Key ratios of commercial bank with which investors must be familiar; Rastriya Banijya & Nepal Bank’s with lowest cost of funds

It is time for all to diversify their analysis strategy as number of new investors are massively rising and market is based on true facts and figures rather than rumor. Low volatility in the price of banks makes hard for investors to book profit in short period of time as banking sector has sideways trend in terms of price. Major fundamental indicators of companies like Earnings per Share (EPS), Dividend per share (DPS), net worth per share, Return on Equity (ROE) and Return on Assets (ROA) are not sufficient to find out the true financial position of the company. Apart from these ratios Capital Fund to RWA, loan loss provision, CD Ratio and Cost of Fund are also key indicator to analyze the financial positions of the company. What is Capital Adequacy Ratio? Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CAR), is the ratio of a bank’s capital to its risk. National regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. As of fourth quarter report of fiscal year 2073/74, If we analyze the CAR of commercial banks, all the 28 commercial banks have capital adequacy ratio more than 10 percent. Standard Chartered Bank Limited (SCB) has a capital Adequacy Ratio of 22.04 percent which is the highest out of all 28 commercial banks while Prabhu Bank Limited (PRVU) has the least CAR of 11.05%. What is Loan loss provision? Loan loss provision (LLP) is a non-cash expenses which are set aside by the banks for the untimely payment of principal and interest. Provisioning higher amount as loan loss will directly reduce profit of the bank which also symbolizes portion of bad loans. Due to low non-performing loan (NPL), Sanima Bank Limited has highest percentage of LLP to NPL as its NPL is only 0.01%, which is lowest NPL among commercial banks. See more about NPL in our recently published article. What is cost of Funds? Likewise, the cost of funds is the average interest cost that a financial institution pay for the use of money. Simply it is the amount that bank has to pay to its depositors for keeping their money for utilizing the same in lending activities. In terms of Cost of Fund of Commercial Banks in fourth quarter, there are ten Commercial Banks with the fund more than 5 percent.  Prime Commercial Bank has the highest cost of fund of 8.15 percent while Rastriya Banijya Bank’s stand lowest at 1.27%.  Meanwhile, Prabhu Bank has not provided its cost of fund in Q4. What is CCD ratio? Nepal Rastra Bank, the banking sector regulator, requires commercial banks to maintain CD ratio — technically referred to as credit to core-capital-cum-deposit (CCD) ratio — of 80 per cent. This means of every Rs 100 in deposit and core capital, only Rs 80 can be extended as loans. Almost all commercial banks have maintained the CCD ratio of 80 percent.

• Jashma Sainju
• Sijan Bajracharya