Are you thinking to invest in Nabil Bank Limited ? Know in detail about its financial performance

Company Information:

Nabil Bank Limited is the first private-sector class “A” commercial bank in Nepal, commencing its business in July 1984. Nabil Bank Limited started off as a joint venture with Emirates Bank International forming Nabil Arab Bank Limited. Later bank divested its stake in Nabil which was ultimately taken over by NB International. The name was changed to Nabil Bank, following the withdrawal of its joint venture partner.

The bank is promoted by NB International, Ireland (50%) and Rastriya Beema Sanstha (9.67%), and Chaudhary Group with a majority stake of 53%. The bank has a presence in all the provinces through 119 branches and 185 ATM booths.

Financial Highlights:

The increasing reserve suggests that the company has been profitable throughout the period. Nabil Bank Limited has been able to increase its reserves and surplus Y-O-Y which has increased the shareholders’ value at a CAGR of 2.5% for over 4 years time period. The reserve can be used by the company for its expansion or allocating the money in profitable investment which in turn will increase the return on equity. In the first quarter of FY 2077/2078, the company reported an ROE of 15.36%.

In terms of deposit mix, term deposit covered about 39.85% of total deposit which was 31.91% in 2018, saving deposit covered about 30.60% which was 32.74% in 2018. Similarly, the current deposit and Call deposit covered 11.03% and 17.42% respectively as of FY 2019. The increment in term deposits has contributed to the higher cost of funds in 2019.

When we look at the past trends of the CASA Ratio of Nabil Bank, we could see that the ratio has declined for the last 3 years from 60% in 2017 to 45% in 2019. If we observe the whole banking industry, the average CASA Ratio stood at 41% while Nabil Bank’s CASA stood at 45%.

As of Q1 of FY 2077/2078, the company had a market share of 5.54% in terms of deposit with a total of Rs. 1.96 Kharba of deposit.

As per the first quarter of FY 2077/2078, Nabil Bank Limited had a market share of 5.42% with a total loan disbursement of 1.57 Kharba. For the last 4 years, the company has increased its loans and advances by CAGR 13.32%.

The loan book is comprised of working capital loans of 34.04% which was 30.48% in the previous year and term loans of 15.53% in the year 2019.

Net Interest Income of the company which is a core business revenue has increased at a compounded annual growth rate of 6.15% for the last 4 years.

In the fourth quarter of FY 2076/2077, the net interest income of the company declined as compared to the previous year because of the low-interest-rate environment in the country as a relief for the borrowers. During the lockdown period, the banking industry had excess liquidity but there were no borrowers during the time due to lockdown. This led the bank to have a bit higher cost of funds compared to what they were earning.

Before the pandemic hit the economy, the bank had been increasing its net profit at a compounded annual growth rate of 38%. The company had a healthy margin above 40%. Looking at the efficiency of the company, they had a healthy efficiency between 19%-22% till FY 2019. The bank has also a sizable amount of fees and commission income which stabilizes the operating profit.

However, the bank had to set aside a huge amount of provision for possible bad debts in Q4, 2076/2077 which has impacted its profitability.

Key Parameters:

(*EPS is calculated on an annualized basis)

Net Interest Margin is a ratio to measure how much a company earned from loans and advances after paying the cost to the depositors. While in the Q4 of FY 2076/2077, the company reported its NIM of 4.7%, the company had a healthy NIM of above 5% for the last 5 years. This is mainly because of the management’s ability to operate under a lower cost of fund environment for an extended period of time.

The deposit mix of the company highly affects the NIM because if the company has a higher amount of depositor’s money in a high-cost account, then the company has to bear a higher cost of funds. In terms of Nabil Bank, higher loan/deposit has enabled the company to have a cushion against the rising cost because of increased competition which has maintained the NIM.

In terms of earnings per share, it has been in decline order because of increasing shares outstanding. Despite the increase in net profit, it has not aligned with the increasing pace of shares outstanding. However, the earning of the company is above the industry average.

The underwriting skills of the management are without a doubt very much efficient. The growth the company had and the disbursement of loans could have been in question but the management has been able to maintain their non-performing loan below 1 for the last 5 years.

Dividend History:

Wrapping Up:

Nepal being in a developing phase there is a huge demand for loans from SME’s or large corporate house, industry as a whole has huge growth potential in the coming years.

In terms of Nabil bank Limited, it has already been able to maintain its market share above 5% in credit base and the customer’s perception towards the bank is a plus point to the company in years to come. Healthy margins, organic growth, effective utilization of shareholders money, reporting ROE of more than 15% and ROA of more than 2% and efficient underwriting of the company has shown that it stands out from its competitor in the industry. The competitiveness of the bank to keep its cost of funds lower than 5% for the last 3 years despite unhealthy competition has been a key factor for its increasing profitability.

However, the current economic scenario has posed a different situation for the banking industry and it is crucial for investors to look at what strategies will the management adopt to maintain their competitiveness without harming much of the shareholders’ value in the years to come.