Chapter 12 · Part 12 — Regulatory, Governance and Market Terms
AML, FATF, governance and share market data
Why anti-money-laundering is a business-continuity issue in Nepal, and why a share trading on 64 days weakens every price ratio.
FATF Grey List
Simple definition. An international watchlist of countries with weaknesses in their anti-money-laundering systems.
Technical definition. The Financial Action Task Force's list of "Jurisdictions under Increased Monitoring" — countries that have committed to resolve identified strategic AML/CFT deficiencies within agreed timeframes and are subject to increased monitoring.
The report names it as an external challenge:
Why it matters to a bank's economics — the correspondent-banking chain.
┌──────────────────────────────────────────────────────────────────┐ │ A NEPALI BANK CANNOT OPERATE INTERNATIONALLY ALONE. │ │ │ │ To settle a USD import letter of credit, or to receive a │ │ remittance from the Gulf, Malaysia or Korea, it needs a │ │ CORRESPONDENT BANK abroad to hold its nostro account and │ │ clear the currency. │ │ │ │ │ ▼ │ │ Grey listing → foreign correspondents apply ENHANCED DUE │ │ DILIGENCE to Nepali institutions: │ │ • Slower processing │ │ • Higher compliance cost passed through │ │ • More transactions queried or declined │ │ • Risk of "DE-RISKING" — the correspondent simply │ │ terminating the relationship │ │ │ │ │ ▼ │ │ IF CORRESPONDENT RELATIONSHIPS WERE LOST: │ │ x Import LCs could not be issued → LC commission gone │ │ (Part 8.E.17) │ │ x Remittances could not be received → remittance fee gone │ │ (Part 8.E.13) — and remittance is a large share of │ │ Nepal's GDP │ │ x Trade finance would stop │ │ x FX trading income would collapse (Part 2.8) │ │ │ │ ⇒ This is an EXISTENTIAL OPERATIONAL RISK, not a │ │ compliance formality. │ └──────────────────────────────────────────────────────────────────┘
Analyst implication. When assessing any Nepali bank, treat AML/CFT capability and correspondent-banking relationships as a rated risk factor, alongside credit and liquidity. A bank's fee income from remittance and trade finance is contingent on them.
Related terms. 12.20 · Part 2.4, 2.8 · Part 8.E.13, 8.E.17 · Part 10.7
Corporate Governance
Simple definition. The system by which the bank is directed and controlled, and held accountable.
Technical definition. The framework of board structures, committees, policies, internal controls, compliance functions and disclosure practices through which an institution is governed, prescribed for BFIs by NRB directives and by the Companies Act 2063.
The report's own statement, in full:
The governance architecture, assembled from the whole report.
┌─────────────────────┐
│ SHAREHOLDERS │
│ Promoter · Public │
│ AGM │
└──────────┬──────────┘
│ elect
┌──────────▼──────────┐
│ BOARD (7) │
│ 20 meetings │
│ 1 Independent │
└──────────┬──────────┘
┌──────────────┬─────────┼─────────┬──────────────┐
▼ ▼ ▼ ▼ ▼
┌─────────┐ ┌───────────┐ ┌──────┐ ┌────────┐ ┌──────────┐
│ AUDIT │ │ RISK │ │ HR │ │ ASSETS │ │ OTHER │
│ (5) │ │ (6) │ │ (4) │ │LAUNDER-│ │ (2) │
│ │ │ │ │ │ │ING (7) │ │ │
│ chaired │ │ chaired │ │chair-│ │ │ │ │
│ by NED │ │ by NED │ │ed by │ │ │ │ │
│ │ │ │ │ NED │ │ │ │ │
└─────────┘ └───────────┘ └──────┘ └────────┘ └──────────┘
│
┌──────────▼──────────┐
│ EXECUTIVE COMMITTEE │
│ CEO + 6, incl. a │
│ Chief Risk Officer │
└──────────┬──────────┘
│
┌────────────────────┼────────────────────┐
▼ ▼ ▼
┌────────────────┐ ┌──────────────────┐ ┌────────────────┐
│ ALCO │ │ COMPLIANCE DEPT │ │ INTERNAL AUDIT │
│ Asset-Liability│ │ incl. Corporate │ │ (reports to │
│ management │ │ Governance Unit │ │ Audit Cttee) │
└────────────────┘ └──────────────────┘ └────────────────┘
Underpinned by: Code of Conduct and Ethics (12.23)The evidence base for assessing governance quality — assembled across Parts 10, 11 and 12.
| Signal | Evidence | Read |
|---|---|---|
| Board activity | 20 meetings + 24 committee meetings | Active |
| Independence | 3 committees chaired by non-executives; 1 independent director | Present, thin ! |
| Connected lending | **Nil loans to promoters** | Clean |
| Risk focus | Chief Risk Officer on ExCo; Risk Cttee 6 meetings | Appropriate |
| AML priority | Most frequent committee (7 meetings) | Matches the FATF risk |
| Candour | Management analysis names NPA rise explicitly | Good disclosure |
| Legal exposure | "No material cases except regular debt recovery and Income Tax" | Clean |
| External discipline | FMO and Employees Provident Fund on the board | Positive |
| CEO accountability | Personal responsibility statement signed | Required, present |
Related terms. 12.23, 12.24 · Part 10 (entire) · Part 11
Code of Conduct and Ethics
Definition. The bank's internal policy setting expected standards of behaviour for directors and employees — covering conflicts of interest, confidentiality, insider trading, gifts and entertainment, fair dealing, and whistleblowing.
The report's reference: "There are number of policies and procedures in place, including the Code of Conduct and Ethics to ensure highest level of compliance standard within the Bank."
Why it matters in a bank specifically. Employees have access to customer funds, confidential credit information and unpublished price-sensitive information about listed borrowers. The code is the first line of defence against insider dealing, front-running and misuse of customer data — none of which is caught by any financial ratio.
Asset and Liability Committee (ALCO)
Simple definition. The management committee that manages the balance sheet — matching what the bank owns against what it owes.
Technical definition. A senior management committee responsible for managing the structure of the balance sheet: interest rate risk, liquidity risk, funding strategy, pricing, and the maturity and repricing profile of assets and liabilities.
What ALCO actually decides — and where you see its decisions in this report.
┌──────────────────────────────────────────────────────────────────┐ │ ALCO DECISION VISIBLE IN │ ├──────────────────────────────────────────────────────────────────┤ │ Deposit pricing and mix Cost of Funds 3.74% │ │ (fell 132bp) — Part 6.5 │ │ │ │ Lending rate / base rate Base Rate 5.11% — Part 6.7 │ │ Spread 3.43% — Part 6.8 │ │ │ │ How much to lend vs invest CD ratio 82.77% — Part 6.6 │ │ NPR 19bn into securities │ │ — Part 1.8, 4.15 │ │ │ │ Liquidity buffer size NLA 28.99% — Part 6.16 │ │ │ │ Wholesale funding reliance Due to BFIs down NPR 3.2bn │ │ — Part 1.18, 11.9 │ │ │ │ FX and derivative position Matched derivative book │ │ — Part 1.4 │ │ │ │ Funds transfer pricing Intersegment revenue │ │ — Part 9.9 │ └──────────────────────────────────────────────────────────────────┘
Reading NMB's year through an ALCO lens. The decisions cohere:
Grow deposits (+13.1%) faster than loans (+10%)
→ CD ratio falls to 82.77%, creating headroom
Deploy the surplus into government securities (+NPR 19bn)
→ NLA rises to 28.99%, RWA impact minimal
Repay interbank borrowing (−NPR 3.2bn)
→ funding quality improves
Let deposit rates fall with the market
→ cost of funds down 132bp, NII up 17.5%
⇒ A DEFENSIVE, LIQUIDITY-BUILDING year — entirely rational
given rising NPL and thin CET1. ALCO ran this balance
sheet conservatively.That is a coherent and defensible strategy, and it is only visible when you read the balance sheet, cash flow and ratio table together as ALCO would.
Why ALCO is management, not board. Unlike Audit, Risk and HR — which are board committees chaired by non-executive directors — ALCO is an executive committee. It makes operational balance-sheet decisions within a risk appetite the board sets.
Related terms. Part 6.5–6.8, 6.16 · Part 1.4, 1.8, 1.18 · Part 9.9 · 12.22
SHARE MARKET DATA
Maximum Price / Minimum Price / Closing Price
Simple definition. The highest, lowest and final traded prices of the bank's share during the period.
The disclosure, as published:
Maximum Price – 257 Minimum Price – 230 Closing Price – NPR 239.50 Trading number – 8,289 Days of Trading – 64
What each is used for.
| Measure | Use |
|---|---|
| **Maximum / Minimum** | Trading range — a crude volatility indicator |
| **Closing Price** | The input to **PE ratio** (Part 6.13) and Price-to-Book |
Working the numbers.
TRADING RANGE Range = 257 − 230 = NPR 27 As % of min = 27 ÷ 230 = 11.7% → A narrow band. Not a volatile period for this share. PE RATIO (Part 6.13) Bank EPS NPR 20.18 → 239.50 ÷ 20.18 = 11.87 OK matches Group EPS NPR 28.47 → 239.50 ÷ 28.47 = 8.41 x does not ⇒ CONFIRMED: the published PE uses STANDALONE EPS PRICE-TO-BOOK Net worth per share (Bank) NPR 181.15 P/B = 239.50 ÷ 181.15 = 1.32× → The market values the bank at 1.32× its book equity. DIVIDEND YIELD (cash only) Cash dividend 5% on NPR 100 par = NPR 5.00 per share Yield = 5.00 ÷ 239.50 = 2.09% TOTAL DISTRIBUTION YIELD (cash + stock, at par) NPR 10.00 ÷ 239.50 = 4.18%
Related terms. Part 6.13, 6.14 · 12.26 · Part 11.1
Trading number / Days of Trading
Simple definition. How many transactions took place, and on how many days the share actually traded.
The disclosure:
Trading number 8,289 Days of Trading 64
What these numbers actually tell you — and this is the most under-appreciated disclosure in the report.
┌──────────────────────────────────────────────────────────────────┐ │ DAYS OF TRADING = 64 │ │ │ │ A Nepali fiscal year has roughly 240 trading days │ │ (allowing for weekends and Nepal's many public holidays). │ │ │ │ 64 ÷ ~240 = the share traded on roughly 27% of │ │ available days. │ │ │ │ ⇒ ON ABOUT THREE DAYS IN FOUR, THIS SHARE DID NOT TRADE. │ ├──────────────────────────────────────────────────────────────────┤ │ TRADING NUMBER = 8,289 transactions │ │ 8,289 ÷ 64 = ~130 trades on each day it did trade │ └──────────────────────────────────────────────────────────────────┘
Four consequences an analyst must draw from this.
1. THE CLOSING PRICE IS A WEAK SIGNAL A price set on 27% of days by ~130 trades carries far less information than a continuously-traded share. Treat the PE ratio and P/B accordingly — they are indicative, not precise. 2. LIQUIDITY RISK FOR INVESTORS IS REAL A large holder cannot exit quickly without moving the price. This is a genuine cost of holding Nepali bank shares that no financial ratio captures. 3. FAIR VALUE HIERARCHY IMPLICATIONS "Quoted price in an ACTIVE market" is the Level 1 test (Part 8.C.10). A share trading on 27% of days may not meet it — which is part of why Nepali banks' equity holdings often sit at Level 2 or 3. 4. IT EXPLAINS THE FVOCI ELECTION With thin, volatile pricing, running NEPSE fair value changes through profit would make reported bank earnings swing on illiquid price marks. The irrevocable FVOCI election (Part 3.4) insulates the P&L — and NMB used it, taking a NPR 937 million adverse swing entirely outside profit and EPS.
Cross-reference to the report's own statement: "As the open market share operations determines the market price and transaction of the Bank's shares, the Bank Management is neutral on the ruling share price of the Bank."
Related terms. 12.12 NEPSE · 12.25 · Part 6.13 · Part 3.4 · Part 8.C.10
Part 12 — Revision table
| Term | What it is | Why it matters here |
|---|---|---|
| Nepal Rastra Bank (NRB) | Central bank and BFI supervisor | Writes the **accounting overlay** on top of NFRS [R] |
| Unified Directives | NRB's consolidated rulebook | Source of every [R] in this guide |
| Bank and Financial Institutions Act, 2006 | The banking statute | Creates the class structure, capital and reserve rules |
| Class "A" financial institution | Full commercial bank | NMB's licence; highest requirements [R] |
| Class "D" financial institution | Microfinance (Laghubitta) | Funded by parent lending; weaker asset quality |
| ICAN | Issues standards and **carve-outs** | An IFRS answer ≠ the Nepali answer |
| NASB | Develops NFRS/NAS | NASB writes; ICAN pronounces |
| SEBON | Capital market regulator | Licenses the merchant bank and broker subsidiaries |
| Securities Registration and Issuance Regulation, 2073 | SEBON disclosure regulation | Source of the six-part disclosure section |
| Securities Businessperson (Merchant Banker) Regulations, 2008 | Merchant banker licensing | NMB Capital's licence |
| Companies Act, 2063 | General company law | Capital redemption reserve, AGM, share premium [R] |
| Nepal Stock Exchange Limited | The only exchange | Thin trading shapes fair value and PE reliability |
| Annual General Meeting (AGM) | Shareholder meeting | **AGM approval** creates the dividend liability |
| Promoter / Public Shareholder | Two-class ownership | Makes the connected-lending prohibition enforceable [R] |
| Independent Director | Unaffiliated board member | 1 of 7 — present but thin |
| Merchant and investment banking | Capital-market services | Must be a separate SEBON-licensed subsidiary |
| Share brokerage business | Trade execution | Volume-driven, capital-light, Group column only |
| Non-Performing Assets (NPA) | Same as NPL | 4.91%, up from 4.11% — management says so |
| Capital Adequacy Ratio | Capital ÷ RWA | Family name — **always specify the layer** |
| AML/CFT compliance | Anti-money-laundering framework | Most board committee time of any area |
| FATF Grey List | Increased-monitoring list | Threatens correspondent banking → remittance and LC income [R] |
| Corporate Governance | Direction and control | Nil connected lending; thin independence layer |
| Code of Conduct and Ethics | Behavioural policy | Controls what no ratio reveals |
| Asset and Liability Committee (ALCO) | Balance-sheet management | **Its decisions are what Part 6 measures** |
| Maximum / Minimum / Closing Price | Share price data | Closing NPR 239.50 → PE 11.87 on **standalone** EPS |
| Trading number / Days of Trading | Liquidity data | **64 days only** — every price-based ratio is a thin signal |
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