How to Analyze Bank Financial Statements Nepal Q2 Guide

Step 1: Check Earnings Per Share (EPS) — Profitability

The first thing any analyst checks in a bank's financial statement is the Earnings Per Share (EPS). This single number tells you how much profit the bank generated for each share of stock outstanding. Higher EPS means the bank is more profitable on a per-share basis, which is ultimately what drives shareholder value and stock prices over time.

To find EPS, look at the bank's income statement for the net profit figure, then divide by the total number of shares outstanding. Most Nepal banks report EPS directly in their quarterly disclosures. For Q2 2082/83, the EPS spread across commercial banks is significant, revealing a wide profitability gap.

Key takeaway: EBL (Rs 30.86) generates nearly double the per-share profit of MBL (Rs 16.73). This 1.84x gap tells you that EBL is a significantly more profitable bank, but remember — profitability alone doesn't tell you whether the stock is cheap or expensive. That's what the later steps address.

Step 2: Check Return on Equity (ROE) — Efficiency

While EPS tells you the absolute profit per share, ROE tells you how efficiently the bank is using shareholders' money to generate those profits. ROE is calculated as Net Profit divided by Shareholders' Equity, expressed as a percentage. A bank with ROE of 15% generates Rs 15 of profit for every Rs 100 of equity capital — that's efficient. A bank with ROE of 7% generates only Rs 7 — that's mediocre.

For Nepal's commercial banks, an ROE above 12% is considered strong, 8-12% is average, and below 8% raises questions about management efficiency and capital deployment. Here's how Q2 2082/83 data looks using estimated ROE derived from EPS and book value relationships:

NABIL leads with an estimated ROE of approximately 14.86%, followed by EBL at around 13.76%. These are the only two banks generating ROE consistently above 13%, which is one reason they command premium valuations. At the lower end, NBL generates an estimated ROE of roughly 6.76%, which is well below the cost of equity and suggests the bank isn't generating sufficient returns on its capital base. This low ROE is a key reason why NBL trades at such low P/E and P/B multiples — the market recognizes the capital efficiency problem.

Key takeaway: Look for banks with ROE above 12%. When ROE is below 8%, the bank may be destroying shareholder value, and its low P/E or P/B might be a value trap rather than a genuine bargain.

Step 3: Check Non-Performing Loan Ratio (NPL) — Risk

This is where many beginner investors go wrong. They look at profitability and valuation but ignore the risk lurking inside the loan book. The Non-Performing Loan (NPL) ratio measures what percentage of a bank's total loans have stopped generating interest income — essentially, loans where borrowers have defaulted or are severely delinquent. A high NPL ratio is a ticking time bomb because those loans may need to be written off, directly reducing future earnings.

For Nepal's banking sector, an NPL below 2% is excellent, 2-4% is acceptable, and above 5% is a red flag requiring serious scrutiny. Here's the Q2 2082/83 reality:

Key takeaway: EBL's NPL of 0.68% means only 68 paisa out of every Rs 100 lent is problematic. KBL's 6.92% means nearly Rs 7 out of every Rs 100 lent is in trouble. This single metric explains a huge part of why some banks trade at premium valuations (EBL, NABIL) while others trade at steep discounts (NBL, KBL). A 10x difference in loan quality between EBL and KBL is not something to overlook.

Step 4: Check Price-to-Earnings (P/E) — Valuation

Now that you know the bank's profitability (EPS), efficiency (ROE), and risk (NPL), it's time to check whether the market has priced all this correctly. The P/E ratio divides the current share price by EPS, telling you the multiple investors are paying for each rupee of earnings. A bank with P/E of 10 costs Rs 10 per rupee of earnings; a bank with P/E of 23 costs Rs 23 — more than double — for the same rupee of earnings.

Using our P/E benchmarks for Nepal: below 10 is undervalued territory, 10-18 is fair value, and above 20 is expensive. The critical insight is to compare P/E with the quality metrics from Steps 1-3. A low P/E bank with excellent NPL and ROE is a genuine bargain. A low P/E bank with terrible NPL is a value trap.

Practical example: NBL has P/E 7.67 (undervalued zone) but NPL of 5.34% (red flag). Meanwhile, NABIL has P/E 18.40 (fair/high zone) but NPL of just 0.88% (excellent). NABIL's higher P/E is justified by its superior loan quality. NBL's low P/E partially reflects real risk. The investor's job is to determine whether the discount is excessive relative to the risk — and in NBL's case, a P/E below 8 for a bank with improving operations may indeed be too cheap.

Step 5: Check Net Interest Margin (NIM) — Core Business Strength

Net Interest Margin (NIM) measures the difference between interest earned on loans and interest paid on deposits, expressed as a percentage of interest-earning assets. This is the most fundamental measure of a bank's core business — after all, banking is essentially about borrowing cheaply and lending at higher rates. Higher NIM means the bank captures a wider spread on each rupee intermediated.

For Nepal's banks, NIM typically ranges between 3% and 5%. Banks with NIM above 4% are demonstrating strong pricing power or efficient deposit mobilization. Banks with NIM below 3.5% may be competing aggressively on loan pricing or paying too much for deposits. Based on available sector data, KBL operates with a higher NIM around 4.84% while SBI operates closer to 3.44%. This spread matters because higher NIM provides a larger cushion against credit losses and operating expenses.

Key takeaway: Look for banks with NIM above 3.8%. Banks with very high NIM may face sustainability questions if they achieve it by lending to riskier borrowers, while banks with very low NIM may struggle to maintain profitability in a competitive environment.

Step 6: Check Dividend Yield — Income Return

The final step in bank financial analysis is assessing dividend yield — the annual dividend divided by the share price, expressed as a percentage. For income-focused investors, this is a crucial metric because it represents the return you receive regardless of stock price movements. In Nepal's banking sector, dividend yields range significantly from SBI's 1.14% to KBL's sector-leading 6.54%.

A consistent dividend payer with yield above 3% is attractive for long-term investors. KBL's 6.54% yield means investors receive Rs 6.54 annually for every Rs 100 invested — comparable to or better than fixed deposit rates. NBL (3.36%), GBIME (3.11%), and SCB (2.93%) also offer meaningful dividend income. Conversely, SBI (1.14%) and SBL (1.48%) provide minimal income returns.

Applying the Framework — Quick Assessment of Top Banks

NABIL: EPS 29.69 (pass), ROE ~14.86% (pass), NPL 0.88% (pass), P/E 18.40 (borderline pass), NIM strong (pass), DY 2.36% (modest). Verdict: 5/6 — Strong fundamental stock. Premium valuation justified by fundamentals.

EBL: EPS 30.86 (pass), ROE ~13.76% (pass), NPL 0.68% (pass), P/E 18.53 (borderline), NIM solid (pass), DY 2.02% (low). Verdict: 5/6 — Comparable to NABIL but slightly more expensive.

NBL: EPS 17.76 (pass), ROE ~6.76% (fail), NPL 5.34% (fail), P/E 7.67 (deep value), NIM moderate (pass), DY 3.36% (pass). Verdict: 3/6 — Value trap risk. Only for investors who believe NPL will improve.

KBL: EPS 20.74 (pass), ROE moderate (pass), NPL 6.92% (fail), P/E 10.59 (value), NIM 4.84% (pass), DY 6.54% (strong pass). Verdict: 4/6 — High income play but NPL risk demands monitoring.

This framework works for every bank on NEPSE. Practice by applying it to development banks and finance companies as well. The metrics and thresholds remain the same — only the sector averages shift slightly.