Nepal's Commercial Banks: High Profits, Low Dividends – A Paradox for Investors

The latest financial reports from Nepal's commercial banks paint a paradoxical picture for investors. While the sector collectively reported a robust net profit, the actual distributable profit for shareholders tells a starkly different story, raising concerns about investor returns amidst seemingly strong corporate performance.

According to the unaudited fourth-quarter reports of the last fiscal year, twenty commercial banks in Nepal collectively amassed a staggering net profit exceeding NPR 69.86 billion. This figure, on the surface, might suggest a thriving financial sector and a recovering national economy. However, a deeper dive into the allocation of these profits reveals a significant disparity: while employees are set to receive bonuses and the government will collect substantial taxes, many shareholders are left with empty hands.

This perplexing situation is encapsulated by the sentiment of prominent investor Ambika Prasad Paudel, who critically remarked on social media, "Amazing is my country's tax system, where the balance sheet gives tax to the government, bonus to employees, but leaves investors empty-handed!" The core of this issue lies in the concept of 'distributable profit.' Despite the impressive NPR 70 billion in net profit, the aggregate distributable profit for all commercial banks has turned negative by over NPR 1 billion. This doesn't imply that all banks are unable to issue dividends; rather, it highlights that while some banks are in a strong position, the overall average for the twenty banks is in the red.

Several factors contribute to this contradictory outcome, primarily stemming from legal obligations and stringent regulatory frameworks. The Bonus Act, 2030, mandates that 10% of a company's profit must be compulsorily allocated to an employee bonus fund. Concurrently, the Income Tax Act ensures that a significant portion of institutional profit is siphoned off as corporate tax, destined for government coffers. After these statutory allocations to employees and the government, the remaining portion available for shareholders as dividends is solely dependent on the 'distributable profit,' which has now shrunk to a negative figure for the sector as a whole.

A major driver behind this zero or negative distributable profit is the rigorous regulations imposed by Nepal Rastra Bank (NRB), the central bank. When banks face challenges in recovering loans on time and their non-performing loan (NPL) ratios escalate, they are compelled to set aside a substantial portion of their earned profits for potential risk management, known as provisioning. For instance, NIC Asia Bank, despite reporting net profits in the billions, finds its distributable profit negatively impacted by over NPR 14.86 billion due primarily to high non-performing loans requiring extensive provisioning.

It's crucial for investors to understand that the reported net profit does not always equate to readily available cash. A significant portion of this profit might include accrued interest yet to be collected from customers or funds earmarked for managing the risk of bad loans. These amounts are often held in regulatory reserve funds and cannot be immediately distributed as dividends. However, this does not mean the money is permanently lost. It remains an asset of the bank and, by extension, belongs to the investors. As loans are recovered in the future, these provisions can eventually be converted into distributable profits. Therefore, while shareholders might not receive immediate dividends, their investment remains secured as book assets within the bank.

This scenario raises a critical question: Is it fair that while bank management and employees celebrate high profits, and the government comfortably collects taxes, the ordinary investors who bear the risk by purchasing bank shares are left waiting for years without dividends? While regulatory measures aimed at ensuring financial stability are undoubtedly crucial, the state's apparent lack of serious attention to protecting the investments of shareholders, who are directly impacted by these policies, could severely diminish investor confidence in the banking sector. A sustained lack of returns for shareholders, despite robust reported profits, risks making the banking sector less attractive for capital investment, potentially hindering its long-term growth and stability. A balanced approach that safeguards both financial stability and investor interests is paramount for the sustainable development of Nepal's capital market.