Chapter 17 · Part 17 — Formula Sheet
Formulas: liquidity, concentration, distribution and mechanics
Cash-flow quality tests, the concentration stress tests, valuation measures, and the nine formulas to memorise.
48 of 51 · 8 min
Concentration and cash-flow quality
┌─────────────────────────────────────────────────────────────────────────┐ │ CREDIT CONCENTRATION │ │ │ │ = Exposure to 20 largest borrowers ÷ Total Loans and Advances × 100 │ │ │ │ * USE THE "GROUP (RELATED PARTY)" BASIS, NOT "INDIVIDUAL CUSTOMER" │ │ Nepal's economy runs on family business groups. │ │ NMB: group 18.03% vs individual 6.49% — a 2.78× difference │ │ │ │ * THE STRESS TEST: │ │ Top-20 exposure ÷ Total equity │ │ NMB: 48.31bn ÷ 38.06bn = 1.27× │ │ At 50% LGD → consumes 64% of the capital base │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ DEPOSIT CONCENTRATION │ │ │ │ = Deposits from 20 largest depositors ÷ Total Deposits × 100 │ │ │ │ * THE LIQUIDITY STRESS TEST: │ │ │ │ Net liquid assets ≈ NLA% × Total deposits │ │ Coverage = Net liquid assets ÷ Top-20 deposits │ │ │ │ NMB: 91.35bn ÷ 69.33bn = 1.32× │ │ ⇒ Reframes a 28.99% liquidity ratio from "comfortable" to │ │ "adequate but not generous" │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ * INTEREST CASH CONVERSION — the best earnings-quality test │ │ │ │ = Interest received (cash flow) ÷ Interest income (P&L) × 100 │ │ │ │ NMB Bank: 18,856 ÷ 21,042 = 89.6% (prior year 90.8%) │ │ │ │ ! A WIDENING GAP means an increasing share of reported interest is a │ │ receivable, not cash. Corroborates NPL deterioration. │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ CASH OPERATING PROFIT TEST │ │ │ │ Compare: Operating cash flow BEFORE changes in operating assets │ │ and liabilities │ │ Against: Operating Profit (P&L) │ │ │ │ NMB Bank: 5,936 vs 6,118 = within 3% │ │ ⇒ The operating profit IS cash-backed │ │ │ │ ! Use THIS, not net operating cash flow, to answer "is the profit │ │ real?" — net operating cash flow is dominated by balance-sheet growth │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ DECOMPOSING NEGATIVE OPERATING CASH FLOW │ │ │ │ Adjusted OCF ≈ Reported OCF │ │ + Increase in loans and advances │ │ + Increase in placements │ │ + Increase in NRB balance (CRR-driven) │ │ │ │ NMB Group: −10,461 + 25,093 + 3,256 + 2,221 ≈ +20,108 │ │ ⇒ Negative because of GROWTH, not distress │ └─────────────────────────────────────────────────────────────────────────┘
Distribution and valuation
┌─────────────────────────────────────────────────────────────────────────┐ │ NET PROFIT AVAILABLE FOR DISTRIBUTION (NRB) │ │ │ │ = Net Profit as per Statement of Profit or Loss │ │ − Statutory appropriations [R] │ │ (General reserve, debenture redemption, exchange fluctuation, │ │ CSR fund, employees training fund) │ │ ± Regulatory adjustments │ │ (interest receivable, short provisions, NBA, DTA, goodwill, │ │ bargain purchase gain, actuarial loss, capitalised interest) │ │ │ │ Type — REGULATORY │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ TOTAL DISTRIBUTABLE PROFIT │ │ │ │ = Net Profit available for distribution │ │ + Opening Retained Earning │ │ ± Adjustments │ │ − Bonus shares issued │ │ − Cash Dividend Paid │ │ │ │ Then: │ │ Distributable to common equity = Total − PNCPS dividend │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ APPROPRIATION RATE │ │ │ │ = Total transfers to reserves ÷ Profit for the period × 100 │ │ │ │ NMB: 2,205,386 ÷ 4,013,671 = 54.95% │ │ ⇒ 55% of profit locked into non-distributable reserves │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ DIVIDEND PAYOUT RATIOS │ │ │ │ Cash payout = Cash dividend ÷ Profit for the period × 100 │ │ Total payout = (Cash + Stock dividend) ÷ Profit × 100 │ │ │ │ NMB: cash 22.88% · total 45.76% │ │ │ │ ! Nepali dividends are declared as a % OF PAR VALUE (NPR 100), │ │ NOT of market price. "5% dividend" = NPR 5 per share. │ │ │ │ COVERAGE TEST: │ │ Total distribution vs Net profit available for distribution │ │ NMB: 1,836,670 vs 1,808,285 → NOT FULLY COVERED │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ PE RATIO (Annualized) │ │ │ │ = Market Price per Share ÷ Annualised Basic EPS │ │ │ │ ! NMB's published PE uses STANDALONE BANK EPS, even in the Group │ │ column. Verify which basis before comparing banks. │ │ 239.50 ÷ 20.18 = 11.87 OK · 239.50 ÷ 28.47 = 8.41 x │ │ ! Weak signal when the share trades on few days (NMB: 64 days) │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ PRICE-TO-BOOK (P/B) │ │ │ │ = Market Price per Share ÷ Net-Worth per Share │ │ │ │ NMB Bank: 239.50 ÷ 181.15 = 1.32× │ │ * Often more informative than PE for banks — book value is a more │ │ stable anchor than earnings │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ DIVIDEND YIELD │ │ │ │ Cash yield = Cash dividend per share ÷ Market price × 100 │ │ Total yield = (Cash + stock at par) ÷ Market price × 100 │ │ │ │ NMB: cash 5.00 ÷ 239.50 = 2.09% · total 10.00 ÷ 239.50 = 4.18% │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ ** THE EARNINGS-QUALITY RATIO — the single most useful diagnostic │ │ │ │ QUALITY = Distributable profit per share ÷ Basic EPS × 100 │ │ │ │ NMB FY2082/83: 9.08 ÷ 20.18 = 45.0% │ │ NMB FY2081/82: 10.35 ÷ 14.80 = 69.9% │ │ ──────── │ │ Deterioration: −24.9pp │ │ │ │ A falling ratio = an increasing share of reported profit is │ │ non-cash, uncertain, or locked away. │ └─────────────────────────────────────────────────────────────────────────┘
Accounting mechanics
┌─────────────────────────────────────────────────────────────────────────┐ │ EFFECTIVE INTEREST RATE (EIR) │ │ │ │ Gross carrying CF₁ CF₂ CFₙ │ │ amount = ──────── + ──────── + … + ──────── │ │ (1+EIR)¹ (1+EIR)² (1+EIR)ⁿ │ │ │ │ Solve for EIR — the IRR of the instrument's cash flows │ │ │ │ CF — ALL contractual flows INCLUDING fees integral to the yield │ │ ! EIR ≠ the coupon rate │ │ ! NEPAL TRANSITION: "old term loans" (booked ≤ Asar end 2083) stay │ │ on GROSS INTEREST RATE │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ AMORTISED COST │ │ │ │ = Initial recognition amount │ │ − Principal repayments │ │ ± Cumulative EIR amortisation of any premium/discount │ │ − Loss allowance │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ DEFERRED TAX │ │ │ │ Deferred tax = Temporary difference × Enacted tax rate [R] │ │ Temporary difference = Carrying amount − Tax base │ │ │ │ DEDUCTIBLE difference → DEFERRED TAX ASSET (only if future taxable │ │ profit is PROBABLE) │ │ TAXABLE difference → DEFERRED TAX LIABILITY (recognised in FULL) │ │ │ │ ! Tax follows the item: OCI item → OCI tax; P&L item → P&L tax │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ GOODWILL / BARGAIN PURCHASE (NFRS 3) │ │ │ │ = Consideration transferred │ │ + Non-controlling interest │ │ + Fair value of any previously held interest │ │ − Fair value of identifiable net assets acquired │ │ │ │ POSITIVE → GOODWILL (asset, not amortised, impairment-tested) │ │ NEGATIVE → BARGAIN PURCHASE GAIN (immediate P&L, but BLOCKED from │ │ distribution) │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ STRAIGHT-LINE DEPRECIATION │ │ │ │ Annual charge = (Cost − Residual value) ÷ Useful life │ │ Rate = 1 ÷ Useful life │ │ │ │ Building 40y=2.5% · Computers 5y=20% · 7-year assets=14.28% │ │ Land — NOT depreciated. Sub-NPR-10,000 items — expensed. │ │ Leasehold improvements — over the LEASE term, not the asset's life │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ EQUITY METHOD (associates, NAS 28) │ │ │ │ Carrying amount = Cost │ │ + Share of post-acquisition profit (→ P&L) │ │ + Share of post-acquisition OCI (→ OCI) │ │ − Dividends received │ │ − Impairment │ └─────────────────────────────────────────────────────────────────────────┘ ┌─────────────────────────────────────────────────────────────────────────┐ │ LEASE (NFRS 16) │ │ │ │ Lease liability = PV of remaining lease payments, discounted at │ │ the implicit rate or the incremental borrowing rate │ │ ROU asset = Lease liability + initial direct costs │ │ + prepayments − incentives │ │ │ │ ROU depreciation → Depreciation & Amortisation │ │ Unwinding of discount → Interest expense │ │ ⇒ Total expense is FRONT-LOADED vs a straight-line rent │ └─────────────────────────────────────────────────────────────────────────┘
The nine formulas to memorise
╔═══════════════════════════════════════════════════════════════════════╗ ║ If you remember nothing else: ║ ╠═══════════════════════════════════════════════════════════════════════╣ ║ ║ ║ 1. Assets = Liabilities + Equity ║ ║ ║ ║ 2. NII = Interest income − Interest expense ║ ║ ║ ║ 3. Impairment = MAX(NFRS 9 ECL, NRB provision [R]) ║ ║ ║ ║ 4. ECL = PD × LGD × EAD × DF, probability-weighted ║ ║ ║ ║ 5. CAR = Capital Fund ÷ RWA × 100 — and look through to CET1 ║ ║ ║ ║ 6. NPL = (Substandard + Doubtful + Loss) ÷ Gross loans × 100 ║ ║ — always read with Coverage and Net NPL ║ ║ ║ ║ 7. ROE = ROA × Equity Multiplier — always decompose ║ ║ ║ ║ 8. Distributable profit = Profit − Appropriations ║ ║ − Regulatory adjustments ║ ║ ║ ║ 9. QUALITY = Distributable per share ÷ Basic EPS ║ ║ ║ ╚═══════════════════════════════════════════════════════════════════════╝
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