Key Ratios to Watch in Nepal Banks Q2 2082/83

Ratio 1: Earnings Per Share (EPS)

Formula: Net Profit / Total Shares Outstanding
What it tells you: How much profit the bank earns per share. Higher is better.
Ideal range for Nepal: Above Rs 20 is strong, Rs 15-20 is average, below Rs 15 is weak.

Best: EBL at Rs 30.86 — leads all commercial banks with the highest per-share profitability. EBL's earnings power reflects strong loan book management, efficient operations, and the best asset quality in the sector. Worst: MBL at Rs 16.73 — while not alarming, MBL's EPS trails the sector median and suggests the bank has room for significant efficiency improvements. The gap between EBL and MBL is Rs 14.13 per share — demonstrating the massive profitability spectrum within Nepal's commercial banking sector.

Ratio 2: Return on Equity (ROE)

Formula: Net Profit / Shareholders' Equity x 100
What it tells you: How efficiently the bank uses shareholder capital to generate profits.
Ideal range for Nepal: Above 12% is strong, 8-12% is average, below 8% is inefficient.

Best: NABIL with estimated ROE of approximately 14.86%. This means for every Rs 100 of shareholder equity, NABIL generates nearly Rs 15 in profit — excellent by Nepal standards. NABIL's high ROE supports its premium P/B ratio of 4.55 because the bank truly creates superior returns on its capital base. Worst: NBL with estimated ROE of approximately 6.76%. Despite reasonable EPS of Rs 17.76, NBL's lower efficiency in converting equity to profit is a structural concern. When ROE falls below the cost of equity (typically 10-12% in Nepal), the bank is essentially destroying shareholder value in economic terms.

Ratio 3: Return on Assets (ROA)

Formula: Net Profit / Total Assets x 100
What it tells you: How efficiently the bank uses its entire asset base (not just equity) to generate profits.
Ideal range for Nepal: Above 1.5% is strong, 1.0-1.5% is average, below 1.0% is weak.

ROA is particularly useful for comparing banks of different sizes. A large bank like NABIL with massive assets needs to generate proportionally more profit to maintain a healthy ROA. In Nepal's context, most commercial banks achieve ROA between 1.0% and 2.0%. Banks like EBL and NABIL tend to be in the upper range, reflecting their ability to generate strong net income relative to their balance sheet size. Banks with bloated asset bases but modest profits will show ROA below 1.0%, signaling inefficient asset deployment.

Ratio 4: Price-to-Earnings (P/E)

Formula: Market Price per Share / Earnings per Share
What it tells you: How expensive the stock is relative to its earnings — the price of each rupee of profit.
Ideal range for Nepal: 10-18 is fair value. Below 10 is potentially undervalued. Above 20 is expensive.

Most Affordable: NBL at P/E 7.67 — investors pay just Rs 7.67 for each rupee of NBL's earnings. This is the cheapest valuation in the sector but comes with the caveat of higher NPL and lower ROE. Most Expensive: SCB at P/E 22.95 — investors pay nearly Rs 23 for each rupee of earnings, a premium driven by foreign brand perception and relatively low NPL. The fair value sweet spot lies in the middle: banks like MBL (12.23), SBL (13.44), GBIME (13.44), and SANIMA (16.18) all trade within the ideal range.

Ratio 5: Price-to-Book (P/B)

Formula: Market Price per Share / Book Value per Share
What it tells you: How the market values the bank relative to its net asset value.
Ideal range for Nepal: Below 3 is cheap, 3-5 is fair, above 5 is expensive.

Cheapest: NBL at P/B 1.84 — the market values NBL at barely 1.84 times its book value, which is remarkably cheap for a commercial bank. Three other banks — KBL (2.37), GBIME (2.59), and MBL (2.82) — also trade below the cheap threshold of 3.0. Most Expensive: SCB at P/B 6.00, followed by EBL at 5.62. These banks trade at 5-6 times their book value, meaning investors believe their franchise, management quality, and future earnings potential are worth substantially more than the accounting value of their net assets.

Ratio 6: Non-Performing Loan Ratio (NPL)

Formula: Non-Performing Loans / Total Loans x 100
What it tells you: What percentage of the bank's loan book is in trouble (borrowers not paying).
Ideal range for Nepal: Below 2% is excellent, 2-4% is acceptable, above 5% is a red flag.

Best: EBL at 0.68% — this is exceptional asset quality. Less than 1% of EBL's loan book is non-performing, indicating rigorous credit underwriting and effective recovery mechanisms. NABIL follows closely at 0.88%. Worst: KBL at 6.92% — nearly 7% of KBL's loans are non-performing, which is a serious red flag. This means potential future write-offs that could significantly impact earnings. NBL at 5.34% also exceeds the danger threshold. Banks with NPL above 5% need to demonstrate a clear improvement trajectory to justify investment.

Ratio 7: Net Interest Margin (NIM)

Formula: (Interest Income - Interest Expense) / Average Interest-Earning Assets x 100
What it tells you: The spread between what the bank earns on loans and pays on deposits.
Ideal range for Nepal: Above 3.8% is strong, 3.0-3.8% is average, below 3.0% is weak.

NIM is the bread and butter of banking. A bank with NIM of 4.5% earns Rs 4.50 of net interest income for every Rs 100 of interest-earning assets. In Nepal's rate environment, banks with higher NIM either have better deposit mixes (more low-cost CASA deposits) or stronger pricing power on loans. KBL demonstrates a notably higher NIM compared to peers, while SBI operates at the lower end of the spectrum. Banks should aim for NIM stability rather than aggressive expansion, as pushing NIM too high may involve lending to riskier borrowers.

Ratio 8: Credit-to-Deposit (CD) Ratio

Formula: Total Loans / Total Deposits x 100
What it tells you: What percentage of deposits the bank has lent out — a measure of liquidity and lending aggressiveness.
Ideal range for Nepal: 75-85% is optimal. Below 70% means underlending (missed revenue). Above 90% means potential liquidity stress.

Nepal Rastra Bank monitors CD ratios closely as part of its liquidity management framework. Banks with CD ratios near the upper regulatory limit face constraints on further lending without proportional deposit growth. Banks with lower CD ratios have room to expand lending but may be leaving potential earnings on the table. The ideal CD ratio balances growth opportunity with prudent liquidity management.

Master Reference Table — All Key Ratios Q2 2082/83

Red Flags to Watch — When Ratios Signal Danger

Beyond individual red flags, watch for combinations that signal systemic problems. A bank with rising NPL AND falling NIM AND declining EPS is in a deterioration spiral. A bank with high P/E AND high P/B AND low DY is priced for perfection — any negative surprise will hit hard. The safest approach is to avoid banks with more than one red flag unless you have high conviction in a turnaround catalyst.

How to Use These Ratios in Practice

Start with a screening approach: eliminate banks with NPL above 5% and P/E above 22 from your consideration set. This immediately removes the highest-risk and most overvalued stocks. From the remaining pool, rank by quality score and value metrics. Look for banks in the sweet spot of moderate P/E (10-16), low P/B (under 3.5), reasonable NPL (under 3%), and EPS above Rs 18.

In Q2 2082/83, the banks that best fit this ideal profile are SANIMA (P/E 16.18, P/B 3.89, NPL 1.33%, EPS 20.48) and GBIME (P/E 13.44, P/B 2.59, NPL 4.91%, EPS 17.06). Neither is perfect — SANIMA's P/B is slightly high and GBIME's NPL is concerning — but both offer balanced exposure to Nepal's banking sector without extreme risks.