Bank investors earnings decline
KATHMANDU, MAR 14 -
Investors in commercial banks’ saw their investment earnings decline by 10 percentage points in the last six months, thanks to decreasing profits of banks.
As banks’ profits could not go up with respect to their increased capital base, their return on equity (RoE) suffered. RoE is the amount of the net income of a bank expressed in terms of percentage of its total shareholders’ equity.
Average RoE of commercial banks came down to 16 percent as of second quarter of this fiscal year from 26 percent at the end of the last fiscal year, according to the financial status of banks. This means shareholders earned Rs 16 per equity investment worth Rs 100 this year, against their earning of Rs 26 per equity investment worth Rs 100 at last year’s end.
A majority of banks witnessed a sharp decline in their profits in the second quarter this year compared to the same period last year, with some of them recording a profit decline of over 90 percent. “The main reason behind the fall in RoE is banks’ inability to increase their profits with respect to capital increment,” said Sashin Joshi, chief executive officer of NIC Bank.
Over the last year, commercial banks issued right shares, bonus shares as well as retained their earning to increase their capital base. “From mid-January 2011 to mid-January 2012, the shareholder fund increased by Rs 17 billion,” said BN Gharti, deputy general manager of KIST Bank. “But income could not rise proportionally.”
Despite persistent excess liquidity, banks are failing to make lending massively due to suppressed credit demand, according to bankers. High cost of fund continues despite a decrease in interest rates on deposits, and banks are finding it hard to recover realty loans, requiring them to make higher loan loss provisioning. “These factors hit banks’ profits hard,” said Gharti.
Another reason behind declining profits of banks is that they were unable to mobilise resources and remained highly liquid throughout first half. Due to suppressed credit demand, their credit growth remained sluggish against deposit growth. Over the period, credit of banks and financial institutions grew by just Rs 55.25 billion, while the deposits rose by Rs. 85.68 billion.
Moreover, interest rates on government’s treasury and inter-bank lending also came below 1 percent, effectively trimming banks’ earnings, as interest earning is bank’s biggest income source. “The decrease in interest earning also hit the RoE,” said Gharti.
Projecting a gloomy scenario, bankers expect a further decline in income in coming months.
Return on equity measures a company’s profitability as well as their performance by revealing how much profit it generates with the money invested by shareholders. “Since this ratio measures a company’s ability to earn for its shareholders, it is a very important indicator in determining investors’ attraction towards stocks of the particular company,” said Rabindra Bhattarai, stock analyst.
According to Bhattarai, investors pay less to stocks having lesser RoE, so it might lead to a further fall in the stock price of commercial banks. As a result, the capital market is likely to go further bearish, as commercial banks are movers and shakers in the exchange.
Source: Kantipur
