Support Laghubitta’s Profit Surges 181%, but Impairment Reversal Also Lifts Bottom Line

Kathmandu — Support Laghubitta Bittiya Sanstha Limited (SMB) has closed the latest fiscal year with a sharp improvement in profitability, as higher interest income and a reversal of impairment charges pushed its net profit to Rs 76.1 million. The unaudited fourth-quarter financial statement shows that profit increased by 181.36 percent from Rs 27 million in the previous fiscal year.

The increase means the microfinance institution earned nearly 2.8 times as much profit as it did a year earlier. The headline growth is substantial, but a closer look at the financial statement shows that the improvement did not come from a single source. Expansion in core interest income strengthened operating performance, while the reversal of previously recognised impairment charges provided an additional lift to earnings.

Support Laghubitta’s net interest income increased by 35.55 percent during the review period. For a microfinance institution, this is an important indicator because net interest income reflects the difference between income generated from lending activities and the cost of funds. A rise of more than one-third suggests that the institution’s core financial intermediation business improved considerably during the year.

Total operating income rose by 34.85 percent, broadly in line with the growth in net interest income. Operating profit, however, jumped by a much stronger 134.25 percent. The faster rise in operating profit than in revenue indicates an improvement in operating leverage, meaning a larger portion of additional income was ultimately converted into profit.

Another factor behind the improvement was the reversal of around Rs 10.2 million in impairment charges by the end of the fiscal year. Impairment provisions are generally created to absorb expected losses from loans and other financial assets. When part of those provisions is reversed, the amount flows back into earnings and increases reported profit.

This distinction is important when interpreting the 181.36 percent growth in net profit. Part of the improvement appears to have come from stronger recurring business, particularly higher net interest income, but part was also supported by the impairment reversal. An impairment reversal is favourable because it can indicate an improvement in expected credit losses or recovery conditions, but it is not necessarily a recurring source of income that can be expected every year.

The institution reported distributable profit of Rs 67 million. This represents roughly 88 percent of its reported net profit, indicating that a large portion of earnings remained available for distribution after regulatory and accounting adjustments. Its distributable earnings per share stood at Rs 50.03.

The difference between headline earnings per share and distributable earnings per share is also worth noting. Support Laghubitta reported EPS of Rs 56.82, while distributable EPS was Rs 50.03. The gap of Rs 6.79 per share shows that not all accounting profit is immediately available for shareholder distribution.

The figure nevertheless indicates substantial dividend capacity compared with the institution’s paid-up capital. But distributable EPS should not be interpreted as a guaranteed cash or bonus dividend. Any dividend proposal will depend on the board’s decision, Nepal Rastra Bank’s regulatory requirements, capital adequacy considerations and approval from the institution’s annual general meeting.

Profit growth has also translated directly into a sharp improvement in shareholder earnings. EPS increased by Rs 34.71 during the year to Rs 56.82. Based on the disclosed change, EPS in the previous corresponding period was around Rs 22.11. The increase therefore reflects a significant rise in profit generated against the same broad capital base.

Support Laghubitta has paid-up capital of Rs 134 million and reserves of Rs 140.9 million. Its reserve fund is therefore slightly larger than its paid-up capital, with reserves equivalent to about 105 percent of capital. This gives the institution a stronger accumulated equity buffer than would be suggested by paid-up capital alone.

Adding paid-up capital and reserves gives an equity base of around Rs 274.9 million. This is also consistent with the company’s reported net worth per share of Rs 205.13, assuming shares have the standard face value of Rs 100. Net worth above Rs 200 means the institution has built shareholders’ equity equivalent to slightly more than twice the face value of each share.

From a market valuation perspective, however, the stock is not inexpensive on current earnings. The company reported a price-to-earnings ratio of 32.15 times at the end of the fiscal year. At an EPS of Rs 56.82, the disclosed P/E ratio implies a market price of roughly Rs 1,827 per share at that point.

Using the same implied market price against a net worth of Rs 205.13 per share gives a price-to-book ratio of roughly 8.9 times. This suggests that investors were valuing the stock at a significant premium to its accounting book value. Such a valuation usually reflects expectations of strong future earnings, dividend prospects or scarcity value, but it also increases the risk of price correction if future growth fails to meet those expectations.

The latest numbers therefore present two different messages for investors. On the operating side, the institution has delivered meaningful improvement: net interest income is up more than 35 percent, operating income has expanded at a similar pace and operating profit has more than doubled. These figures suggest that the underlying business performed substantially better than a year earlier.

On the other hand, the extraordinary pace of net profit growth should not automatically be extrapolated into the next fiscal year. A 181 percent rise in profit is far greater than the 35.55 percent increase in net interest income, which shows that factors beyond ordinary revenue growth contributed materially to the final earnings figure. The impairment reversal is one such factor.

This means the quality of next year’s earnings will matter more than simply whether profit rises again. Investors will need to watch the trend in non-performing loans, loan-loss provisions, recovery of overdue credit, cost of funds, lending growth and net interest margins. If the institution can maintain stronger operating profit without relying heavily on impairment reversals, the latest improvement would appear more sustainable.

The relatively high P/E ratio also raises the bar for future performance. At more than 32 times earnings, the market price already incorporates considerable expectations. If earnings continue to expand, that valuation could become easier to justify. But if profit growth normalises sharply after the one-off benefit from impairment reversal, valuation pressure could emerge even if the company remains profitable.

Overall, Support Laghubitta’s fourth-quarter statement is considerably stronger than a year earlier. The institution has improved its core interest income, operating profitability, EPS, distributable profit and reserve position. Yet the most important conclusion from the numbers is not simply that profit rose by 181 percent. The more relevant question is how much of that improvement can be repeated.

For the coming fiscal year, the sustainability of net interest income and operating profit, rather than another impairment reversal, will provide the clearer test of Support Laghubitta’s underlying financial strength.