Chapter 2 · Part 2 — Statement of Profit or Loss

Tax, and the bottom line

Current versus deferred tax, the effective rate, and how to decompose a profit number before believing it.

10 of 51 · 8 min

Current Tax

Simple definition. The tax actually payable on this year's taxable profit.

Technical definition. The amount of income taxes payable in respect of the taxable profit for the period, determined under the Income Tax Act 2058 and Rules, measured using rates enacted or substantively enacted at the reporting date.

How it is computed.

Accounting profit before tax
  + Disallowed expenses (accounting provisions not yet tax-deductible,
    fines, non-deductible donations, excess depreciation)
  − Allowable deductions not in accounting profit
    (tax depreciation in excess of book, allowable provisions)
  − Exempt income [R]
  = TAXABLE PROFIT
  × Applicable tax rate [R]
  = CURRENT TAX

The bank-specific driver. For a Nepali bank the largest reconciling item is almost always loan-loss provisions: NFRS 9 / NRB provisions are expensed in the accounts long before they are deductible for tax. This creates the deferred tax asset discussed at Part 1.15.

(NMB, Asar 2083, Bank YTD: NPR 1,795,529 thousand vs NPR 1,271,727 thousand — up 41.2%, tracking pre-tax profit growth of 40.7%. Consistent.)

Journal entry.

Dr  Income tax expense — current tax     1,795,529,000
    Cr  Current tax liability / Current tax asset      1,795,529,000

Effect on cash flow. Income taxes paid under operating activities — NPR 1,720,000 thousand (Bank), close to the charge.

Related terms. Part 1.9, Part 1.23 · Income tax expense · Part 8 Current Income Tax

Deferred Tax expense/(Income)

Simple definition. The change during the year in the bank's future tax position.

Technical definition. The movement in deferred tax assets and liabilities recognised in profit or loss, excluding amounts recognised directly in OCI or equity.

Formula.

Deferred tax expense/(income)  =  Closing net DTL  −  Opening net DTL
                               (equivalently: −(Closing net DTA − Opening net DTA))
                               EXCLUDING movements taken to OCI

Reading the sign.

Positive (no brackets)  → deferred tax EXPENSE → reduces profit
Bracketed               → deferred tax INCOME  → INCREASES profit

*(NMB, Asar 2083: NPR (61,174) thousand, identical for both Group and Bank and in both years shown as (61,174) / (41,172). A credit, increasing profit.)*

Journal entry.

Dr  Deferred tax asset                       61,174,000
    Cr  Income tax expense — deferred                    61,174,000
        (credit to expense → profit increases)

Effect on cash flow. None. Deferred tax is non-cash.

Analyst interpretation. A persistent deferred tax credit propping up profit is a quality-of-earnings concern. Test: compute profit after tax excluding the deferred credit and see how much of the growth survives.

Related terms. Part 1.15 Deferred tax assets · Part 1.25 Deferred tax liabilities · Part 7 Deferred tax assets recognised · Part 8 Deferred Tax · Part 15

Profit for the period

Simple definition. The bottom line — what the bank earned after everything, including tax.

Technical definition. The residual of total income less total expenses for the period, attributable to equity holders of the parent and to non-controlling interests.

Formula.

Profit for the period  =  Profit before income tax  −  Income tax expense

(NMB, Asar 2083, YTD, NPR thousand.)

                              Group          Bank
Profit before income tax     6,115,361      5,748,026
Current Tax                 (1,895,769)    (1,795,529)
Deferred Tax                    61,174         61,174
                            ──────────     ──────────
Profit for the period        4,280,765      4,013,671

Prior year                   3,063,269      2,854,638
Growth                          +39.74%        +40.60%

Where it goes — the four destinations.

                 PROFIT FOR THE PERIOD
                           │
     ┌───────────┬─────────┴──────────┬──────────────┐
     ▼           ▼                    ▼              ▼
┌─────────┐ ┌──────────┐    ┌──────────────┐ ┌─────────────┐
│ RETAINED│ │   EPS    │    │  ROE / ROA   │ │DISTRIBUTABLE│
│ EARNINGS│ │          │    │              │ │   PROFIT    │
│ (Part 5)│ │ (Part 3) │    │  (Part 6)    │ │  (Part 7)   │
└─────────┘ └──────────┘    └──────────────┘ └─────────────┘
  Balance      Per-share      Return          What may
  sheet        performance    measures        actually be
                                              paid out

The Group/Bank split and NCI. (Group, NPR thousand.)

Total comprehensive income attributable to:
  Equity holders of the Bank                3,997,320
  Non-controlling interest                     71,248
                                            ─────────
  Total                                     4,068,568

Derived measures — worked.

1. BASIC EPS (Bank standalone, per the report's own method)

                Annualised earnings − PNCPS dividend
   EPS  =  ─────────────────────────────────────────────
                Number of common (ordinary) shares

   Reported (NMB, Bank): NPR 20.18   (prior year NPR 14.80)
   Group:                NPR 28.47   (prior year NPR 15.84)

   Note the Group EPS is materially higher than the Bank's —
   the subsidiaries contribute meaningfully to earnings per share.

2. RETURN ON EQUITY (Annualized) — reported
   Bank  11.58%   (prior year 9.34%)
   Group 15.30%   (prior year 9.64%)

3. RETURN ON ASSETS (Annualized) — reported
   Bank  1.04%    (prior year 0.88%)
   Group 1.42%    (prior year 0.89%)

Quality-of-earnings review — putting Part 2 together.

Reported profit growth (Bank)                        +40.60%

But consider:
├─ Interest INCOME fell 5.5% — revenue did not grow
├─ NII growth came from a 18.5% fall in interest expense
│    → a RATE-CYCLE effect, not a franchise effect,
│      and it will not repeat once deposits fully reprice
├─ Personnel expenses were flattered by a
│    NPR 204.5m one-off VRS credit  → adjusted opex is higher
├─ Deferred tax contributed a NPR 61m credit to profit
├─ Impairment ROSE 43% and NPL rose from 4.11% to 4.91%
└─ Fee income growth of +18.6% is genuine and repeatable OK

CONCLUSION: profit growth is real but substantially
cycle-driven. The durable components are fee income growth
and volume growth. The rate tailwind and the one-off credits
are not durable, and asset quality is deteriorating.

Effect on cash flow. Profit and operating cash flow diverge sharply for a bank. NMB reported profit of NPR 4.28 billion (Group) but negative operating cash flow of NPR (10.46) billion — because loan growth consumes cash. See Part 4.

Related terms. Part 3 (all EPS terms) · Part 5 Profit for the period · Part 6 ROE, ROA, PE Ratio · Part 7 Net Profit or Loss as per Statement of profit or loss · Part 4

Part 2 — Revision table

Term	Meaning	Formula	Statement location	Key issue
Interest income	Earnings on lending and securities	EIR-based accrual	P&L line 1	Stops accruing on Stage 3; EIR transition from FY2083/84
Interest expense	Cost of deposits and borrowing	EIR-based accrual	P&L line 2	Driven by deposit mix, not size
Net interest income	Core lending spread	Int. income − Int. expense	Subtotal	~72% of NMB's operating income; geared
Fees and Commission Income	Service charges	NFRS 15	P&L	Fees integral to yield go into EIR instead
Fees and commission expense	Direct cost of fee services	Accrual	P&L	Sits in income block, not opex
Net fee and commission income	Net service income	Fee income − fee expense	Subtotal	Capital-light; best growth to have
Net interest, fee and commission income	Core banking earnings	NII + net fees	Subtotal	Best cross-bank comparison line
Net trading income	FX and securities dealing	Realised + unrealised	P&L	Buy/sell margin only — not revaluation
Other operating income	Residual operating income	—	P&L	Holds FX revaluation; bonus shares ≠ income
Total operating income	Bank revenue	Sum of the four	Subtotal	Denominator of cost-to-income
Impairment charge/(reversal)	Cost of credit risk	Higher of ECL and NRB provision	P&L	Non-cash; main earnings-management lever
Net operating income	Risk-adjusted revenue	Op. income − impairment	Subtotal	Growth gap vs revenue = credit drag
Operating expense	Running costs	Personnel + other + D&A	Heading	—
Personnel expenses	Employee cost	NAS 19	P&L	Actuarial remeasurement → OCI; VRS one-off distorted NMB's
Other operating expenses	Admin and general	Accrual	P&L	NFRS 16 moved rent out of here
Depreciation & Amortisation	Asset consumption	Straight line	P&L	Includes ROU; excludes goodwill
Operating Profit	Recurring business profit	Net op. income − opex	Subtotal	Best operating comparison
Non operating income	One-off income	—	P&L	Exclude from recurring earnings
Non operating expense	One-off costs	—	P&L	Check whether it recurs
Profit before income tax	Pre-tax profit	Op. profit ± non-op.	Subtotal	Ties to segment note
Income tax expense	Total tax charge	Current + deferred	P&L	Compute effective rate
Current Tax	Cash tax on taxable profit	Taxable profit × rate [R]	P&L	Taxable ≠ accounting profit
Deferred Tax expense/(Income)	Change in future tax	Δ net deferred position	P&L	Non-cash; NRB appropriates it out of distributable profit
Profit for the period	Bottom line	PBT − tax	P&L final	Decompose it: franchise vs cycle vs one-off

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