What it is
Shareholders do not get net profit. They get what is left after the bank has filled the funds the law and NRB require.
First, BAFIA 2073 takes at least 20% of net profit into the general reserve (10% once the reserve equals twice paid-up capital). Then NRB's dividend procedure moves certain items into the regulatory reserve: the gap where NFRS provisions are lower than NRB's minimum provisions, interest booked but not received (including interest capitalised in grace periods), and similar items. Other transfers (exchange equalisation, investment adjustment, CSR fund, staff training fund) also come off.
What remains, plus any opening retained earnings, is distributable profit. The board proposes a dividend from it; NRB must approve.
Distributable profit per share is often well below EPS. That is why a bank with EPS of Rs 30 may pay Rs 15.
How it is calculated
Distributable profit = Opening retained earnings + Net profit − General reserve transfer (≥ 20%) − Regulatory reserve transfers − Other mandatory fund transfers ± Adjustments. Distributable profit per share = Distributable profit ÷ Shares.
Worked on Nabil Bank Limited, FY 2082/83 Q4
From NABIL's FY 2082/83 net profit of Rs 790.58 crore, at least 20% (about Rs 158.12 crore) goes to the general reserve before any regulatory reserve items. The remainder, with opening retained earnings of the year, is what the board can propose as dividend, subject to NRB approval.
What good looks like
Distributable profit per share close to EPS means little is being trapped by regulatory adjustments. A wide gap, growing year on year, means more of the reported profit is 'paper' profit NRB does not accept as payable.
Watch out
- EPS is not dividend capacity; distributable profit is.
- Cash dividends also require meeting the capital adequacy ratio, with an extra buffer NRB has asked for.
- A bonus share also uses distributable profit (and some reserves), so it competes with cash.
- Quarterly reports do not show distributable profit; it appears in the audited annual report and the dividend announcement.
In Nepal
BAFIA 2073 §44: at least 20% of net profit to the general reserve until it equals twice paid-up capital, then 10%. NRB Procedure for Approval of Financial Statement Publication and Dividend Distribution, 2082: NFRS-vs-NRB provisioning shortfall and interest capitalised in grace periods go to the regulatory reserve; cash dividends are tied to capital adequacy; cash dividends cannot be paid from merger goodwill, and only bonus shares may come from certain adjustment reserves. An earlier NRB directive required an extra 1% capital buffer to pay cash dividends and restricted cash dividends from share premium.
Questions
At least 20% goes to the general reserve, more goes to NRB's regulatory reserve, and capital rules may hold back cash. Only the remainder can be paid.
The board proposes it from distributable profit, NRB must approve it, then the AGM votes on it.
No. It is paid from the same distributable profit and reserves as cash, converted into new shares. Your ownership percentage does not change.