Financial sector performance drops in third quarter of 2021

The third quarter saw Nu 75mn less in profit compared to the second quarter

Although all the five banks, including non-banking lenders, recorded a net profit of Nu 2.61bn at the end of the third quarter this year, it is still Nu 75mn less than the profit made in the second quarter, which stood at Nu 3.36bn.

According to the Royal Monetary Authority (RMA) quarterly review, the income from interest alone increased from Nu 10.542bn to Nu 11.863bn, while the financial institution’s interest expenses saw an increase from Nu 6.396bn to Nu 8.003bn.

The financial sector performance report also depicted a similar trend in the capital fund which stood at Nu 23.7bn in September, compared to Nu 20.5bn last year.

However, the risk of dispersion and distribution of capital among the financial institutions remains high and those institutions that have entered the pandemic with relatively low capital and riskier exposures may face the challenge, the report stated.

The release of the Capital Conservation Buffer (CCB) built before the pandemic has allowed financial institutions to cover for the increase in Non-Performing Loans (NPLs) and maintain their financing activities to boost the country’s economy.

The CCB release makes Nu 2.6bn in capital accessible across the financial sector, with further prospect of lending between Nu 20bn to Nu 25bn.

“Given the overall uncertainty of the scale and duration of the crisis, it is important that the financial sector remains well capitalized,” an official said, “Financial institutions should ensure that the assessment of their capital positions is forward-looking and that it takes into account current uncertainties.”

Meanwhile, the total loan availed by people at the end of the third quarter increased to Nu 175.7bn, way up from last year’s Nu 164.8bn. NPL also decreased from Nu 25.471bn to Nu 21.769bn, while the gross NPL ratio decreased from 15.45% to 12.38%. 

According to the report, extensive monetary measures, including the installation of temporary deferment facility, have helped in mitigating the immediate liquidity shock felt across the sector, preventing financial institutions from accumulating further NPLs.

However, the impact of the pandemic on the financial sector’s asset quality, for instance NPLs, is expected to be a key challenge going forward.

“If the adverse impacts of the pandemic on our economy prove to be acute and persistent, financial institutions would be under stress and a significant portion of distressed loans may ultimately require repayment extension and restructuring,” the report further states.

The profitability (before tax) as of September 2021 stood at Nu 2.6bn, compared to a loss of Nu 1bn in September last year.

Figures show that the service and tourism sector owes Nu 44.6bn, constituting 28% of the total loan sanctioned by the financial institutions, followed by the housing sector at 26%, and the production and manufacturing sector with Nu 22bn at 13%.

The study of the loan portfolio shows that the financial sector has been made vulnerable by the service industry, which has an overwhelming NPL ratio of 32%, mostly attributed to the collapse of the tourism and hotel industry. It is followed by the trade and commerce sector and the production and manufacturing sector with an NPL ratio of 18% each.

Meanwhile, the capital fund stood at Nu 23.7bn in the third quarter this year as compared to Nu 20.5bn in September last year. The cash flow in the financial institutions is expected to remain relatively stable with the implementation of the Domestic Liquidity Management Framework to help the financial institutions with liquidity support.

So far, the domestic financial system has already played a significant role in supporting the liquidity needs of businesses in this pandemic. The deposit’s structure has remained stable and largely unaffected since December 2019. The Cash Reserve Ratio (CRR) was reduced from 10% to 9% in March and further to 7% in April last year, releasing total liquidity of over Nu 4bn to enable more lending.

Financial institution’s Statutory Liquidity Ratio (SLR) as of September this year is also above the minimum regulatory requirement of 20% for banks and 10% for non-banking institutions.

Kinley Yonten from Thimphu