Diminishing banks’ dividend distribution capability

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.