August 11: As the commercial banks are not able to expand credit investment according to the increase in capital, the return on equity (ROE) of the banks has been decreasing.

The capital of the banks has increased a lot due to mergers and acquisitions and distribution of bonus shares. Despite increasing the capital, they have not been able to invest the capital proportionately. Because of this, the return of investment of stock investors has decreased. Analysts say that the decrease in return on equity means that the return of shareholders who have invested in banks and financial institutions has decreased.

Return on equity (ROE) is given great importance by most of the value investors including Warren Buffett. ROE informs about the rate at which investors can get returns from stock market investments. Value investors analyze ROE to see if a company is consistently outperforming other companies in the same sector.

Equity is obtained by subtracting external liabilities (claims other than shareholders) from the total assets. Mathematically, ROE is obtained by dividing the net profit by total equity. The longer the company is giving good return on equity, the better it should be considered for investment. ROE is a measure of a company's ability to make a profit and how effectively it generates profit. Companies with high ROE are considered good for investment. When comparing ROE, it should be compared between companies in the same sector. Generally, a company with this index of 15-20 percent is considered good.

According to the financial statements of the fourth quarter of banks for the last fiscal year, the ROE of 20 commercial banks was 10.76 percent on average. In the previous year, the ROE of these banks was 11.05 percent. Compared to the previous year, the ROE of some banks has increased, while the ROE of most of the banks has decreased.

Among the 20 commercial banks, Standard Chartered Bank had the highest ROE at 17.47 percent in the last fiscal year. Similarly, NIC Asia Bank was in the second place with 15.69 percent ROE. The lowest ROE among these banks was of Kumari Bank as 5.31 percent. The ROE of 10 banks was higher than the average, while the ROE of 10 banks was lower than the average.

Investors’ attraction in this sector is declining in recent days due to the decreasing returns of commercial banks. Investors are less attracted to banks as the returns on investments in other sectors are higher than in banks.