Report On EBL & NIC

A Research Report on Comparative Ratio Analysis of EBL & NIC
CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION
1.1.1 Introduction to Bank
It has become quite difficult to find out the evolution era of banking activities.
Economists have assumed that people carried out banking activities before 12th century.
If we go through the word origin of bank, the word Bank is derived from the Italian word
“Banco” which refers to the bench on which bankers would keep its money and their
records. Similarly, Latin word Bancus, French word Banque and so on. All these refer to
the same meaning i.e., “Bench” on which banker would keep his money and record. In
the ancient period, the money lender used a bench to accept and give loan to borrowers
by sitting in a bench. In such a way, they came in a good transaction of money and
thereby started the banking transaction. Later on it started to be called as “Bank” by
English man. Business activities started to increase in the economy, because of increasing
mobility of people. These activities started to cover the different nations. Hence, people
started to think about the banking activities as per the need of the society. In this course,
the first bank, Bank of Venice was established in 1157 A.D in Venice. After this, the
second banking institution Bank of Barcelona in Spain was established in 1401 A.D.
Similarly, Bank of Geneva in 1407 A.D. Nepal Bank Limited on 30th Kartik 1994 B.S,
and Nepal Arab Bank in 2041 B.S, which is the first joint venture bank of Nepal.
It came to know that banking business has got a modern age after the
establishment of BANK OF ENGLANDS in 1694 A.D. Though, several other banks
were introduced but the actual acceleration in the growth of banks started after
introduction of banking act 1833 in United Kingdom. Then after, the bank started
spreading throughout the world in short period of time. The functions of these banks
expanded gradually as per the need of the society and the businessmen.
Meaning of Bank
Bank is financial institution, which purchase and sell the use of money and credit.
It deals with money in the sense that it accepts different kinds of deposits, disburse loans,
and render other financial services. Since, banks are rendering a wide range of services to
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several people; they have become an essential part of modern society. Therefore, in other
words, we can say that a bank is an institution which accepts deposits from the public and
these deposits in turns advances loans by creating credit. Bank creates credit by giving
loan of traders, industrialist and businessman. Bank moves money in terms of receipt of
income and payment of expenditure and deposit. Thus, broadly we can say, any institute
involved in monetary transaction is called bank. Some economists have defined the term
bank in their own way.
In this context, a bank mainly performs the basic two functions:
i. Draws surplus money from people, which are not in use.
ii. Lend this money to those who are in need to use it (either for business or industrial
purpose).
But now-a-days, modern banking system provides various other functions, with
the aim of earning profits. Banks are those sectors without which we cannot imagine
about development. Finance is considered as blood of every organization. Hence, bank
provides blood to business organization in terms of loan.
In the words of Kent, “A Bank is an organization whose principle operations are
concerned with the accumulation of the temporarily idle money of the general public for
the purpose of advancing to other for expenditure.”
Similarly, in the words of Walter Leaf, “A Bank is that institution who is always
ready to receive money on deposit to be return against the cheque of their deposits.”
In the same manner, G. Crowther has defined bank in his book "An Outline of
Money" as, "A Bank is an institution collects money from those who have it to spare or
who are saving it out of their income, and it lends this money to those who requires it.
Banking History in Nepal

Going with the historical evidences we can find some crude banking activities in
the earlier period of time. During the phase of development in banking concept in Nepal,
the first banking institution was established in 1994 B.S in the name of Nepal Bank
Limited. It is the first bank in the banking history in Nepal. NBL was the pioneer in the
modern banking history of Nepal. In 2003 B.S, Rastra Bank was established as Nepal’s
first central bank. Similarly, Rastriya Banijya Bank was established in 2022 B.S, as the
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second commercial bank of Nepal, and Agricultural Development Bank in 2024 B.S.
The commercial transactions were difficult with these banks and Nepal Arab Bank
(NABIL) was established in 2041 B.S. This is the first Joint Venture with Arab Bank in
the history of Nepal. NABIL bank launched its operation with a marketing concept i.e.,
“Customer is King in market”. Subsequently, other commercial banks, agricultural banks,
industrial banks were established there after.
INTRODUCTION TO EVEREST BANK LIMITED

When Government adopted open market and liberal economic policy, then only
there was a suitable environment for commercial Banks to be established. As a result
modern commercial banks were establishing by the investors in collaboration with
foreign bank in form of limited company to utilize the opportunity created by the
government. Because the government's encouragement and open market policy for joint
venture bank operation, Everest Bank Limited was established on first Kartik 2051 by
issuing 30% shares to general public and remaining hold by the promoters. Later it was
collaborated with Punjab National Bank India in 1995, which holds 20% share of EBL.
On the date of establishment the capital structure of EBL were, authorized capital Rs
12,000,000 issued capital Rs.6,000,000 and paid up capital Rs. 30, 000,000.
TABLE A
SHARE HOLDING PATTERN OF EBL

(Rs.in million)
Nepalese promoters 50
Punjab National Bank (Joint-Venture Partner) 20
General Public 30
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FIGURE A
Share Holding Pattern

Nepalese
Promoters
30%
Punjab National
Bank(join -
venture partner)
50% General Public
20%
TABLE B
CAPITAL STRUCTURE OF EBL
(Rs. in million)
Authorized Capital 600
Issued capital 316.8
Paid up Capital 315
Preference Share Capital 140
FIGURE B
600
500 Authorised Share

Capital
400 Issued share
Capital
300
Paid-Up Share
200 Capital
Preference Share
100 Capital
4
With a view to increase the volume of its transactions and providing more
services to General Public it has expanded its operation at different places in Kathmandu
Valley. The branch offices of EBL in Kathmandu Valley are:
Lazimpath Branch (Head Office)
Baneshwor Branch (Main Branch)
New Road Branch
Teku Branch
Satungal Branch
Pulchowk Branch
Some other branches are being operated outside Kathmandu Valley too, with the
purpose to expand its services in other part of country. They are:
Biratnagar Branch, Hanumandas Road
Birjung Branch, Adarshanagar.
Managalapur Branch, Rupendehi.
Butwal Branch, Chawrha Highway
Duhabi Branch, Sunsari.
Simra Branch, Surya Niwas
Janakpur Branch, Janakpur
Dhangadi Branch, Kailali
Birjung Branch, Adarshanagar
Board of Director of EBL

The members of board of directors are as follows:-
Mr. Bishnu Krishna Shrestha - Chairman
Mr. Sh. Jaspal Singh Jass - Executive Director
Dr. Bal Gopal Vaidya - Director
Mr. Ved K Shrestha - Director
Mr. Arun Man Sherchan - Director
Mr. Harwant Singh - Director
Mr. Ratna Sansar Shrestha - Director, (FCA)
Mr. Nabin Bhakta Shrestha - Public Shareholders
Mr. Shivasharan K.C. - Director, Public Shareholders
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INTRODUCTION TO NEPAL INDUSTRIAL AND COMMERCIAL BANK

LIMITED
Nepal Industrial and Commercial Bank Limited (NIC Bank), which commenced
operation on 21 July 1998, is the first commercial bank in the country to be capitalized at
NPR 500 million. The Bank was promoted by some of the prominent business houses of
the country. The current shareholding pattern of the Bank constitutes of promoters
holding 65% and general public holding 35%. NIC Bank is one of the most widely held
banking companies in Nepal with close to 35,000 shareholders. The shares of the Bank
are actively traded in Nepal Stock Exchange with current market capitalization of about
NPR 2,976 million.
Within 8 years of commencing business the Bank has grown rapidly with 8
branches throughout the country with 2 more being opened this year. All branches
throughout the country with 2 more being opened this year. All branches are inter-
connected through V-Sat and capable of providing on line, real time transactions.
The Bank is the first commercial bank in Nepal to be ISO 9001:2000 certified for
quality management system.
The Bank is run by professionals and believes in the highest standards of
corporate governance.
Board of Director of NIC

The members of board of directors are as follows: -
Mr. Jagdish Prasad Agrawal - Chairman
Mr. Tulsi Ram Agrawal - Director
Mr. Ashok Kumar Agrawal - Director
Mr. Bimal Kumar Agrawal - Director
Mr. Rajendra Aryal - Director
Mr. Birendra Kumar - Director
1.2 AREA OF STUDYS

The area of study of this research report is Finance. This report is concentrated
to analyse the comparative financial performance of two joint venture banks, namely
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EBL and NIC Ltd. The financial tool that is used to analyse the performance is Ratio
Analysis.
Both of these banks are operating under the same conditions and problems.
Opportunities are also similar, because they are established more or less at the same
period. Thus it would be relevant to make a comparative analysis of these two banks.
Main focus of this study will be on aspect such as liquidity, profitability, stability etc.
So, this study aims to have a comparative analysis as regard to different ratios of both
the banks.
This analysis hopes to concentrate on policy aspects adopted by these banks in the
context of fund collection and resource mobilization. It seems to be essential for
commercial banks for resource collection and their effective mobilization
1.3 ISSUES TO BE ADDRESSED

These studies basically focus our attention to reveal the struggle and success
achieved by the EBL and NIC. Commercial Bank's main motive is to make profit by
providing quality service to the customers. In Nepal, the profitability rate, operating
expenses, dividend distribution among the shareholders etc. have found to be
inconsistent. There must be some reasons behind the difference of performance.
Organizations established at the same period with equal capital, operating in the same
condition have different earning capacity. The problem of the study is ultimately, to
find out the reasons about the difference in financial performance between EBL and
NIC.
1.4 OBJECTIVE OF THE STUDY

The general objective of this study is to evaluate & compare the financial
performances of the selected joint venture banks, i.e. EBL & NIC. The specific goals of
the proposed study are mentioned below.
To analyze the financial position of the selected banks.
To examine, analyze & compare the financial performance of these banks in
terms of liquidity position, capital structure, management of assets,
profitability etc.
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To find out discrepancies if any.

To recommend the appropriate measures to correct the weakness on the basis
of findings of an analysis.
Financial policy of HMG and commercial banks, monitoring and collection policies
of the banks will be kept in mind while doing the study.
1.5 NEED OF STUDY

The primary need of the study is to fulfill the university requirement for the BBA
5th semester course. Apart from this, the needs of study arise because of researcher aims
to gain practical experience and knowledge about the relevant subject so as to apply the
for managerial decision in the future.
A sound financial performance is important for the growth of business enterprises
and financial institution. It is necessary that financial management of an institution must
be appropriate to yield a fair rate of return on capital employed in them. Any mistake
made in financial management adversely affects the financial condition of an institution.
In this regard, it is required to measure the financial performance of the Joint Venture
Banks from time to time.
All investors invest their fund on share for the purpose of getting greater return;
the firm always maximize the value of heir fund. Different investors invest their funds in
joint venture and simultaneously they take a more acute interest in the government for
dividend, top management for remuneration. So on, that causes to maximize the value of
the firm.
This study will also help as a literature for the further study about the relating
topics.
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1.6 ORGANIZATION OF STUDY
1.6.1 Research Design

Research design is the main part of a thesis of any research work. The research
design serves as a framework for the study, guiding the collection and analysis of the
data, the research instruments to be utilized, and the sampling plan to be followed.
According to Kerlinger, "Research design is the plan, structure, and strategy of
investigation conceived so as to obtain answers to research question and to control
variance".
This research aims to discover how the banks performed in the last year and its
relevance in the present and future. Therefore, the reliability of the research largely
depends upon the authenticity and reliability of the data collected and in this case the data
collected from the reports published by the EBL and NIC.
1.6.2 Research Methodology

Research Methodology is a way to solve the research problem in a systematic
manner. The research methodology describes about the methods to be used and the
reasons why they are being used. The primary objectives of this study is to analyze the
financial statements of the EBL and NIC. Here, the financial statements of the last year of
EBL and NIC will be analyzed with help of a financial tool like ratio analysis.
The research is divided into three major chapters. They are Introduction,
Presentation and Analysis of Data, and Summary and Conclusion. The first chapter
includes the introduction, area of study, issues to be addressed/ questioned to be
answered, objectives of study, need of study and organization of study.
The second chapter includes presentation of data of figures in tables, charts,
graphs etc., analysis of data using some financial tools, and major findings.
Finally, the chapter includes a brief summary of the report, major conclusions
derived from the analysis of data and suggestion if any.
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1.6.3 Sources of Data

Data collection is one of the most important aspects of any research study. With
the data, the research study cannot be carried on. Data are of two types. They are primary
and secondary data. Primary data are those that which are collected for the first time
where as secondary data are those that which are already gathered by others.
This study is based o secondary data. The data are extracted from the website of
Nepal Stock Exchange Limited (www.nepalstock.com), EBL (www.everestbank.com),
annual report published by EBL for EBL and published reports and website of NIC
(www.nic.com) for NIC, and others various magazines, newspaper, and research report.
1.6.4 Data Collection Technique

The data solely depends upon secondary data. Required data are collected from
the concerned banks as well as from the website of Nepal Stock Exchange Limited. Data
are gathered through following procedure. Firstly, financial statements of these banks i.e.
(EBL and NIC Limited) were downloaded from the Internet to the computer disk.
Secondly, all the downloaded financial statements were transcribed into computer
printout. Thirdly, the required financial statements of these two banks were taken for the
analysis.
1.6.5 Data Analysis Tools

Collection of data is useless until and unless financial and statistical tools are
analysed. Therefore, certain financial and statistical tools such ratio analysis have been
used to analyse the income statement and balance sheet to extract some valuable
information as well for the operation of these two joint venture banks.
1.6.6 Sampling Method

EBL and NIC are the leading banks in the banking sector of Nepal and it is hope
that the banks will represent the banking sector of Nepal. Therefore, the sampling has
been conducted according to the judgmental sampling method under non-probability
sampling design.
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CHAPTER 2
PRESENTATION AND ANALYSIS OF DATA
In this chapter, the annual reports of respective banks have been collected for
analysing the financial performance of and statistical tools such as, ratio analysis.
2.1 PRESENTATION OF DATA

1. Balance Sheets of Everest Bank Limited and Nepal Industrial and Commercial
Bank Limited for the fiscal years 2005/2006.
BALANCE SHEET OF EVEREST BANK LIMITED

AS ON 32 ASHAD 2063 (16TH JULY, 2006)
Share Capital and Liabilities This Year Previous Year
Amount Rs. Amount Rs.
1. Share Capital 518,000,000 518,000,000
2. Reserve and Funds 444,808,301 314,617,365
3. Debentures & Bonds 300,000,000 300,000,000
4. Borrowings --- ---
5. Deposit Accounts 13,802.444,988 10,097,690,989
6. Bills Payable 15,805,995 17,777,860
7. Proposed Dividend and Dividend Payable 114,666,758 23,527,388
8. Income Tax Liabilities --- 3,312,244
9. Other Liabilities 763,558,645 457,590,572
TOTAL 15,959,284,687 11,732,516,418
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Assets This Year Previous Year

1. Cash Balance 259,247,645 192,590,297
2. Balance with Nepal Rastra Bank 1,139,514,873 779,669,004
3. Balance with Banks/Financial Institutions 154,104,976 77,729,907
4. Money at Call and Short Notice 66,960,000 570,000,000
5. Investments 4,200,515,220 2,128,931,852
6. Loans, Advances and Bills Purchased 9,801,307,676 7,618,671,476
7. Fixed Assets 152,089,805 134,068,090
8. Non-banking Assets 7,436,642 24,570,614
9. Other Assets 178,007,850 206,285,178
TOTAL 15,959,284,687 11,732,516,418
BALANCE SHEET OF NEPAL INDUSTRIAL & COMMERCIAL BANK

LIMITED
AS ON 32 ASHAD 2063 (16TH JULY, 2006)
Share Capital and Liabilities This Year Previous Year
1. Share Capital 600,000,000 500,000,000
2. Reserve and Funds 166,462,479 184,193,958
3. Debentures & Bonds 200,000,000 ---
4. Borrowings 457,705,060 450,371,046
5. Deposit Accounts 8,765,950,638 6,241,378,160
6. Bills Payable 91,508,236 28,329,320
7. Proposed Dividend and Dividend Payable 10,954,038 54,011,043
8. Income Tax Liabilities 4,630,863 2,040,229
9. Other Liabilities 86,390,394 50,072,809
TOTAL 10,383,601,708 7,510396,565
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Assets This Year Previous Year

1. Cash Balance 139,186,303 69,777,858
2. Balance with Nepal Rastra Bank 455,769,231 837,300,718
3. Balance with Banks/Financial Institutions 154,183,545 103,307,989
4. Money at Call and Short Notice 353,515,103 89,880,961
5. Investments 2,479,912,524 1,572,902,035
6. Loans, Advances and Bills Purchased 6,655,964,020 4,711,712,301
7. Fixed Assets 39,863,854 59,495,866
8. Non-banking Assets 2,645,625 3,465,000
8. Other Assets 102,561,503 62,558,837
TOTAL 10,383,601,708 7,510396,565
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2. Profit and Loss Accounts of Everest Bank Limited and Nepal Industrial and
Commercial Bank Limited for the fiscal years 2005/2006.
PROFIT AND LOSS ACCOUNTS OF EVEREST BANK LIMITED
FOR THE PERIOD FROM 1 SHRAWAN 2062 TO 32 ASHAD 2063
(16 JULY 2005 TO 16 JULY 2006)
Particulars This Year Previous Year
1. Interest Income 903,411,137 719,297,855
2. Interest Expenses 401,397,351 299,565,269
Net Interest Income 502,013,786 419,732,586
3. Commission & Discount 96,839,264 78,130,046
4. Other Operating Incomes 48,902,381 31,479,208
5. Exchange Fluctuation Income 14,397,970 27,077,784
Total Operating Income 662,153,401 556,419,624
6. Staff Expenses 70,924,675 60,597,367
7. Other Operating Expenses 143,562,167 129,067,225
8. Exchange Fluctuation Loss --- ---
Operating Profit Before Provision for Possible Loss 447,666,559 366,755,032
9. Provision for Possible Loss 70,465,665 88,926,593
Operating Profit 377,200,894 277,828,439
10 Non-Operating Income/Expenses 2,959,467 2,974,088
11. Loan Loss Provision Written Back --- 5,252,936
Profit from Regular Operations 380,160,361 286,055,463
12. Profit/(Loss) from Extra-Ordinary Activities --- 5,252,936
Profit after considering all activities 380,160,361 280,802,527
13. Provision for Staff Bonus 34,560,033 28,080,253
14. Provision for Income Tax --- ---
Current Year’s 106,753,311 81,914,477
Previous Year’s 1,556,081 2,593,186
TOTAL 237,290,936 168,214,611
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PROFIT AND LOSS ACCOUNTS OF NEPAL INDUSTRIAL & COMMERCIAL

BANK LIMITED
FOR THE PERIOD FROM 1 SHRAWAN 2062 TO 32 ASHAD 2063
(16 JULY 2005 TO 16 JULY 2006)
Particulars This Year Previous Year
1. Interest Income 579,979,428 457,069,969
2. Interest Expenses 340,221,921 225,992,488
Net Interest Income 239,757,507 231,617,481
3. Commission & Discount 29,447,261 27,101,792
4. Other Operating Incomes 20,242,413 9,180,305
5. Exchange Fluctuation Income 25,387,941 24,605,930
Total Operating Income 314,835,122 292,505,508
6. Staff Expenses 45,494,167 39,003,504
7. Other Operating Expenses 57,356,334 51,629,103
8. Exchange Fluctuation Loss --- ---
Operating Profit Before Provision for Possible 211,984,621 201,872,901
Loss
9. Provision for Possible Loss 60,913,102 19,952,248
Operating Profit 151,071,519 181,920,653
10 Non-Operating Income/Expenses 59,335 284,887
11. Loan Loss Provision Written Back 10,359,202 5,085,849
Profit from Regular Operations 161,490,056 187,291,389
12. Profit/(Loss) from Extra-Ordinary Activities 10,359,202 4,261,599
Profit after considering all activities 151,130,854 183,029,790
13. Provision for Staff Bonus 13,739,169 18,302,979
14. Provision for Income Tax 40,804,011 50,971,077
Current Year’s 40,804,011 50,971,077
Previous Year’s --- ---
TOTAL 96,587,674 113,755,734
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2.2 ANALYSIS OF DATA
2.2.1 RATIO ANALYSIS

Ratio is an arithmetical relationship between two figures. It, in general, is a
statistical yardstick through which the relationship between two figures can be compared
and measured. Financial statements are prepared not as end in themselves but in order
that users can make decisions. The financial statements need to be interpreted. Moreover,
a single figure taken from financial statement can mislead or may not even make sense at
all. For instance, sales of Rs. 1 million may not indicate anything about the performance
of the firm. Therefore, there is a need for one figure to be compared with another to have
meaningful understanding about the performance and, more importantly, about the firm.
Calculation of ratios allows the relationship between different parts of financial statement
to be seen more clearly.
Ratio analysis of financial statements refers to the process of determining,
interpreting, and presenting the relationship of items and groups of items analyzed from
the financial statements. Financial ratios are fundamental analytical tools for interpreting
financial statements. Financial ratio analysis relates items in financial statements
mathematically in a meaningful way. Financial ratios can help describe the financial
condition of an organization, efficiency of its activities, its comparable profitability, and
the perception of investors as expressed by their behavior in financial markets. The
financial ratios often permit analyst and decision maker to piece together a scenario about
where an organization has come from, its current condition, and its possible future.
Analyst evaluates these ratios against particular characteristics of a company and
industry. Though there are many categories of financial ratios, they are commonly
categorized in five classes – profitability, liquidity, efficiency, leverage and valuation.
Ratio analysis is a powerful tool of financial analysis. In financial analysis, a ratio
is used as an index or yards stick for evaluating the financial position and performance of
a firm. Ratio helps to summarize the large quantities of financial data and to make
qualitative judgment about firm’s financial performance.
According to Wixon, Kell and Bedford, “A ratio is an expression of the
quantitative relationship between two numbers.”
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According to Kohler, “A ratio is the relationship of one amount to another

expressed as the ratio of or as a simple fraction, integer, decimal fraction or percentage.”
Process of Financial Statement Analysis

Analysis is a process of breaking down a complex set of data and placing them
into a convenient and definite group to present them in a comprehensible format to
facilitate interpretation.
Interpretation is explaining the significance of facts and figures analyzed.
Analysis includes the following steps:
1) Breaking the financial statements into simpler ones
2) Regrouping
3) Rearranging the figures given in the financial statement
4) Calculating ratios
Financial statement analysis is a technique of answering various questions

regarding the financial performance of a firm in the past, present and the future. The
analysis enables the analysts to recommend corrective measures to be taken as and when
the need arises. To address the following questions, the financial statement analysis is
undertaken.
1) How was the performance of the firm in the past? In which areas did the firm
faced problems?
2) How is the present performance of the firm? Has the performance improved or
deteriorated when compared to the past? In which areas does the firm face
problems?
3) What will be the future performance? Is there possibility of problems arising in
the future?
4) What are the corrective measures that can be taken at present to improve the
5) performance? How will the recommended alternatives influence the firm’s
performance?
6) If the recommended alternatives improve firm’s performance, will the incremental
benefits exceed the cost?
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Importance and Limitations of Ratio Analysis

Once we have discussed about the ratio analysis, we also have to be aware of its
importance and limitations.
Importance of Ratio Analysis

1) Ratio analysis simplifies the financial statements. It indicates the changing
financial condition of the firm.
2) Ratio analysis provides data for inter-firm comparison and highlights factors that
attribute to the firm’s success and/or failure.
3) Ratio analysis assists management in its basic functions of forecasting, planning,
4) coordinating, controlling and communicating.
5) Ratios can be used in used to measure inter-firm and intra-firm efficiency.
6) Ratios can serve as index of efficiency and can be used for management control.
7) Ratio analysis serves as an effective instrument to assess business characteristics
such as liquidity, solvency, etc.
Limitations of Ratio Analysis

1) Ratios are quantitative tools. To draw conclusion and to make decision, only
quantitative tools do not suffice. We must consider qualitative factors also.
2) Many writers have different opinion about the same item and they have defined it
according to their perception. Therefore, there is no standard formula to calculate
ratios. This results in inconvenience in comparison.
3) A single ratio fails to disclose financial condition of a firm whereas many ratios
lead to confusion.
4) Ratios are based on historical data; thus, they lack ability to predict or forecast
future. They only reveal past condition.
5) Ratios are means and not end in themselves. They serve as guide to present
problems; they do not indicate solution to problems.
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Financial ratio is thus mathematical relationship between two figures. Though

there are many ratios, only those ratios have been covered in this study, which are
relevant to the financial performance of the banks.
2.2.1.1 PROFITABILITY
Profit is the difference between revenues and expenses over a period of time. A
company should earn profits to survive and grow over a long period of time. So profits
are essential, but profit earning is not the ultimate aim of company and it should never be
earned at the cost of employees, customers and society.
However, profitability is a measure of efficiency and the search for it provides an
incentive to achieve efficiency. The profitability of a firm can be measured by its
profitability ratios and profitability ratios are those ratios, which indicate degree of
success in achieving, desired profit levels. In other words, the profitability ratios are
designed to provide the answers to questions such as,
Is the profit earned by the firm adequate?
What rate of return does it present?
What is the rate of profit for various divisions and segments of the firm?
What is the earning per share?
What amount is paid in dividends/
What is the rate of return to equity holders? And so on.
Profitability ratios are of two types: those showing profitability in relation to

sales, and those showing profitability in relation to investment. Together these ratios
indicate the firm’s efficiency of operation.
In the present study, the profitability ratios are computed by relating the profits of
a bank to its investment. Such ratios are popularly known as return on investment. Here
investment may refer to return on assets, return on capital employed and return on
shareholder’s equity.
In this section, some profitability ratios have been calculated to reflect the degree
of success in achieving desire profit level by Himalayan Bank Limited and Nepal SBI
Bank Limited.
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2.2.1.1.1 Return on Equity (ROE)

The objective of every bank is to earn high profit. If the banks utilize its equity
properly, then only the bank can earn maximum profit. Equity capital is a banks own
capital. The return on equity shows the extent to which a bank is successful to mobilize
its equity. It is the measuring rod of the profitability of a bank. A high ratio indicates the
success of bank in mobilizing its equity capital and vice versa. Following formula will
help to calculate this ratio:
Net Income
ROE =
Equity
EBL NIC
237,290,936 96,587,674
= =
518,000,000 600,000,00
= 45.81% = 16.10%
ROE of EBL & NIC
16.10%
EBL
NIC
45.81%
Higher the ROE, better it is.
2.2.1.1.2 Return on Total Assets (ROTA)

Return on assets ratio measures how well management uses all the assets in the
business to generate an operating surplus. This ratio provides the foundation necessary
for a company to deliver a good return on equity. A company without a good return on
total assets (ROA) finds it almost impossible to generate satisfactory ROE.
Higher the ROA indicates the higher efficiency in the utilization of total assets
and vice-versa. ROA is low due to low profit. In other words, it is low utilization of
bank’s assets and over use of higher interest bearing amount of debt and vice-versa. In
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this study, ROA is examined to measure the profitability of all the financial resources in
bank-assets and is calculated by applying the following formula:
Net Income
ROTA =
Total Assets
EBL NIC
96,587,674
=
237,290,936 =
15,959,284,687 10,383,601,708
= 1.49% = 0.93%
ROTA of EBL & NIC
0.93%
EBL
NIC
1.49%
Higher the ROTA, better it is.
2.2.1.1.3 Equity Capital Ratio (ECR)

Equity capital ratio shows the relationship between shareholder equity and capital
employed. It can be obtained by dividing shareholder capital by capital employed.
Eqiuty
ECR =
Total Assets
EBL NIC
600,000,000
=
518,000,000 =
15,959,284,687 10,383,601,708
= 3.25% = 5.78%
21
ECR of EBL & NIC
3.25%
EBL
NIC
5.78%
Higher the Equity Capital, better it is.
2.2.1.1.4 Spread
The spread of commercial banks and financial institutions can be computed in
various ways and interpreted as per the literature.
According to Fred C. Yeager, “The spread is defined as the ratio of (Net Interest
Revenue – Interest expense) to the total assets”.
According to George Hemple and Jess B. Yawdtiz, “Spread management
emphasizes the difference between the return on assets and cost of liabilities over time”.
A high positive spread is generally desirable and is readily accepted by any type of
financial institution.
In the present study, spread is considered as the difference if interest income and
the interest expense.
Net Interest Income
Spread =
Total Assets
EBL NIC
903,411,137 − 401,397,351 579,979,428 − 340,221,921
= =
15,959,284,687 10,383,601,708
= 3.15% = 2.31%
22
SPREAD of EBL & NIC
2.31%
EBL
3.15% NIC
Higher the spread, better it is.
2.2.1.1.5 Net Operating Cost Ratio

The net operating cost ratio is net operating costs divided by total assets.
Net Operating Cost
Net Operating Cost Ratio =
Total Assets
Where,
Net Operating Cost = Operating Cost + Loan Losses Provision + Other Income
EBL
[70,924,675 + 143,562,167 + 0] + 70,465,665 − 48,902,381
=
15,959,284,687
= 1.48%
NIC
[45,494,167 + 57,356,334 + 0] + 60,913,102 − 20,242,413
=
10,383,601,708
= 1.40%
NOCR of EBL & NIC
1.40% EBL
1.48% NIC
Lower the net operating cost ration, better it is.
23
2.2.1.1.6 Interest Income Ratio

The interest income ratio is interest income divided by average total assets.
Interest Income
Interest Income =
EBL Average Total Assets
903,411,137
=
[15,959,284,687 + 11,732,516,418] ÷ 2
= 6.52%
NIC
579,979,428
=
[10,383,601,708 + 7,510,396,565] ÷ 2
= 6.50%
IIR of EBL & NIC
EBL
6.50% 6.52% NIC
Higher the interest income ratio, better it is.
2.2.1.1.7 Interest Expenses Ratio

The interest expenses ratio is interest expenses divided by average total assets.
Interest Expenses
Interest Income =
EBL Average Total Assets NIC
401,397,351 340,221,921
= =
[15,959,284,687 + 11,732,516,418] ÷ 2 [10,383,601,708 + 7,510,396,565] ÷ 2
= 2.90% = 3.80%
24
IER of EBL & NIC
2.90%
EBL
3.80% NIC
Lower the interest expenses ratio, better it is.
2.2.1.2 LIQUIDITY
Liquidity ratios measures the short-run solvency of the firm. Liquidity ratios
indicate how capable a business is of meeting its short-term obligations as they fall due.
Difference between current assets and current liabilities is known as working capital
which provides the liquidity in business organization. Liquidity provides health, strength,
honor, generosity and beauty as conspicuously and undeniably as the want of it creates
illness, weakness, disgrace, meanness and ugliness.
It is extremely essential for a business organization to be able to meet its

obligations as they become due, so it should maintain sufficient liquidity neither excess
nor less. As it measures the ability of the firm to meet its short-term obligations, it
reflects the short-term financial strength and weakness of the firm.
A high degree of liquidity shows inability of proper utilization of fund whereas

the lack of liquidity shows the signal of poor creditworthiness, loss of creditor’s
confidence or even in legal tangles resulting in the closure of the company. So the firm
should maintain appropriate liquidity over the immediate future to meet its short-term
liabilities as they fall due. To measure the liquidity position of Everest Bank Limited and
Nepal Industrial & Commercial Bank Limited, the following ratios have been calculated.
25
2.2.1.2.1 Loan Ratio

Loans are non-liquid assets. Most loans cannot be sold and must be held until
maturity. Thus, a high ratio of loans to total assets means low liquidity. On the other
hand, loans are generally the most profitable assets, so a high ratio of loans to total assets
generally contributes to profitability.
Net Loans and Advances

Loan Ratio =
Total Assets
EBL NIC
9,801,307,676 6,655,964,020
= =
15,950,284,687 10,383,601,708
= 61.41% = 64.10%
LR of EBL & NIC
61.41% EBL
64.10% NIC
Higher the loan ratio increases, but reduces liquidity.
2.2.1.2.2 Cash and Bank Balance Ratio

The cash and bank balance ratio is cash balance plus bank balance divided by
total deposits.
Cash Balance + Bank Balance
Cash and Bank Balance Ratio =
Total Deposits
EBL NIC
259,347,645 + 1,139,514,873 + 154,104,976 139,186,303 + 455,769,231 + 154,183,545

= =
13,802,444,988 8,765,950638
= 11.25% = 8.55%
26
CBBR of EBL & NIC
8.55% EBL
11.25% NIC
Higher the Cash and Bank Balance ratio means higher liquidity.
2.2.1.2.3 Purchased Liability to Total Assets

Purchased liabilities are the short-term fund raised in the money market.
Purchased Liabilities
Purchased Liability to Total Assets =
Total Assets
EBL NIC
0 457,705,060
= =
15,959,284,687 10,383,601,708
= 0% = 4.41%
Purchased Liability to Total Assets of
EBL & NIC
0%
EBL
NIC
4.41%
Higher the ratio, the less is the liquidity in the company. Here EBL has less percentage of
purchased liabilities to the total assets.
2.2.1.3 SAFETY
2.2.1.3.1 CREDIT QUALITY
It is difficult to measure credit quality using financial statement information, but
some insights can be gained through ratio analysis.
27
2.2.1.3.1.1 Cash Loss Provision Ratio (Credit Loss Provision to Total Assets)
The ratio of credit loss provisions to total assets is one such measure.
Credit Loss Provision
Credit Loss Provision Ratio =
Total Assets
EBL NIC
70,465,665 60,913,102
= =
10,383,601,708 10,383,601,708
= 0.441% = 0.590%
CLPR of EBL & NIC
0.44%
EBL
0.59% NIC
Higher the credit loss provision ratio increases safety but means high anticipated loan
default risk.
2.2.1.3.1.2 Credit Loss Coverage

The credit loss coverage measures the margin for error provided by income.
EBT + Credit Loss Provision
Credit Loss Coverage =
Total Assets
EBL NIC
380,160,361 + 70,465,665 151,130,854 + 60,913,102

= =
10,383,601,708 10,383,601,708
= 0.028 = 0.020
28
CLC of EBL & NIC
0.020
EBL
NIC
0.028
Higher the credit loss coverage means a greater margin for error and thus more safety.
2.2.1.3.2 CAPITAL ADEQUACY

Capital provides protection for depositors and other creditors in the event that
assets decline in value or the financial institution suffers losses.
2.2.1.3.2.1 Capital Adequacy on Risk Weighted Assets

The capital adequacy on risk-weighted assets is defined as the capital fund
divided by total risk weighted assets.
Capital Fund
Capital Adequacy =
Total Risk Weigh ted Assets
EBL NIC
1,391,339,000
= =
1,036,838,663
11,291,137,000 7,656,131,091
= 12.32% = 13.54%
Capital Adequacy on Risk Weighted
of EBL & NIC
12.32% EBL
13.54% NIC
Higher the capital adequacy, better it is.
29
2.2.1.3.2.2 Equity Capital Ratio

Equity
Equity Capital Ratio =
Average Total Assets
EBL NIC
518,000,000 600,000,000
= =
[15,959,284,687 + 11,732,516,418] ÷ 2 [10,383,601,708 + 7,510,396,565] ÷ 2
= 3.74% = 6.71%
ECR of EBL & NIC
3.74%
EBL
NIC
6.71%
Higher the equity capital ratio, better it is.
2.2 MAJOR FINDINGS

1) EBL earns more return on equity than NIC.
2) EBL earns more return on total assets than NIC.
3) NIC has more equity to total assets than EBL.
4) EBL earns more spread than NIC.
5) NIC expends less operating cost than EBL.
6) EBL earns more interest income to total assets than NIC.
7) EBL earns less interest expenses to total assets than NIC.
8) EBL has more liquidity than NIC in terms of loan invested.
9) EBL is more liquidity than NIC in terms of cash and bank balance ratio.
10) NIC has liquidity in the company because purchase liquidity to total assets ratio
of NIC is higher than EBL. So, NIC has more liquidity than EBL.
11) NIC is safer than EBL according to credit loss provision ratio.
12) EBL has more credit loss coverage than NIC; it means a greater margin for error
and thus more safety.
30
13) NIC has more capital adequacy than EBL.

14) NIC has more equity to average total assets than EBL, so NIC is the better.
31
CHAPTER 3
SUMMARY AND CONCLUSION
3.1. SUMMARY
The financial institution in general and commercial banks plays an important role
in the economic development of the nation. Basically, financial system is the channel
through which mobilization and allocation of savings is carried out in the economy. With
this objective, commercial banks play a vital role. Banking helps to mobilize small
savings collectively to the huge capital investment.
Increasing competitions in the banking sector has narrowed the profit margin.
This study was started to study and compare the performance of the two financial
institutions in terms of profitability, liquidity and safety.
The proposed banks were EBL and NIC. The performance of the bank was
analyzed through ratio analysis. These banks are helping in providing all kinds of
probable banking facilities to the national as well as international customers by its trained
and efficient personnel. The study is based on secondary data that has been processed and
analyzed comparatively. The annual report of 2005/2006 has been examined for the
purpose of the study.
While comparing the financial performance of EBL and NIC, it has been
classified into three chapters i.e. Introduction, Presentation and Analysis of data and
lastly summary and conclusion.
In the first chapter, introduction, area of study, statement of the problem,
objective of study, need of the study and organization of the study. Similarly, second
chapter deals with the data presentation and analysis by using financial and statistical
tools. Lastly, it is concerned with the summary and conclusion for improving the future
performance.
32
3.2 MAJOR CONCLUSIONS

1) Since EBL has equity capital ratio of 3.25%, which is less than the equity capital
ratio of NIC, which is 5.28%. The ROE of EBL is more than NIC. But EBL
(1.49%) is better than NIC (0.93%) in terms of ROTA. Spread is important than
interest income and interest expenses ratio and EBL earns spread of 3.15% than
spread 2.31% of NIC. EBL however has higher net operating rate than NIC.
2) Looking at the loans to total assets ratio, it is found that EBL has used 61.41% of
total assets for loans and advances whereas NIC only uses 64.10% f its total assets
for loans and advances. Having lower loan to total assets ratio gives EBL more
liquidity than NIC but it has adversely affected the profitability of EBL.
3) NIC has lower net loans and advances in comparison to EBL but it has higher
default rate suggested by ratio of NPA to TA. EBL has higher cash and bank
balance ratio than NIC, it means EBL is highly liquidity.
4) EBL has better credit loss coverage than NIC, which means greater margin for
error and thus more safety, but EBL has less credit loss provision, which means
that EBL decreases its safety.
5) Both of the banks have higher capital adequacy ratio than the mark specified by
the NRB. But capital fund of NIC is more adequate than that of EBL.
6) Usually, it is said that higher the deposits, higher the loans but this doesn’t hold
true incase of these banks.
3.3 SUGGESTIONS
Based on the analysis conducted in chapter 2, the following suggestions have
been provided to all stakeholders.
1) The management of NIC should take appropriate steps towards the deposits as it
is falling down than EBL’s deposit. The low volume of deposits adversely affects
in investments. The management on NIC may provide certain incentive factors to
deposits so that deposits can be increased. The management can reduce the
minimum balance in saving account, or may provide other services like insurance
schemes, any branch banking, etc.
33
2) The concerned authority of NIC should focus on interest income, as it is

decreasing and lower than EBL’s. There could be many reasons like non-payment
of interest by client in time, improper utilization of assets, low level of
investment. Efficient management of loans and advances focusing on recovery of
interest in time and finding new area of investment can solve these problems.
3) NIC has established NPA management cell for recovery of graded and written of
accounts. That’s why it has lower net credit loss ratio. EBL should also multiply
the efforts and formulate proper policies to recover its written-off accounts.
34

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A Research Report on Comparative Ratio Analysis of EBL & NIC

Banking History in Nepal

INTRODUCTION TO EVEREST BANK LIMITED

SHARE HOLDING PATTERN OF EBL

Share Holding Pattern

500 Authorised Share

Board of Director of EBL

INTRODUCTION TO NEPAL INDUSTRIAL AND COMMERCIAL BANK

Board of Director of NIC

1.2 AREA OF STUDYS

1.3 ISSUES TO BE ADDRESSED

1.4 OBJECTIVE OF THE STUDY

To find out discrepancies if any.

1.5 NEED OF STUDY

1.6 ORGANIZATION OF STUDY

1.6.1 Research Design

1.6.2 Research Methodology

1.6.3 Sources of Data

1.6.4 Data Collection Technique

1.6.5 Data Analysis Tools

1.6.6 Sampling Method

2.1 PRESENTATION OF DATA

BALANCE SHEET OF EVEREST BANK LIMITED

Assets This Year Previous Year

BALANCE SHEET OF NEPAL INDUSTRIAL & COMMERCIAL BANK

Assets This Year Previous Year

PROFIT AND LOSS ACCOUNTS OF NEPAL INDUSTRIAL & COMMERCIAL

2.2 ANALYSIS OF DATA

2.2.1 RATIO ANALYSIS

According to Kohler, “A ratio is the relationship of one amount to another

Process of Financial Statement Analysis

Financial statement analysis is a technique of answering various questions

Importance and Limitations of Ratio Analysis

Importance of Ratio Analysis

Limitations of Ratio Analysis

Financial ratio is thus mathematical relationship between two figures. Though

Profitability ratios are of two types: those showing profitability in relation to

2.2.1.1.1 Return on Equity (ROE)

Higher the ROE, better it is.

2.2.1.1.2 Return on Total Assets (ROTA)

ROTA of EBL & NIC

Higher the ROTA, better it is.

2.2.1.1.3 Equity Capital Ratio (ECR)

ECR of EBL & NIC

Higher the Equity Capital, better it is.

SPREAD of EBL & NIC

Higher the spread, better it is.

2.2.1.1.5 Net Operating Cost Ratio

Lower the net operating cost ration, better it is.

2.2.1.1.6 Interest Income Ratio

IIR of EBL & NIC

Higher the interest income ratio, better it is.

2.2.1.1.7 Interest Expenses Ratio

IER of EBL & NIC

Lower the interest expenses ratio, better it is.

It is extremely essential for a business organization to be able to meet its

A high degree of liquidity shows inability of proper utilization of fund whereas

2.2.1.2.1 Loan Ratio

Net Loans and Advances

LR of EBL & NIC

Higher the loan ratio increases, but reduces liquidity.

2.2.1.2.2 Cash and Bank Balance Ratio