Chapter 2 · Part 2 — Statement of Profit or Loss
Operating expenses and operating profit
Staff costs under NAS 19, the lease reclassification, and the one-off that made a bank's payroll look flat.
Net operating income
Simple definition. Operating income after deducting the cost of bad loans, but before running costs.
Formula.
Net Operating Income = Total Operating Income
− Impairment charge/(reversal) for loans and other losses(NMB, Asar 2083, Bank YTD, NPR thousand.)
Total operating income 13,024,067
Impairment charge (2,345,056)
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Net operating income 10,679,011
Prior year 9,246,347
Growth +15.50%Purpose. It isolates risk-adjusted revenue — what the bank actually earned after the credit losses embedded in earning it. Comparing growth in total operating income (+19.66%) to growth in net operating income (+15.50%) tells you immediately that credit costs consumed about 4 percentage points of revenue growth.
Analyst interpretation. This gap is the cleanest single measure of whether growth is being bought with credit risk. Track it every period:
Total operating income growth − Net operating income growth = the drag from credit cost NMB: 19.66% − 15.50% = 4.16 percentage points of drag
Related terms. Total operating income · Impairment charge/(reversal)
Operating expense
Simple definition. The cost of running the bank — people, premises, technology, depreciation.
Technical definition. A heading comprising personnel expenses, other operating expenses and depreciation and amortisation, recognised on an accrual basis.
Structure.
Operating expense = Personnel expenses
+ Other operating expenses
+ Depreciation & AmortisationNote this heading is a label, not a number, in the NRB format — the three components are listed beneath it and the total flows into operating profit.
*(NMB, Asar 2083, Bank YTD, NPR thousand: 3,051,537 + 1,141,958 + 368,009 = 4,561,504.)*
Related terms. 2.14, 2.15, 2.16 · Total operating income (cost-to-income ratio)
Personnel expenses
Simple definition. The total cost of employing people — salary, allowances, bonus, provident fund, gratuity, leave and training.
Technical definition. Employee benefit costs recognised under NAS 19 Employee Benefits, comprising short-term benefits, post-employment benefits (defined contribution and defined benefit), other long-term benefits and termination benefits.
Components in a Nepali bank.
| Component | NAS 19 category | Measurement |
|---|---|---|
| Basic salary, allowances | Short-term | Accrual |
| **Staff bonus** | Short-term | Statutory, under the **Bonus Act** [R] |
| **Provident fund** | Defined **contribution** | Expensed as contributed |
| **Gratuity** | Defined **benefit** | **Actuarial valuation** |
| **Accumulated sick leave** | Other long-term | **Actuarial valuation** |
| **Accumulated home leave** | Other long-term | **Actuarial valuation** |
| Training and development | Short-term | Accrual; also a statutory fund [R] |
| Amortisation of Day 1 difference on staff loans | — | See below |
Defined contribution vs defined benefit — the key NAS 19 distinction.
PROVIDENT FUND (defined CONTRIBUTION)
─────────────────────────────────────
Bank pays a fixed % to a fund independent of the bank.
Once paid, the obligation ENDS.
The report: "Provident fund is recognised at the time of
contribution to the fund which is independent to the Bank."
↓
Simple: expense = amount contributed. No actuary needed.
NO OCI impact.
GRATUITY / LEAVE (defined BENEFIT)
──────────────────────────────────
Bank promises a future payment based on salary and service.
The bank bears the risk that the cost turns out higher.
↓
Requires an ACTUARY to estimate:
• future salary growth • discount rate
• employee turnover • mortality
↓
Service cost + interest cost → PROFIT OR LOSS
REMEASUREMENT (actuarial gains/losses) → OCI
↑
and NEVER recycled to profitThe report confirms all three defined-benefit items are actuarially valued "as per the provisions of Nepal Accounting Standards" and that "The actuary valuation is done on annual basis only."
The VRS distortion — worked in full. This is the most instructive item in NMB's P&L.
From the report (Note 13):
WHAT HAPPENED, STEP BY STEP
───────────────────────────
1. Bank had lent staff money at concessional rates.
2. The below-market element was recognised as a PREPAID
employee benefit ("Day 1 difference") in Other assets
— NPR 3.07 billion in total.
3. It was being amortised to Personnel expenses over the
expected service period.
4. VRS: those employees LEFT and settled their housing loans.
5. The service period ended early → the remaining unamortised
NPR 204.5 million prepayment had no future service to
attach to.
6. It was REVERSED — credited back to Personnel expenses.
Dr Personnel expenses (204,500,000) ← a CREDIT
Cr Other assets — deferred employee expenditure 204,500,000The analytical consequence.
Reported personnel expenses FY2082/83 NPR 3,051,537 thousand Reported personnel expenses FY2081/82 NPR 3,042,547 thousand Apparent growth +0.30% ← looks like tight cost control Add back the one-off credit NPR 204,500 thousand Adjusted personnel expenses FY2082/83 NPR 3,256,037 thousand Adjusted growth +7.02% ← the real underlying picture
Journal entries.
Monthly salary:
Dr Personnel expenses 250,000,000
Cr Cash / Salary payable 222,000,000
Cr TDS payable 18,000,000
Cr Provident fund payable 10,000,000
Gratuity service cost (actuarially determined):
Dr Personnel expenses 45,000,000
Cr Gratuity obligation (Other liabilities) 45,000,000
Actuarial REMEASUREMENT loss — goes to OCI, not P&L:
Dr OCI — Actuarial gains/(losses) on defined benefit plans 58,594,000
Cr Gratuity obligation 58,594,000Effect on OCI. Actuarial remeasurements only. (NMB, Group: NPR (58,594) thousand, with associated tax of NPR 38,358 thousand — net NPR (20,236) thousand.) Effect on cash flow. Cash payment to employees is a separate direct-method line — NPR 2,621,625 thousand (Bank) versus a personnel expense of NPR 3,051,537 thousand. The NPR 430 million gap is non-cash: actuarial accruals, unpaid bonus, and the VRS reversal.
Analyst interpretation.
- Compute cost per employee and revenue per employee where headcount is disclosed.
- Adjust for one-offs before drawing conclusions.
- Rising personnel cost with flat headcount usually means the actuarial assumptions changed (a lower discount rate raises the obligation) — check the note.
Related terms. Part 1.16 Other assets · Part 1.26 Other liabilities · Part 3 Actuarial gains/(losses) · Part 4 Cash payment to employees · Part 8 NAS 19, Provident fund, Gratuity, Day 1 difference, VRS · Part 10 Key Management Personnel
Other operating expenses
Simple definition. The cost of running the business other than staff and depreciation.
Technical definition. Administrative and general operating costs recognised on an accrual basis.
Components in a Nepali bank.
- Rent — but note NFRS 16 moved most property rent out of this line into depreciation of ROU assets and interest on lease liabilities
- Electricity, water, security, cleaning
- Communication, internet, connectivity to branches
- IT and core-banking system maintenance, licences
- Advertising, promotion, CSR spend
- Audit fees, legal and professional fees
- Directors' meeting fees and allowances (see Part 10)
- Insurance, including deposit insurance [R]
- Printing, stationery — *"Stationery purchased are stated at cost and charged to revenue at the time of consumption"*
- Repairs and maintenance
- NRB and regulatory fees, SEBON fees, NEPSE listing fees
The NFRS 16 effect on this line — worth understanding.
BEFORE NFRS 16 AFTER NFRS 16
────────────── ─────────────
Branch rent ROU asset recognised in PPE
↓ Lease liability in Other liabilities
Other operating expenses ↓
(single straight-line Depreciation of ROU asset
rent expense) → DEPRECIATION & AMORTISATION
Unwinding of discount
→ INTEREST EXPENSE
↓
Other operating expenses FALLS
Operating profit RISES (because
interest sits below it in some
presentations)
EBITDA-type measures improveFor a bank with a large leased branch network, this reclassification is material. It is a presentation change, not an economic one — but it makes pre- and post-NFRS 16 comparisons invalid.
(NMB, Asar 2083, Bank YTD: NPR 1,141,958 thousand vs NPR 1,079,219 thousand — up 5.8%, broadly in line with inflation and network growth.)
Related terms. Depreciation & Amortisation · Part 8 NFRS 16, Operating Lease, Stationery · Part 10 Board Member Allowances
Depreciation & Amortisation
Simple definition. The annual cost of using up buildings, equipment, software and leased premises.
Technical definition. The systematic allocation of the depreciable amount of property, plant and equipment (NAS 16), right-of-use assets (NFRS 16) and intangible assets (NAS 38) over their useful lives.
Composition.
Depreciation & Amortisation = Depreciation of owned PPE
+ Depreciation of ROU (leased) assets
+ Amortisation of software and intangibles
+ Amortisation of leasehold improvementsGoodwill is excluded — it is impairment-tested, never amortised (Part 1.14).
Rates applied by the source bank — reproduced from Part 1.13 for convenience:
| Asset | Life | Rate | Method |
|---|---|---|---|
| Building | 40 yrs | 2.5% | Straight line |
| Office equipment | 7 yrs | 14.28% | Straight line |
| Computers | 5 yrs | 20% | Straight line |
| Furniture & Fixtures | 7 yrs | 14.28% | Straight line |
| Vehicles | 7 yrs | 14.28% | Straight line |
| Intangibles / software | 5 yrs | — | Straight line |
| Land | — | **Not depreciated** | — |
(NMB, Asar 2083, Bank YTD: NPR 368,009 thousand vs NPR 384,593 thousand — down 4.3%, consistent with assets reaching the end of their depreciation lives faster than new additions.)
Effect on cash flow. Non-cash. In the direct method it does not appear as a line; the basis note explains that operating profit is adjusted for "non-cash transactions such as depreciation and loan losses."
Analyst interpretation. Falling depreciation with flat PPE means the asset base is ageing — a future capex requirement is building. Rising depreciation after a big capex year is simply the cost catching up.
Related terms. Part 1.13 Property and equipment · Part 1.14 Goodwill and Intangible assets · Part 8 NAS 16, Straight Line method, NFRS 16, ROU assets
Operating Profit
Simple definition. Profit from the bank's normal business, before one-off items and tax.
Formula.
Operating Profit = Net Operating Income − Operating Expenses
= Total operating income
− Impairment charge/(reversal)
− Personnel expenses
− Other operating expenses
− Depreciation & AmortisationFull worked build-up. (NMB, Asar 2083, Bank YTD, NPR thousand.)
Interest income 21,041,592
Interest expense (11,615,353)
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Net interest income 9,426,240
Fees and Commission Income 2,830,190
Fees and commission expense (239,321)
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Net fee and commission income 2,590,868
Net interest, fee and commission income 12,017,108
Net trading income 681,415
Other operating income 325,545
───────────
Total operating income 13,024,067
Impairment charge/(reversal) (2,345,056)
───────────
Net operating income 10,679,011
Personnel expenses (3,051,537)
Other operating expenses (1,141,958)
Depreciation & Amortisation (368,009)
───────────
OPERATING PROFIT 6,117,506
Prior year 4,739,988
Growth +29.06%Purpose. The cleanest measure of the bank's recurring earning power, before items management classifies as non-operating and before tax policy effects.
Related terms. Net operating income · Operating expense · Profit before income tax
Non operating income
Simple definition. Income from things outside the bank's normal business.
Technical definition. Income not arising from ordinary banking operations — typically one-off, incidental or extraordinary in nature.
Typical items in a Nepali bank.
- Gain on disposal of investment in a subsidiary or associate
- Recovery of loans previously fully written off (where policy classifies it here rather than as an impairment reversal)
- Insurance claims received
- Write-back of long-outstanding liabilities no longer payable
- Grant income not related to operations (see Part 8, Grant)
(NMB, Asar 2083, Bank YTD: NPR 120,847 thousand vs NPR 3,951 thousand a year earlier — a 30-fold increase from a tiny base. Small in absolute terms but worth a note check, since a jump of this shape usually means a specific one-off event.)
Analyst interpretation. Exclude non-operating income when assessing recurring earnings. A bank that meets a profit expectation only because of non-operating income has not met it operationally. Where the item is material, recompute EPS and ROE without it.
Related terms. Non operating expense · Operating Profit
Non operating expense
Simple definition. Costs from things outside the bank's normal business.
Technical definition. Expenses not arising from ordinary banking operations.
Typical items. Loss on disposal of an investment; write-off of non-operating assets; penalties and fines (including regulatory penalties imposed by NRB [R]); donations and non-CSR contributions; extraordinary legal settlements.
*(NMB, Asar 2083, Bank YTD: NPR 490,327 thousand vs NPR 658,746 thousand — down 25.6%, but still a substantial figure that materially reduces profit before tax. At NPR 490 million against operating profit of NPR 6,118 million it consumes 8% of operating profit. This warrants investigation in the notes — a recurring "non-operating" expense of that size may not be genuinely non-operating.)*
Related terms. Non operating income
Profit before income tax
Simple definition. Profit after all income and costs, before the government takes its share.
Formula.
Profit before income tax = Operating Profit
+ Non operating income
− Non operating expense(NMB, Asar 2083, Bank YTD, NPR thousand.)
Operating Profit 6,117,506
Non operating income 120,847
Non operating expense (490,327)
─────────
Profit before income tax 5,748,026
Prior year 4,085,193
Growth +40.71%Cross-check against segment reporting. The report's segment note (Part 9) reconciles: Total Profit before tax for reportable segments = NPR 5,748 million, matching exactly. Use this as a consistency check — the segment note and the P&L must agree.
Purpose. The base for the effective tax rate calculation and the starting point of the statutory tax computation (before tax-law adjustments).
Related terms. Operating Profit · Income tax expense · Part 9 Reconciliation of reportable segment profit
Income tax expense
Simple definition. The total tax charge for the period — what is payable now plus the change in future tax.
Technical definition. The aggregate amount included in profit or loss for the period in respect of current tax and deferred tax, per NAS 12.
Formula.
Income tax expense = Current Tax + Deferred Tax expense/(Income)
Effective tax rate.
Income tax expense
Effective Tax Rate = ──────────────────────────────── × 100
Profit before income taxWorked example. (NMB, Asar 2083, Bank YTD, NPR thousand.)
Current Tax 1,795,529
Deferred Tax expense/(Income) (61,174) ← a CREDIT
─────────
Income tax expense 1,734,355
Effective tax rate = 1,734,355 ÷ 5,748,026 × 100 = 30.17%The statutory rate applicable to banks and financial institutions in Nepal is set by the Income Tax Act 2058 as amended by the annual Finance Act — verify for the year concerned. An effective rate close to the statutory rate, as here, indicates few permanent differences.
Why the effective rate can differ from the statutory rate.
| Cause | Direction |
|---|---|
| Permanently disallowed expenses (fines, some donations) | Raises ETR |
| Tax-exempt income (certain government securities [R]) | Lowers ETR |
| Deferred tax credit from newly recognised DTA | Lowers ETR |
| Under/over provision for prior years | Either |
| Rate change enacted during the year | Either |
Presentation. The heading with two components beneath. Notes should reconcile accounting profit to the tax charge.
Related terms. Current Tax · Deferred Tax expense/(Income) · Part 1.9, 1.15, 1.23, 1.25 · Part 8 Current Income Tax, Deferred Tax
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