Chapter 20 · Part 20 — Final Revision
Final Revision
One page per part, and the twenty things that matter most.
One page per Part. The complete term checklist. The twenty things that matter most.
One page per Part
PART 1 — Statement of Financial Position (37 terms)
ASSETS = LIABILITIES + EQUITY A bank runs at ~10× leverage: an 8-10% loss across the asset book wipes out shareholders. That arithmetic is the reason capital regulation exists.
| The five that matter most | Why |
|---|---|
| **Loans and advances to customers** | The engine and the risk. Impairment = **MAX(NFRS 9 ECL, NRB provision)** [R] |
| **Investment securities** | Classification decides whether gains hit P&L, OCI, or **nothing** (FVOCI-equity) |
| **Deferred tax assets** | Non-cash. Blocked from distribution **and** deducted from CET1 [R] — NRB blocks it twice |
| **Deposits from customers** | Mix beats size. CASA drives cost of funds |
| **Reserves** | The **regulatory reserve** is NRB's block on distributing non-cash profit |
Traps: a write-off costs nothing now · Watchlist ≠ NPL · investment property = foreclosed collateral · "Investment in subsidiaries: nil" in the Group column means they were consolidated · Other assets held NPR 3.07bn of deferred employee expenditure
PART 2 — Statement of Profit or Loss (24 terms)
Interest income − Interest expense = NII (~72% of operating income) + net fees + trading + other = Total operating income − impairment = Net operating income − opex = Operating profit ± non-operating = PBT − tax = Profit
| The five that matter most | Why |
|---|---|
| **Interest income** | Stops accruing at Stage 3. Nepal is mid-**EIR transition** |
| **Net interest, fee and commission income** | * The **best cross-bank comparison line** — immune to fee classification |
| **Impairment charge/(reversal)** | The main earnings-management lever. Non-cash |
| **Personnel expenses** | NMB's looked flat only because of a **NPR 204.5m VRS credit** |
| **Profit for the period** | Decompose it: franchise vs cycle vs one-off |
NMB's year in one line: profit +40.7% on interest income that fell 5.5% — the growth came from an 18.5% fall in interest expense.
PART 3 — Other Comprehensive Income (17 terms)
Comprehensive income = Profit + OCI OCI NEVER affects EPS. Two categories: will NOT be reclassified (FVOCI-equity, revaluation, actuarial) vs MAY BE reclassified (hedge, translation, FVOCI-debt).
| The three that matter most | Why |
|---|---|
| **Gains/(losses) from equity investments at fair value** | Irrevocable FVOCI election. NMB swung **NPR 937m negative with zero EPS impact** |
| **Actuarial gains/(losses)** | Annual valuation → **all lands in Q4** → never annualise Q4 |
| **Basic EPS** | Deduct the PNCPS dividend; **restate prior periods for bonus issues** |
The finding: NMB's profit grew ~40% but total comprehensive income grew ~19%. The gap is invisible to an EPS-only reader.
PART 4 — Statement of Cash Flows (37 terms)
For a bank: loans and deposits are OPERATING, not investing/financing. Operating + Investing + Financing = Net change in cash Closing cash MUST equal the balance sheet.
| The four that matter most | Why |
|---|---|
| **Interest received** | * vs interest income = **the best earnings-quality test**. NMB: 89.6%, deteriorating |
| **Operating cash flow before changes** | The real "is the profit cash?" test. NMB: within 3% of operating profit |
| **(Increase)/Decrease in operating assets** | Loan growth consumes cash one-for-one on day one |
| **Cash at end of the year** | **Must tie to the balance sheet.** Check first |
The rule: negative operating cash flow at a bank is usually growth, not distress — decompose before judging.
PART 5 — Statement of Changes in Equity (28 terms)
THE READING RULE: If a row's TOTAL column is ZERO, nothing left the bank — equity was merely reclassified from "free" to "locked." Only non-zero rows changed net worth.
| The four that matter most | Why |
|---|---|
| **Regulatory reserve** | * NRB's block on distributing non-cash profit. Its movement is the **best earnings-quality number** |
| **Transfer to reserves** | Nets to zero — but locked **55% of NMB's profit** |
| **Bonus shares capitalized** | Nets to zero. Free shares are **not free** — they permanently consume dividend capacity |
| **General reserve** | ~20% of profit [R], permanently retained |
NMB's story: earned NPR 4.01bn; 55% locked, 23% paid in cash, 23% to share capital; free retained earnings fell.
PART 6 — NRB Ratios (17 terms)
| Ratio | NMB Bank | The insight |
|---|---|---|
| Capital fund to RWA | 12.73% ▲ | Improvement **bought with AT1** |
| **CET 1 to RWA** | **8.99% ▼** | * The purest capital **FELL** |
| NPL to total loan | 4.91% ▲ | From 4.11% — ~NPR 2.9bn more bad loans |
| Coverage | 92.57% ▼ | Group fell 10.75pp — worth **23.5% of pre-tax profit** |
| Cost of Funds | 3.74% ▼ | −132bp — **the engine of the whole year** |
| CD Ratio | 82.77% ▼ | Headroom created |
| Average Interest Spread | 3.43% ▼ | * Compressed 39bp — masked by volume |
| ROE / ROA | 11.58% / 1.04% ▲ | Improved **while leverage fell** — real profitability |
| Liquidity (NLA) | 28.99% ▲ | Improved even as cash halved |
The rule: always look through total CAR to CET1. Always read NPL as a trio with coverage and net NPL. Never annualise a stock ratio.
PART 7 — Distributable Profit (24 terms)
NFRS PROFIT 4,013,671 100.0% − Statutory appropriations [R] (37.3%) = Before regulatory adjustment 62.7% − Regulatory adjustments (17.7%) = Available for distribution 45.1% ± Opening balance, distributions − PNCPS dividend = TO COMMON EQUITY 43.6%
| The four that matter most | Why |
|---|---|
| **Interest receivable adjustment** | * NMB swung **NPR 890m adverse** — the dominant driver |
| **Deferred tax assets recognised** | The **same NPR 61m** adds to profit and is removed from distribution |
| **Total Profit Distributable to Common Equity** | 43.6% of reported profit |
| **Annualised Distributable Profit per share** | * **NPR 9.08, DOWN 12.3%, while EPS rose 36.4%** |
The single most important comparison in the guide.
PART 8 — Accounting Policies, NFRS/NAS (137 terms)
| Theme | The one thing |
|---|---|
| **NFRS framework** | ! **Carve-outs make NFRS ≠ IFRS, and they change.** Check ICAN for your period |
| **Consolidation** | Add 100%, eliminate intra-group, carve out NCI |
| **Foreign exchange** | Revaluation → other operating income; trading margin → net trading income |
| **NFRS 9 classification** | Business model + SPPI decide everything |
| **Fair value hierarchy** | Level 3 = management judgement. **Find it and read the note** |
| **ECL** | PD × LGD × EAD × DF, **probability-weighted** — losses are convex |
| **Three stages** | Two cliff-edges: lifetime ECL at Stage 2; **interest stops** at Stage 3 |
| **Higher-of rule** | Impairment = **MAX(NFRS 9 ECL, NRB provision)** |
| **Revenue** | NFRS 15 for fees; NFRS 9 for interest. Point in time or over time? |
| **NAS 19** | Four categories, **three** P&L/OCI destinations |
| **Day 1 difference / VRS** | The NPR 204.5m credit that made staff costs look flat |
| **NFRS 16** | All leases on balance sheet — breaks pre/post comparability |
| **Deferred tax** | DTLs in full, DTAs only if probable. NRB blocks the DTA twice |
| **NAS 32** | One test: contractual obligation to deliver cash? |
| **PNCPS** | Every feature engineered to be equity **and** AT1 |
PART 9 — Segment Information (17 terms)
! UNIT CHANGE: the segment note is in NPR MILLIONS.
What the segment note revealed that the P&L could not:
1. External revenue was FLAT (−0.3%) while profit rose 40.7% 2. Corporate −12.0%, SME −13.4%, Deprived −3.9% → EVERY non-retail lending segment declined 3. Treasury +76.9% — 38% of the improvement, pure rate cycle 4. "Others" +NPR 1,000m — 60% of the improvement, UNEXPLAINED 5. Corporate yield collapsed 165bp while that book grew 14.5% 6. Retail supplies NPR 108.6bn of net internal funding 7. Retail earns 6.43% on segment assets vs Corporate's 1.46%
The rule: segments are not comparable across banks (management approach). Compare trends within a bank.
PART 10 — Related Party Disclosures (19 terms)
| The four that matter most | Why |
|---|---|
| **Loans and Advances to Promoters** | * **NIL** — the most important sentence in the note |
| **Transaction with Subsidiaries** | NPR 2.59bn to the microfinance subsidiary = the Group-vs-Bank gap exactly |
| **Assets Laundering Prevention Committee** | **7 meetings — the most.** FATF grey list is a correspondent-banking survival issue |
| **Dividend Distribution** | Only ~44% of subsidiary profit upstreamed → **Group EPS overstates dividend capacity** |
Governance read-out: nil promoter lending · 20 board meetings · non-executive committee chairs · one independent director of seven ! · Chief Risk Officer on ExCo
PART 11 — Other Disclosures and Concentration (14 terms)
* CONCENTRATION IS INVISIBLE IN EVERY OTHER RATIO. Two banks with identical NPL, CAR and NLA can have completely different fragility.
| Dimension | NMB | Read |
|---|---|---|
| Borrowings | 0.61% of deposits | FACT Not a risk — deposit-funded |
| **Deposits** | 21.80%, **down** from 23.32% | ! Liquid assets cover top-20 only **1.32×** — but all growth came from a broader base |
| **Credit** | 18.03%, **up** from 17.73% | ! NPR 48.31bn = **1.27× total equity**. At 50% LGD → 64% of capital |
Use the GROUP measure (18.03%), not individual (6.49%). Nepal's economy runs on family business groups — a 2.78× difference.
PART 12 — Regulatory, Governance, Market (26 terms)
NRB → central bank, supervisor, AND author of the accounting
overlay (higher-of ECL, regulatory reserve, distributable
profit, ratio table)
SEBON → capital market; licenses the merchant bank and broker
ICAN → standards AND carve-outs
NEPSE → the only exchange; NMB traded on just 64 days| The four that matter most | Why |
|---|---|
| **Unified Directives** | The source of every [R] in this guide. Structure stable, numbers not |
| **FATF Grey List** | Threatens correspondent banking → remittance and LC income. **Existential, not formal** |
| **ALCO** | * Its decisions are exactly what Part 6 measures |
| **Trading number / Days of Trading** | **64 days** — every price-based ratio is a thin signal |
PART 13 — Integrated Example
A complete fictional bank (HCBL) with all seven statements tying exactly, plus fifteen transactions traced through every statement — deposit, loan, accrual, repayment, NPL, write-off, securities, FVOCI disposal, PPE, share issue, dividend, bonus, debenture, FX, lease and acquisition — and a five-year trace of one loan from origination to write-off.
The fourteen consistency checks live here. Run them on any real bank.
PART 14 — How to Read a Quarterly Report
TEN STEPS, NINETY MINUTES 1. Fourteen consistency checks 6. Cash flow quality tests 2. Management's own words 7. SoCE — where the profit went 3. Decompose the profit 8. Distributable profit 4. Asset quality trio + normalisation 9. Segment note 5. Look through CAR to CET1 10. Concentration + related party
Twelve red flags · Six false alarms · The one-paragraph verdict.
PART 15 — NFRS vs NRB
NRB's THREE MECHANISMS 1. HIGHER-OF RULE → changes the accounts (impairment only) 2. REGULATORY RESERVE → blocks distribution, leaves profit intact 3. CAPITAL DEDUCTIONS → asset stays, counts for nothing [R] * NRB never asks the bank to publish false accounts. It says: you may not pay it out, and it is not capital.
The gap between the two regimes is not an error. THE GAP IS THE INFORMATION.
PART 16 — Financial Statement Linkages
Eight primary linkages · The four-way investment-securities split · The Group↔Bank bridge · Fourteen ties · One number (profit) traced to THIRTEEN destinations
The linkage that matters most:
P&L PROFIT ──────────────► EPS NPR 20.18 (what accountants say
they earned)
less appropriations (37.3%)
less regulatory adjustments (17.7%)
──────────────────────────► NPR 9.08 (what the regulator will
let them have)
The first rose 36.4%. The second fell 12.3%.PART 17 — Formula Sheet
Every formula, with variables defined, period basis stated, and accounting-vs-regulatory flagged.
The nine to memorise:
1. Assets = Liabilities + Equity 2. NII = Interest income − Interest expense 3. Impairment = MAX(NFRS 9 ECL, NRB provision) [R] 4. ECL = PD × LGD × EAD × DF, probability-weighted 5. CAR = Capital Fund ÷ RWA — look through to CET1 6. NPL = (Substandard + Doubtful + Loss) ÷ Gross loans 7. ROE = ROA × Equity Multiplier — always decompose 8. Distributable = Profit − Appropriations − Regulatory adjustments 9. QUALITY = Distributable per share ÷ Basic EPS
PART 18 — A–Z Glossary
70+ abbreviations, the full NFRS and NAS standards reference, and the Nepal-specific terms you will not find in an IFRS glossary: Kitta · Laghubitta Bittiya Sanstha · Non-Banking Asset · Regulatory reserve · Deprived sector · Base rate · CD ratio · Exchange equalisation reserve · Promoter shareholder · Watchlist · Carve-out · Old term loan · Higher-of rule.
PART 19 — Analyst Checklist
Fifteen sections, from "before you read a single number" to "before you write." Including the cross-bank comparison card — what you may compare freely and what you must never compare without checking.
The final test: Have you found at least one material thing the headline numbers do not show? If not, you have not finished.
The complete term checklist
All 383 unique terms, 397 entries, verified covered.
| Part | Section | Terms | Status |
|---|---|---|---|
| 1 | Statement of Financial Position | 37 | |
| 2 | Statement of Profit or Loss | 24 | |
| 3 | Other Comprehensive Income | 17 | |
| 4 | Statement of Cash Flows | 37 | |
| 5 | Statement of Changes in Equity | 28 | |
| 6 | Ratios as per NRB Directives | 17 | |
| 7 | Distributable Profit/Loss | 24 | |
| 8 | Accounting policy / NFRS / NAS | 137 | |
| 9 | Segment Information | 17 | |
| 10 | Related Party Disclosures | 19 | |
| 11 | Other disclosures and concentration | 14 | |
| 12 | Regulatory, governance, market | 26 | |
| **TOTAL ENTRIES** | **397** | ||
| **UNIQUE TERMS** | **383** |
The 14-entry difference is deliberate: terms that are genuine line items in more than one statement (e.g. Derivative financial instruments as both asset and liability) are covered under each.
The twenty things that matter most
╔═══════════════════════════════════════════════════════════════════════╗ ║ 1. A bank runs at ~10× leverage. An 8–10% asset loss wipes out ║ ║ shareholders. That is why capital regulation exists. ║ ║ ║ ║ 2. Impairment in Nepal = MAX(NFRS 9 ECL, NRB provision) [R] ║ ║ ║ ║ 3. A write-off costs NOTHING now. The cost was the earlier ║ ║ provision. And it FLATTERS the NPL ratio. ║ ║ ║ ║ 4. Watchlist is NOT NPL — but it is next year's NPL. ║ ║ ║ ║ 5. Read NPL as a TRIO: ratio, coverage, net NPL. Never alone. ║ ║ ║ ║ 6. Compare CET1 across banks, never total CAR. Total capital can ║ ║ be dressed with AT1 and Tier 2; CET1 cannot. ║ ║ ║ ║ 7. Negative operating cash flow at a bank is usually GROWTH. ║ ║ Decompose it before judging. ║ ║ ║ ║ 8. Interest received ÷ interest income is the best single ║ ║ earnings-quality test available. ║ ║ ║ ║ 9. OCI never affects EPS. FVOCI-equity gains never reach profit ║ ║ — not even on sale. ║ ║ ║ ║ 10. Bonus shares are not free. They permanently convert dividend ║ ║ capacity into share capital, and force retrospective EPS ║ ║ restatement. ║ ║ ║ ║ 11. The regulatory reserve movement is the single best ║ ║ earnings-quality number in a Nepali bank's accounts. ║ ║ ║ ║ 12. EPS ≠ dividend capacity. Read the distributable profit ║ ║ statement. NMB's EPS rose 36% while distributable profit per ║ ║ share FELL 12%. ║ ║ ║ ║ 13. Segment reporting routinely overturns the headline. NMB: every ║ ║ non-retail lending segment DECLINED. ║ ║ ║ ║ 14. Concentration is invisible in every other ratio. Compute ║ ║ top-20 credit ÷ equity, and top-20 deposits ÷ liquid assets. ║ ║ ║ ║ 15. Group ≠ Bank. Every difference is a finding — especially the ║ ║ NPL, coverage and operating-cash-flow gaps. ║ ║ ║ ║ 16. Q4 is lumpy by construction: annual actuarial valuation, ║ ║ year-end impairment, deferred tax remeasurement. Never ║ ║ annualise it. ║ ║ ║ ║ 17. NFRS ≠ IFRS. ICAN carve-outs change the answer, and they ║ ║ change over time. Check for your period. ║ ║ ║ ║ 18. Never state an NRB threshold from memory. Formulas are ║ ║ permanent; percentages are not. [R] ║ ║ ║ ║ 19. Run the fourteen consistency checks BEFORE analysing. A failed ║ ║ check is either your misreading or the bank's error — and you ║ ║ must know which. ║ ║ ║ ║ 20. The gap between what NFRS says the shareholders EARNED and ║ ║ what NRB says they may RECEIVE is not an inconsistency to be ║ ║ explained away. ║ ║ ║ ║ THE GAP IS THE INFORMATION. ║ ╚═══════════════════════════════════════════════════════════════════════╝
The regulatory-currency reminder
A closing note on the worked bank
Throughout these twenty Parts, one real report has been used as the teaching template: NMB Bank Limited's Interim Financial Statements (Unaudited), Asar End 2083 (16 July 2026), Q4 FY 2082/83.
That choice was deliberate. The layout is NRB's prescribed format, so everything transfers to any Class "A" bank in Nepal. And the report is a genuinely good teaching document — it discloses the VRS reversal that flattered its own staff costs, names the NPA deterioration explicitly, and states its challenges plainly.
The analysis in this guide is not a judgement on that institution. It is a demonstration of method. Every finding was derived from figures the bank published, using techniques any reader can apply. Where the analysis is uncomfortable — the CET1 decline, the coverage collapse, the divergence between EPS and distributable profit — the bank made all of it findable.
That is what a well-prepared set of financial statements looks like: everything you need to reach an independent conclusion, including the parts that do not flatter.
╔═══════════════════════════════════════════════════════════════════════╗ ║ ║ ║ FINANCIAL TERMINOLOGY GUIDE FOR NEPALESE ║ ║ COMMERCIAL BANKS ║ ║ ║ ║ 20 Parts · 383 terms · 397 entries ║ ║ ║ ║ Parts 1–12 Every term, by statement and note ║ ║ Part 13 A complete worked bank ║ ║ Part 14 How to read a report ║ ║ Part 15 NFRS vs NRB ║ ║ Part 16 How the statements connect ║ ║ Part 17 Every formula ║ ║ Part 18 A–Z glossary ║ ║ Part 19 The checklist ║ ║ Part 20 Revision ║ ║ ║ ╚═══════════════════════════════════════════════════════════════════════╝
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