Net profit growth rate of majority of the commercial banks fell in the first quarter of the current fiscal year, as interest income took a dip due to reduction in lending rates and relatively high deposit rates.

Higher deposit rates and lower credit rates are good news for depositors and borrowers. But this is not a good sign for the stock market, because commercial banks account for almost half of the market capitalisation.

As of Sunday, 17 out of 28 commercial banks have published their first quarter unaudited financial reports. These 17 banks generated a net profit of Rs6.7 billion in the first quarter, up 5.8 percent than in the same period a year ago.

These banks had seen a 43-percent surge in their net profit in the first quarter of the last fiscal year.

Of the banks that have published their reports, only three—state-owned Rastriya Banijya Bank, Nepal SBI Bank and Prime Commercial Bank—saw hike in their profit growth rate. Net profit of seven other banks—Himalayan, Global IME, Citizens, Bank of Kathmandu, Siddhartha, Sunrise and Mega—fell in the first quarter.

And seven other banks—Nepal Investment, Nabil, Everest, NMB, Sanima, NIC Asia and Janata—saw deceleration in profit growth rate.

“The major reason for rapid fall in profit growth rate is huge drop in net interest income of commercial banks,” Nabil Bank CEO Sashin Joshi said.

Net interest income of the these 17 banks expanded by 9 percent in the first quarter of this fiscal year, as against 39 percent recorded in the same period a year ago. 

Interest, especially interest imposed on loans, is the major source of income for commercial banks. But lately banks are competing with each other to reduce credit rate, as hike in government spending in the final quarter of the last fiscal year has injected liquidity.

All the while, tenure of big chunk of deposits acquired at higher cost in the last fiscal year during shortage of loanable funds has not expired, preventing banks from drastically reducing deposit-related costs. 

This prompted average interest spread—the difference between average lending and deposit rates—of 17 banks to narrow down to 3.99 percent in the first quarter of the current fiscal year, from 4.14 percent in the same period a year ago.  

“Going forward, banks are expected to come under more pressure as current macroeconomic indicators are not encouraging as well,” said Joshi. He was referring to 0.7 percent hike in remittance inflow as well as a balance of payments deficit recorded in the first two months of the current fiscal year.

If inflation is adjusted, country’s remittance income fell in real terms in the two-month period. This is not a good sign because remittance is a big source of deposit for banks.

Also, the government’s capital spending, another big source of deposit for banks, has stood at meagre 5 percent of the allocated budget of Rs335.2 billion so far. These are indications that banks may face shortage of loanable funds in the coming days in a grim replay of events of the last fiscal year.

“While banking institutions are bracing for some turbulence, expectations of bank promoters for higher returns have not changed,” Joshi said. “This will exert pressure on managements, compelling them to make some compromises in quality, which may hit the banking sector.”