What it is
Each year the bank earns a profit. It moves some to the general reserve (the law requires it), some to the regulatory reserve (NRB requires it), and pays some as dividends. Whatever is left is added to retained earnings.
Retained earnings is the only big equity line that is free. It is where dividends come from. If it is negative, the bank has accumulated losses and cannot pay dividends.
In quarterly reports it includes the current year's profit so far, which is not yet available for dividends until the audit and NRB approval.
How it is calculated
Opening retained earnings + net profit for the period − transfers to reserves − dividends declared.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's retained earnings were Rs 516.91 crore at the end of FY 2082/83 Q4. That includes the year's net profit of Rs 790.58 crore before the year-end transfers and dividend decision.
What good looks like
Positive and growing, with a dividend paid each year. A negative balance means accumulated losses. A very large balance may mean dividends are being held back, often because NRB capital rules bind.
Watch out
- Q4 retained earnings are before the audit and before NRB approves a dividend, so they overstate what can be paid.
- Distributable profit is smaller than retained earnings after regulatory adjustments.
- A bonus share issue reduces this line.
In Nepal
A dividend in Nepal needs NRB's prior approval of the audited accounts (Procedure for Approval of Financial Statement Publication and Dividend Distribution, 2082). Cash dividends also need the bank to meet its capital adequacy ratio, with an extra 1% buffer required under an earlier NRB directive.
Questions
No. The year's transfers to general and regulatory reserves come first, and NRB must approve the amount.
Past losses have used up past profits. Such a bank cannot pay a dividend until it earns back the deficit.