Sanima Bank’s Profit Rises 38% as Lower Credit-Loss Charges Lift Earnings

Kathmandu — Sanima Bank closed fiscal year 2082/83 with a sharp improvement in profitability, as growth in its core banking business was reinforced by a substantial decline in impairment charges. While deposits, loans and operating income expanded at around 10 to 13 percent, net profit surged 38 percent, showing that improved credit costs played a major role in the earnings jump.

According to the bank’s unaudited fourth-quarter financial statement, net profit reached Rs 3.55 billion at the end of Ashad 2083, compared with Rs 2.57 billion a year earlier. The bank added around Rs 978 million to its annual profit.

The pace of profit growth was far stronger than the expansion in revenue. Total operating income increased 13.13 percent to Rs 9.73 billion from Rs 8.60 billion, while operating profit climbed 44.44 percent to Rs 5.17 billion.

This gap is important. It suggests that Sanima’s strong profit growth did not come simply from lending more money or earning more interest. A major part of the improvement came from the amount the bank had to set aside against potential credit losses.

Impairment charges declined to Rs 1.08 billion from Rs 1.89 billion a year earlier, a drop of almost 43 percent. In absolute terms, the bank’s impairment burden fell by around Rs 811 million.

That reduction alone is equivalent to roughly 83 percent of the Rs 978 million increase in net profit, although the two figures cannot be treated as a direct one-for-one relationship because taxes, expenses and other income also affect final earnings.

A year earlier, impairment charges were equivalent to around 22 percent of operating income. This year, the ratio has fallen to roughly 11 percent. The decline allowed a much larger share of operating earnings to reach the bottom line.

Sanima’s core income nevertheless also improved.

Net interest income increased 10 percent to Rs 6.99 billion from Rs 6.36 billion. Net fee and commission income rose 11.10 percent to Rs 1.33 billion from Rs 1.20 billion.

The simultaneous growth in interest and fee income indicates that the bank expanded both traditional lending-related earnings and income generated from banking services.

The increase in fee income is particularly useful from an earnings-quality perspective because banks that generate more income outside the interest spread are somewhat less dependent on movements in lending and deposit rates.

Sanima’s business volume also expanded at a relatively balanced pace.

Customer deposits increased 11.24 percent to Rs 249.12 billion from Rs 223.95 billion. This means the bank mobilised around Rs 25.16 billion in additional deposits during the year.

Loans and advances to customers rose 11.02 percent to Rs 195.88 billion from Rs 176.44 billion, an increase of about Rs 19.44 billion.

The near-identical growth rates of deposits and loans are notable. Unlike banks where deposits may rise rapidly while lending remains weak, Sanima appears to have expanded both sides of its balance sheet at roughly the same pace.

Its regulatory credit-to-deposit ratio eased slightly to 80.77 percent from 81.03 percent.

The decline is small, but it indicates that deposit growth marginally outpaced the use of those resources for lending. It also leaves the bank with some room for further credit expansion, subject to regulatory limits, capital availability and demand from creditworthy borrowers.

Asset quality also moved in a favourable direction.

The non-performing loan ratio declined to 2.87 percent from 3.01 percent a year earlier.

A fall of 0.14 percentage points may look modest, but it carries greater significance because the bank simultaneously expanded its loan portfolio by more than 11 percent.

Maintaining lower bad loans while growing credit indicates that loan recovery and portfolio quality improved, at least according to the year-end figures.

The decline in NPLs also provides some justification for the sharp reduction in impairment charges.

Still, a 2.87 percent NPL ratio remains close to the 3 percent mark. The improvement should therefore be viewed as progress rather than proof that credit risk has disappeared, a condition banking has somehow failed to invent.

The bank’s ability to prevent bad loans from rising as its credit portfolio expands will be central to whether this year’s profit growth can be sustained.

Sanima’s capacity to distribute earnings to shareholders has also strengthened.

Distributable profit increased 34.66 percent to Rs 2.83 billion from Rs 2.10 billion.

Distributable earnings per share rose to Rs 20.85 from Rs 15.48, an increase of about 35 percent.

This provides a stronger base for shareholder returns than a year earlier. However, distributable EPS should not be interpreted as a guaranteed dividend. The actual dividend will depend on the board’s recommendation, regulatory requirements, capital needs and shareholder approval.

The bank’s regular earnings per share increased to Rs 25.75 from Rs 18.94, a rise of nearly 36 percent.

Net worth per share also improved to Rs 188.42 from Rs 168.83, meaning book value increased by Rs 19.59 per share, or about 11.6 percent.

The reported price-to-earnings ratio declined to 13.59 times from 19.80 times.

A lower P/E in combination with substantially higher EPS indicates that earnings have strengthened relative to the bank’s market valuation. However, the ratio also depends on movements in the share price and should not be interpreted from earnings alone.

The bank also strengthened its capital and reserve position during the year.

Share capital rose 14.73 percent to Rs 15.58 billion from Rs 13.58 billion, an increase of Rs 2 billion. The capital figure includes the bank’s 8.25 percent perpetual non-cumulative preference shares.

Retained earnings increased 37.15 percent to Rs 2.88 billion, while reserves rose 24.16 percent to Rs 9.12 billion.

Combined reserves and surplus reached Rs 12.01 billion, up 27.05 percent from Rs 9.45 billion.

The expansion in reserves gives the bank a larger buffer to absorb future risks and support business growth.

However, the capital fund-to-risk-weighted assets ratio increased only marginally, from 13.01 percent to 13.10 percent.

The small movement despite higher capital suggests that growth in assets and risk-weighted exposures absorbed much of the additional capital cushion.

Another notable feature of Sanima’s results is that earnings improved even as interest rates moved sharply lower.

The bank’s base rate declined to 4.91 percent from 6.12 percent, a fall of 1.21 percentage points.

Its interest-rate spread narrowed to 3.39 percent from 3.68 percent, a reduction of 0.29 percentage points.

A falling spread normally creates pressure on bank profitability because the difference between what banks earn on loans and what they pay for funds becomes narrower.

Yet Sanima still managed to increase net interest income by 10 percent.

That suggests the bank offset some of the pressure from lower margins through higher business volume and balance-sheet management.

The challenge is whether that strategy can continue if lending rates remain low and competition for good borrowers intensifies.

The latest figures therefore show two distinct layers to Sanima Bank’s performance.

The first is genuine business expansion. Deposits increased by more than 11 percent, loans grew at a similar pace, net interest income rose 10 percent and operating income increased 13 percent.

The second, and more powerful, factor is the reduction in credit costs.

Impairment charges fell almost 43 percent, operating profit jumped more than 44 percent and net profit rose 38 percent.

This means Sanima did not need explosive revenue growth to generate a much stronger bottom line. Better asset quality and lower provisioning did a large part of the work.

That is positive for the current year, but it also sets a higher bar for the future.

Impairment charges cannot necessarily decline by another 43 percent every year. Once that benefit normalises, future profit growth will need to depend more heavily on sustainable loan expansion, fee income, operating efficiency and disciplined management of funding costs.

The bank therefore ends the year in a stronger position than it began: profit is higher, bad loans are lower, reserves are larger and shareholder earnings have improved.

But the most important question is no longer whether Sanima produced a strong year. The numbers clearly show that it did.

The real test will be whether it can maintain double-digit core income growth and keep asset quality under control once the unusually large benefit from lower impairment charges begins to fade.