How clean are the balance sheets of financial institutions

Going by the popular perception, financial institutions dominate the domestic secondary market because they are considered more transparent than any other.
That's precisely why investors swear by them. However, not before checking the non-audited reports of the institutions, as they are published ahead of the annual general meetings.
But that's where the cookie crumbles. There is a huge difference between non-audited reports as opposed to the audited ones, which are usually published after almost six months.
For instance, there is a significant 33.49 per cent gap in the non-audited and audited accounts of Machhapuchhre Bank, as evident in the fourth quarterly report of fiscal year 2007-08. The anomaly lies in the net profit.
"As per the non-audited report, Machhapuchhre Bank posted a profit of Rs 127.82 million. But, the audited document reveals that it has raked only Rs 85.01 million in profit during the year. The difference is a staggering 33.49 per cent," stated a recent report, compiled by Securities Research Centre and Services (SRCS).
Radhesh Pant, president, Nepal Bankers' Association (NBA), attributed the deviation to the fundamentals of loan-loss provision.
"At times, a bank may think that loan is either good or entails a medium risk. But, Nepal Rastra Bank, the regulatory authority, may think otherwise. That leads to the gaping holes in the profit sheet," reasoned Pant.
Of the 25 commercial banks, the SRCS has compared the non-audited and audited reports of 19 commercial banks.
According to the NRB's directives, all financial institutions — commercial banks, development banks, finance companies and others — are obliged to publish their non-audited balance sheet immediately after the end of the fiscal. The move aims to maintain transparency in the financial sector, which, in turn, boosts investors' confidence.
Buoyed by the data, an investor decides to buy or sale shares of the institution since the audited report takes a far longer time to be made public.
Commercial banks — the secondary market propeller — follow NRB's directives, albeit, notionally. Usually, the cat is out of the bag by the end of fourth quarter and audited report.
Consider this: a report suggests that one of the commercial bank, which is preparing to float Initial Public Offer (IPO), has posted loss in its non-audited report. But, the audited one, the quantum of loss has multiplied manifold.
"Sunrise Bank has shown a loss of Rs 135.72 million in its non-audited report. But in the audited one, the loss has climbed up to a whopping Rs 272.08 million. The variation stood at 100.47 per cent," added the report.
All though aren't guilty of cooking the book.
Reputed ones like Standard Chartered Bank Nepal, Everest Bank and Citizens Bank International, Nabil bank and Nepal Investment Bank Ltd (NIBL) have a nominal difference in their non-audited and audited reports. In fact, records reveal that their net profit has ‘marginally’ increased or decreased in the audited report that is normal.
Standard Chartered Bank Nepal's net profit rose by Rs 45.52 million. Similarly, Everest Bank's net stood increased by Rs 10.95 million and Citizens profit increased by Rs 43.54 million that is 8.62 per cent.
Nabil Bank’s net profit decreased, by a nominal, 0.51 per cent and NIBL’s by 0.24 per cent.


Variation in audited and un-audited reports of banks (2007-08)
Nabil – 0.51 per cent
NIBL – 0.24 per cent
SCNBL – 0.56 per cent (up)
HBL – 2.83 per cent
NSBL – 2.88 per cent
EBL – 0.24 per cent (up)
BoK – 2.63 per cent
NCCBL – 0.64 per cent (up)
NIC – 2.36 per cent
Lumbini Bank – 0.32 per cent
MBL – 33.49 per cent
Laxmi Bank – 0.60 per cent
SBL – 8.29 per cent
Citizens’ – 8.62 per cent (up)
Prime – 6.78 per cent
Sunrise – 100.47 per cent
BoAN – 0.02 per cent
DCBL – 6.46 per cent
NMB – 0.40 per cent