Chapter 14 · Part 14 — How to Read a Quarterly Report
How to Read a Quarterly Report
A ten-step method, twelve red flags and six false alarms.
44 of 51 · 13 min
A method, not a summary. Follow it in order and you will reach a defensible view of any Class "A" bank in about ninety minutes.
The wrong way, and why it fails
┌──────────────────────────────────────────────────────────────────┐ │ WHAT MOST READERS DO │ │ │ │ 1. Look at profit → "up 40%, good" │ │ 2. Look at EPS → "NPR 20.18, good" │ │ 3. Look at the capital ratio → "12.73%, fine" │ │ 4. Stop │ ├──────────────────────────────────────────────────────────────────┤ │ WHAT THEY MISSED IN NMB's FY2082/83 │ │ │ │ • Revenue was FLAT — the profit came from a falling cost of │ │ funds that will not repeat │ │ • CET1 actually FELL; the capital rise was bought with AT1 │ │ • Provision coverage collapsed 10.75pp while NPL rose │ │ • Distributable profit per share FELL 12% while EPS rose 36% │ │ • Every non-retail lending segment declined │ │ • Staff costs looked flat only because of a NPR 204.5m one-off │ │ │ │ Six material findings. All disclosed. All missed. │ └──────────────────────────────────────────────────────────────────┘
Before you start: five questions to settle
1. WHICH COLUMN? Group or Bank (standalone)?
→ NRB regulates the BANK
→ dividends come from the BANK
→ the Group shows the full footprint
⇒ Use BANK for capital, dividends and
regulatory ratios; Group for scale
2. WHICH PERIOD? "This Quarter" or "Upto This Quarter (YTD)"?
⇒ Use YTD for performance; "This Quarter"
only for momentum
3. WHICH UNIT? NPR '000 almost everywhere — but the SEGMENT
note switches to NPR Mio.
⇒ Check every table header
4. WHICH QUARTER? Q4 absorbs every year-end true-up: actuarial
valuation, final impairment, deferred tax
remeasurement, bonus provision
⇒ Expect a lumpy Q4; never annualise it
5. AUDITED? Interim reports are UNAUDITED and explicitly
"subject to change upon otherwise instructions
of statutory auditor and/or regulatory
authorities"
⇒ Q1–Q3 figures are provisionalThe reading order — ten steps
STEP 1 — Run the fourteen consistency checks (15 minutes)
From Part 13.3. Do this first, always. If a check fails you have either misread the statements or found an error, and you must know which before proceeding.
The three that catch the most problems:
• Cash flow closing cash = balance sheet cash • SoCE closing equity = balance sheet total equity • Segment PBT total = P&L profit before tax
STEP 2 — Read the management's own words (10 minutes)
Go to the back of the report first. The Disclosure as per Securities Registration and Issuance Regulation, 2073 section (Part 12.9) contains six items, and two of them are the most candid text in the document:
→ 1. MANAGEMENT ANALYSIS
Deposits, loans, capital ratios, NPA level, in management's
own framing
→ 4. PROBLEMS AND CHALLENGES ← READ THIS FIRST
Internal and external challenges, and the Strategy in response
NMB's, verbatim:
Internal: "Increasing cost of operations against Income"
"Sourcing and retention of quality work force in the
increased competitive market"
External: "Challenging business environment for investment"
"Political Instability and Economic Slowdown"
"Competitive yield on assets"
"Challenges in Recovery and Collection"
"Under/Over Liquidity concerns"
"Nepal continued to be in FATF Grey List"STEP 3 — Decompose the profit (15 minutes)
Never accept a headline profit number. Build this table:
This year Last year Change Interest income 21,042 22,268 −5.5% ← REVENUE Interest expense (11,615) (14,247) −18.5% ← COST Net interest income 9,426 8,021 +17.5% Net fee and commission income 2,591 2,185 +18.6% ← DURABLE Net trading income 681 361 +88.7% ← VOLATILE Other operating income 326 318 +2.5% Total operating income 13,024 10,885 +19.7% Impairment (2,345) (1,638) +43.2% ← WARNING Operating expenses (4,562) (4,506) +1.2% ← check one-offs Profit before tax 5,748 4,085 +40.7%
Then ask the four questions:
1. Did REVENUE grow? NMB: interest income FELL 5.5%
2. Where did growth come from? Cost of funds, −132bp
3. Is it REPEATABLE? No — rate cycle
4. Any ONE-OFFS? Yes — NPR 204.5m VRS credit,
NPR 61m deferred tax creditSTEP 4 — Test the asset quality trio (15 minutes)
Never read NPL alone. Always the trio:
This year Last year Direction NPL ratio 4.91% 4.11% ▲ WORSE Coverage 92.57% 98.38% ▼ WORSE Net NPL 1.66% 1.58% ▲ WORSE
Then run the coverage-normalisation calculation — the most valuable two minutes in the whole review:
What would it have cost to hold coverage at last year's level?
Gross loans × NPL% × (prior coverage − current coverage)
NMB Group: 258,400 × 5.18% × (98.79% − 88.04%)
= 13,385 × 10.75%
≈ NPR 1,439 million of additional impairment
Against Group pre-tax profit of NPR 6,115 million = 23.5%
⇒ Nearly a quarter of pre-tax profit came from NOT maintaining
prior-year provisioning discipline.Also check:
• Credit cost = Impairment ÷ average gross loans NMB: 2,345 ÷ 239,108 = 0.98% (prior year ~0.76%) • Watchlist balance in the classification note — next year's NPL • Investment property (NBA) trend — rising = foreclosures • NBA disposals — nil disposals + rising NBA = escalating provisions ahead [R]
STEP 5 — Look through the capital ratio to CET1 (10 minutes)
This year Last year Change Capital fund to RWA 12.73% 11.92% +0.81pp Tier 1 Capital to RWA 9.90% 9.05% +0.85pp CET 1 Capital to RWA 8.99% 9.05% −0.06pp ! DERIVE THE STRUCTURE: AT1 = Tier 1 − CET1 = 0.91pp ← the PNCPS Tier 2 = Total − Tier 1 = 2.83pp
The three questions:
1. Did CET1 rise or fall? NMB: FELL
2. What drove the headline rise? A NPR 3bn AT1 issue
3. How much growth headroom is
left before the minimum [R]? Compute the RWA the bank
could add at current CET1STEP 6 — Read the cash flow for quality of earnings (10 minutes)
Three comparisons, in order of value:
1. INTEREST RECEIVED vs INTEREST INCOME ← the best single test
NMB: 18,856 ÷ 21,042 = 89.6% conversion
Prior year: 90.8%
⇒ Deteriorating. Consistent with rising NPL.
2. OPERATING CASH FLOW BEFORE CHANGES vs OPERATING PROFIT
NMB: 5,936 vs 6,118 = within 3%
⇒ The operating profit IS cash-backed. Reassuring.
3. NET OPERATING CASH FLOW — decompose before judging
NMB Group: −10,461, but add back:
loan growth 25,093 + NRB balance 2,221 + placements 3,256
⇒ ≈ +20,108 adjusted
⇒ NEGATIVE BECAUSE OF GROWTH, not distress.STEP 7 — Read the SoCE to find where the profit went (10 minutes)
Profit for the period 4,013,671
− Transfer to reserves (2,205,386) 55% locked
− Cash dividend (918,335) 23% out
− Bonus shares capitalised (918,335) 23% to capital
───────────
Change in free retained earnings (28,385) ← FELL
⇒ The bank earned NPR 4.0 billion and its free reserves
DECREASED.Then look specifically at the regulatory reserve transfer:
NMB: NPR 709,748 = 17.7% of profit ⇒ Nearly one rupee in six of reported profit was of a quality NRB would not allow to be distributed. Go to Part 7 to find out which item drove it.
STEP 8 — Read the distributable profit statement (10 minutes)
This is the step almost everyone skips, and it changes the conclusion.
This year Last year Change Basic EPS NPR 20.18 NPR 14.80 +36.4% ▲ Distributable per share NPR 9.08 NPR 10.35 −12.3% ▼ ⇒ THEY MOVED IN OPPOSITE DIRECTIONS.
Find the driver by reading down the regulatory adjustments:
Interest receivable (297,150) vs +593,012 last year
⇒ a NPR 890 million ADVERSE SWING
⇒ THE dominant cause
Debenture redemption reserve (621,825) vs (237,301)
⇒ tripled, with debentures flat
Actuarial loss (195,282) vs (127,894)
Interest capitalised (67,505) vs (47,879) ⇒ +41%, forbearance?Then test dividend coverage:
Declared: 5% cash + 5% stock = NPR 10.00 per NPR 100 share Distributable per share: NPR 9.08 ⇒ NOT FULLY COVERED. Funded from the opening balance.
STEP 9 — Read the segment note (10 minutes)
Build this table. It routinely overturns the headline conclusion.
This year Last year Change Contribution to
the improvement
Others (2,998) (3,998) +1,000 60% ! unexplained
Treasury 1,452 821 +631 38% ! rate cycle
Retail 3,780 3,254 +526 32% durable
Deprived 148 154 (6) (0%)
Corporate 1,869 2,124 (255) (15%) ▼
SME & MSME 1,498 1,730 (232) (14%) ▼
────── ────── ──────
TOTAL 5,748 4,085 +1,663 100%
⇒ EVERY non-retail lending segment DECLINED.
⇒ 98% of the improvement came from Treasury and "Others."And compute segment yields:
Corporate yield = external revenue ÷ segment assets
This year: 9,597 ÷ 128,101 = 7.49%
Last year: 10,223 ÷ 111,881 = 9.14%
──────
Compression: 165bp
⇒ Assets grew 14.5% at a yield 165bp lower.STEP 10 — Read the concentration and related-party notes (10 minutes)
Two calculations that appear nowhere else in the report:
1. CREDIT CONCENTRATION vs CAPITAL
Top 20 borrower GROUPS NPR 48.31 billion
Total equity NPR 38.06 billion
─────────────────
Ratio 1.27×
At 50% LGD → NPR 24.2bn loss → 64% of capital consumed
! USE THE GROUP MEASURE (18.03%), NOT INDIVIDUAL (6.49%).
Nepal's economy runs on family business groups.
2. DEPOSIT CONCENTRATION vs LIQUIDITY
Top 20 depositors NPR 69.33 billion
Net liquid assets (28.99% × 315,118) ≈ NPR 91.35 billion
─────────────────
Coverage 1.32×
⇒ The 28.99% liquidity ratio looked comfortable in Part 6.
Against concentration, it is adequate but not generous.And the single most important governance line:
"Loans and Advances extended to Promoters: There are no such loans extended to promoters."
The ninety-minute review, timed
┌──────────────────────────────────────────────────────────────┐ │ MIN STEP OUTPUT │ ├──────────────────────────────────────────────────────────────┤ │ 0-15 Fourteen consistency checks Trust the │ │ numbers │ │ 15-25 Management analysis + Problems and Know what │ │ Challenges to look for │ │ 25-40 Profit decomposition Real vs │ │ cycle vs │ │ one-off │ │ 40-55 Asset quality trio + coverage The biggest │ │ normalisation single risk │ │ 55-65 CET1 look-through Growth │ │ headroom │ │ 65-75 Cash flow quality tests Is profit │ │ cash? │ │ 75-85 SoCE + distributable profit Real │ │ dividend │ │ capacity │ │ 85-95 Segment + concentration Where the │ │ risk is │ └──────────────────────────────────────────────────────────────┘
Twelve red flags
1. NPL rising while coverage falls
→ under-provisioning; run the normalisation calculation
2. CET1 flat or falling while headline CAR rises
→ the improvement was bought with AT1/Tier 2
3. Interest received well below interest income, and widening
→ collection deteriorating
4. Distributable profit per share falling while EPS rises
→ earnings quality deteriorating; dividend at risk
5. A large regulatory reserve transfer
→ a large share of profit is non-cash or uncertain
6. Loan growth much faster than deposit growth
→ CD ratio pressure; expensive funding ahead
7. Investment property (NBA) rising with nil disposals
→ foreclosures accumulating; escalating provisions [R]
8. "Interest Capitalised Term Loan" rising alongside NPL
→ possible forbearance rather than construction lending
9. "Others" segment moving by an amount comparable to the
total profit change
→ the profit improvement is unexplained
10. Corporate/large-borrower concentration rising above
total equity
→ a handful of names can consume the capital base
11. A recurring "non-operating expense" of material size
→ it is operating in substance; put it in your cost base
12. Any related-party lending to promoters or directors
→ check terms, limits [R] and board approval processSix things that look alarming but usually are not
FACT 1. NEGATIVE OPERATING CASH FLOW
Normal for a growing bank. Decompose it: separate cash
earning power from cash consumed by loan growth.
FACT 2. CASH BALANCE HALVING
Check where it went. NMB's moved into liquid government
securities — the NLA ratio actually IMPROVED.
FACT 3. HUGE GROSS SECURITIES PURCHASES (NPR 1 trillion)
Treasury bill rollover. Net it against sales.
FACT 4. GROSS DERIVATIVE ASSETS AND LIABILITIES BOTH LARGE
Near-matched = hedging. Check the NET position.
FACT 5. A LUMPY Q4
Annual actuarial valuation, year-end impairment
assessment and deferred tax remeasurement all land there.
FACT 6. "INVESTMENT IN SUBSIDIARIES: NIL" IN THE GROUP COLUMN
It means they were consolidated, not that none exist.Comparing two banks — the rules
┌──────────────────────────────────────────────────────────────────┐ │ ALWAYS COMPARE │ │ • Bank standalone to Bank standalone (or Group to Group) │ │ • CET 1, not total CAR │ │ • Net interest, fee and commission income — immune to the │ │ EIR/NFRS 15 fee-classification choice (Part 2.7) │ │ • Credit cost (impairment ÷ average loans), not absolute │ │ impairment │ │ • Cost of funds — the purest measure of deposit franchise │ │ • Base rate — mandated formula, genuinely comparable │ ├──────────────────────────────────────────────────────────────────┤ │ NEVER COMPARE WITHOUT CHECKING │ │ • PE ratios — one bank may use Group EPS, another standalone │ │ • Segment margins — segment definitions differ by bank │ │ • NPL ratios — check Group vs Bank, and write-off policy │ │ • Coverage — depends on collateral profile and NPL grade mix │ │ • Pre- and post-NFRS 16 cost ratios — not comparable │ │ • Anything spanning the EIR transition (FY2083/84) │ └──────────────────────────────────────────────────────────────────┘
The one-paragraph verdict — worked on NMB
NMB Bank Limited, FY 2082/83 (Bank standalone) Profit rose 40.7% on FLAT revenue. The entire improvement came from a 132bp fall in cost of funds — a rate-cycle benefit that reverses when deposits fully reprice — supported by a NPR 204.5m one-off VRS credit and a NPR 61m deferred tax credit. Every non-retail lending segment declined; corporate yield compressed 165bp while that book grew 14.5%. Asset quality deteriorated materially: NPL 4.11% → 4.91% with coverage falling 5.8pp (Group: 10.75pp), and holding coverage flat would have cost roughly 23.5% of Group pre-tax profit. Capital appears stronger at 12.73%, but CET1 FELL to 8.99% — the improvement was purchased with NPR 3bn of AT1, a route now largely used, so further loan growth requires retained profit or ordinary equity. Liquidity and funding quality genuinely improved: deposits +13.1% against loans +10%, CD ratio down to 82.77%, NLA up to 28.99%, interbank borrowing repaid, and deposit concentration down to 21.80% with all growth from a broader base. Credit concentration moved the other way, rising to 18.03% of loans across twenty borrower groups — 1.27× total equity. Most tellingly, distributable profit per share FELL 12.3% to NPR 9.08 while EPS rose 36.4% to NPR 20.18, and the declared 10% total distribution was not fully covered. Governance is sound: nil promoter lending, an active board, non-executive committee chairs, and candid disclosure of the NPA deterioration. The market appears to have drawn the same conclusion — the PE de-rated from 18.22 to 11.87 even as EPS rose. VERDICT: earnings quality is weaker than the headline; funding is stronger; credit is the risk to watch; and the capital constraint is now binding.
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