Comparative analysis of commercial banks based on profitability ratios generally overlooked; Find out the ratios less popular but equally important

The major indicators are called major because they're always in highlight. However, there are ratios less popular but equally important in deciding the fundamental position of a company's financial performance.

Such ratios of all commercials banks are compiled and analyzed in this article.

Cost to income ratio

It measures Company’s efficiency on profit making; lower cost to income ratio signifies better profitability of company. Cost to income ratio of 50% means, company is spending 50 Rupees on every 100 Rupees of its profit. The average cost to income ratio for commercial bank industries is 37.31% in Q3 of fiscal year 2074/2075.

From the graph above most inefficient Bank on retaining its earning is Nepal Credit &Commercial bank (NCCB) who’s Cost to income ratio of 58.66% and most efficient bank is Prime Commercial Bank (PCBL), it’s Cost to income ratio stands at 19.85%.

Interest expense to interest income

Banks operate by borrowing fund on which they have to pay interest and lend that money to others and charge an interest. If the Bank interest expense nears interest income, then that means company is not generating good profit from its core business. Interest expense to Interest income of 50% means company is spending 50 rupees on paying interest for every 100 rupees of interest income.

Average Interest Expense to Interest Income ratio of Q3 in this year is 61.02%. Bank with low and high interest expense to interest income ratio is Rastriya Banijya Bank (RBB) with 24.97% and Nepal Credit &Commercial bank (NCCB) with 78.92%.

Staff Expense to Total operating profit

Bank’s major operating expense comes in form of staff expenses and in the case of Government banks, staff expense is huge. Lower the ratio better is the bank’s profitability.

The average staff expense to total operating income of Q3 in this year for commercial banks is 21.36%. The banks with low and high ratio are Prime Commercial Bank (PCBL) with 10.28% and Agriculture Development Bank (ABDL) with 43.66%, usually staff expense is high in case of government banks.

Net Interest Spread

Banks profitability depends on Net interest Spread (NIS). NIS is the difference between interest that Bank pay to depositor and interest they charge to lenders. Banks with High NIS value usually generates large profits.

The average NIS value of Q3 in this year for commercial banks is 4.14%.Banks with High and low NIS values are Agriculture Development Bank with 5.61 % and civil bank with 2.41%.

Return on Asset

We often choose a company with large profits for investing but we will not be able understand the financial health of the firm by looking only at the profit. For example, there are two banks one with 100 Cr assets and other with 10 Cr and their annual profits are 5 Cr and 2 Cr. First bank’s profit is higher than the second one but more profitable Bank is second one because it generates 2 Cr from 10Cr which is 20% of its total capital whereas 1st bank generates only 0.5%.  So in order understand company’s profitability capacity we have looked at Return on Asset. Company with high RoA can produce large profits.

Average return on Asset for Q3 this year is 1.73% for commercial bank. The company with high and low RoA is Nepal Bank limited with 3% and NIC Asia Bank with 0.82%.

Net interest income to total Income

Net interest income is a major source of revenue for Banks. Normally, ratio of net interest income to total income of Banks is between 65 to 80%.

The average net interest to total income of Q3 in this year for commercial banks is 75.11%. The banks with high and low percentage are Rastriya Banijya Bank (RBB) with 88.28% and Nepal Bangladesh Bank limited with 61.11%.