Increasing loan loss provisioning hurts investors

KATHMANDU, FEB 20: 

The increased loan loss provisioning has added to the woes of investors with prospects of contraction in dividends in the coming days.

The unaudited financial report of the listed banks show an increment of 39 per cent in loan loss provisioning during the second quarter. The increased loan loss provisioning in the second quarter is suspected to further dampen the share market. Higher provisioning means lesser profits, contracting the dividends to investors.

“Increased provisioning will leave investors disappointed,” chairman of Security Research Canter and Services (SRCS) Rabindra Bhattarai said, adding that dividends are a major attraction for investors in the current dismal market situation.

Along with the increased provisioning, non performing asset (NPA) has also increased. The average NPA of listed banks stands at 3.37 per cent which stood at 2.5 per cent last year. Nepal Bangladesh Bank sits with the highest NPA of 18.58 per cent in the second quarter.

In addition, Nepal Bangladesh Bank has opted to write off loans worth Rs 450 million before selling its shares to International Finance Investment and Commerce (IFIC) Bank of Bangladesh.

“Writing off bad loans worth Rs 450 million means shrinkage in profits by the same amount, while a larger profit means more dividends for investors,” pointed out Bhattarai.

The writing off of Rs 450 million means the amount provisioned against possible loan loss will not go back as profits. “If the bank was able to get back the disbursed amount, it would have written back the loan increasing the profit by Rs 450 million.”

Banks tend to remove bad debts from their balance sheets by writing them off. Only those loans that are declared non collectible are written off to clean the balance sheet. But in this case, the bank is trying to write off loans issued to companies that belong to NB Group which owns a majority stake in the bank. “Though share holders of the bank do not have high expectations from Nepal Bangladesh Bank due to its history of distributing low dividends, such actions send out the wrong message to investors as a whole,” said Bhattarai.

“The market is already moving towards the bottom once again, and if banks transfer the burden of their bad investment decisions to investors like in this instance, then it is not surprising to see investors unhappy with the current market prospects,” according to general secretary of Nepal Stock Investors’ Association Prakash Rajoria.

Source: THT