ROE slumps as profit heads south
KATHMANDU, MAy 25:
A plunge in profit of commercial banks has resulted in a decline in their return on equity (ROE) in the last quarter.
The average ROE ratio of the commercial banks listed at the stock exchange stood at 13.4 per cent, according to the unaudited third quarterly report of the banks for the current fiscal year. The average ROE of these banks stood at 18.6 per cent in the corresponding quarter of last fiscal year.
The commercial bank’s group profit has declined by about 16 per cent in the third quarter which pulled the overall return of the banks down. ROE measures the rate of return on the shareholders’ equity of the common stock owners illustrating the company’s capability of using funds to generate earnings.
“With the lowered earnings of the banks, return on shareholders’ investment has gone down,” said share analyst and managing director of Securities Research Center and Services Rabindra Bhattarai.
Since ROE is calculated by dividing net income by shareholders’ equity, increased number of shares has further helped in its decline. In the last one year, the banking subgroup alone has seen an addition of 5.5 per cent stocks without including the newly added Sanima Bank.
The continuous addition of rights and bonus shares has increased the number of shares belonging to 24 commercial banks listed at Nepal Stock Exchange to more than 470 million which stood at 417 million a year ago. “As the number of shares increases, the return on equity goes down; increment in equity size has offset the profits of the commercial banks that is already sliding,” Bhattarai pointed out.
In the last one year, listed banks had issued rights shares to the existing shareholders to increase their paid up capital. Likewise, nine commercial banks have distributed bonus shares.
ROE, which is the major indicator of a company’s profitability, is one of the gauges for investors to help them make investment decisions. Normally, investing in companies with a high ROE is considered a way to achieve the highest possible return without taking undue risks because it is easier to make money as the share owner of a company that is making high returns rather than as a share owner of a company with dismal returns.
Though a large segment of investors in the Nepali capital market do not make decisions based on such fundamentals, lately, investors have begun taking educated decisions based on statistical indicators. “Of late, share prices of many companies have gone through correction due to the entry of more cautious and educated investors,” pointed out Bhattarai.
Among the 23 banks that have published their ROE in their financials, the ROE of 10 commercial banks is above average while the ROE of the remaining 13 is less than the average.
In the corresponding quarter of last fiscal year, the ROE of 11 commercial banks was greater than that of the industrial average. Citizens Bank International and Machhapuchchhre Bank did not include ROE in their third quarter financials.
Source: THT
