Majority of Development Bank Reports Decline in Profitability Whereas 3 Banks Report Net Loss for Q2; Which Companies Fared the Best?

Without a doubt, the Financial Institutions are also experiencing economic instability as a result of market swings, given the increasing interest rates, inflation, and overall worldwide recession. Financial institutions' primary business revenue may be affected as a result of the monetary policy's higher interest rate bar, which may be advantageous for some financial institutions and detrimental for others. In this comprehensive analysis, we will examine the financial performance of “B” class financial institution; Development Banks of Nepal, and see which institution is maintaining a good financial position despite numerous obstacles. 

So, let's dissect the performance of B-class financial institutions based on the unaudited 2nd quarterly report of 2079/80 fiscal year.

There are 16 Developments banks listed in NEPSE currently. However, not all of the banks fall under the same category. The development banks can be categorized into two subcategories. National level banks, and regional level banks. A wise investor would create a portfolio of development banks comparing their performance with the banks falling in the respective categories.

Net profit:

As per the quarterly report,  Muktinath Bikas Bank Limited (MNBBL)  has reported the highest net profit for the period amounting to Rs. 62.62 Crores.  Garima Bikas Bank Limited (GBBL)   comes in second place in terms of profit which amounts to Rs. 50.21 Crores. The third position is secured by  Shine Resunga Development Bank Limited (SHINE)   with a net profit of Rs.  42.97 crores.

3 out of 16 development banks have reported net loss for this period. Out of which,  Saptakoshi Development Bank Limited (SAPDBL) has reported the highest net loss of Rs. 25.25 Crores.

On the other hand, Jyoti Bikas Bank Limited (JBBL)  has reported highest decline in net profit by 89.90% to stand at Rs. 3.48 Crores from Rs. 34.40 Crores. 

Paid up capital:

Muktinath Bikas Bank Limited (MNBBL)  has the highest paid-up capital amounting to Rs. 6.42 Arba among all the development banks. Garima Bikas Bank Limited (GBBL)  has the second-highest paid-up capital amounting to Rs. 5.19 Arba.

On the other hand, Narayani Development Bank Limited (NABBC) has the lowest paid-up capital of Rs.26 Crores. 

Reserve and surplus:

Reserve is the amount that is retained by the company from its profits to promote future growth.

Lumbini Bikas Bank Limited (LBBL)  has reported the highest reserve and surplus which amounts to Rs. 2.4 Arba. LBBL is followed by  Mahalaxmi Bikas Bank Limited (MLBL)  with a reserve of Rs. 2.3 Arba. Muktinath Bikas Bank Limited (MNBBL)  has secured the third position with a reserve of 2.2 Arba.

Whereas,  Saptakoshi Development Bank Limited (SAPDBL) has reported lowest reserves and surplus amounting to Rs. 20 Crores.

Deposits from Customers:

In B-class institution,  Muktinath Bikas Bank Limited (MNBBL)  has topped the list with a total deposit of Rs. 1.09 Kharba. This list is followed by  Garima Bikas Bank Limited (GBBL)  with a total deposit of Rs. 71.96 Arba. Jyoti Bikas Bank Limited (JBBL)  has secured the third position with a total deposit of Rs. 55.80 Arba.

The overall development bank has collected a total deposit of Rs. 5.13 Kharba. 

Loans and Advances to Customers:

Till Q2 2079/2080, total loans and advances of development banks stood at Rs. 4.30 Kharba. The average loan stood at Rs. 26.94 Arba.

Muktinath Bikas Bank Limited (MNBBL)  has disbursed the highest amount of loans which amounts to Rs. 92.20 Arba. Following the list,  Garima Bikas Bank Limited (GBBL)  has disbursed a total loan of Rs. 59.58 Arba. Jyoti Bikas Bank Limited (JBBL)  has disbursed a loan of Rs. 48.50 Arba which puts it in third place.

Net interest income:

Net Interest Income is the core business revenue which is calculated by subtracting the cost related to the deposits from the income from loans and advances.

In terms of Net interest income,  Muktinath Bikas Bank Limited (MNBBL)  tops the list with a total of Rs.2.04 Arba. Garima  Bikas Bank Limited (GBBL)  has the second-highest net interest income amounting to Rs. 1.15 Arba. GBBL is followed by  Jyoti Bikas Bank Limited (JBBL)  which has reported a net interest income of Rs. 1.15 Arba.

Out of the 16 banks, 8 banks have reported above industry average net interest income.

Provisions for the period (Impairment/Reversal):

Banks have set aside a certain amount in loan loss provision and have delayed the loan repayment of several borrowers. A total of Rs 3.11 Arba has been shown in an impairment charge for a loan and other losses.

In the national level,  Jyoti Bikas Bank Limited (JBBL)  has the highest impairment charge for a loan and other losses with Rs. 64.9 Crores. Muktinath Bikas Bank Limited (MNBBL) also have higher provisions amounting to Rs. 44.2 Crores. 

In the regional level, Narayani Development Bank Limited (NABBC)  has reported the lowest impairment charges for this period.  

Earnings per share:

Shine Resunga Development Bank Limited (SHINE)  topped the list in terms of EPS amounting to Rs. 20.06 per share. Muktinath Bikas Bank Limited (MNBBL)  has the second-highest EPS with Rs. 19.51 per share.

Out of 16 development banks, 9 banks have reported above industry average EPS.

Net worth per share:

The highest net worth per share is reported by  Lumbini Bikas Bank Limited (LBBL)  with Rs. 169.69 per share. This is followed by  Mahalaxmi Bikas Bank Limited (MLBL)  with a net worth per share of Rs. 157.94 per share. Similarly,  Kamana Sewa Bikas Bank Limited (KSBBL)  reported a net worth of Rs. 151.21 per share.

The average net worth per share comes at Rs. 127.26 per share when we factor in all the net worth per share of all the 16 banks.

P/E Ratio:

The P/E ratio tells investors what they are paying for each rupee of earnings of the firm. The lower the ratio, the better the deal.

In terms of the P/E ratio,  Shine Resunga Development Bank Limited (SHINE)  has the lowest P/E ratio of 17.21 times. This means that you are paying Rs. 17.21 for every Rupee of earning of Shine Resunga Development Bank Limited (SHINE). Green Development Bank Limited  reported highest P/E of 258.66 times from the regional level.  

One should always check the fundamentals of the company and if they found the bad fundamentals then there is a reason for the lower valuation. Also the PE is calculated as per the quarter end closing price of the respective companies. In today's date the price differs in the secondary market. 

Capital Adequacy Ratio (CAR):

In terms of Capital Adequacy ratio (CAR),  Corporate Development Bank Limited (CORBL) seems to have reported the highest CAR of 63.70%, while Lumbini Bikas Bank Limited (LBBL) has the lowest CAR of 11.01%.

CAR is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities.

Non-Performing Loans:

Non-performing loan indicates the risk of credit provided by the bank to its clients. Higher NPL indicates that the bank might be at risk.

In terms of NPL,  Muktinath Bikas Bank Limited (MNBBL)  has the lowest ratio with an NPL of 0.98% and in the regional level, Saptakoshi Development Bank Limited (SAPDBL)  has reported the highest NPL of 15.90%. 

Out of 16 banks, 10 banks have reported below industry average NPL for this quarter. However, this is mainly because SAPDBL alone has massive NPL which led to increasing in average number. One should calculate the industry average in terms of their own analysis model . 

Others:

Cost of Funds:  The term cost of funds refers to how much banks and financial institutions spend in order to acquire money to lend to their customers. The lower the cost of funds, the better because it ultimately reduces the cost of banks. As per reports,   Corporate Development Bank Limited (CORBL)  has the highest Cost of Funds of 11.13%, whereas Sindu Bikas Bank Limited (SINDU)  the lowest cost of funds of 9.4%.

CD Ratio:  The CD ratio refers to the credit-deposit ratio in banking parlance. It tells how much of the money banks have raised in the form of deposits has been deployed as loans. Similarly,  Narayani Development Bank Limited (NABBC)  has reported highest CD ratio of 91.53%, whereas  Karnali Development  Bank Limited (KRBL) has reported  the lowest CD ratio of 75.01%.

Base Rate and Interest Spread:

Base rate is defined as the minimum interest rate set by the NRB below which banks are not permitted to lend to their customers. Narayani Development Bank Limited (NABBC)  reports the highest base rate of 17.02%, and  Excel Development Bank Limited (EDBL)  has the lowest base rate of 12.26%.

Similarly, the net interest rate spread is the difference between the interest rate a bank pays to depositors and the interest rate it receives from loans to consumers. Here, Miteri Development Bank  has the highest interest spread of 5%.

Cost of Funds, CD Ratio, Base Rates and Interest Spread: 

Finally, the table below shows provides a full picture of major indicators of 16 development banks as of the second quarter of FY 2079-2080.