How have commercial banks performed relative to Q1 of last year?; It's important to know because the best form of comparison is with your previous self

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Thu, Nov 29, 2018 1:23 PM on Exclusive, Financial Analysis, Latest,

-Aakriti Thakali

It is often said that the best way to scrutinize our growth is by comparing ourselves on where we were yesterday and where we've reached today. Although all commercial banks are "A" class banks with paid-up capital of at least Rs 8. arba, there are a myriad of characteristics that sets them apart. Each bank has their unique set of objectives, with different set of priorities and strategies.

We have already seen the comparison of all 28 commercial banks with each other on the basis of a wide range of indicators. Similarly, we've also seen each banks' comparison relative to its performance on the corresponding quarter; but don't you think it would make more sense if both these comparisons were mixed to bring out a comprehensive comparison format? Well, that's what we thought and in the article that follows, we done the same so that as investors you can make informed decisions.

The commercial banks will be compared on 8 crucial indicators, not on the basis of absolute number but rather on the basis of growth they have achieved on each indicator from last fiscal year's first quarter till the first quarter of this fiscal year.

Reserve and surplus

Reserve and surplus are the cushions for any organization. The larger the reserve, the more secured from any financial shocks. While doing the comparison of absolute figures, we might be the victim of myopic vision. The reserves of any company is largely decided by the size of the business of the company. Thus by looking at how much each bank's reserves has grown we can access the real picture.

In addition, most of the banks' reserve and surplus has increased drastically as they have started to prepare their report in NFRS format. This is mainly due to valuation of securities based on fair value, so we need to be cautious as most of the reserve and surplus amount is not distributable.

From the above table we can see that the two banks on top of the list are the banks that has government stake in it – Nepal Bank and Rastriya Banijya Bank. Nepal Bank has achieved an exceptional growth of 312% from last year's first quarter till now followed by Rastriya Baijya Bank at 142%. However, looking at the lower end of the table, we can see that Standard Chartered Bank, Civil Bank and Century Commercial Bank have negative growth rate, meaning their reserves have fallen down from last year's position. Even among the three Standard Chartered has experienced higher decrement.

Deposits

Deposits also can be understood as the lifeline of banks, without it they will simply cease to exist. Similarly, the more deposit as bank collects, the more it will be able to lend and hence will be able to earn more. So, ignoring deposits'' performance while analyzing bank is a blunder no one should commit.

The above table shows that Mega Bank has yet again captured the top position with the higher deposit growth from last Q1 to this Q1. Following Mega is NIC Asia with equally promising growth of 57.55%. At the other end of the table we have Standard Chartered Bank, with a negative growth (decline) in its deposit base. Similarly, Nepal Bank's growth in deposit is also very minimal, preceded by NCC Bank.

Loans and advances

Loans and advances for any bank are the backbone of all earnings. However, the important thing to note is, you can't lend more than what you have (deposits). Lending more now in the hope of getting more deposits in future might as well be one of the most prominent reason of liquidity crunch in the market right now.

The growth in Loans and advances also shows how much the bank has expanded and grown its business. Looking at the table above we can see Mega Bank topping the list with a growth rate of 74%, followed by 61% of NIC Asia Bank. The significant growth of Mega's loan portfolio can also be attributed to the merger with Tourism Development Bank (TDBL) and given this fact it will be challenging for Mega to keep this growth rate in next year.

Interestingly, the two toppers of reserves and surplus growth are the laggards in loans and advances growth. This can be explained by the liquidity shortage in the market and the fact that they comprise government stake, because of which they might have become stringent in loans disbursement and hence the lower growth rate.

Net profit

Net profit or the net income represents the end result of anything the company does. It shows whether the strategies implemented has worked, it shows whether the shareholders have a chance of getting dividend, it shows how well one has done in comparison to other. So basically, for a layman net profit is the first thing they look and they are right to do so too.

Mega Bank has yet again topped the list with 394% growth in the net profit, which is twice the growth of second on the list i.e NIC Asia Bank. Similarly, the last position is occupied by Nepal Bank Limited with 6% decrement in the net profit from the corresponding quarter of last fiscal year till this quarter.

Non-performing Loan (NPL) to Total Loan

Non-performing loan (non-performing assets) are the cancer of Banks which kills the company from inside, slowly and hazardously. So keeping the NPL to total loan ratio at the lowest percentage possible has been the priority of bankers since long. As you can see in the table below, the ratio for each bank lie below 0, which shows a good picture of the banking industry so far.

However, going deeper into comparison we can see that NMB Bank has done the exceptional job of decreasing the NPL to Total Loa ratio by 54% from last year's Q1 till the Q1 of this year. Similarly, Century Bank and Nabil Bank are following closely behind NMB Bank.

Similarly we can see that 8 banks have positive growth in NPL to total loan, which is not a very good news. Nepal Bangladesh Bank's NPL has increased by 112% and Nepal SBI Bank's has increased by 54%.

Return on Assets (ROA)

Return on assets calculated as Net Income divided by Total assets gives the return generated per unit of Assets. So, a higher ROA depicts better performance of the bank and vice versa.

As we can see in the table above, Mega Bank yet again has topped the list with a growth of 195.74%, which once again is twice as high as the second topper Kumari bank with 80.73%. Similarly, NMB Bank and Nepal Bank have ended up at the bottom with a negative growth in ROA.

Return on Equity (ROE)

Return on equity (ROE) helps you access the financial performance of any company on the basis of net income generated per unit of equity invested in that company. ROE is a very important indicator especially for investors in order to know how much their investment is making.

Mega Bank, again, occupies the top position in ROE with a growth rate of 124%, followed by NIC Asia Bank with 114%. Similarly, at the other end of the table we can see that the ROE of 6 banks has gone done from the corresponding period. The worst performer in this indicator is Nepal Bank with a decline of 59%.

Net worth per share

Net worth per share gives the book value of per share for the total number of shares floated in the market. As an investor, it is important to know the net worth per share of the company so that upon comparing it with market price you can see how much it has been undervalued or overvalued.

The table above shows that Nepal Bank limited has been able to gain the highest growth in the net worth per share. It has achieved a growth of 88%, which is almost twice as high as the second bank, Rastriya banijya bank.

Similarly, we can see that 10 banks have experienced decline in their net worth per share value, the lowest of which is Standard Chartered bank with a decline of 41%.

Annualized earnings per share (EPS)

Earnings per share, calculated as Net Income divided by number of shares outstanding, refers to the earnings generated by the bank per one unit of share. After determining the EPS, the dividend payout ratio is determined which finalizes how much will be given to the shareholders and how much will be retained in the bank for reinvestment and future growth as reserves.

The table above shows that NIC Asia Bank has topped the list with 165% growth rate, surpassing Mega Bank (124%). The aggressive expansion and growth strategy of NIC Asia has finally bore some fruits. At the other end, we can see that the EPS of Standard chartered bank has decreased by 37%, followed by Civil Bank with 30%.

Overall

The overall picture below gives you a bird-eye view of how the comparison turned out. So far you might have already guessed that Mega Bank has topped in most indicators and that too at a very high growth rate. We might even say that the first lady CEO of commercial banking industry is here for all the good reasons. While at the same time we must also acknowledge that this termendous growth rate has been possible through its merger with Tourism Development Bank (TDBL) and to maintain this same growth rate in the next Fiscal Year is going to be a real feat.

The above table shows the summary of the entire comparison that we've carried out. The green colored box represents the best performer and red represents worst. Mega Bank, obviously, has secured top place in most indicators whereas Standard Chartered and Nepal Bank has secured higher red colors.