Bank profits fell 3.5% and the sector still beat the index

Nepal's commercial banks earned less last year than the year before, and the market rewarded them for it. Net profit across the banks that filed for both periods fell 3.5% to Rs 65.31 arba. Over the last quarter the sector's median stock is up 8.36% while the benchmark is down 1.62%. A sector that shrinks its earnings and still beats the index is not being priced on its earnings.

The argument here is that this is a funding-cost trade wearing an earnings-recovery costume, and that the distinction matters most for the banks the median does not describe. It changes things for anyone who bought the sector on the deposit story: the deposit story is real, but it has not yet become a lending story, and the filings show the gap.

The margin did the damage

Net interest income fell 4.8% to Rs 180.4 arba from Rs 189.39 arba, and that is the line that decides what a Nepali bank earns. The strange part is that the funding side improved more than anything else in the dataset: the median cost of funds dropped 1.05 percentage points to 3.36%. Cheap money arrived and the margin still narrowed — the median interest spread slipped 0.21 points to 3.43% — because the asset side repriced faster than the liabilities.

The balance sheet explains why. Total assets grew 12% to Rs 8051.19 arba while loans and advances grew 5.5% to Rs 4611.31 arba. The difference went into the only place left: securities and placements yielding 1.01% at 91 days and 1.95% at a year, against an interbank rate of 2.75%. Total operating income still rose 3.6% to Rs 238.73 arba, so fee and treasury lines held; but operating profit fell 5.2% to Rs 101.38 arba, which says costs and provisions took the gain back.

Credit quality is where the cost shows. Median NPL rose 0.64 points to 4.91%, and the median capital adequacy ratio fell 0.56 points to 12.47%. Neither number is alarming on its own. Together they say the book is aging while the buffer thins.

The average hides a split

Thirteen of the nineteen banks posted higher profit than a year earlier; six posted lower. The aggregate still fell 3.5%. That combination only works one way: the decline is concentrated in the large balance sheets, and the typical bank — median ROE 9.26%, down 1.34 points from 10.6% — is doing better than the total implies.

The tape splits the same way. Seventeen of nineteen are up over sixty sessions against two down, which reads as breadth; the dispersion says otherwise. Laxmi Sunrise is up 22.17%, Siddhartha 18.09% and Nepal Bank 14.07%. NIC Asia is down 5.53%, Prabhu down 2.13%, and Standard Chartered — up 2.43% — is a laggard only by virtue of standing still while the median ran. A median of 8.36% is an average of two different trades.

Turnover makes the point from another angle. Average daily turnover over the last twenty sessions is Rs 91.36 crore, up 65.6% at the median name against the prior sixty sessions, but 28.6% of it sits in two stocks, Kumari Bank and Laxmi Sunrise. Money is coming in, and it is coming into a short list.

The case for the rally

The counterargument is not weak. A 1.05-point fall in the cost of funds is the largest single improvement anywhere in these filings, and it lands on the liability side first. Deposits grew 13.1% to Rs 6718.94 arba — the raw material is there, and it is cheaper than it was. The sector's median credit-to-deposit ratio fell 3.29 points to 73.63%, and the system ratio stands at 70.79%, so there is room to lend before anyone meets a constraint. With a 91-day bill at 1.01%, the opportunity cost of not lending is close to zero; a bank parking the surplus in Treasuries is choosing a 1% asset over a loan.

That is a genuine mechanism, and it is what the market has been buying. Equity rose 6.9% to Rs 749.3 arba, capital sits above the line at a 12.47% median, and thirteen of nineteen banks already earn more than they did. If the deposit surplus converts, the same balance sheets that produced a 4.8% decline in net interest income produce the reverse.

Weigh it up and the sector is being paid for the funding line, not the loan book. The forces are not evenly matched. Cost of funds at 3.36%, deposits up 13.1% and a 73.63% credit-to-deposit ratio are real and already in the numbers; loan growth of 5.5% and NPL at 4.91% are the reasons those numbers have not reached profit. The tape reflects the first set and has barely begun on the second — two-way flow, 54.3% buy-initiated across ten sessions, five buyer-led against three seller-led.

What would change the picture is the credit-to-deposit ratio turning up from 73.63% — a stretch in which loans outgrow deposits and the 7.6-point gap between the two closes. What would break it is median NPL pushing further above 4.91% while median ROE stays near 9.26%. Until one of those prints, the rally rests on the cost of money rather than the price of credit.