gold and Silver Dealers’ Association, the yellow bullion is being traded at Rs 111, 300 per tola today. It was traded at Rs 112, 000 per tola on Wednesday

Meanwhile, tejabi gold is being traded at Rs 110, 750 per tola.

Similarly, the price of silver has dropped by Rs 10 and is being traded at Rs 1,380 per tola today.  

The Nepal Stock Exchange (NEPSE) gained 41.06 points to close at 2,060.91 points on Wednesday.

Similarly, the sensitive index surged by 7.48 points to close at 393. 05 points.

A total of 5,010,716-unit shares of 265 companies were traded for Rs 1. 88 billion.

Meanwhile, Himalayan Laghubitta Bittiya Sanstha Limited was the top gainer today, with its price surging by 9. 83 percent.

Likewise, Century Debenture 2088 was the top loser as its price fell by 9.99 percent.

At the end of the day, total market capitalization stood at Rs 3. 05 trillion.

With a significant surge in non-performing loans (NPL), commercial banks find themselves in a difficult position when it comes to distributing dividends to their shareholders from the profits of the last fiscal year. 

In the last fiscal year, while banks’ net profit surged by 25.03 percent, their distributable profit declined by 26 percent as they have to set aside a significant amount for regulatory adjustment. The profit of the banks reached Rs 70.17bn, but their distributable profit, which they can distribute to the shareholders, is only Rs 31.9bn. 

As per the unaudited reports of the banks, the average dividend ratio for commercial banks has declined by two percent points to 11.51 percent. This is in contrast to the 13.51 percent in the fiscal year 2021/22.  The dividend ratio may come down further after the final audit, according to bankers.

In the past few years, there has been a decline in the ability of banks to distribute dividends. The most significant capacity for dividend distribution by banks in the past decade occurred during the fiscal year 2012/13, reaching 22.25 percent.

In FY 2021/22, the distributable profit of banks stood at Rs 29.46bn, which was even lower than that of FY 2022/23. However, banks' dividend distribution capacity was higher than the last fiscal year.

Bankers attribute the decline in dividend distribution capacity to rising NPL and surge in provisioning amount. Krishna Bahadur Adhikari, the CEO of Nepal Bank, said that the reduction in dividend capacity can be attributed to the recent economic downturn. “The economic crisis has led to difficulties in recovering loan interests. And, a significant amount has to be set aside for provisioning for the bad loans,” said Adhikari. 

The unaudited financial report of the 20 commercial banks for the fourth quarter of the last fiscal year shows NPLs of all have surged in FY 2022/23 compared to FY 2021/22. The NPLs of banks have reached 2.8 percent, marking a staggering increase of 122.22 percent compared to FY 2021/22. The NPL of commercial banks stood at 1.26 percent in FY 2021/22.

With the sharp rise in NPLs, the loan loss provisions of banks have also increased. As per the unaudited financial reports for the fourth quarter, the amount for provisioning has increased by 94.37 percent. Banks have set aside Rs 25.93 bn for loan loss provisions till mid-July, 2023 compared to Rs 13.34bn during the same period of the last fiscal year. The total provisioning of banks increased by Rs 12.59bn in the last 12 months.

Banks have been experiencing a progressive decline in their capability to distribute dividends following increments in their paid-up capital. Over the recent years, banks have been augmenting their paid-up capital through mergers, acquisitions, and issuing bonus shares as dividend payments. Nevertheless, the growth in income and profits of these banks has not matched the proportional increase in capital. Sudesh Khaling, the CEO of Everest Bank, explains that due to this phenomenon, banks are facing a situation of reduced average dividend capacity.

According to Khaling, distributing the bonus shares of banks means automatically reducing the dividend capacity for the next year. “In the past few years, banks focused on giving bonus shares. They (banks), however, have not been able to earn income and profit, which has resulted in the weakening of their dividend distribution capacity,” said Khaling. 

Khaling said that when banks distribute bonus shares, they effectively decrease their dividend capacity for the following year. He noted that over recent years, banks have primarily emphasized providing bonus shares. “However, banks have struggled to generate income and profits, leading to a decline in their ability to distribute dividends,” said Khaling.

According to Nepal Financial Accounting Standard (NFRS), uncollected interest should also be reported as income, so there has been a significant increase in the net interest income of most banks. However, due to a non-recovery of the interest at the end of mid-July, the banks are under pressure when it comes to distributable profits.

Amongst the commercial banks, Everest Bank stands out with the capacity to offer the most substantial dividend payout derived from the earnings of the previous fiscal year. It has the potential to allocate dividends of up to 40.5 percent to its shareholders. The NIC Asia Bank can distribute dividends of 31.98 percent from the profit of the last fiscal year. Standard Chartered Bank Nepal can provide dividends of up to 28.99 percent.

Notably, both Kumari Bank and Himalayan Bank will be unable to distribute dividends for the preceding fiscal year due to their negative distributable profits.