Chapter 2 · Part 2 — Statement of Profit or Loss
Fees, trading income and the impairment charge
Thirteen fee types, the FX split most readers get wrong, and the single most discretionary line in a bank's accounts.
Fees and Commission Income
Simple definition. What the bank charges for services — issuing a letter of credit, managing a loan, running a card, handling a remittance.
Technical definition. Income from services provided to customers, recognised under NFRS 15 Revenue from Contracts with Customers when the performance obligation is satisfied, excluding fees that are integral to the effective interest rate of a financial asset, which are instead included in the EIR measurement.
The full list, from the source report. The policy note enumerates them:
| Fee | What triggers it | Nepali banking context |
|---|---|---|
| **Loan documentation fee** | Loan origination | Integral to EIR in principle — see the split rule below |
| **Loan management fee** | Ongoing administration | Recurring |
| **Consortium fee** | Arranging a syndicated loan | Large infrastructure/hydropower deals |
| **Commitment fee** | On undrawn facility | Compensates for reserved capital |
| **Card issuance and renewal fees** | Debit/credit card | Growing fast with digitisation |
| **Prepayment and swap fee** | Early repayment / switching | Common when rates fall |
| **Remittance fee** | Inbound/outbound transfer | **Major** in Nepal — remittance is a huge share of GDP |
| **Investment banking fee** | Issue management, underwriting | Earned in NMB Capital (subsidiary) |
| **Asset management fee** | Managing mutual funds | NMB Capital manages Sulav Investment Fund-2, NMB 50 |
| **Brokerage** | Share trading | Earned in N.M.B. Securities (subsidiary) |
| **Commission on letter of credit** | Trade finance | Import-heavy economy → significant |
| **Commission on guarantee** | Bid/performance bonds | Contracting sector |
| **Locker rental income** | Safe deposit lockers | Small but steady |
The critical NFRS 9 vs NFRS 15 split. The report states the rule:
A FEE IS CHARGED
│
┌────────────────┴─────────────────┐
▼ ▼
Is it INTEGRAL to the yield Is it for a SEPARATE
of a financial asset? SERVICE?
(origination fee that is │
effectively part of pricing) │
│ │
▼ ▼
NFRS 9 — include in EIR NFRS 15 — recognise when
Spread over the loan's life the performance obligation
through INTEREST INCOME is satisfied, in
│ FEES AND COMMISSION INCOME
│ │
▼ ▼
Practical expedient: if the e.g. LC commission, guarantee
amount is IMMATERIAL, it may commission, remittance fee,
be taken to P&L immediately locker rent, card feesWhy this matters for comparing banks. Two banks with identical economics can report materially different splits between Interest income and Fees and commission income depending on how aggressively they treat fees as integral. Always compare Net interest, fee and commission income — the combined subtotal — across banks, not the components. This is exactly why NRB's format includes that subtotal.
Group vs Bank — where the subsidiaries show up. (NMB, Asar 2083, YTD, NPR thousand.)
Group Bank Difference Fees and Commission Income 3,221,195 2,830,190 391,005
The NPR 391 million difference is fee income earned in the subsidiaries — investment banking and asset management fees in NMB Capital, brokerage in N.M.B. Securities. This is the clearest place in the P&L to see what the non-bank businesses contribute.
Journal entry.
LC commission of NPR 250,000 earned on issuing a letter of credit:
Dr Cash / Customer account 250,000
Cr Fees and commission income 250,000
Commitment fee received upfront for a 12-month undrawn facility,
NPR 1,200,000 — service delivered over time:
Dr Cash 1,200,000
Cr Unearned commission (Other liabilities) 1,200,000
Monthly release:
Dr Unearned commission 100,000
Cr Fees and commission income 100,000Effect on regulatory ratios. Fee income is capital-light — it generates profit without consuming RWA. A bank growing fee income improves ROE and capital adequacy simultaneously. This is why fee growth is prized.
Analyst interpretation.
- Fee income as a share of total operating income is a quality metric. Higher = less dependence on the rate cycle and on credit risk.
- NMB: 19.9% (Bank). Rising fee share is a structural positive.
- Growth in remittance and card fees tracks Nepal's economy directly — remittance inflows and digitisation.
Related terms. Fees and commission expense · Net fee and commission income · Net interest, fee and commission income · Part 8 NFRS 15, EIR, Revenue recognition · Part 9 (segment revenue)
Fees and commission expense
Simple definition. What the bank pays out in fees to others to deliver its own services.
Technical definition. Expenses incurred for services received that are directly related to fee-generating activities, recognised as incurred.
Typical components in a Nepali bank.
- Card scheme fees paid to Visa / Mastercard and to the domestic switch
- Correspondent bank charges on LCs and remittances
- Agency and sub-agent commissions on remittance collection
- ATM interchange and network fees
- Brokerage and clearing fees paid
Presentation. Deducted from fees and commission income. Note it is not an operating expense — it sits in the income block, because it is a direct cost of earning fee income.
(NMB, Asar 2083, Bank YTD: NPR 239,321 thousand against fee income of NPR 2,830,190 thousand — an 8.5% cost ratio.)
Analyst interpretation. Rising fee expense as a proportion of fee income means the bank is earning fees through more expensive channels — heavier reliance on agents, or card volumes with high scheme costs. Track the ratio, not the absolute.
Related terms. Fees and Commission Income · Net fee and commission income
Net fee and commission income
Simple definition. Service income after the direct costs of providing those services.
Formula.
Net Fee and Commission Income = Fees and Commission Income
− Fees and Commission Expense(NMB, Asar 2083, Bank YTD, NPR thousand.)
Fees and Commission Income 2,830,190
Fees and commission expense 239,321
─────────
Net fee and commission income 2,590,868
Growth vs prior year (2,184,586) = +18.60%Analyst interpretation. Fee income growing 18.6% while interest income fell 5.5% is a genuinely positive structural signal — the bank is building income that does not depend on the rate cycle or consume capital. Of the three income engines, this is the one to want growing.
Related terms. Fees and Commission Income · Fees and commission expense
Net interest, fee and commission income
Simple definition. The bank's combined core income from lending and services, before market-related income.
Formula.
Net interest, fee = Net interest income and commission income + Net fee and commission income
(NMB, Asar 2083, Bank YTD, NPR thousand.)
Net interest income 9,426,240
Net fee and commission income 2,590,868
──────────
Net interest, fee and commission 12,017,108
Prior year 10,205,480
Growth +17.75%Why NRB's format includes this subtotal. Because it is the most comparable earnings measure across banks. It neutralises the EIR-vs-NFRS-15 classification choice discussed at 2.4 — whatever a bank does with its fee split, this subtotal is the same. It also strips out trading income, which is volatile and not a measure of franchise strength.
Related terms. Net interest income · Net fee and commission income · Total operating income
Net trading income
Simple definition. Profit from dealing — buying and selling foreign exchange and securities.
Technical definition. The net result of trading activities, comprising realised and unrealised gains and losses on financial assets and liabilities held for trading and on derivatives, together with foreign-exchange trading gains.
What is in it, per the source report. Two policy notes define the boundary:
and, on FX:
The important FX distinction. Nepali banks earn FX income two ways, and they land in different lines:
┌──────────────────────────────────────────────────────────────┐ │ (a) BUY/SELL SPREAD on foreign exchange transactions │ │ Customer buys USD at the bank's selling rate; │ │ bank bought at its buying rate. The margin is a │ │ genuine TRADING GAIN. │ │ ↓ │ │ NET TRADING INCOME │ └──────────────────────────────────────────────────────────────┘ ┌──────────────────────────────────────────────────────────────┐ │ (b) REVALUATION of foreign-currency assets and liabilities │ │ at the NRB mid-point rate at period end. │ │ An accounting remeasurement, not a transaction. │ │ ↓ │ │ OTHER OPERATING INCOME │ │ (report: "Net difference arising from the conversion │ │ of foreign currency assets and liabilities is │ │ accounted for as revaluation gain/loss under Other │ │ Operating Income") │ └──────────────────────────────────────────────────────────────┘
Nepali context. Trading income is driven by:
- Remittance conversion volume (very large in Nepal)
- Import LC settlement in USD
- Tourism-season currency exchange
- Derivative fair value movements (see Part 1.4)
*(NMB, Asar 2083, Bank YTD: NPR 681,415 thousand vs NPR 360,571 thousand — up 89%. A near-doubling. Given derivative balances also more than doubled, this is consistent with higher FX transaction volume rather than a one-off.)*
Volatility warning. Because derivative fair value changes flow here with no hedge accounting (Part 1.4), this line is inherently volatile. It is the lowest-quality of the income engines.
Related terms. Other operating income · Part 1.4 Derivative financial instruments · Part 1.5 Other trading assets · Part 8 Net Trading Gain, Foreign Exchange Transactions
Other operating income
Simple definition. Operating income that is not interest, not fees, and not trading.
Technical definition. A residual operating income caption comprising foreign-currency revaluation gains and losses, dividend income, rental income, gains on disposal of assets, recoveries and sundry operating income.
Components in a Nepali bank.
| Component | Note |
|---|---|
| **FX revaluation gain/loss** | Per policy — conversion of FX assets/liabilities at NRB mid-point rate |
| **Dividend income** | Recognised "when the right to receive the dividend is established" |
| Rental income | From bank-owned premises let out |
| Gain on disposal of PPE | Per NAS 16 |
| Recoveries of previously written-off amounts (non-loan) | — |
| Grant income | Where related to income (see Part 8, Grant) |
The bonus-share rule for dividend income. The report states: "For bonus shares, the numbers of shares alone are increased without any change in the cost price of shares."
(NMB, Asar 2083, Bank YTD: NPR 325,545 thousand vs NPR 318,466 thousand — stable.)
Analyst interpretation. Because FX revaluation sits here, this line can swing with the NPR/USD rate even when the bank has done nothing differently. Strip out revaluation before reading a trend. Persistent large "other" income deserves a note check — it can hide one-off gains dressed as operating income.
Related terms. Net trading income · Part 8 Foreign Exchange Transactions, Dividend Income, Grant
Total operating income
Simple definition. Everything the bank earned from operations, before credit losses and running costs.
Formula.
Total Operating Income = Net interest income
+ Net fee and commission income
+ Net trading income
+ Other operating income(NMB, Asar 2083, Bank YTD, NPR thousand.)
Net interest income 9,426,240 72.4%
Net fee and commission income 2,590,868 19.9%
Net trading income 681,415 5.2%
Other operating income 325,545 2.5%
────────── ──────
Total operating income 13,024,067 100.0%
Prior year 10,884,518
Growth +19.66%Purpose. The revenue line of a bank — the denominator of the cost-to-income ratio, the most-watched efficiency measure in banking.
Operating expenses
Cost-to-Income Ratio = ────────────────────────────── × 100
Total operating incomeWorked example using the source report. (Bank, YTD, NPR thousand.)
Personnel expenses 3,051,537
Other operating expenses 1,141,958
Depreciation & Amortisation 368,009
──────────
Total operating expenses 4,561,504
Cost-to-Income = 4,561,504 ÷ 13,024,067 × 100 = 35.03%
Prior year: (3,042,547 + 1,079,219 + 384,593) ÷ 10,884,518
= 4,506,359 ÷ 10,884,518 = 41.40%
→ Improvement of 6.4 percentage points.But — recall Part 1.16. Personnel expenses were flattered by the NPR 204.5 million VRS reversal. Adjusting for it:
Adjusted personnel expenses = 3,051,537 + 204,500 = 3,256,037 Adjusted total opex = 4,766,004 Adjusted cost-to-income = 4,766,004 ÷ 13,024,067 = 36.59%
Still an improvement, but 1.6 percentage points less impressive. This is what quality-of-earnings analysis actually looks like.
Related terms. All of 2.3–2.9 · Operating expense · Part 6 · Part 17
Impairment charge/(reversal) for loans and other losses
Simple definition. The cost of expected bad debts charged against this period's profit.
Technical definition. The net charge or credit recognised in profit or loss representing the movement in the allowance for expected credit losses on financial assets, adjusted to the higher of NFRS 9 ECL and the provisioning required by the NRB Unified Directives, plus impairment on other assets.
Framework. NFRS 9 for ECL; NFRS 9 Expected Credit Loss (ECL) Related Guidelines, 2024 issued by NRB for the higher-of rule; NRB Unified Directives for regulatory provisioning grades and rates [R].
Formula.
Impairment charge Closing impairment Opening impairment
for the period = allowance required − allowance held + Write-offs
recovered (as credit)
where
Closing allowance required = HIGHER OF
(a) NFRS 9 ECL across Stages 1, 2 and 3
(b) NRB regulatory provision by loan grade [R]The sign convention — read it carefully.
POSITIVE number (a charge) → EXPENSE → reduces profit BRACKETED number (a reversal) → INCOME → increases profit
The line is labelled "Impairment charge/(reversal)" precisely because it can go either way. A reversal arises when loans are upgraded, recovered, or when collateral is taken over at a value exceeding the provision held (see Part 1.12, Non-Banking Assets).
Journal-entry logic.
1. Building the allowance:
Dr Impairment charge for loans and other losses 2,345,056
Cr Allowance for impairment (contra-asset) 2,345,056
2. Reversal on upgrade / recovery:
Dr Allowance for impairment 500,000
Cr Impairment charge/(reversal) 500,000
3. Write-off (allowance already in place) — NO P&L EFFECT:
Dr Allowance for impairment 100,000,000
Cr Loans and advances to customers 100,000,000
4. Recovery of an amount previously written off:
Dr Cash 8,000,000
Cr Impairment charge/(reversal) 8,000,000Worked example — the higher-of rule in action. Illustrative — HCBL.
Loan book NPR 100,000,000,000
NFRS 9 ECL computation:
Stage 1 NPR 92,000,000,000 × 0.9% = NPR 828,000,000
Stage 2 NPR 6,000,000,000 × 8.0% = NPR 480,000,000
Stage 3 NPR 2,000,000,000 × 45.0% = NPR 900,000,000
────────────────────
Total NFRS 9 ECL NPR 2,208,000,000
NRB regulatory provision (illustrative rates [R] — VERIFY):
Pass NPR 90,000,000,000 × 1.20% = NPR 1,080,000,000
Watchlist NPR 8,000,000,000 × 5.00% = NPR 400,000,000
Substandard NPR 1,000,000,000 × 25.0% = NPR 250,000,000
Doubtful NPR 600,000,000 × 50.0% = NPR 300,000,000
Loss NPR 400,000,000 × 100% = NPR 400,000,000
────────────────
Total NRB regulatory provision NPR 2,430,000,000
HIGHER OF (2,208,000,000 ; 2,430,000,000) = NPR 2,430,000,000
↑ NRB wins here
Allowance already held NPR 2,100,000,000
────────────────
Impairment charge for the period NPR 330,000,000The reconciliation an analyst should demand.
NFRS 9 ECL 2,208,000,000
NRB regulatory provision 2,430,000,000
─────────────
Excess of regulatory over
accounting ("regulatory
provision shortfall") 222,000,000 ← recognised, and appropriated
to REGULATORY RESERVE
(Part 7)This is why the distributable-profit statement carries the line "Short loan loss provision in accounts (-)/reversal (+)". When regulatory provisioning exceeds the accounting charge, the difference is blocked from distribution.
The actual NMB numbers. (Bank standalone, YTD, NPR thousand.)
FY2082/83 FY2081/82 Change Impairment charge 2,345,056 1,638,170 +43.15% As % of total operating income 18.00% 15.05%
A 43% increase in credit cost. Read alongside NPL rising from 4.11% to 4.91% and the Group NPL at 5.18% (from 4.51%), the picture is consistent: asset quality deteriorated materially during the year, and the bank recognised it.
Effect on profit. Direct and full. Every rupee of impairment is a rupee off pre-tax profit. Effect on the balance sheet. Increases the allowance, reducing net loans. Effect on cash flow. None — it is a non-cash charge. This is a major reason operating cash flow diverges from profit. In the direct method used here, the effect is embedded in the movement in loans and in operating profit before changes in operating assets and liabilities. Effect on regulatory ratios. Reduces retained earnings → reduces CET1 → reduces capital adequacy. Increases Total loan loss provision to Total NPL (coverage). Reduces distributable profit.
Analyst interpretation. This is where earnings management hides. Test it:
| Test | What it reveals |
|---|---|
| Impairment charge ÷ average loans (**credit cost**) | Trend in underwriting quality |
| Coverage ratio trend | Whether provisioning is keeping pace with NPL |
| NPL rising **but** impairment flat | Under-provisioning — a red flag |
| NPL falling **and** coverage falling | Write-offs, not recovery |
| Large reversal in one quarter | Check for NBA takeover (Part 1.12) or upgrades |
| Q4 impairment much larger than Q1–Q3 | Year-end catch-up; ask why it was not seen earlier |
Credit cost calculation. Using NMB Bank figures.
Impairment charge
Credit cost = ───────────────────────────────── × 100
Average gross loans
Average loans ≈ (249,759,929 + 228,456,304) ÷ 2 = 239,108,117
Credit cost = 2,345,056 ÷ 239,108,117 × 100 = 0.98%
Prior year = 1,638,170 ÷ ~215,000,000 × 100 ≈ 0.76%Credit cost rose roughly 22 basis points. On a NPR 240 billion book, each basis point is NPR 24 million of profit.
Related terms. Part 1.7 Loans and advances to customers · Part 1.12 Investment property · Part 6 NPL ratio, Total loan loss provision to Total NPL · Part 7 Short loan loss provision · Part 8 ECL, Stage 1/2/3, PD, LGD, EAD · Part 15
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