Most people who buy bank stocks on NEPSE buy a headline. The bank announces a 20 percent dividend, the news sites run it, the Facebook groups celebrate, and the price ticks up. The dividend is real. It is also the last thing you should be looking at. By the time a bank is in trouble, the dividend is often the bait that keeps retail investors holding while the people who read the financial statements have already left.
The banking ratios NPL, CD ratio and CAR are the three numbers that actually tell you whether a bank is healthy. They are not secret. Every commercial bank publishes them in its quarterly report. They are just boring, and boring is exactly why they get ignored. This piece walks through all three, where to find them, what a healthy reading looks like, and the one combination that should make you sell regardless of what the dividend is doing.
Why the dividend lies to you
A dividend tells you what a bank chose to distribute last year. It tells you nothing about the loans sitting on its books right now. A bank can pay a fat dividend out of accumulated reserves in a year when its loan book is quietly rotting. Worse, in Nepal the regulator can force a bank that breaches its capital floor to stop paying dividends entirely, which means the headline you bought on can vanish the next quarter.
So treat the dividend as the reward and the three ratios as the risk. You do not buy the reward without pricing the risk. Here is how to price it.
NPL: the asset quality warning light
NPL stands for non-performing loan. A loan is the bank’s asset. It is the thing that earns interest. When a borrower stops paying, that asset stops performing, and the loan is reclassified as non-performing.
Nepal Rastra Bank (NRB), the central bank and the banking regulator, sets the rules for when this happens. A loan whose scheduled payment has not been received for three months or more is treated as non-performing (NRB loan classification directive). NRB sorts loans into categories by how overdue they are. Pass loans are current or less than a month late. Watchlist loans are one to three months late and still count as performing, but they are the early warning. Once a loan crosses three months it becomes substandard, then doubtful at six to twelve months, then loss after a year (NRB, per loan classification guidance summarised by industry sources). Substandard, doubtful and loss together make up the non-performing pool.
The NPL ratio is simply non-performing loans divided by total loans, shown as a percentage. If a bank has lent NPR 100 crore and NPR 3 crore of it has gone bad, the NPL ratio is 3 percent.
Why it matters is the provisioning. NRB forces banks to set aside money against loans that may not be repaid. The provision is small for a pass loan, around 1.1 percent, rises to 25 percent for substandard, 50 percent for doubtful, and 100 percent for a loss loan (NRB loan loss provisioning norms, per industry sources). That provision comes straight out of profit. So a rising NPL ratio is not an abstract quality score. It is a direct, mechanical drain on the bank’s earnings, which is the same earnings that pay your dividend.
What does healthy look like. A commercial bank with an NPL ratio comfortably under 3 percent is in normal territory. Below 2 percent is genuinely clean. Once you see a bank pushing past 4 or 5 percent, the asset quality is deteriorating and the provisioning pressure on profit is real. Across the sector, NPLs have been rising in recent years as the economy slowed and loan recovery got harder, a stress the IMF flagged in its review of Nepali bank books. The single most useful thing you can do is not look at one quarter’s NPL but the trend across the last four. A bank going from 1.5 to 2.2 to 3.1 to 4.0 percent is telling you a story, and it is not a good one.
One caution. Banks have levers to flatter the number, including rescheduling and restructuring loans so they slip back out of the non-performing bucket. If NPL looks suspiciously flat while the whole sector’s is climbing, read the notes.
CD ratio: the lending headroom gauge
CD ratio means credit-to-deposit ratio. It answers a simple question. Of every rupee the bank has taken in as deposits, how much has it lent back out as credit. The formula is total credit divided by total deposits, times 100 (standard banking definition).
A bank earns its money on the spread between what it pays depositors and what it charges borrowers. So it wants to lend. But it cannot lend every rupee, because depositors can ask for their money back and the bank has to be able to pay. The CD ratio measures exactly this tension between earning and safety.
NRB caps it. The current ceiling is 90 percent, meaning a bank can deploy a maximum of 90 percent of its deposits as loans (NRB, set via monetary policy 2021/22, which replaced the older credit-to-core-capital-plus-deposit or CCD measure). The calculation has some technical adjustments, including how refinance and certain long-term foreign-currency borrowings are treated, but the headline rule is the one that matters to you.
Read the CD ratio two ways. A very low CD ratio, say in the 70s, means the bank has plenty of room to grow its loan book. It is sitting on lendable money it has not yet deployed. That is headroom. It can also mean weak loan demand or that the bank cannot find creditworthy borrowers, which is its own problem. Through 2024 and into 2025 the whole sector ran unusually low, with the average commercial bank CD ratio drifting into the mid-to-high 70s as deposits piled up faster than banks could lend (Nepal Rastra Bank data reported by Fiscal Nepal, New Business Age and myRepublica). Billions sat parked at the central bank.
A CD ratio pressed up against 90 is the opposite. The bank has almost no room left to lend. Every new loan now requires new deposits first, and chasing deposits means raising deposit rates, which squeezes the spread. A maxed CD ratio is a bank running out of fuel. It cannot grow earnings the easy way, and it has thinned its own liquidity buffer to get there.
Healthy is somewhere in the middle. A bank in the low-to-mid 80s is using its deposits efficiently while keeping a margin below the ceiling. A bank at 89 and change is living on the edge of the regulation.
CAR: the loss-absorbing cushion
CAR stands for capital adequacy ratio. This is the one that tells you whether the bank can survive its own mistakes. CAR measures the bank’s own capital against its risk-weighted assets, which is the loan book and other exposures scaled up or down by how risky each piece is. In plain terms, it is the cushion. If loans go bad and losses hit, capital is what absorbs the blow before depositors and the bank itself are at risk.
NRB requires commercial banks to maintain a minimum CAR of 11 percent (NRB, under its Basel III-aligned framework). That figure already bakes in a capital conservation buffer of 2.5 percent on top of the base requirement, and NRB can add a countercyclical buffer of up to a further 2.5 percent at its discretion (NRB Basel III implementation, per The Himalayan Times and NRB guidance). So 11 percent is the line, not a comfortable target. A bank that wants breathing room runs above it.
Here is the part that connects directly to the headline you bought on. When a bank’s CAR falls below the regulatory floor, NRB restricts what it can do, and one of the first things to go is the dividend. A bank that breaches its capital requirement can be barred from distributing to shareholders until it rebuilds the cushion. The dividend is not protected by good intentions. It is gated by this ratio.
What healthy looks like. A commercial bank carrying CAR in the 12 to 13 percent range has a real margin above the 11 percent floor. A bank sitting at 11.2 percent has almost none, and any uptick in bad loans, which raises provisioning and eats capital, can push it under. The closer CAR sits to 11, the more fragile the dividend is, no matter how generous it was last year.
Where to find all three in a quarterly report
You do not need a Bloomberg terminal. Every NRB-licensed commercial bank publishes an unaudited quarterly financial report, and the same numbers flow through to ShareSansar and Merolagani company pages. Inside the report, look for these.
NPL ratio appears in the highlights or financial indicators section, often labelled “Non-Performing Loan to Total Loan” and given as a percentage. The supporting detail, the breakdown into pass, watchlist, substandard, doubtful and loss, sits in the loan classification note.
CD ratio is in the same financial indicators block, usually as “Credit to Deposit Ratio (as per NRB).” Watch the wording, because banks sometimes show a separate internal CD figure alongside the regulatory one. You want the NRB measure, since that is the one against the 90 percent ceiling.
CAR is reported as “Capital Adequacy Ratio” or “Total Capital Fund to RWA,” again in the indicators section. Banks often show core capital (Tier 1) and total capital separately. The total is the one you compare to 11 percent.
The single most valuable habit is to pull the same three lines from the last four quarterly reports and lay them side by side. One quarter is a snapshot. Four quarters is a trajectory, and trajectory is what protects you.
If you are still getting comfortable reading market documents at all, our guide to how to read a NEPSE floorsheet covers the trading side, and the macro backdrop that moves all of these ratios at once is the subject of how NRB monetary policy moves NEPSE.
A worked example
Take a hypothetical commercial bank, call it Bank A, that just announced a 16 percent dividend. The headline looks strong. Now pull the three ratios across four quarters.
NPL: 1.9, 2.6, 3.4, 4.3 percent. CD ratio: 84, 87, 89, 89.6 percent. CAR: 12.4, 11.9, 11.5, 11.2 percent.
Read together, this is a bank in trouble. NPL has more than doubled in a year, which means provisioning is rising and biting into profit. The CD ratio is jammed against the 90 percent ceiling, so the bank has no easy room to lend its way to more income and is having to chase expensive deposits. And CAR has slid from a healthy 12.4 to a fragile 11.2, just above the 11 percent floor, with rising bad loans set to push it lower. The 16 percent dividend was declared on last year’s strength. The three ratios are telling you next year may not look anything like it. This is exactly the bank where the dividend is bait.
Contrast it with a Bank B paying a more modest 11 percent dividend but reporting NPL steady around 2 percent, a CD ratio in the low 80s with room to grow, and CAR holding at 13 percent. The smaller dividend sits on a far sounder book.
The verdict: the one combination that should make you sell
If you remember nothing else, remember this. Rising NPL combined with a maxed-out CD ratio is the sell signal, and the dividend does not override it.
Each on its own is a yellow flag. A rising NPL means the loan book is deteriorating and profit is about to take a provisioning hit. A CD ratio pinned at 90 means the bank has no headroom to grow earnings and has spent its liquidity cushion. Put them together and you have a bank whose core business is shrinking in quality at the same moment it has lost the ability to grow in size. That is the squeeze. Profit falls, capital gets eaten by provisions, CAR drifts toward the floor, and at some point the regulator gates the dividend you bought the stock for.
When you see that pair moving in the wrong direction across consecutive quarters, the generous dividend is not a reason to hold. It is the reason the stock has not fallen yet. Sell into it.
None of this requires you to be an analyst. It requires you to open four quarterly reports and read three lines from each before you trust a dividend headline. The investors who do this are not smarter than you. They are just looking at the numbers that move first.
This is analysis, not financial advice.
