The Growth Landscape: Where Nepal's Banks Stand
The second quarter of fiscal year 2082/83 has delivered a clear verdict on which banks are growing and which are stagnating. Our Bank Quality Growth Scores, which aggregate earnings momentum, balance sheet expansion, asset quality trends, and profitability improvements, reveal a banking sector with significant disparity between leaders and laggards. Understanding this disparity is essential for building a growth-oriented portfolio heading into 2026.
At the top of the growth rankings, EBL and NABIL have distinguished themselves with scores above 85, earning the coveted A+ growth rating. These are not merely good banks performing adequately; they are institutions demonstrating accelerating earnings power, improving return metrics, and expanding market share simultaneously. Below them, SCB maintains an A grade at 78.79, while the middle tier shows growth scores in the B range, indicating steady but unremarkable expansion.
Top Growth Performers: Detailed Analysis
| Bank | Growth Score | Grade | Current EPS | Projected EPS 2026 | Growth Rate | LTP |
|---|---|---|---|---|---|---|
| EBL | 87.99 | A+ | Rs 30.86 | Rs 36-38 | 18-22% | Rs 670 |
| NABIL | 85.02 | A+ | Rs 29.69 | Rs 34-36 | 15-20% | Rs 496.1 |
| SCB | 78.79 | A | Rs 27.35 | Rs 31-33 | 14-18% | Rs 631 |
| SANIMA | 68.50 | B+ | Rs 20.48 | Rs 23-25 | 12-15% | Rs 330 |
| SBL | 62.40 | B | Rs 17.93 | Rs 20-21 | 10-12% | Rs 380.8 |
EPS Growth Trajectory: Quarterly Earnings Path
To forecast where bank earnings are headed, we need to understand the drivers behind current EPS levels and project how they will evolve. The three primary drivers of bank EPS growth in Nepal are net interest income expansion, fee income growth, and provisioning normalization from improving asset quality.
NABIL's current EPS of Rs 29.69 reflects a bank that has successfully managed its balance sheet through the post-pandemic cycle. With an NPL ratio of just 0.88 percent and ROE of 14.86 percent, NABIL generates superior returns on every rupee of equity capital. Projecting forward, if credit growth maintains a 12-15 percent pace and NABIL holds its market share, EPS should reach Rs 34-36 by the end of 2026, representing 15-20 percent growth from current levels.
EBL's trajectory is even more compelling. Starting from a higher EPS base of Rs 30.86 with the sector's lowest NPL ratio (0.68 percent), EBL has more room for provisioning-driven earnings improvement. As the bank continues to clean up its already pristine loan book, funds previously allocated to provisions can flow directly to the bottom line. Our model projects EBL's EPS reaching Rs 36-38 by year-end 2026, representing an 18-22 percent growth rate that justifies a premium valuation.
Mid-Tier Growth Expectations
The mid-tier commercial banks present a mixed growth picture. While their earnings are growing, the pace is notably slower than the sector leaders, and their growth paths carry more risk due to higher NPL exposure.
| Bank | Current EPS | NPL % | Growth Constraint | 2026 EPS Range |
|---|---|---|---|---|
| KBL | Rs 20.74 | 6.92% | NPL provisioning drag | Rs 22-24 |
| MBL | Rs 16.73 | 2.10% | Scale limitations | Rs 18-20 |
| GBIME | Rs 17.06 | 2.30% | Competitive pressure | Rs 19-21 |
| NBL | Rs 17.76 | 5.34% | Asset quality concerns | Rs 19-21 |
KBL's growth is constrained by its elevated NPL ratio of 6.92 percent, the highest among commercial banks. Every percentage point increase in NPLs requires additional provisioning, directly reducing reported earnings. Until KBL demonstrates a sustained decline in NPLs below 5 percent, its EPS growth will likely trail the sector leaders by a significant margin despite having a respectable EPS base of Rs 20.74.
Sector Catalysts: What Will Drive Growth in 2026
Banking sector growth does not occur in a vacuum. Several macroeconomic and structural factors will determine whether our growth projections materialize or require revision. Understanding these catalysts is as important as analyzing individual bank fundamentals.
1. Credit Demand Expansion
Nepal's economy is projected to grow at 5-6 percent in real GDP terms through 2026, driven by recovery in tourism, hydropower investment, and infrastructure spending. This GDP growth translates directly into credit demand, as businesses borrow to expand and consumers take loans for housing and vehicles. Historical data shows that banking sector credit growth runs at approximately 2-2.5 times GDP growth in Nepal, suggesting credit expansion of 12-15 percent in the coming year. The banks best positioned to capture this credit growth are those with the largest branch networks and strongest capital bases, primarily the top-tier commercial banks like NABIL and EBL.
2. Interest Rate Cycle
Nepal Rastra Bank's monetary policy stance has moved toward accommodation after a period of tightening. Lower policy rates reduce banks' cost of funds while the lending rate adjustment tends to lag, creating a period of expanded net interest margins. This margin expansion directly boosts earnings. NABIL and SCB, with their strong deposit franchises, are particularly well positioned to benefit from this interest rate dynamic. If NRB maintains its current accommodative stance through 2026, the net interest margin tailwind alone could add 2-3 percentage points to EPS growth rates across the commercial banking sector.
3. Digital Banking Transformation
Nepal's banking sector is undergoing a quiet digital revolution that is reshaping cost structures and creating new revenue streams. Mobile banking adoption has accelerated dramatically, with transaction volumes growing at over 40 percent annually. For banks, this means lower operational costs as branch dependency decreases and higher fee income from digital transaction charges. The banks investing most aggressively in digital infrastructure, notably NABIL, EBL, and SCB, will see their cost-to-income ratios improve by 2-4 percentage points over the next two years, directly enhancing profitability and EPS growth.
2026 Price Targets: Valuation-Based Projections
Price targets are derived from two components: projected EPS and the price-to-earnings multiple the market is willing to assign. For growth leaders, we can expect some P/E expansion as the market rewards sustained earnings growth with higher multiples. For mid-tier banks, P/E ratios are likely to remain range-bound or contract slightly.
| Bank | Current LTP | Current P/E | Proj. EPS 2026 | Target P/E | Price Target | Upside |
|---|---|---|---|---|---|---|
| NABIL | Rs 496.1 | 18.4x | Rs 34-36 | 18-19x | Rs 620-680 | 25-37% |
| EBL | Rs 670 | 18.53x | Rs 36-38 | 23-24x | Rs 830-920 | 24-37% |
| SCB | Rs 631 | 22.95x | Rs 31-33 | 24-25x | Rs 750-820 | 19-30% |
| SANIMA | Rs 330 | 16.18x | Rs 23-25 | 17-18x | Rs 390-450 | 18-36% |
| KBL | Rs 184.1 | 10.59x | Rs 22-24 | 10-11x | Rs 220-260 | 20-41% |
| NBL | Rs 241 | 7.67x | Rs 19-21 | 8-9x | Rs 155-190 | -21 to -35%* |
*NBL's low P/E reflects market concerns about its 5.34% NPL ratio. Price targets assume NPL does not worsen; any deterioration could lead to further P/E compression.
GDP Growth Impact on Banking Sector Returns
Nepal's GDP growth and banking sector returns have maintained a strong positive correlation over the past decade. Every percentage point of GDP growth above 4 percent historically translates to approximately 3-4 percent in additional banking sector earnings growth, amplified through the credit multiplier effect.
The government's infrastructure spending plans, including hydropower projects and road development, create direct lending opportunities for commercial banks. Large-scale project financing is a high-margin activity that only the largest commercial banks can undertake, further concentrating growth among NABIL, EBL, and SCB. Additionally, remittance inflows, which constitute roughly 25 percent of Nepal's GDP, continue to support the deposit base and lending capacity of the banking system.
If GDP growth reaches the projected 5-6 percent range, our banking sector EPS forecasts remain on track. However, investors should also consider the downside scenario where GDP growth falls to 3-4 percent due to global headwinds or domestic policy disruptions. In this scenario, credit growth would moderate to 8-10 percent, reducing EPS growth rates by approximately 3-5 percentage points across the sector. Even in this bearish scenario, top performers like EBL and NABIL would still deliver 12-15 percent EPS growth, comfortably outperforming the broader market.
Key Risks to Growth Forecasts
No growth forecast is complete without a rigorous examination of the risks that could derail the projected trajectory. Nepal's banking sector faces several headwinds that investors must monitor.
A third risk involves global economic conditions affecting Nepal's remittance flows. If major labor destination countries (Gulf states, Malaysia, Japan) experience economic downturns, remittance inflows could decline, reducing the banking system's deposit growth and constraining lending capacity. This risk is partially mitigated by the diversification of Nepal's remittance sources across multiple countries, but it remains a tail risk that could impact the entire banking sector simultaneously.
Political and regulatory risk also deserves attention. Nepal's regulatory environment can change rapidly, with new directives from NRB potentially altering the competitive landscape overnight. Recent directives on mandatory lending to priority sectors and caps on interest rate spreads have already impacted certain banks' profitability. Investors should monitor NRB communications closely and adjust growth expectations when significant policy changes are announced.
Growth Sector Strategy: Positioning for 2026
Based on our growth analysis, here is a tiered strategy for investors seeking to capture banking sector growth in 2026.
Tier 1: High-Conviction Growth (60% allocation)
Allocate 60 percent of banking sector capital to the three highest-growth banks: EBL (30 percent), NABIL (20 percent), and SCB (10 percent). These banks offer the combination of strong growth scores (78-88), low NPLs (0.68-1.88 percent), and proven management track records that minimize downside risk while maximizing growth capture.
Tier 2: Growth Recovery Plays (25% allocation)
Allocate 25 percent to banks showing improving growth trajectories: SANIMA (15 percent) and SBL (10 percent). These banks have quality scores above 63 and are demonstrating steady EPS expansion, albeit at a slower pace than Tier 1. The lower P/E multiples (13-16x versus 18-23x) provide a margin of safety if growth disappoints.
Tier 3: Value with Growth Optionality (15% allocation)
The remaining 15 percent can be allocated to value plays that offer growth optionality: KBL (10 percent) and GBIME (5 percent). These banks trade at P/E multiples below 14x with dividend yields above 3 percent, providing income while investors wait for potential growth catalysts such as NPL improvements or merger activity.