Banking is the backbone of NEPSE. Commercial banks represent the largest chunk of total market capitalization, account for the highest daily trading volume, and are the most liquid stocks on the exchange. For most Nepali investors, their first stock purchase is a bank stock, and banking shares form the core of most portfolios.

But evaluating banks is fundamentally different from evaluating a hydropower company or a manufacturing firm. Banks are financial intermediaries — they make money by managing money — and their health is measured by a specific set of metrics that can seem opaque to beginners.

This guide breaks down how banking works on NEPSE, what metrics to focus on, and how to compare banks intelligently.

Why Banking Dominates NEPSE

Before diving into analysis, it helps to understand why banks are so prominent:

Large paid-up capital: NRB requires commercial banks to maintain high minimum capital (NPR 8 billion+), making them among the largest companies by equity
Frequent corporate actions: Banks regularly issue bonus shares, rights shares, and cash dividends, keeping investors engaged
High liquidity: Thousands of shares trade daily for major banks, making it easy to buy and sell
Institutional familiarity: Everyone understands what a bank does, unlike niche sectors
27 commercial banks (post-merger consolidation) provide plenty of choices

As of recent years, commercial banks, development banks, and finance companies together constitute over 60% of NEPSE's total market capitalization.

How Banks Make Money

At its core, a bank's business model is simple:

Accept deposits from the public (savings, fixed deposits, call deposits) at a certain interest rate
Lend that money to borrowers (home loans, business loans, overdrafts) at a higher interest rate
The difference between what they charge borrowers and what they pay depositors is their profit

This difference is called the spread or net interest margin, and it is the primary driver of bank profitability in Nepal.

Beyond Lending: Other Income Sources

Banks also earn from:

Fee-based income: Account maintenance fees, remittance commissions, LC (Letter of Credit) charges, guarantee fees
Foreign exchange income: Profits from currency trading and conversion (significant for banks handling remittances)
Investment income: Returns from government bonds, treasury bills, and other securities
Card and digital banking fees: ATM charges, mobile banking fees, card transaction income

However, for most Nepali commercial banks, net interest income (from lending) constitutes 70-80% of total revenue. The spread is king.

Key Banking Metrics Explained

1. Non-Performing Assets / Non-Performing Loans (NPA/NPL)

What it is: The percentage of a bank's total loan portfolio where borrowers have stopped making repayments (typically overdue by 90+ days).

Why it matters: If a bank lends NPR 100 billion and 3% (NPR 3 billion) goes bad, that comes directly out of profits and capital. High NPAs mean the bank made poor lending decisions or the economy is under stress.

NRB requirements: NRB monitors NPA closely and requires banks to maintain provisions (set aside money) against bad loans. Higher NPAs require higher provisions, which reduce reported profits.

What to look for:

NPA below 2%: Excellent asset quality
NPA 2-4%: Acceptable
NPA above 5%: Concerning — the bank may be facing credit quality problems

Trend matters more than a single number. A bank whose NPA went from 1.5% to 3% in one year is more worrying than a bank that has stayed stable at 2.5% for three years.

2. Capital Adequacy Ratio (CAR)

What it is: The ratio of a bank's capital (equity + retained earnings + reserves) to its risk-weighted assets (loans and investments, weighted by their risk level).

Why it matters: CAR measures how much of a buffer the bank has to absorb losses before depositors' money is at risk. It is the primary safety metric.

NRB minimum: Commercial banks must maintain at least 11% CAR. Banks falling below this face regulatory restrictions.

What to look for:

CAR at 11-12%: Meeting minimum but tight — limited room for loan growth
CAR at 13-15%: Comfortable buffer
CAR above 15%: Very strong but may indicate the bank is not utilizing capital efficiently

Connection to rights shares: When a bank's loan book grows faster than its capital, CAR declines. To restore it, banks issue rights shares or retain more profit instead of paying dividends.

3. Base Rate and Spread Rate

Base Rate: The minimum interest rate below which a bank cannot lend. It reflects the bank's cost structure. A lower base rate means the bank can offer cheaper loans, attracting better borrowers.

Spread Rate: The markup above the base rate that a bank charges on loans. NRB caps the spread rate (historically at 4-5%) to prevent excessive lending rates.

What to look for:

Base rate comparison shows operational efficiency — a bank with a lower base rate has cheaper deposits and lower operating costs
Spread rate is largely equalized by regulation, so differences are minimal
The combination (base rate + spread) gives you the approximate average lending rate

4. Cost of Fund

What it is: The weighted average interest rate a bank pays on all its deposits and borrowings.

Why it matters: This is the bank's raw material cost. A bank that can attract cheap deposits (low-interest savings accounts, current accounts with zero interest) has a fundamental advantage because its lending margin is wider.

What drives lower cost of fund:

Large CASA (Current Account Savings Account) base — current accounts pay 0%, savings accounts pay low rates
Strong brand that attracts depositors without high interest incentives
Good digital banking platform that retains customers
Government/institutional deposits (often at below-market rates)

Banks like Nabil, Standard Chartered Nepal, and Nepal Investment Mega have historically enjoyed lower cost of funds due to strong brands and institutional relationships.

5. Credit-to-Deposit (CD) Ratio

What it is: The proportion of a bank's deposits that have been lent out as loans.

NRB limit: Currently set at 80%. If a bank has NPR 100 billion in deposits, it can lend a maximum of NPR 80 billion.

Why it matters:

CD ratio near 80%: The bank is fully lent out, cannot grow loans further without growing deposits first. This is a constraint on growth.
CD ratio at 70-75%: The bank has room to grow its loan book, which means potential for higher future earnings.
CD ratio well below 70%: The bank may be struggling to find quality borrowers or being overly conservative.

Sector-wide dynamics: When the entire banking system is near the 80% CD limit, competition for deposits intensifies (driving up interest rates paid to depositors), and credit growth slows economy-wide. NRB uses the CD ratio as a macro-prudential tool.

6. Net Interest Margin (NIM)

What it is: Net interest income (interest earned minus interest paid) divided by average earning assets.

Why it matters: NIM tells you how effectively the bank converts its assets into interest profits. It is the purest measure of core banking profitability.

Typical NIM for Nepali commercial banks: 2.5% to 4.5%

A bank with 3.5% NIM and NPR 200 billion in earning assets generates approximately NPR 7 billion in net interest income — the top line of its profit engine.

7. Return on Equity (ROE)

What it is: Net profit divided by shareholders' equity. It measures how much profit the bank generates for each rupee of shareholder investment.

Why it matters: ROE is the ultimate measure of value creation for shareholders. A bank earning 15% ROE means shareholders are getting a 15% return on the book value of their investment.

What to look for:

ROE above 15%: Strong value creation
ROE 10-15%: Average for the sector
ROE below 10%: Below expectations — may indicate inefficiency or high provisioning

Caution: ROE can be artificially high if the bank has low capital (denominator effect). Always check ROE alongside CAR.

NRB's Influence on Banking Stocks

Nepal Rastra Bank is not just a regulator — it is the single biggest external factor affecting banking stock prices. Key NRB actions that move banking stocks:

Monetary Policy Changes

NRB's annual monetary policy (typically announced in Shrawan/July) sets:

Cash Reserve Ratio (CRR): how much banks must keep idle at NRB
Statutory Liquidity Ratio (SLR): how much must be invested in government securities
CD ratio limits
Sector-wise lending targets (productive sector, agriculture, energy)

Easing of these ratios generally boosts banking stocks; tightening suppresses them.

Interest Rate Corridor

NRB's repo and reverse repo rates influence the broader interest rate environment. Lower policy rates eventually mean lower lending rates, higher loan demand, and potentially higher bank profits (with a lag).

Regulatory Directives

NRB issues directives on provisioning (how much banks must set aside for risky loans), loan classifications, dividend policies, and capital requirements. A single directive can shift billions in bank profits overnight.

Example: When NRB tightened real estate lending norms or increased provisioning requirements for certain sectors, banking stocks corrected significantly as the market repriced future earnings.

The Merger Wave and Its Effects

Starting around 2021, NRB pushed aggressive consolidation of the banking sector:

Commercial banks that did not meet higher capital thresholds were encouraged (or required) to merge
Multiple rounds of mergers reduced the number of commercial banks significantly
Development banks and finance companies merged with commercial banks

Effects on Shareholders:

Share swap ratios: When Bank A merges with Bank B, shareholders of both receive shares in the merged entity based on an agreed ratio. This can create or destroy value depending on the terms.
Post-merger adjustment: Share count changes, and the market takes time to correctly value the merged entity
Operational synergies: Cost savings from branch/staff rationalization (takes 2-3 years to fully realize)
Integration challenges: Different cultures, systems, and customer bases create friction

For investors: Post-merger banks often trade at discounts as the market waits to see execution quality. This can be an opportunity or a trap depending on management capability.

Dividend History and Policy

Nepali commercial banks have historically been reliable dividend payers:

Typical dividend range: 15-30% annually (combination of cash and bonus shares)
Cash dividends: Usually 5-15% of par value (NPR 5-15 per share)
Bonus shares (stock dividends): Usually 5-20% (5-20 new shares per 100 held)

Important considerations:

NRB sometimes restricts dividends (requiring banks to retain more capital)
After merger years, dividends may be reduced as the merged entity builds reserves
Banks with low CAR may be restricted from paying dividends until capital improves
Bonus shares increase your share count but dilute per-share value (they are not "free money")

How to Compare Banks: Peer Analysis

When comparing commercial banks, create a simple comparison table:

Metric	Bank A	Bank B	Bank C
NPA %	1.8%	3.2%	2.1%
CAR %	13.5%	11.8%	14.2%
NIM %	3.2%	3.8%	2.9%
ROE %	14%	12%	16%
CD Ratio	78%	76%	72%
Cost of Fund	6.5%	7.8%	6.2%
P/E Ratio	18x	14x	22x
P/B Ratio	1.8x	1.1x	2.3x

This side-by-side view quickly reveals which banks are operationally superior and which are priced cheaply relative to their metrics.

Valuation: When Are Banking Stocks Cheap vs Expensive?

Price-to-Book (P/B) Ratio

For banks, P/B is often more meaningful than P/E because banking earnings are cyclical but book value is more stable.

P/B below 1.0: The market values the bank at less than its net asset value. This happens during severe downturns and suggests either deep pessimism or genuine concerns about hidden NPAs.
P/B of 1.0-1.5: Fair to slightly undervalued for a decent bank
P/B of 1.5-2.5: Fairly valued for strong performers
P/B above 3.0: Expensive — the bank needs to deliver exceptional growth to justify this

Price-to-Earnings (P/E) Ratio

P/E below 12: Cheap by historical standards
P/E of 12-20: Normal range
P/E above 25: Expensive — market expects high growth or the stock is in a bubble

Historical pattern on NEPSE: During market downturns (2022-2023 correction, for example), major banking stocks traded at P/B of 0.8-1.2x and P/E of 8-14x. During bull markets, the same stocks trade at P/B of 2-3x and P/E of 25-40x. This cyclicality creates opportunities for patient investors.

Major Commercial Banks on NEPSE

Here is a brief profile of some major banks (note: situations change, always check current financials):

Nabil Bank (NABIL)

One of the oldest private sector banks
Strong brand, good fee income, relatively low cost of fund
Merged with Nepal Bangladesh Bank
Consistent dividend payer

Nepal Investment Mega Bank (NIMB)

Result of multiple mergers creating one of the largest banks by asset size
Wide branch network across Nepal
Largest balance sheet among private banks

Global IME Bank (GBIME)

Aggressive growth through mergers (absorbed multiple development banks and a commercial bank)
Largest branch network in Nepal
Focus on financial inclusion and rural banking

NIC Asia Bank (NICA)

Technology-focused bank with strong digital banking platform
Consistent performer with good asset quality
Active in retail and SME lending

Standard Chartered Bank Nepal (SCB)

Foreign-owned (majority stake by Standard Chartered Group)
Premium brand, lowest cost of fund historically
Conservative lending approach, very low NPA
Limited branch network, focuses on corporate and high-net-worth clients
Highest P/B ratio among banks due to perceived quality

Himalayan Bank (HBL), Everest Bank (EBL), Nepal SBI Bank (SBI)

Established players with long operating histories
Joint venture banks with foreign partner banks
Generally conservative operations with decent asset quality

Risks in Banking Stocks

1. Rising NPAs During Economic Slowdown

When the economy slows, borrowers struggle to repay. Sectors like real estate, hospitality, and SMEs are particularly vulnerable. A broad economic downturn can push banking sector NPAs from comfortable 2% to concerning 4-5% in a relatively short period.

2. Interest Rate Cycle

When NRB tightens monetary policy (to control inflation or stabilize the currency), interest rates rise. This can:

Slow credit growth (less demand for expensive loans)
Increase deposit costs faster than banks can reprice loans
Push marginal borrowers into default

3. Regulatory Tightening

NRB can change rules that directly hit profitability: increasing provisioning requirements, limiting sector exposure, capping spreads, restricting dividends. Banks have limited ability to push back against regulatory changes.

4. Concentration Risk

Many Nepali banks have significant exposure to a few sectors (real estate, import finance, share margin lending). If any single sector faces distress, multiple banks suffer simultaneously.

5. Political and Governance Risk

Some banks have ownership structures linked to political groups or business houses. Related-party lending, governance issues, and management instability can surface unexpectedly.

Practical Tips for Banking Stock Investors

Diversify across 3-4 banks rather than concentrating in one. Regulatory changes can hit individual banks differently.
Watch the quarterly financials — NRB requires banks to publish quarterly results. Track NPA trend, profit growth, and CD ratio quarter by quarter.
Budget for rights shares — banking stocks will periodically issue rights. Keep cash aside.
Buy during fear, hold during greed — banking stocks at P/B below 1.2 during market panics have historically been excellent long-term entries.
Do not chase bonus shares — a 20% bonus share is not free money. The price adjusts proportionally. Focus on underlying business quality, not cosmetic share count increases.
Understand the NRB cycle — before major monetary policy announcements, banking stocks often become volatile. Read NRB communications to understand the direction of policy.
Compare within the sector — no bank operates in isolation. If all banks have rising NPAs, it is a systemic issue. If only one bank's NPA is rising, it is a specific governance or credit quality problem.

Banking stocks on NEPSE offer a combination of liquidity, regular dividends, and long-term growth that few other sectors can match. But they require understanding the unique metrics and regulatory dynamics that drive their performance. Armed with the knowledge of NPA, CAR, NIM, and the NRB policy cycle, you can make far more informed decisions about which banks to own and when to buy them.