How to evaluate banking stocks in NEPSE.

The short answer

Look at three things: NPL (how much lending has gone bad), CAR (how much capital absorbs losses), and EPS (what it earns per share). NRB requires commercial banks to hold a minimum CAR of 11%. Sector NPL has been running around 5.4%. Judge a bank against those and against its own trend.

Why banks are different

A manufacturer sells things for more than they cost. You can look at revenue, margin and inventory and broadly understand it.

A bank borrows money from depositors and lends it out. Its product is risk. Its balance sheet is mostly other people’s money, and its profit is the gap between what it pays for deposits and earns on loans.

So the questions are different. Not “is it selling enough?” but “are the loans being repaid, and is there enough capital behind them if they are not?”

This matters on NEPSE more than almost anywhere, because commercial banks, development banks and finance companies make up a large share of the market.

NPL: is the lending working?

Non-performing loans are loans not being repaid on schedule, expressed as a percentage of total lending.

A rising NPL ratio hurts twice. The bank stops earning interest on that money, and NRB requires it to set aside provisions against the likely loss — a direct charge against profit. Provisioning rises as a loan moves through substandard, doubtful and loss categories.

For context, sector NPL has been around 5.4% and remains a supervisory focus. What matters more than any single figure is direction: a bank whose NPL has climbed for three consecutive quarters is telling you something, whatever its profit line says.

CAR: is there a cushion?

Capital adequacy ratio compares the bank’s own capital to its risk-weighted assets. In plain terms: how much loss can it absorb before depositors are exposed.

NRB requires commercial banks to maintain a minimum CAR of 11%. The sector has been running above that, around 12.6%. Development banks and finance companies sit under their own thresholds.

A bank near the minimum has less room. It may need to raise capital — often through a rights issue, which dilutes existing shareholders — or slow its lending, which slows its earnings. Neither is fatal, but both are worth knowing before you buy.

EPS: what it earns per share

Earnings per share is profit divided by shares outstanding. It is the headline everyone quotes, and it is the least reliable of the three on its own.

Two reasons. Provisions can be released as well as taken, which flatters a quarter without anything improving. And bonus shares increase the share count, so EPS can fall while the bank earns more.

Read EPS with NPL and CAR, across several quarters. Strong EPS beside a rising NPL and a thinning capital cushion is not a good result; it is a good quarter inside a worsening position.

Reading them together

A bank worth owning generally shows: NPL at or below the sector and stable or falling, CAR comfortably above the 11% minimum, and EPS that is consistent rather than spiky.

A bank to look at harder shows a rising NPL, a CAR close to the floor, and earnings held up by something that will not repeat.

Neither pattern is a recommendation. They are the questions to take into the annual report.

Common mistake to avoid

Buying on dividend yield alone. Banks in Nepal distribute generously and the yield is the easiest number to find. But a bank must retain capital to hold its CAR and fund lending growth. A large payout from a bank with a thin cushion and deteriorating loans is capital leaving exactly when it is needed.

Pro tip

Compare like with like. A commercial bank against a commercial bank, not against a development bank or a microfinance institution — they carry different capital requirements and different risk. Punji’s compare tool puts two side by side, and the screener filters by sector so you are looking at a peer group rather than the whole board.

Get the numbers from the bank’s own quarterly and annual reports and from NRB’s published statistics. Sector figures move, so treat any percentage in this article as a reference point rather than today’s reading.