Nepal's banks lifted profits by 32% by setting aside less, not by lending more

Nepal's 20 commercial banks had their best year in some time on paper. Their combined net profit for the 2025/26 fiscal year, which ended in mid-July, reached Rs 69.78bn (about $450m), up 32.33% from Rs 52.73bn a year earlier, according to ShareSansar's tally of fourth-quarter reports. The average bank earned Rs 3.49bn, against Rs 2.64bn the year before.

The headline hides a weaker business underneath. Net interest income, the gap between what banks earn on loans and pay on deposits, rose only 1.29% to Rs 192.28bn, The Annapurna Express reported. Himal Press, using the same preliminary statements, put the rise at 1.27% and found that total impairment charges and provisioning expenses fell 27.65%. In other words, most of the extra profit came from banks setting aside less money against bad loans, and from writing back provisions made in earlier years.

Where the money came from

The pattern is clearest at the banks that grew fastest. Kumari Bank's profit rose about fourfold to Rs 7.38bn, making it the second most profitable bank after Nabil, which earned Rs 7.90bn. The Annapurna Express attributed Kumari's jump primarily to heavy provisioning reversals. Himalayan Bank, whose profit grew more than tenfold to Rs 1.48bn, posted the highest percentage growth, Himal Press reported. Global IME Bank ranked third with Rs 6.22bn.

At the other end, Prabhu Bank made a loss of Rs 240m, against a profit of Rs 870m a year earlier. Fourteen banks grew their profits and six saw them shrink, ShareSansar counted, with the steepest falls at Nepal Investment Mega Bank (36.72%) and Agriculture Development Bank (29.49%).

Nepal Rastra Bank's own monthly statistics show why lending no longer carries the sector. Commercial banks' interest income fell from Rs 497.6bn in 2024/25 to Rs 454.5bn in 2025/26, while their interest expenses fell from Rs 306.7bn to Rs 262.4bn. Both sides of the balance sheet repriced downwards as rates dropped. The weighted average lending rate fell to 6.55% from 7.85%, the central bank reported in its annual macroeconomic review. With private-sector credit growing just 6.5% over the year, there was little extra volume to make up for thinner margins. The wider problem is described in our report on why banks are flush but nobody is borrowing.

Bad loans still rising

Asset quality moved the wrong way. The average non-performing loan ratio rose by 0.83 percentage points over the year, according to Himal Press, and The Annapurna Express put it at 5.43%, up from 4.60%, linking the rise to the end of regulatory forbearance schemes. The central bank's statistics put commercial banks' ratio at 5.56% at mid-July. Everest Bank reported the lowest ratio, at 0.49%.

That tension shows up in what shareholders can actually receive. Sixteen banks reported positive distributable profit, led by Everest Bank at Rs 5.25bn, while four did not, ShareSansar reported. The Annapurna Express said NIC Asia Bank's distributable deficit stood at Rs 14.86bn, which rules out a dividend from it for now.

Provision write-backs are legitimate when borrowers repay or loans are restructured, but they are a one-off source of income. A bank cannot release the same reserve twice. For a sector whose core earnings grew by little more than 1%, next year's profits depend on whether loan demand returns, as the central bank's monetary policy assumes.

What to watch

First-quarter results for 2026/27, expected in November, will show whether write-backs continue to prop up earnings or whether new provisioning returns as non-performing loans rise. The other test is credit growth: the central bank's plan for 2026/27 relies on banks lending far more than they did last year.