State of commercial banks: Economic slowdown takes a toll on financial performance

The first half of FY 2022/23 was quite momentous in the Nepali banking sector in terms of banking consolidation. Three mergers and one acquisition took place in the banking sector, reducing the total number of commercial banks operating in the country to 22. Amid the consolidation drive, times are challenging for banks. Commercial banks that have enjoyed windfall profits even during the Covid-19 crisis years of 2020 and 2021 have found themselves surrounded by a severe liquidity crunch and shortage of loanable funds forcing them to increase interest rates over the past year.   With non-performing loans (NPL) rising, the overall profit of commercial banks has tanked in the first half of the current fiscal year. The unaudited financial reports of commercial banks for the second quarter show their profit declined by 1.34 percent in the first six months of the current fiscal year 2022/23.

There has been a significant increase in NPLs of commercial banks in the first half of the current fiscal year. As per the financial reports of 22 commercial banks, their bad loans have gone up by a whopping 111.71 percent. The average NPL of commercial banks has increased to 2.35 percent in the first half of FY 2022/23 compared to 1.11 percent during the same period of FY 2021/22.

Bankers say NPLs have risen mainly due to the non-recovery of debts. As the private sector is struggling with rising borrowing rates and a sharp slowdown in market demand, banks are facing challenges to recover loans. According to bankers, the non-payment of loan installment and interest has increased in this fiscal year. Had there been economic activity, it would have been easier for borrowers to pay the principal loan amounts and interest on time, they say. The deposits of commercial banks grew by 9.34 percent totaling Rs 4,647.931 billion by mid-January 2023. At the same time, the extension of loans grew by only 3.45 percent in the first half of the current fiscal year. While banks' interest income grew by 35.65 percent, their interest expenses expanded by much higher during this period. As banks have to pay higher interest rates for deposits amid a prolonged liquidity crunch, their interest income surged by 41.26 percent. This has affected the bank's net interest income which grew by 25.69 percent. Banks saw their net fee income and net trading income shrinking in the first half of the current fiscal. The net fee income decreased by 11.13 percent while net trading income shrunk by 39.04 percent during this period.  15 banks' net profit rise Of the 22 commercial banks, 15 have reported an increase in profits compared to the same period of the last fiscal year. Similarly, six banks have reported a decline in their profits and one bank has posted a loss. Sunrise Bank, Citizens Bank International, Siddhartha Bank, Prime Commercial Bank, Prabhu Bank, and Nepal Bank have reported a decline in their profits. The Agricultural Development Bank reported a loss of Rs 0.128 billion in the first half of the current fiscal.  The banks' quarterly report shows two banks' profit has crossed the Rs 3 billion mark while three other banks earned above Rs 2 billion in profit in this fiscal. There are 12 other banks whose profit has crossed the Rs one billion mark in the first half of FY 2022/23. Nabil Bank records highest profit Nabil Bank has topped the chart as the bank's profit grew by 56.67 percent in the first six months of the current fiscal year. The bank earned Rs 3.41 billion in profit in the first six months of the current fiscal year.  NIC Asia Bank came second with a profit of Rs 3.27 billion, an increment of 36 percent followed by the Global IME Bank reporting a profit of Rs 2.78 billion. However, Global IME's profit grew by a meager 4.42 percent in this fiscal. In terms of percentage growth, Everest Bank has the highest profit growth of 89.49 percent. The bank recorded a profit of Rs 1.58 billion in the first half of this fiscal compared to Rs 0.83 billion in the last fiscal. Standard Chartered Bank's profit also grew by 61.36 percent to Rs 1.90 billion. Meanwhile, Agricultural Development Bank Limited has reported a big slump of 109.06 percent in profit earning in the first half of the current fiscal. The bank has incurred a loss of 0.128 billion in the first half of FY 2022/23 compared to a profit of 1.42 billion during the same period of FY 2021/22. The bank's profit decreased due to an increment in the impairment charges. The bank's NPL also increased from 2.08 percent to 4.52 percent in this fiscal. According to the bank, it has set aside Rs 2.17 billion for impairment charges, an increment of 250 percent compared to the last fiscal.  ADBL posts highest NPL The profits of banks have also been affected by the increment in bad loans as they have to keep aside large amounts of money for the provisioning of bad loans. Provisioning is a practice where banks are required to maintain a certain amount in reserve when loans are not recovered. Of the 22 commercial banks that have published their second quarter report, the Agricultural Development Bank Limited (ADBL) has the highest NPL. The bank's NPL has increased to 4.52 percent by mid-January compared to 2.08 percent during the same period of the last fiscal.  The profit of the ADBL has decreased by a whopping 109.06 percent in the first half of the current fiscal. The bank has incurred a loss of 0.128 billion in the first half of FY 2022/23 compared to a profit of 1.42 billion during the same period of FY 2021/22.  Himalayan Bank Limited (HBL), Sunrise Bank, Kumari Bank, Nepal Investment Bank, and Nepal Bank are the other five banks whose NPL is above 3 percent. The HBL's NPL has reached 3.77 percent in the first half of FY 2022/23 compared to 0.72 percent during the same period of FY 2021/22. Sunrise Bank's NPL increased to 3.36 percent in mid-January 2023 from 1.40 percent in mid-January 2022. The NPL of Kumari Bank and Nepal Bank has increased to 3.15 percent and 3.11 percent, respectively.  The NPL of Kumari Bank increased mainly due to the merger with NCC Bank. As the NCC Bank had a higher NPL, Kumari Bank's overall bad loan increased after the merger.  Rastriya Banijya Bank (RBB) is the only commercial bank that has its NPL decreased in this fiscal year. The government-owned bank has been able to reduce its bad loans by 9.67 percent during the review period. The RBB's NPL has decreased to 2.79 percent in mid-January 2023 from 3.06 percent in mid-January 2022.  Three mergers, one acquisition, and one merger MoU In terms of banking consolidation, the first half of FY 2022/23 was historic. The first six months of the current fiscal year saw three mergers and one acquisition in the banking sector.  Kumari Bank and NCC Bank started unified business on January 1. The second week of January saw two mergers and one acquisition becoming successful in the Nepali banking sector; the Global IME Bank and Bank of Kathmandu merged and commenced their unified business and Prabhu Bank acquired Century Commercial Bank. Nepal Investment Bank and Mega Bank completed their merger and commenced business as Nepal Investment Mega Bank. Two more banks - Laxmi Bank and Sunrise Bank joined the merger bandwagon, signing a memorandum of understanding (MoU) for a merger on January 9.