Declining dividend rates of commercial banks in Nepal

KATHMANDU: Dividend rates of commercial banks in Nepal have been consistently declining. Once able to offer up to 50% dividends to shareholders, many banks are now struggling to provide even 10%. Some banks, hindered by prolonged sluggishness in business, have been unable to distribute dividends altogether. Compared to a decade ago, the returns provided to investors have significantly decreased.

Everest Bank, which ranks second in terms of highest share value among commercial banks, is recognized for its strong financial indicators and governance. However, it has been unable to maintain the level of returns offered in the past. For instance, during fiscal years 2010/11, 2012/13, and 2013/14, the bank distributed 50% cash dividends. In contrast, for fiscal year 2022/23, it distributed 20.53% returns, and for fiscal year 2023/24, only 15.53%.

Sudesh Khaling, CEO of Everest Bank, attributes the reduced dividend capacity to the contraction in bank profits. “Banks have seen profit shrinkages. Distributing bonuses has increased paid-up capital, but as capital grows, the capacity to pay dividends has declined,” he explained. He further noted that the lack of economic improvement has also restrained market demand, affecting banks’ profitability.

Standard Chartered Bank’s Declining Dividends

Standard Chartered Bank, which holds the highest share price among commercial banks, was once a “hotcake” in the stock market. In fiscal year 2010/11, it distributed 50% cash dividends, followed by 45%, 40%, and 41.5% in subsequent years. However, from last year’s profits, the bank distributed only 19% cash and 6.5% bonus shares, totaling a 25.5% return. Despite this, Standard Chartered remains the highest-returning bank among the 10 banks that have announced dividends for the past year.

Nabil Bank, which provided up to 45% cash dividends in 2013/14, was unable to offer more than 10% from its 2023/24 profits. Several banks have also disappointed investors by announcing that they would not distribute any dividends this year, following last year’s trend.

Shrinking Dividend Capacity Across Banks

The dividend capacity of other banks is also weakening. Over six banks failed to distribute dividends for fiscal year 2022/23 due to negative distributable profits. These banks are unlikely to distribute dividends even from last year’s profits. Ratna Raj Bajracharya, former CEO of Global IME Bank, cites high costs and low income as the primary reasons for declining dividends.

“As soon as the base rate drops based on the cost of funds, immediate premiums cannot be applied. No matter how much banks try to control costs, it’s challenging,” he explained. Bajracharya added that bank earnings from fees are insufficient to cover operating costs, further impacting profitability.

Post-COVID Economic Sluggishness

Nepal’s economy remains sluggish after COVID-19, with market demand yet to recover. This has significantly slowed credit disbursement over the past three years. Borrowers are struggling to repay loans on time, leading to a rise in non-performing loans (NPLs) and an increase in blacklisted borrowers.

“The narrative that the weak economy justifies loan defaults has gained ground,” Bajracharya noted. He added that regulatory leniency has further hindered banks’ ability to recover loans, contributing to rising NPLs and reduced profits.

Rising Non-Performing Loans and Idle Liquidity

As of the first quarter of the current fiscal year, the average NPL of commercial banks stands at 4.28%. With rising bad debts and surplus idle liquidity, the cost of funds has remained high. In fiscal year 2015/16, the Nepal Rastra Bank (NRB) mandated a fourfold increase in bank capital. While banks complied by raising their capital, they have been unable to expand their businesses proportionately.

The declining dividend rates have prompted many institutional shareholders to exit banks, reducing their attractiveness in the stock market. Analysts note that despite occasional market upswings, bank share prices remain “underpriced.”

Santosh Mainali, former president of the Stock Brokers Association of Nepal, attributes the decline in dividend capacity to NRB’s decision to increase capital requirements without proportional business growth. “As dividend rates drop, shareholder interest has diminished,” he said.

Lower trading volumes and reduced investor confidence have also restrained share price growth. “Short-term traders have created a narrative that companies with a higher number of shares are unlikely to see price appreciation,” Mainali added.