Nepali commercial banks have witnessed a decline in their return on equity (ROE) over the last three years as they have been unable to expand their investments in line with the surge in capital.
It has caused investors to lose interest in buying bank shares, analysts say.
ROE refers to the rate at which investors can get returns from shares compared to their investment. It is used to assess whether a company consistently outperforms other companies in the same sector.
Equity is calculated by subtracting external liabilities (claims other than those of shareholders) from total assets. Mathematically, ROE is obtained by dividing net profit by total equity.
The average ROE of 20 commercial banks fell from 11.05% in the fiscal year 2021/22 to 9.21% in 2023/24.
Standard Chartered Bank had the highest ROE at 16.009% among commercial banks by the fourth quarter of last fiscal year, followed by Everest Bank at 13.32%.
Nepal Bank has the lowest ROE, at 4.38%.
Similalry, NIC Asia Bank had the second-lowest ROE at 4.58% last fiscal year, dropping from 16.97% in FY 2021/22.
Companies with an ROE of 15-20% percent are generally considered good, excerpts say.
“Capital has increased but profit has dropped, causing ROE to decline,” said former banker Parshuram Kunwar Chhetri. “The profit was also affected by an increase in provisioning.”
There has been a significant surge in banks’ capital i recent years due to mergers and acquisitions and the distribution of bonus shares.
Stakeholders and analysts argue that despite the growth in capital, banks have not been able to make more profits by increasing their investment, ultimately failing to attract share investors.
Apart from it, investors have been attracted to other companies which provide higher returns in investments than banks.
“Banks’ ROE has dropped as their earnings have not been in line with the growth in their capital,” said Jyoti Dahal, advocate and securities expert.
Correction: This news article has been updated to correct the ROE of NIC Asia Bank.
