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June, 2003 |
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Stock Taking |
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An Appraisal of Young Banks As
a sequence to our analytical article titled “Banks and 2002” that
appeared in Nubiz May 2000 issue, we now present a comparative analysis
of some banks that have been in operation for between last five and ten
years. In this connection we have taken Himalayan Bank Ltd. (established
10 years ago), Nepal SBI Bank Ltd. (9 years), Nepal Bangladesh Bank Ltd.
(8 years), Bank of Kathmandu Ltd. (8 years), Everest Bank Ltd. (8 Years)
and Nepal Industrial and Commercial Bank Ltd. (5 years). During
the Fiscal Year 2001-02, Himalayan Bank Ltd. (HBL) has overtaken all the
five banks analyzed here. This is reflected by HBL’s earning per share
(EPS) of Rs. 60.36, which is nearly double than its nearest competitor
Everest Bank Ltd. (EBL) which has an EPS of Rs. 33.16. After HBL and EBL
comes NB Bank with on EPS of Rs. 18.47, Nepal SBI Bank Ltd. (NSBI) Rs.
9.62, Bank of Kathmandu (BOK) Rs. 1.98 and Nepal Industrial &
Commercial Bank (NIC) Rs. 1.38. Similarly in terms of market value also
HBL is at the top with Rs. 1,000.00 per share. NB Bank had market value
of Rs. 490.00, EBL Rs. 405.00, SBL Rs. 401.00, BOK Rs. 254.00 towards
the end of FY2001/02. Any
shareholder or potential investor measures the quality and viability of
a bank in terms of returns provided by the bank. In this regard also HBL
has done very well compared to the rest of the six banks. HBL has
provided 35% dividend from the profits of 2001-02, which includes 25%
bonus share and 10% cash dividend. Similarly, NB Bank has provided 30%
dividend in the form of bonus share, EBL 20% and BOK 10%. This year NSBI
and NIC Bank have not been able to provide any return to their
shareholders. As
far as the stability is concerned, all of these six banks seem to be
quite stable. To measure the stability, the ratio of its shareholder’s
reserve to its share capital is used. In HBL it is 100% whereas NB Bank
has 75.24%, EBL 32.83%, NSBI 31.98%, BOK 12.21% and NIC 5.24%. This
ratio is low in BOK and NIC compared to other banks and this is due to
higher share capital they have compared to the others. BOK and NIC have
share capital of Rs. 464 million and 500 million respectively. Similarly
to be assured of stability, we should also consider the capital
adequacy. In relation to capital adequacy all these banks have met the
standard fixed by NRB, i.e. 10% of its total capital fund, except NB
Bank that has only 9.91%. NIC has maintained it at 20.9%, BOK 14.42%,
EBL 12.9%, NSBI 12.86% and HBL 11.56%. As
far as profitability is concerned again HBL is at the top, having able
to earn Rs. 235.40 million net profit. Similarly, EBL, NB Bank, NSBI,
BOK and NIC have earned Rs. 86 million, Rs. 66 million, Rs. 40.87
million, Rs. 9.20 million & Rs. 6.90 million respectively. A
bank makes income in two ways - interest earning and fee / commission
earning. Between the two, the first one is considered to be more risky
because high investment has to be made in the form of loans and advance
where considerable amount of risk is involved. But the second form of
earning, i.e. fees and commission, incurs lesser risk. For example,
commission from remittance service, L/C business, guarantee business
etc. Thus to analyze the income trend of a bank the ratio of interest
earned from loan to total operating income has been worked out. This
ratio is very high (75.95% and 75.89% respectively) in case of NB Bank
and BOK while HBL has the lowest (61.46%). NIC, EBL and NSBI have
74.18%, 73.13% and 70.81% respectively. Therefore, it can be seen that
NB Bank and BOK are over-dependent on interest earning. HBL has the
highest income from other sources. Its 38.54% of total operating income
comes from as earnings from other sources. Similarly NSBI has 29.19%,
EBL has 26.85%, NIC has 25.82%, BOK 24.11% & NB Bank 24.05% of its
earnings from other sources. Another
aspect affecting profitability is the portion of the total operating
income incurred as operating expense (cost of service). In this regard
NIC has the highest cost of service as a ratio to total operating income
(i.e. 80.12%) and HBL has the lowest (60.17%) which is the main reason
for the latter’s highest profitability. The ratio of the cost of
service to operating income of EBL is 72.56%, BOK 72.56%, NSBI 73.94%
and NB Bank 64.25%. The
most important and sensitive area which affects the profitability of any
bank is the portion of its Non-Performing Assets (NPA). NPA indicates
the substandard, doubtful and bad loans in which a bank has invested. As
per the rule imposed by the regulatory authority (Nepal Rastra Bank),
certain amount of the bank’s profits have to be kept aside as Loan
Loss Provision (LLP) on the non- performing assets. In this regard,
provision has to be made 5% on good loan as a percentage of the total
loan of this category, 25% on substandard loan as percentage of total
loan of this category 50% on doubtful loan and 100% on bad loan. The
ratio of loan loss provision to total credit is the lowest (2.37%) in
EBL while HBL has the highest (6.73%), which is due to the highest
amount of credit flowed by HBL. Another yardstick to measure the
efficiency of a bank, which affects profitability to a great extent, is
the amount of interest suspense. To focus this point, the ratio of
interest suspense to the interest income from loan has been studied. In
this regard, NSBI is in the worst condition having 62.77% of its total
interest income categorized as suspense. After NSBI, NB Bank has the
highest interest suspense of 37.96%, HBL has 21.76%, while BOK has
11.84% and the two banks having the low interest suspense are NIC and
EBL with 6.4% and 6.76% respectively. Commercial Banks COMPARATIVE
BALANCE SHEET
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