Commercial Banks Face Dividend Cuts Amid Economic Slowdown

Kathmandu – Nepal’s commercial banks are bearing economic slowdown, with their distributable profits plummeting to NPR 17.75 billion. This sharp decline has significantly impacted dividend payouts, leaving shareholders disappointed. Of the 20 Class ‘A’ banks, 11 have declared dividends averaging a modest 4.77 percent, while the remaining nine banks have decided not to distribute any dividends.

The financial reports for the last fiscal year paint a bleak picture of the banking sector. The collective net profit of commercial banks fell to NPR 64.16 billion. While 11 banks managed to increase their profits, nine experienced a sharp drop, further straining their ability to reward shareholders. In the fiscal year 2022/23, these banks distributed NPR 31.90 billion in dividends, but this year’s reduced distributable profit of NPR 18.58 billion has made it impossible to sustain that level of payout.

Among the banks that declared dividends, Standard Chartered Bank emerged as the most generous, offering 25.50 percent to its shareholders. Siddhartha Bank followed with a modest 4 percent dividend. However, some prominent banks, including Himalayan Bank, Kumari Bank, Machhapuchchhre Bank, Nepal Investment Mega Bank, NIC Asia, NMB Bank, Prabhu Bank, and Rastriya Banijya Bank, announced no dividends at all.

The decline in profitability and dividends can be attributed to several challenges the banking sector is currently facing. One of the most critical issues is the rise in non-performing loans (NPLs). By mid-October 2024, the average NPL ratio of commercial banks had increased to 4.42 percent, up from 3.8 percent in mid-July 2024. Many banks reported NPLs exceeding 5 percent, reflecting a significant increase in bad debts. This has forced banks to set aside more funds for loan-loss provisions, which rose by 29.5 percent during the review period, directly impacting their profits.

Additionally, Nepal Rastra Bank’s tighter regulatory oversight on loan-loss provisions has further constrained the profitability of banks. In some cases, profits declined by up to 25 percent due to the central bank’s stricter financial supervision. The combination of regulatory policies and economic challenges has created a perfect storm for commercial banks.

Excess liquidity has also emerged as a pressing issue, with banks struggling to utilize their surplus loanable funds. The insufficient capital adequacy fund and declining demand for loans have further compounded their woes. The slowdown in business activities has also led to a drop in personal deposit interest rates, which have fallen to as low as 5.5 percent, reflecting the challenges in maintaining profitable operations.

Furthermore, many banks have accumulated significant volumes of non-banking assets that they have been unable to liquidate. These assets, often acquired due to defaults, have become a burden on their financial performance and are limiting their ability to generate distributable profits.

Despite these challenges, banks and financial institutions (BFIs) recorded net profits of NPR 30.83 billion in the first five months of the current fiscal year. This figure is slightly lower than the NPR 30.91 billion recorded in the same period last year. Commercial banks accounted for 90 percent of the total, contributing NPR 37.75 billion.

There was some improvement between mid-November and mid-December 2024, as BFIs saw their net profits increase by NPR 8 billion within a month. However, the long-term outlook remains uncertain as the banking sector continues to grapple with rising NPLs, shrinking profits, and declining shareholder confidence.