Shangrila Development Bank: A Fourteen-Year Financial Performance Review (Q4 2069/70 – Q4 2082/83)

Background of Shangrila Development Bank (SADBL)

Shangrila Development Bank Ltd. (SADBL) former Shangrila Bikas Bank Limited was established in 2061 B.S. SADBL underwent a merger with Bageshwori Development Bank in July 2014, resulting in a significant increase in the scale of operations (total asset base increased to NPR 7,462 million post-merger as compared to NPR 4,445 million before merger).

Afterward, the banks emerged as competitive national level development banks. Currently, the bank is serving nation thorough 109 branches and 30 ATMs spread across the country by employing around 864 staff (As of Annual report 2081/82) nationwide. As of Q4 2082/83, banks total assets stood at Rs. 66.04 billion. At the same time, total equity stood at Rs 6.33 billion.

How has SADBL emerged over the period and role as a national level player in own class? Let’s look at its ups and downs on financial performance during this journey (Q4 2069/70 to Q4 2082/83) of 14 years.

Balance Sheet Analysis

Assets

The overall asset size of SADBL has increased by 18.04 times, from Rs. 3.66 billion to Rs. 66.04 billion. The proportion of Loans and Advances to Customers to Total Liabilities and Equity decreased from 64.71% in the base year to 69% in Q4 2082/83. Below are the major asset indicators over the review period.

1. Cash and Cash Equivalents

Cash and cash equivalents increased from Rs. 81.12 crore to Rs. 2 billion. Holding cash and cash equivalents above the regulatory requirement is generally not considered efficient for banks. In this regard, SADBL has excess position due to higher liquidity in the market.

2. Loans and Advances to Customers

The bank has remarkably expanded its core lending business. Loans and advances increased by 16.89 times, from Rs. 2.71 billion as of Q4 2069/70 to Rs. 45.87 billion by Q4 2082/83. Over the fourteen - year period, the bank achieved remarkable growth in business expansion.

3. Property and Equipment

Property and Equipment initially stood at Rs. 3.5 crore and showed an increasing trend and reached Rs. 97.99 crore at its peak this achieved on Q4 2082/83. This category may also include certain non-banking properties.

4. Total Assets

Total assets increased rapidly during the initial years. Although the growth rate slowed in recent years, assets continued to grow steadily. Overall, SADBL's asset base expanded by 18.04 times, increasing from Rs. 3.66 billion in Q4 2069/70 to Rs. 66 billion in Q4 2082/83.

Liabilities

Total liabilities (excluding equity) stood at Rs. 3.22 billion in Q4 2069/70. They increased by 18.50 times, reaching Rs. 68.68 billion by Q4 2082/83. Deposits from customers, the bank's core liability, grew at a median annual growth rate of 16.69%, increasing from Rs. 3.12 billion to Rs. 56.92 billion. Meanwhile, total liabilities and equity combined increased from Rs. 3.66 billion to Rs. 66.04 billion. The major liability trends are discussed below.

1. Deposits from Customers

Deposits from customers increased at a median annual growth rate of 16.69%. Within total liabilities (excluding equity), deposits accounted for 97% in Q4 2069/70, decreasing to 95% by Q4 2082/83. This indicates that the bank remains highly dependent on customer deposits and may need to diversify its funding sources by utilizing other financial instruments.

2. Other Liabilities

Other liabilities is steadily increasing throughout the review period. From Q4 2069/70 to Q4 2082/83, they increased marginally from Rs. 10.56 crore to Rs. 85.05 crore. This category reached its highest level of Rs. 92 crores in Q4 2079/80.

3. Total Liabilities

Total liabilities followed a pattern like customer deposits, recording an median annual growth rate of 16.69%. Since deposits constitute the largest portion of liabilities, total liabilities closely tracked deposit growth.

4. Equity Analysis

Total equity of SADBL increased at a median annual growth rate of 12.17%. During the same period, share capital grew at a median annual rate of 5%, while reserves increased at a median annual rate of 15.25%.

Profit and Loss Analysis

1. Interest Income and Expenses

Interest income and interest expense represent the bank's core revenue-generating activities and the cost of funding those assets, respectively. Interest income declined after reaching its peak of Rs. 7.13 billion in Q4 2079/80. Thereafter, both interest income and interest expense decreased steadily. By Q4 2082/83, interest income had fallen to Rs. 4.77 billion.

During the declining interest rate environment, SADBL funding costs more increasing than its lending yields. On the positive side, net interest income continued to increase. Although the interest spread rate narrowed, the bank appeared to have successfully expanded its lending business.

2. Net Fees and Commission Income

Another positive aspect of SADBL is the steady growth in its net fees and commission income. SADBL earned Rs. 25.72 crore in Q4 2082/83, representing an increase of approximately 1.5 times in last seven years.

3. Operating Profit and Net Profit

Operating profit reflects the bank's profitability before taxation and provisioning, while net profit represents earnings attributable to shareholders.

SADBL recorded its highest-ever net profit of Rs. 88.99 crore in Q4 2082/83. Overall, the bank has maintained a steady growth trend in net profits.

4. Expenses

Interest expense remains the bank's largest expense and is considered the primary direct cost in the banking industry. This expense has shown a declining trend. However, persistently lower interest expenses may make it more challenging for the bank to retain depositors' funds. Other operating expenses have remained at a moderate level.

Trends in Key Performance Indicators

Earnings Metrics

Earnings Per Share (EPS)

The bank's Earnings Per Share (EPS) has experienced considerable volatility over the past nine fiscal years, reflecting changes in profitability and the overall operating environment.

EPS remained above Rs. 10 and in increasing trend from 2079/80. A sharp decline from Rs. 25.3 in 2073/74 to Rs. 13.07 in 2074/75 represents the higher decline in earnings performance during the review period.

The bank recorded an impressive recovery from 2076/77, with EPS rising to Rs. 19.92 on 2078/79 from Rs. 7.06 in 2076/77, the trend towards highest level in the series. As of Q4 2082/83, EPS reached Rs. 23.84.

Q4 2082/83 closed with Distributable EPS of Rs. 13.19, indicating that profitability has substantially improved compared to the post-pandemic years, it is ascending to the peak achieved in 2082/83.

Overall, the long - term trend suggests that the bank has successfully restored profitability after a severe earnings shock.

Efficiency Measures

Return on Equity (RoE)

RoE broadly mirrors the movement in EPS. The ratio declined sharply to 5.58% during Q4 2076/77 due to weak profitability. It rebounded strongly to 13.98% in Q4 2078/79, demonstrating efficient utilization of shareholders' capital.

FY2082/83 recorded 14.06%, reflecting improved earnings generation from shareholders' equity. Although current returns remain higher than in Q4 2074/75, the bank has restored a healthy profitability profile.

Return on Assets (RoA)

RoA followed a similar trajectory. It declined from 2.09% to only 0.59% in FY2079/80. The ratio recovered steadily afterward. Q4 2082/83 recorded 1.35%, the highest level in the last eight years. This indicates improving efficiency in utilizing total assets to generate profits.

Valuation Multiples

Price-to-Earnings (P/E) Ratio

The exceptionally high 30.64 times P/E in Q4 2081/82 was primarily driven market sentiment and stock price in ascending trends as well as SADBL's earnings were also on an upward trend. This ratio should not be evaluated in isolation; it should be compared with industry peers.

Over the last five years, the P/E ratio has fluctuated between 15 and 31 times, suggesting relatively stable market valuation.

Price-to-Book (P/B) Ratio

The P/B ratio remained close to 0.59 times in Q4 2079/80 lower in last five years. A sharp increase to 1.35 times on Q4 2082/83. Since then, the ratio has stabilized below 2.

Q4 2082/83 recorded 1.35 times, median pb ratio of SABL stay at 1.12 times. The ratio increased sharply to 1.35 times in Q4 2082/83, both the share price and net worth have shown an increasing trend. Indicating the market continues to value the bank well above its book value, reflecting positive investor expectations.

Health Indicators

The Capital Fund to Risk-Weighted Assets Ratio never exceeded 21%. SADBL's risk-weighted assets did not fluctuate significantly over the period indicating smoot and efficient assets management capacity on such assets. It improved to 14.63% in Q4 2082/83.

The NPL ratio has shown a consistent upward trend over the review period. It increased from 0.98% in Q4 2078/79 to 6.87% in 2082/83, indicating gradual deterioration in loan quality. If this trend continues, it may lead to a serious situation, continued growth in impaired loans warrants closer monitoring.

The cost of funds declined significantly from the peak level 9.07% in Q4 2074/75 to 3.54% in Q4 2082/83, reflecting easing interest rates and lower deposit costs. Similarly, Base Rate declined from 12.55% to 5.57%.

Interest Spread narrowed from 6.99% on study base year to 4.14% the most recent review period, indicating compliance with NRB directives and increasing competition. This may pressure on profit margins.

Dividend History

The bank's dividend history demonstrates that shareholder returns have closely followed its earnings performance. Dividend payouts weakened significantly during periods of lower profitability. Profitability may be affected by economic or policy shock, business slowdown or higher NPL provisioning. Particularly in FY2080/81 although the EPS increased, Distributable EPS declined due to regulatory obligation and provisioning. However, the strong recovery in dividends over the last two fiscal years, supported by rising distributable profits and improving earnings, indicates an enhanced capacity to reward shareholders. SADBL has distributed average total dividends of 11.74 percent. Another aspect of SADBL didn’t made shareholder hand empty based on last 13 year reviewed years.