Bank bites off more than it can chew

Should investors believe the unaudited report of a financial institution and invest in it if there is a huge difference of detail between the unaudited report and balanced books of the institution? There is a 31.52 per cent variation between unaudited and audited accounts in the net profit shown by a bank's fourth quarterly report for 2006-07.
All financial institutions — commercial banks, development banks, finance companies and others — have to publish their unaudited balance sheet at the end of the fiscal year, according to the Nepal Rastra Bank's (NRB) directives in order to maintain transparency in the financial sector and inform investors of the financial health of the company.
Based on the unaudited report of a particular company or financial institution, investors decide whether to buy or sell the shares of that institution as the audited report takes a longer time to be published.
Commercial banks, a major propeller of the capital market, follow NRB directives 'ritually' but not seriously, shows a report. According to a variation analysis on net profit in the unaudited report in the fourth quarter and audited report in the fiscal year 2006-07, prepared by Securities Research Centre and Services (SRCS), one of the commercial bank's loss has even increased to 10.74 per cent in the audited report.
"The bank has shown Rs 104.6 million loss but according to its audited report the loss increased to Rs 115.9 million, a huge difference of Rs 11.24 million or 10.74 per cent," states the report.
However, Standard Chartered Bank Nepal (SCBN) and Laxmi Bank Ltd (LBL) are two banks which have nominal difference in their unaudited and audited reports. SCBN showed Rs 692.06 million net profit in its unaudited report while its audited report showed Rs 691.66 million, a difference of Rs 0.39 million or 0.06 per cent.
Similarly, Laxmi Bank showed Rs 655.08 million net profit in its unaudited report while its audited report showed the net profit standing at Rs 655.79 million — a minimal difference of Rs 71,000 or 0.11 per cent only.
Of the total 14 commercial banks analysed, most of these have differences in unaudited and audited reports ranging from 1.09 per cent to 5.40 per cent. However, Lumbini Bank reportedly has the highest variation of net profits — 31.52 per cent or Rs 71.18 million difference between its unaudited and audited report for the fourth quarter of 2006-07.
"That is because of the loan-loss provisioning," acting governor Krishna Bahadur Manandhar said adding that a bank may think its loan a good one or medium-risk and provision accordingly but NRB may differ on the quality of loan and the ensuing loan-loss provisioning may punch holes in its profit sheet.