Can we expect 32% bonus from Nepal Bank in coming year from its earning of current fiscal year? Know the reality here

-Krishna Khatiwada

Nepal Bank Limited’s CEO in a press meet, metioned that the bank is in the position to distribute 32% bonus shares. It does sound exciting and alluring to the investors and shareholders but the looming question is, does the bank's financials support the statement?

Firstly, let us understand how bonus affects a company’s financial.

Consider a company of Rs 8 arba paid-up capital with Rs 4 arba reserves & surplus, has announced a bonus of 25%. Then 25% of paid-up capital i.e Rs 2 arba will be taken from reserves & surplus and will be added to the paid-up capital. In this example, after the bonus distribution, the paid-up capital of the company will reach Rs 10 arba and reserve & surplus will reduce to Rs 2 arba. Companies are allowed to distribute bonus from reserve & surplus only.

Many of you may be thinking that Nepal Bank’s reserve is around Rs 3.5 arba, last year and this year it is earning very well which will increase its reserves. So, why can’t Nepal Bank distribute bonus of 32%? The reason is here:

In balance sheet, the asset side is composed of many sub-headings (current asset, fixed asset etc.). Similarly, the reserves & surplus heading is composed of different sub-headings, which include general capital reserve, capital reserve fund, accumulated profit/loss etc.

So in general, the company is allowed to distribute bonus shares from reserve and surplus, but the catch is that even from the reserve and surplus account, only a few sub-headings can be used for issuance of bonus share like the accumulated profit/loss and share premium. Other reserves are created for different contingencies and regulatory requirements like to provide capital in cases like unexpected losses or to provide capital for construction etc. Thus, the reserves mantained in these sub headings cannot be distributed as bonus shares.

We took out reserve & surplus (funds) from the audited annual financial report of Nepal Bank of fiscal year 2073/2074.

From above data, we can see that the accumulated loss of NBL is around Rs 2.03 arba, and the share premium stands at Rs 13.28 crore in fiscal year 2073/2074. In this situation, either the company has to change accumulated loss to profit or has to increase share premium to distribute the bonus.

According to the 3^rd quarter report of NBL this year, the profit of NBL is around Rs. 2.56 arba, so we can expect that at the end of the year its profit will be around Rs 3.41 arba. Then, 20% of total profit needs to be transferred to general reserve, so subtracting 20% from total profit, the remaining amount will stand at Rs 2.728 arba. At extreme, a total of Rs 2.728 arba can be transferred to accumulated profit/loss, which means after recovering the accumulated losses, NBL's accumulated profit/loss account will stand at around Rs 70 crore which can be distributed as bonus. After adding share premium, the total distributable fund will be around Rs 83 crore.

Total paid-up capital of NBL stands at around Rs 8 arba that means with Rs 83 crore, company can distribute a maximum of 10.37 % as bonus share.

How 32% bonus can be distributed?

Nepal Bank can distribute bonus of 32%, only after it issues FPO and the issuance gets decently subscribed. Nepal Bank is issuing around 1.76 crore units of shares at Rs 280 per share, that will add extra Rs 1.76 arba to its paid-up capital at Rs 100 per share and remaining Rs 3.16 arba (1.76 crore*180) will be added to the share premium. With this share premium, the bank can distribute a bonus of around 32%.

A bonus in order to be attractive has to be distributed majorly with the operating profit of the company for the year. However, in this case, Nepal Bank’s shareholders are getting bonuses from their own money which was put in via the FPO. So is this the kind of bonus we are looking for?

Nepal Bank has been improving since last few years but despite that currently, it is not in the state to provide huge bonuses. Nepal Bank had earned around Rs 3 arba per year in last couple of years and more likely its earnings will increase in future as well. In forthcoming years, if it distribute huge bonuses then that can be justified but in this situation bonus of 32% is not justifiable.