Muktinath Bank Profit Rises 12%, but Sharp Increase in Bad Loans Clouds Outlook

Kathmandu — Muktinath Bikas Bank reported higher earnings in the last fiscal year, but a sharp deterioration in loan quality has emerged as a key concern behind an otherwise improved profit statement.

The bank earned a net profit of Rs 1.51 billion in fiscal year 2082/83, up 12.44 percent from around Rs 1.35 billion a year earlier. The increase indicates that the bank was able to maintain earnings growth despite relatively weak credit expansion and challenging conditions for loan recovery.

The headline profit figure, however, tells only part of the story. The bank’s non-performing loan ratio jumped to 4.77 percent from 2.97 percent within a year. This represents an increase of 1.80 percentage points, or more than 60 percent when measured relative to the previous year's NPL ratio.

Such a rise means a substantially larger share of the bank's loan portfolio has fallen into the non-performing category. If the trend continues, the bank could face greater provisioning requirements, weaker interest collection and additional pressure on profitability in subsequent quarters.

Profit supported by interest income and lower impairment

The bank's net interest income increased by 3.63 percent to Rs 4.74 billion during the year. The growth was modest compared with the 12.44 percent increase in net profit, suggesting that factors other than expansion in core interest earnings also contributed to the improvement in the bottom line.

One such factor was the decline in impairment charges. The amount set aside against potential credit losses fell to Rs 572.3 million from Rs 793.5 million, a reduction of about 28 percent.

Lower impairment expenses directly support reported profit because less income is absorbed by provisions against possible loan losses. This appears to have provided meaningful support to Muktinath's earnings during the year.

The combination of a falling impairment charge and a rising NPL ratio, however, deserves attention. The two figures do not necessarily contradict each other because provisioning can be affected by loan classification, recoveries, collateral, regulatory treatment and previous provisions. Nevertheless, continued deterioration in loan quality could eventually require higher provisions, potentially reversing part of the benefit seen this year.

The bank reported net operating income of Rs 4.82 billion and operating profit of Rs 2.42 billion. Net fee and commission income stood at Rs 549.8 million, providing an additional source of revenue beyond the bank's traditional interest-based business.

Deposits grow twice as fast as lending

The bank's balance-sheet expansion remained relatively subdued. Loans and advances to customers and financial institutions increased by only 2.55 percent, while customer deposits grew by 5.20 percent.

Customer deposits reached roughly Rs 123 billion, while loans and advances remained above Rs 100 billion. Total assets increased by 3.33 percent to Rs 141.06 billion.

The difference between deposit and credit growth is financially significant. Banks earn much of their income by mobilising deposits and converting those funds into productive loans and investments. When deposits rise faster than lending, a larger amount of funds may remain in lower-yielding liquid assets unless the bank can find alternative profitable investments.

For Muktinath, this creates a two-sided challenge. The bank needs to expand lending to improve the utilisation of its growing funding base, but rapid credit expansion would be risky when its existing loan portfolio is already showing deterioration.

This means future growth may depend less on simply expanding the loan book and more on finding borrowers with strong repayment capacity.

Reserve strengthens, but retained earnings fall sharply

The bank's reserve fund increased by 25.26 percent to Rs 4.27 billion, strengthening its internal financial buffer.

Retained earnings, however, moved in the opposite direction. They fell by 50.09 percent to Rs 675.7 million.

The bank's distributable profit also stood at Rs 675.7 million. Compared with net profit of Rs 1.51 billion, this means less than half of the year's reported profit was available as distributable earnings under the reported figures.

Its dividend capacity was reported at 8.45 percent. This is an important distinction for shareholders because higher accounting profit does not automatically translate into an equivalent increase in dividends.

The amount that can ultimately be distributed depends on distributable earnings, regulatory requirements, reserves, capital adequacy and decisions taken by the bank's board and approved through the relevant process.

EPS improves, but asset quality becomes the key indicator

The bank reported annualised earnings per share of Rs 18.98, while net worth per share stood at Rs 161.82.

Return on equity was reported at 12.27 percent, indicating that the bank continued to generate a positive return on shareholders' funds. Its price-to-earnings ratio stood at 19.13 times, while the liquidity ratio was 27.95 percent.

On the surface, these indicators present a relatively stable profitability and capital position. But the increase in non-performing loans changes the interpretation of the overall results.

For a bank, current profitability is important, but the quality of the assets generating those profits is equally critical. A bank may maintain or even increase earnings for a period while stressed loans accumulate, but persistent deterioration in asset quality can eventually translate into higher provisions, lower interest income and pressure on capital.

Economic slowdown weighs on lending and recovery

The bank has linked some of the challenges to sluggish economic activity, subdued credit demand and difficulties in loan recovery.

Weak economic activity can affect banks from both sides of the balance sheet. Businesses become reluctant to borrow for expansion when investment opportunities are limited, while borrowers already carrying debt may experience weaker cash flows and greater difficulty servicing their obligations.

This helps explain why Muktinath is seeing relatively slow credit expansion at the same time as its NPL ratio is rising.

Excess liquidity in the broader banking system further complicates the situation. When most banks have sufficient funds but demand for sound credit remains limited, institutions compete more aggressively for a relatively small pool of quality borrowers. That can put pressure on lending rates and margins while increasing the temptation to pursue riskier lending.

The bank has also identified regulatory changes, competition among financial institutions, cybersecurity threats, migration of working-age people abroad and limited investment opportunities as challenges to future business growth.

Internally, loan recovery, expansion of non-interest income and retention of skilled employees remain areas requiring attention.

The real test will be loan recovery

Muktinath has indicated that improving asset quality and strengthening risk management will be among its priorities. The bank plans to focus on better utilisation of assets and liabilities, control of non-performing loans and further development of its risk-management framework.

Digital banking is another area where the bank plans to expand. Greater use of technology could reduce transaction costs and improve service delivery, although digital expansion also requires stronger cybersecurity and operational risk controls.

The bank also intends to invest in staff training and capacity development, an increasingly important issue as competition for experienced banking professionals remains high.

For shareholders and investors, however, the most important figure to watch in the coming quarters may not be headline profit growth.

Muktinath has entered the new fiscal year with profit up 12.44 percent but bad loans at 4.77 percent, compared with 2.97 percent a year earlier. At the same time, deposits are growing at more than twice the rate of credit.

The bank therefore faces a delicate balancing act: it needs to use its available liquidity more productively without compromising lending standards, while simultaneously recovering stressed loans already on its books.

If NPLs begin to decline and credit growth improves without weakening loan quality, the current earnings growth could prove sustainable. But if bad loans continue to rise, higher provisioning could eventually reduce profitability and distributable earnings.

For that reason, the sustainability of Muktinath Bikas Bank's profit will increasingly depend not simply on how much it lends, but on how well those loans perform and how effectively the bank converts its growing deposit base into quality assets.