Every Rs100 invested by shareholders in equity of commercial banks generated average return of around Rs21.2 in the last fiscal year. This return on equity (RoE) is tad lower than Rs21.9 of the fiscal year 2015-16, but satisfactory, as commercial banks had rapidly increased their paid-up capital in the last fiscal year to meet the new minimum regulatory capital requirement.

Many bankers were expecting massive drop in RoE following four-fold hike in minimum paid-up capital from Rs2 billion to Rs8 billion. But the latest result appears to have proven them wrong.

“The industry average on RoE looks pretty impressive,” Bank of Kathmandu CEO Shovan Dev Pant said. “However, new commercial banks that were not well established and could not find quality partners for merger failed to generate adequate return for their shareholders. But, overall, the result looks great.”

The RoE is derived by dividing the net profit of commercial banks by their net worth, which is the sum of paid-up capital and funds in reserve and surplus. This means net profit is the numerator and net-worth is the denominator.

Most of the banks are currently inflating the denominator by using the end-of-the-year figure on paid-up capital and funds in reserve and surplus. This squeezes RoE. Little wonder, a look at fourth-quarter unaudited financial reports of commercial banks shows RoE hovering around 16.7 percent.

Currently banks use paid-up capital of the last day of the fiscal year to calculate RoE. This is not accurate because profit is generated at the end of the year by deploying paid-up capital and reserve and surplus funds held by banks at the beginning of the fiscal year. If fresh paid-up capital was injected or money was added to reserve and surplus funds in the middle of the year, their contribution in profit generation should be calculated accordingly. 

For instance, if fresh paid-up capital was injected at the end of first quarter, that money would make 75 percent contribution to profit generated by a company at the end of the fiscal year. This is because this fund had remained absent in the first quarter and thus did not make any contribution to the profit in the first three months of the year. This should be the same for capital added in other quarters.

The calculation of RoE based on this method does not unnecessarily expand net-worth of banks, thus, contracting returns on investment made by shareholders.

Based on this method of calculation, the top bank to extend highest return to shareholders in the last fiscal year was state-run Nepal Bank Limited with RoE of 45.5 percent. This was followed by state-owned Rastriya Banijya Bank (34.4 percent) and Nabil Bank (31.2 percent).

Banks were able to extend a decent return to shareholders, as their cumulative net profit jumped 26.6 percent to Rs45.3 billion in the last fiscal year. 

In the last fiscal year, net profit of four commercial banks exceeded Rs3 billion each. These banks are: Nabil Bank (Rs3.6 billion), Nepal Bank (Rs3.2 billion), Nepal Investment Bank (Rs3.2 billion) and Rastriya Banijya Bank (Rs3.1 billion). 

The profit of individual banks had exceeded Rs3 billion each for the first time in the country’s banking history.