1

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Profit is one of the core objectives of any firm for its long term reputation and
survival. Profitability is the profit making ability which is considerable an important
factor for perpetual existence of firms. Measuring firm’s profitability or taking into
effect how well a business is being run is a very difficult task. There are various
approaches have been developed. It can be measuring the process of gain sharing
financially or in economic terms, depending on the prevailing situation and the current
scenario. Profitability is also cause of maximizes the values of stakeholders as well as
investors and also show the performance of any firm in competent environment. Profit is
not happening itself; it can be generated by effort. The organization makes a profit by
earning or generating more money than what they are paying in expenses. The main part
of the profit of bank comes from the services fees, charged for it services and the earned
interest from its assets.

Banks, as the critical part of financial system, play an important role in

contributing to a country’s economic development. If the banking industry does not
perform well, the effect to the economy could be huge and broad. Efficient banking
system reflects a sound intermediation process and hence the banks due contribution to
economic growth. If commercial banks are functioning efficiently, monetary policies are
likely to be effective. The determinants of bank profitability can be divided into internal
factors and external factors. Financial sector is the backbone of economy of a country. It
works as a facilitator for achieving sustained economic growth through providing
efficient monetary intermediation.

Banks play a vital role in today’s era. It mobilizes saving and provides shuttle
two of the people who have taken part indirectly or directly. In the past era, banking has
really contributed to improving living standards, quality services and safeguarding the
assets of people. Banks have attained more levels of confidence by the general public,
just because of modernization. Monetary policy directly affects market surplus because
of interest rates granted to borrowers and lenders. Banks usually change the interest rates
for keeping and withdrawing the surplus money held in the market. When banks
increasing interest rates this reads a lower level of interest rents which can cause less to
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the general public.

One of the crucial indicators for health of the banking sector has been long
demonstrated to be profitability. A commercial bank always strives to have “good
health”, or profitability due to the following reason. In the context of globalization,
deregulation and intensive competition from an increase in the share of non-bank
institutions, commercial banks are required to maintain profitable, otherwise, the
survival can be threatened. Banks can then realize higher profits than those realized in
less concentrated markets because they can offer low deposit rates and apply very high
loan rates. This situation is unfavorable for consumers. This model implies that market
performance in certain industries depends on the behavior of sellers and buyers which in
turn is determined by the structure of the market. The structure of an industry depends on
the basic conditions of supply such as raw materials, technology and unionization and
demand such as price elasticity, growth rate, and purchase method (Ferroughi, 2018).
Regarding the relative Market Power model, developed by Shepherd (1983), it postulates
that banking performance depends on market shares. Large banks offering differentiated
products are able to influence prices and increase profits. By offering well-diversified
products, large banks realize non-competitive profits (Berger, 1995).
The Nepalese financial services industry varies day by day and the evaluation of
the profitability of the financial institution became an important aspect. Banks are the
integral part of the financial market, and in order to stay at that level; it is necessary to
determine how banks operate and what factors affect their profitability. The banking
system plays an important role in the functioning of the market economy. Banks are the
most significant elements in the infrastructure of modern society, which serve important
social functions. Sustainability of their operation significantly affects the performance of
the economy as a whole. Therefore, in most countries, banking is the most strictly
regulated sector. Most of the banks in Nepal determine profit on the basis of profitability
ratio. Profitability ratios show the combined effects of liquidity, asset management, and
debt management on operating results. It measures the earnings of the company for a
certain period. Profit margin, net interest margin (NIM), the spread, the return on assets
(ROA), and the return on equity (ROE) are profitability ratio that are widely used.
Among these ratios ROA, ROE and NIM are mostly applicable in banking industry.
Beside this, Macroeconomic and internal factors both affect the profitability of banks.
Internal factors like quality of management, size of the bank, and risk management are
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the major determinants of profitability. On the other side government policies related to
interest rate, appreciation or depreciation of currency, and inflation also affect profits of
banks.

To improve the performance of banks in terms of profitability the role of these

internal and external variables needs to be established. However, the impact of these
variables on the profitability of banks is not agreed upon among researchers. Clearly,
bank profitability matters for financial stability. Profits are the first line of defense
against losses from credit impairment. Those buffers ensure that banks are able to
provide financial services to euro area households and businesses, even in the face of
adverse developments, thereby smoothing rather than amplifying the impact of negative
shocks on the real economy. Banks with poor structural profitability can face higher
funding costs and may be tempted to take on more risk. This reduces the flow of lending
to profitable firms that need funding to invest and grow misallocation of capital
towards unproductive businesses weighs on long-run economic growth (Guindos, 2019).

The number of studies has examined bank performance in an effort to isolate the
factors that account for interbank differences in profitability. These studies fall generally
into several categories. One group has focused broadly on the tie between bank earnings
and various aspects of bank operating performance. A second set of studies has focused
on the relationship between bank earnings performance and balance sheet structure.
Another body of literature has examined the impact of some regulatory, macroeconomic
or structural factors on overall bank performance.
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1.1.1 Profile of Sangri-la Development Bank

It's great to hear about Shangri-la Development Bank's success and commitment towards
providing financial services to the people of Nepal. With a network of 112 branches and
30 ATMs, the bank has been able to cater to the needs of a large number of customers
across the country. The bank's focus on adopting the latest technology in the banking and
financial sector, and offering digital services to customers, is a positive step towards a
more cashless society.

It's also encouraging to learn that the bank is prioritizing financial access in rural areas,
recognizing the important role financial services play in bringing the rural economy into
the formal channel. The bank's engagement in the economic development of the country,
and its contribution to society through various programs under corporate social
responsibility, is commendable.

Overall, Shangri-la Development Bank's 19 years of successful operations are a

testament to its commitment towards providing quality financial services and
contributing to the development of Nepal.

1.2 Statement of the Problem

The success and failure of any commercial banks largely depends on the profitability
ratio of the Sangri-la Development Bank. It is important to determine the factors
affecting the profitability of commercial banks. This study is assisting to reveal how the
Nepalese commercial banks determine profits. Financial institutions are increasing
regularly. Competition among financial institution is at maximum in loan and advance,
deposit and other banking products. As the banks and financial institutions are
competing among themselves to advance credit to limited opportunity sectors. Since the
government of Nepal had created liberal environment in banking sector, many private
sector banks and foreign banks come into the banking industry. In order to grow in the
market, banks have to deal with several policies made by government. There is
regulatory pressure. New regulations inhibit the bank lending ratio which increases the
cost of lending. In the same way, the number one regulatory change across all legislation
is the increased demand for capital in banking operations. In the study of Singh
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H.B(2016) Basel III regulations require banks to hold 4.5% of common equity in the
capital (up from 2%) and hold 6% of Tier I capital (up from 4%), in addition to other
mandatory and discretionary buffers that decrease a bank’s working margin.

Despite the planned efforts of the governments, developing countries could not
achieve economic growth to a satisfactory level. The private sector participation could
not be increased, mainly due to the resource scarcity. Whatever resources were available
in the market also could not be used efficiently, because of the under-developed and
highly controlled financial systems in these countries. Acknowledging this situation, the
emphasis of developing countries has shifted from infrastructure development to
financial sector development.

Hooshyari and Moghanloo (2015) examined that there is strong evidence

between ROA and inflation because p-value of ROA and inflation has less than 0.05.
This indicates that ROA and Inflation affect bank profitability. Similarly, Klein and weill
(2019) found that there is positive impact of bank profitability on economic growth in
the short-run. Due to negative past effects, this impact does not outlive in the long-run.
These findings are robust to alternative measures, specifications, and time-periods.
Conclude assets, loans, equity, and deposits affect bank profitability. The empirical
results have found strong evidence that these variables have a strong influence on the
profitability. However, the results show that higher total assets may not necessarily lead
to higher profits due to the diseconomies of scales. Also, higher loans contribute towards
profitability but their impact is not significant. Equity and Deposits have a significant
impact on profitability (Javaid et al., 2011).
In foreign economy reflects the similarly in our national economy. I have
searched the factors of profitability position of commercial banks in Nepal. Hence, both
internal and external factor have significant impact on bank profitability. The problems
regarding the determination of bank profitability are as follows:
1. What is the profitability position of sample banks?
2. What are the relationships between ROA, ROE, Deposit and loan impact on
profitability of sample commercial banks?
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1.3 Objectives of the Study

The general objective of this study is how Sangri-la Development Bank determine
profitability. This dissertation is conducted to determine the five potential determinants
of bank profitability such as ROA, ROE, Deposit, bank efficiency and credit risk. The
specific objectives of this study are as follows:
1. To analyze the profitability position of sample bank.
2. To examine the relationship between ROA, ROE, deposit and loan with
profitability of Sangri-la Development Bank.

1.4 Rationale of the Study

Research itself has own importance because it aims to gain knowledge and to add
the new literature to the existing field. This significant study was to solve the problem
existing in the financial institution especially for private sector commercial banks in
Nepal and to formulate the policy and strategies to maintain their activities effectively.
The study was important for banks, Board of directors of respective banks, researchers,
scholars, investors, students, as well as government. This study has multidimensional
significant in a particular area of concerned banks which have been undertaken that
justifies for finding out important points and facts to researchers, shareholders, brokers,
traders, financial institution and public knowledge. This study deal with managerial
functions hence it is hoped to some extent this study will help the policymakers to
formulate strong policy regarding determinants of profitability in Nepalese context. This
profitability of banks can be compared to the overall banking situation because this
serves as a good indicator to managers of banks to understand the strength of the banks
against the overall banking industry. Moreover, the research is also significant to the
monetary authorities since it is a major role of the central bank of Nepal to improve
liquidity and financial stability in the Nepalese banking system due to the fact that a
well-funded banking sector is essential in order to maintain the financial system stability
and confidence in the country. With the findings of this study the monetary authorities
will be able to strengthen their policies and advisory services in order to stabilize the
banking sector.
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The study is also significant to depositors/investors since bank performance

serves as an indicator of whether to invest or withdraw their funds from the bank. They
need a past performance in terms of profitability of the banks to know if it will be
beneficial to deposits or invest to earn more returns that will enable them to maximize
their wealth. This study provides depositors as well as investors more and reliable
information that will enable them to analyze the profitability of banks in order to know
the strength of the commercial banks in Nepal. With this study, the government may
decide whether to adopt policies that will make the banking sector more investor friendly
and profitable.
The main significances are:
1. The study helps to show the profitability position of the banks to the investors as well
as concerned management.

2. The financial agencies, stock exchange and stock traders are also interested in the
performance of the bank as well as the customers, depositors and debtors, who can
objectively identify the better bank to deal with in terms of profitability, safety
and liquidity.

3. Policy makers at the macro level that is government and Nepal Rastra Bank
will also benefit regarding the formulation of further policies in regard to
economic development through banking institutions.
4. The study enlightens the shareholders about the financial performance of their
respective bank. This allows them to have a comparative retrospect whether their
fund was better utilized or not.
5. The study also compels the management of respective banks for self
assessment of what they have done in the past and guides them in their future plans
and programs.
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CHAPTER TWO: LITERATURE REVIEW

The review of the literature gives sample ideas of the theoretical as well as
practical aspects related to the research. It gives emphasis to have knowledge on the
subject contributed by the scholars and writers in the past. The focus is more on the
profitability of Nepalese Commercial banks in order to understand what has been done
and what can be further researched. Books of prominent writers, journals and documents
were reviewed and the different opinions from those writers and scholars have been
presented herein.

2.1 Theoretical Review

Theories of Profitability
We all are familiar with the term ‘Profit’. It is quite a common-place word, but
different people use it in different senses. In Economics, however, the term has a precise
meaning. Profit may be defined as the net income of a business after all the other costs-
rent, wages and interests have been deducted from the total income. Theories are the set
of systematically interrelated concepts, definitions and propositions that are used to
explain and predict facts. The basic objectives of theory are to define, establish and
explain the concepts and constructs. Research either develops new theories or improves
the existing theories. Thus, theory and research are interrelated. Profitability theories
provide conceptual base and generalizations regarding profit. Following are the theories
of profitability that have been taken from previous research and thesis.

Market-Power Theories
Market power refers to a company's relative ability to manipulate the price of an
item in the marketplace by manipulating the level of supply, demand or both. The market
power theory suggests that firms merge to improve their ability to set product prices by
reducing output or by organizing. However, many recent studies conclude that increase
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merger activity is much more likely to contribute to improve operating efficiency than to
increase market power.

Market power theory is applied in the banking industry, to explain the bank’s
profitability and how it is affected by its market share. The increase in market share
leads to increase in deposit. Since bank has more deposit it increases its capital ratio and
loan ratio. With the increase in loan ratio bank lending power will be strong and can
provide a loan at a lower rate.

Efficient-Structure Theory
The efficient-structure theory implies that higher profits come first in a timing
sense followed by increasing concentration. That is, better managements and practices
lead to higher profits and that better performance than leads to rising market share and
concentration over time. The idea of the efficiency theory is based on the fact that the
more efficient banks incur lower costs which ultimately lead to higher profitability. The
efficient-structure theory also includes two hypotheses – the X-efficiency and scale
efficiency hypotheses. The X-efficiency hypothesis argues that banks with better
management and practices control costs and raise profit, moving the bank closer to the
best-practice, lower bound cost curve. The scale-efficiency hypothesis argues some
banks achieve better scale of operation and, thus, lower costs. Lower costs lead to higher
profit and faster growth for the scale-efficient banks (Jeon & Miller, 2005).

Economies of Scale Theory

The presence of economies of scale means that large banks have a cost advantage
over small banks, while evidence of economies of scope implies that multi-product
banks are more efficient than financial boutiques. We and selected partners use cookies
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 10

business loans, auto loans and checking accounts at lower cost can pass some of these
savings onto businesses and households while using less of the economy’s valuable
resources (Campbell, 2020).

2.2 Conceptual Framework

The variable of primary interest in the study is the dependent variables of bank
profitability. Five independent variables are used to explain the determinants of
profitability in Nepalese commercial banks. These five variables are ROA, ROE,
Deposit, Bank Efficiency and Credit risk. The chart shows the factors that determine
profitability in Nepalese commercial banks.

ROA

ROE Profitability

Deposit

Bank Efficiency

Credit Risk

Independent Variables and Dependent Variables

2.2.1 Operational Definitions

Return on Total Assets Ratio (ROA)
The return on total assets explains the contribution of assets to generating net
profit. This ratio indicates efficiency towards of assets mobilization. In other words
return on total assets ratio is an overall profitability rate, which measures earning power
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and overall operation efficiency of a firm. This ratio helps the management in identifying
the factors that have a bearing on overall performance of the firm.

Return on Equity (ROE)

ROE measures a firm's efficiency at generating profits from every unit of ROE
show how well a company uses investment funds to generate earnings growth ROEs
between 15 percent and 20 Percent are considered desirable. ROE measures the rate of
return on the ownership interest (shareholders equity) of the common stock owner.
Return on equity (ROE) is the ratio of net income to total equity.
Deposit Ratio
Customer deposit is a liability to the bank. It is the main source of funding for
banks. Banks have more deposits; the bank can provide more loan opportunities to
customers. Then it will be able to create profits in future. Generally supposed that
customer deposits positively related to bank profitability, if there is a satisfactory
demand for loan opportunities in the market. Additional deposits can generate more
profits and lower level of deposits negatively impact on bank profitability. By the way,
banks have additional deposits bank can get more loan opportunities. Hence bank can
generate higher profits. Therefore, customer deposits are positively related to bank
profitability.

Bank Efficiency
Efficiency is the ability to avoid wasting materials, energy, efforts, money, and
time in doing something or in producing a desired result. In a more general sense, it is
the ability to do things well, successfully, and without waste. "Efficiency is thus not a
goal in itself. 

Credit risk
Credit risk is the possibility of a loss resulting from a borrower's failure to repay
a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender
may not receive the owed principal and interest, which results in an interruption of cash
flows and increased costs for collection.

2.3 Empirical Literature Review

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Wood and Staikouras (2004) had conducted a research on the determinants of

European bank profitability. This paper reviewed the literature on bank performance
studies and classifies the bank profitability determinants. The profitability in terms of
return on assets and return on equity were selected as dependent variable. Loan loss
provision, capital, and GDP were taken as an independent variable. The data from 1994
to 1998 is considered. The estimation results suggest that the profitability of European
banks was influenced not only by factors related to their management decisions but also
to changes in the external macroeconomic environment. The results were in contrast to
studies that have examined the structure-performance relationship for European banking
and find a positive effect of the concentration and/or market share variables on bank
profitability.
Davydenko (2010) examined the determinants of bank profitability in Ukraine. It
relates bank-specific, industry-specific and macroeconomic indicators to the overall
profitability of Ukrainian banks. The study used bank-specific factors like capital, size,
credit risk, liquidity, loan to total assets ratio and deposit to total assets ratio. Likewise,
industry specific factors include foreign ownership and macroeconomic factors include
inflation and exchange rate. These bank's specific, industry-specific and macroeconomic
indicators were treated as independent variables for the study. The dependent variables
were return assets and return on equity. The study had used panel of individual banks’
financial statements from 2005 to 2009. This study finds evidence for the difference in
profitability patterns of banks with foreign capital versus exclusively domestically
owned banks. The results had also indicated that there was room for consolidation of
Ukrainian banks in order to benefit from economies of scale. Liquidity defined as cash
as a percent of total assets has appeared insignificant for determining profitability in the
first dynamic panel data model. Deposits measured relative to bank size have a negative
impact on bank performance. The correlation between size and profitability were
positive suggesting economies of scale and suggesting that higher profits can be derived
from mergers in Ukrainian banking. GDP had an expected positive effect since the
banking sector is sensitive to the overall development of the economy. Inflation was
positively related to the bank's profitability which could imply that during the period of
study the levels of inflation were anticipated by bank management. The exchange rate
depreciation had a positive significant effect on income which could be explained by the
ability of bank managers to anticipate exchange rate fluctuations. Foreign ownership had
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a significant negative effect on the profitability of Ukrainian banks when considered on a

standalone basis.

Ali et al., (2011) examined the Bank-Specific and Macroeconomic Indicators of

Profitability - empirical evidence from the commercial banks of Pakistan. The return on
assets and return on equity were used as profitability measures to determine the effect of
bank-specific and macroeconomic indicators on profitability. The descriptive, correlation
and regression analysis results were derived with the help of SPSS software. The study
had used the performance indicator of 22 public and private sector commercial banks of
Pakistan covered the period of 2006-2009. The balance sheet data was collected from
Statistical Bulletin of State Bank of Pakistan 2009, websites of the banks and Lahore
Stock Exchange. The finding the study revealed an efficient image of the profitability on
banking sector of Pakistan for the period 2006-2009. On the micro independent variables
front, profitability seems to have been positively affected by size, operating efficiency,
portfolio composition, asset management and negatively by capital and credit risk in
case profitability is measured by return on assets (ROA).In case profitability is measured
by return on equity (ROE) profitability seems to have positively affected by capital,
portfolio composition and asset management and negatively by size, operating efficiency
and credit risk. On the macroeconomic variables, GDP is found to having positive affect
on profitability (as measured by ROA & ROE).

Ramasamy (2014) examined the impact of the loan deposit ratio on profitability:
panel evidence from commercial banks in Malaysia. With the use of data from 2009 to
2013, the researcher examined the impact of the Loan Deposit ratio on the profitability
of Malaysian commercial banks. The study included all the eight locally owned
commercial banks in Malaysia. The loan deposit ratio of the banks was the independent
variable of the study. The dependent variable was profitability which measures through
return on assets. Data were obtained from the annual reports of the banks. The ratio
analysis along with descriptive, correlation analysis, paired t- test and regression analysis
were used in this study. The result of the study indicated that there was a positive and
non-significant impact of loan to deposit ratio on return on assets in five banks. Further,
the study revealed that only one bank (Bank 5) had a negative and non-significant impact
of loan to deposit ratio on return on assets and bank 7 had a positive and significant
impact.
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Nuriyeva (2014) examined factors affecting the profitability of the Azerbaijan

banking system. The external and internal factors were reviewed and the relationship
between these factors and the profitability of Azerbaijan banks were hypothesized. The
history and the current performance of the banking sector in Azerbaijan were considered
and described in detail. The previous studies from many countries in the field of the
profitability and factors affecting on it were also considered. The CAMEL ratings have
identified the major aspect of the profitability of the commercial banks of Azerbaijan by
taking into consideration the capital adequacy, asset quality ratio, management quality
ratio, earning ability ratio, liquidity ratio, gross domestic product and size of the banks.
The secondary data were collected from the official websites of the banks’ financial
reports for period 2074 to 2078. The modification of the dependent and independent
variables of the regression model was displayed by using the Panel Data Analysis
Method. The detailed examination of all variables showed that Management Quality and
logarithmic value of return on equity are negatively correlated with all dependent
variables. Capital adequacy was negatively weak correlated to return on equity and
positively. Asset quality was positively correlated to all dependent variables and at the
same time to some independent variables such as management quality, liquidity, and
bank size. Earning ability and gross domestic product were negatively weak correlated to
asset quality, weakly correlated to net interest margin and return on asset.

Hooshyari and Moghando (2015) investigated the impact of inflation on the

profitability of banks. The principle motivation behind this investigation was to evaluate
the effect of inflation on profitability of banks in Iran. The profitability in terms of return
on assets was taken as dependent variable. Inflation, NIM, bank size, Liquidity,
Taxation, Capitalization are taken as independent variable. The period of study was
between fiscal years 2010 to 2013. In order to analyze the data resulted from collected
questionnaires deductive and descriptive statistical methods were used, and to display
some statistical data the study used a column diagram and in deductive level to test the
hypothesis of the research and Generalized Method of Moments (GMM) was used to
estimate the model. Findings show that the P-value of ROA and Inflation has lesser than
0.05 which indicates there is strong correlation between return on assets.
 15

Khan et.al, (2015) examined the impact of bank specific and macroeconomic
factors on banks profitability: a study on banking sector of Pakistan. Total 32 banks were
selected for this purpose. Bank specific factors focused on following features i.e.
Earnings Per Share (EPS), SIZE, Cash Equivalents, Spread Ratio and Capital Ratio,
while macroeconomic factors considered i.e. Inflation, Interest Rate and GDP. The
characteristics of individual bank i.e. (internal and external factors) measured the
profitability of the banks. Banks having more Earning Per Share (EPS), size, Cash
Equivalents, Spread Ratio and Capital Ratio, Inflation, Interest Rate and GDP leads to
have additional safekeeping and its benefit can be converted to obtain more profitability.
To approach this, two hypotheses were developed for examining bank’s Profitability
over specific determinants i.e., H0: Macroeconomic and banking specific factors are not
significantly associated with bank's profitability.H1: Macro-economic and banking
specific factors are significantly associated with bank's profitability. The factors that
have significant impact on bank’s profitability (ROA) were EPS, Size, Capital Ratio and
GDP. All these four factors remain significant at 5%. It means that there are 95%
chances that factors are problematic to the bank’s profitability under the normal
circumstances. While the other factors Cash Equivalents, Spread Ratio, Inflation and
Interest Rate remain insignificant on bank’s profitability which means these factors are
non-problematic for the banks under normal circumstances. In closure note results
suggested that in banking industry management while designing decisions is regarding
their future policies and profitability planning, they should consider the economic
environmental factors.

Gaber (2018) examined the determinants of banking sector profitability:

empirical evidence from Palestine by using the aggregate bank balance sheet data over
the time period 1995-2015. This paper employed the ordinary least square method to
investigate the effect of bank’s asset size, capital, loans, deposits, economic growth and
inflation on key bank profitability indicators. The main findings show that size had a
positive impact on ROE. Capital is positively related to ROA. Loans are positively
correlated with both ROA and ROE. Deposits are negatively related to both ROA and
ROE. Also, it was found that neither internal nor external factors had a significant
impact on NIM, despite the fact that overall internal and external factors have a
significant effect as denoted by F-statistics value. Moreover, banking sector had not
 16

benefited significantly from both the inflationary environment and economic growth.
These findings were of value to both academicians and policymakers.

Nepalese Evidence
Karki (2016) examined the impact of credit risk on the performance of Nepalese
commercial banks with having main objectives of evaluating the impact of credit risk on
profitability of Nepalese commercial banks. The study was based on pooled cross-
sectional analysis of data of 18 commercial banks for the period 2007/08 to 2013/14.
Return on assets, return on equity and net interest margin were used ad dependent
variable in the study while capital adequacy ratio, loan and advance to deposit ratio,
nonperforming loan ratio, loan loss provision ratio, liquidity, growth of net interest
income and leverage were used as independent variable for the study. The study revealed
that bank size and deposit have positive and significant impact on return on equity. Bank
size and deposit have negative and insignificant impact on return on equity. Deposit had
positive and significant impact on net interest margin. Bank size had positive and
insignificant impact on net interest margin. Similarly, nonperforming loan ratio, leverage
and growth of net interest income have negative and insignificant impact on net interest
margin.

Pradhan (2016) to show the Investigated the bank-specific and macroeconomic

determinants of bank profitability: A case of Nepal. The objective of this study was to
determine the factors affecting profitability of Nepalese commercial banks. It considers
both bank specific and macro-economic factors. The study was based on a pooled cross-
sectional analysis of secondary data of 22 banks with 154 observations for the period
2005/06 to 2011/12. The pooled cross-sectional data analysis has been undertaken in the
study. The research design adopted in this study was a causal comparative type as it
deals with the relationship of total credit to deposit ratio, market Share, inflation,
liquidity, non–performing loans and gross domestic products with profitability. More
specifically, the study examines the effect of total credit to deposit ratio, market Share,
inflation, liquidity, non–performing loans and gross domestic products on profitability.
The result shows that the higher the credit to the total deposit ratio, the higher would be
the ROA. It also indicates that the larger the market share, the higher would be ROE.
 17

However, beta coefficients are significant at 5 percent level of significance for credit to
total deposit ratio only. The return on assets and return on equity are negatively related
to inflation, liquidity, and non-performing loan.

Shrestha and Pradhan (2016) examined the Impact of liquidity on bank

profitability in Nepalese commercial banks. The researcher was used Investment ratio,
liquidity ratio, capital ratio and quick ratio as the independent variables. The dependent
variables were return on equity (ROE) and return on assets (ROA) while one-year lagged
variables for independent variables were also used to determine the more specific result
of the previous year’s effect on the current year's ROE and ROA. The secondary sources
of data had been used from annual reports of the banks and supervision report of Nepal
Rastra Bank. The regression models were estimated to test the significance and effect of
bank liquidity on performance of Nepalese commercial banks. The results indicated that
there was a positive correlation between the capital ratio and return on equity. However,
the correlation between return on equity and liquidity ratio was found to be negative.
Further, the correlation was found to be negative for the quick ratio with return on
equity. Beta coefficients for investment ratio and capital adequacy were positively
significant with bank performance which indicates that an increase in investment ratio
and capital ratio leads to an increase the performance of the banks. However, beta
coefficients for liquidity ratio and quick ratio were negative with return on assets and
return on equity indicating increased liquidity ratio and quick ratio decreases the return
on assets and return on equity of the bank.

Shrestha (2017) analyzed the Impact of credit risk management on profitability:

Evidence from Nepalese commercial banks. This study examines the impact of credit
risk management on profitability of Nepalese commercial banks. The profitability in
terms of return on assets and return on equity were selected as dependent variables.
Capital adequacy ratio, non-performing loan ratio, cost per loan assets, cash reserve
ratio, assets growth ratio, and leverage ratio were taken as independent variables. The
data were collected from bank supervision reports published by Nepal Rastra Bank and
annual reports of selected commercial banks. The survey was based on 126 observations
from 18 commercial banks in Nepal. In case, descriptive statistics, correlation analysis
some diagnostic tests for the linear regression model assumption was presented. The
regression models are estimated to test the significance and importance of credit risk
 18

management on profitability in Nepalese commercial banks. The findings indicate that

there was a positive relationship between capital adequacy ratio with return on assets and
return on equity. The study also revealed that the beta coefficient was positive for capital
adequacy, cost per loan assets and assets growth ratio with return on assets. The results
hence indicate that increase in capital adequacy ratio leads to increase in return on assets.

2.4 Review of Thesis

Aale (2012) studied the determinants of bank profitability: an empirical study on
Ethiopian private commercial banks. The purpose of this study was to investigate the
determinants of private commercial bank's profitability in Ethiopia by using panel data
of seven private commercial banks from year 2002 to 2011. The study used a
quantitative research approach and secondary financial data are analyzed by using
multiple linear regressions models for the three bank profitability measures; return on
asset, return on equity, and net interest margin. The empirical results showed that bank-
specific factors; capital adequacy, managerial efficiency, bank size and macro-economic
factors; the level of gross domestic product, and regulation have a strong influence on
the profitability of private commercial banks in Ethiopia. Thus, management bodies of
the private commercial banks should strive to strengthen the identified significant factors
and government bodies should also see the adverse effect of tight polices imposed on the
existing private banks as well as for the new entrants.

The results indicated that there exists a relationship between total assets and
bank profitability. As the size (natural logarithm of total assets) of bank increases,
return on assets decreases. This signifies that bank profitability also decreases because
Return on Assets had a direct relation with bank profitability. This clearly indicated that
it was not true that, only banks with the highest assets have high profitability. It was
also examined that total deposits and total equity have inverse relationship with bank
profitability. As a deposit of bank increases, return on Assets decreases. Similarly, as
the capital of banks increases, return on Assets decreases. Since, there was a direct
 19

relationship between Return on Assets and profitability of the bank, it was clear that
bank with highest total deposits and total equity does not possess the highest
profitability. Since banks with highest loan have the lowest Return on Assets in
comparison to banks with the lowest loan, Loan had negative contribution to bank
profitability. This clearly revealed that as loan ratio increases, return on assets decreases
that means bank profitability also decreases. Similarly, return on equity and return on
capital employed also have negative relation with size, capital, loan, and deposit. but net
interest margin had positive relation with respect to size and capital while a negative
relation with loan and deposit.

Nuriyeva (2014) examined factors affecting the profitability of the Azerbaijan

banking system. The external and internal factors were reviewed and the relationship
between these factors and the profitability of Azerbaijan banks were hypothesized. The
history and the current performance of the banking sector in Azerbaijan were considered
and described in detail. The previous studies from many countries in the field of the
profitability and factors affecting on it were also considered. The CAMEL ratings have
identified the major aspect of the profitability of the commercial banks of Azerbaijan by
taking into consideration the capital adequacy, asset quality ratio, management quality
ratio, earning ability ratio, liquidity ratio, gross domestic product and size of the banks.
The secondary data were collected from the official websites of the banks’ financial
reports for period 2006 to 2012. The modification of the dependent and independent
variables of the regression model was displayed by using the Panel Data Analysis
Method. The detailed examination of all variables showed that Management Quality and
logarithmic value of return on equity are negatively correlated with all dependent
variables. Capital adequacy was negatively weak correlated to return on equity and
positively. Asset quality was positively correlated to all dependent variables and at the
same time to some independent variables such as management quality, liquidity, and
bank size. Earning ability and gross domestic product were negatively weak correlated to
asset quality, weakly correlated to net interest margin and return on asset.

Dangol (2015) analyzed the financial performance of commercial banks in

Nepal with reference to prime commercial bank limited (PCBL) and Siddhartha bank
limited (SBL). His main objectives are to analyze the financial performance using
financial ratios applicable in banking sectors, analyze strength and weakness of the
 20

selected banks and perform the trend analysis in selected bank and make a projection
for next five years. The result revealed that PCBL and SBL are well capitalized and
they were complying with the directives of NRB. Total assets of SBL were riskier than
that of PCBL as SBL used a higher portion of debt capital to finance the total assets
than PCBL does. The standard deviation and coefficient of variation of SBL were
2.995% and 4.16% respectively and standard deviation and coefficient of PCBL were
3.47% and 4.84% respectively. It reveals that SBL had maintained its consistency
comparing to PCBL. On the basis of ROE, it can be concluded that SBL had the higher
income earning capacity than PCBL from effectively mobilizing the shareholder’s
equity. Comparing two banks based on total interest earned to total assets, it can be
concluded that the capacity of utilizing total assets to generate interest income was
highest in SBL as compared to that of PCBL. Both the sample banks have complied
with the NRB’s norms in the five consecutive years. Comparing two banks based on
P/E ratio, it can be concluded that the mean ratio of SBL was higher than that of PCBL.
But there was also a high inconsistency in earning of SBL as standard deviation and
coefficient of variation were 11.89% and 56.89% respectively. Further return on assets
was positively correlated with all other ratios except for total operating expenses to total
operating revenue ratio, it indicates that an increase in such ratio will lead to an increase
in return on assets. Similarly, return on equity was positively correlated with Risk-
weighted assets to total assets ratio, return on total deposit ratio, earning per share, the
liquid fund to total deposit ratio, which indicates that an increase in such ratio will lead
to an increase in ROE.

Pandey (2020) had conducted thesis on comparative study on financial

performance analysis of commercial banks with reference to Nepal bank limited and
Himalayan bank limited. The study was conducted with objectives of comparing lending
and deposit position of NBL and HBL, analyzing liquidity position of selected banks and
evaluating the earning and profitability situation of selected banks. The researcher had
used annual general report of NBL and HBL from 2010/11 to 2019/20. Besides this, the
researcher had used national newspapers, journals, magazines, and reports of the central
library of TribhuvanUniversity and Shankar Dev Campus. The researcher had a panel
data model while analyzing the data. With the use of ratio analysis of financial tools and
arithmetic mean, coefficient of variation, coefficient of correlation and trend analysis the
 21

researcher analyzed the data and generate some results which are highlighted. The
liquidity position of HBL was found to be comparatively better than NBL. However,
NBL had maintain better cash and bank balance to total deposit and cash and bank
balance to current deposits ratios. HBL was more successful in on-balance sheet
utilization as well as off balance sheet operation than that of NBL. HBL had a
consistency in earning the profit and expenses on interest. HBL was successful in
earning a higher profit even though with higher interest expenses, whereas NBL was
average with respect to its own total assets and increasing total deposits than that of
HBL. The correlation between the deposit and loan and advances for HBL was strongly
positive as well as there was a significant relationship between them. Whereas for NBL,
the correlation between total deposits and loan and advances was a highly positive but
not significant relationship between them. The trend line of all sample banks was in
increasing trend in case of a deposit, loan and advance and net profit. The trend values of
total investment of HBL and NBL were in decreasing trend, which means that both
banks had not properly utilized total deposit as investment to generate more net profit.

2.5 Research Gap

The purpose of the present research work was quite different from the studies
made by the previous. In this study covers latest financial data and analysis by using
financial as well as statistical tool. This study used financial tool and financial ratio to
evaluate the determinants on profitability position of the bank. This study has suggested
and recommended financial as well as statistical tools were apply to find out financial
strength and weakness at right time and improve financial performance in future. So,
this study was detail analysis of financial performance and position of selected
commercial banks. This study was also tried to fulfill the previous research gap on
profitability of selected commercial bank’s financial position. In order to perform
profitability analysis, researchers have used ratio analysis and statistical tools. In this
research, ratios are systematically analyzed and generalized. Here under this research, all
ratios are categorized according to their area and nature. Researchers have used return on
assets, return on equity, deposit and loan for determination of profits. This study selects
only financial variables and statistical variables; it does not include qualitative factors for
determining profits. In this study, it is tried to carry out the distinct from other previous
article studies in the term of sample size, nature of sample banks, methodology &
statistical tools used.
 22

In this research, foreigner focuses on only the capital but Nepalese focus on
economic factor either capital assets or micro-economics factors. This study tries to
define variable use in the determination of bank profitability by applying and analyzing
financial tools like profitability ratio as well as different statistical tools like the standard
deviation and coefficient of correlation. Probably this will be the appropriate research in
the area of the financial performance of the bank and financial institutions. This research
covers the period from 2015/16 to 2019/20.
 23

CHAPTER THREE: RESEARCH METHODOLOGY

This chapter deals with the methodology that adopted in analysis of the data for
the study. The population and sample, sources and data collection technique, data
analysis tool and various limitations which are associated with the study have been
discussed in this chapter. It helps us to find out accuracy, validity and suitability. The
justification on the present study cannot be obtained without the help of proper research
methodology (Kothari, 1999). The research methodology used in present study is briefly
mentioned below.

3.1 Research Design

Research design is the plan structure and strategy of invention conceived so as to
obtain answer to research objectives. The plan is the overall scheme on program of
research. It includes on the outline of what the investigator will do from writing the
hypothesis and their operational implication to the final analysis of data. The structure of
the research is more specific. It is the outline and the paradigm of the operation of
variables.

This study mainly intends to evaluate the determinants of commercial banks in

Nepal. This study was based on quantitative as well as descriptive or explanatory
research design to achieve the objectives of research. This study was based on secondary
data. Secondary data have been collected from the annual published accounting and
financial statement of banks.
Research design can be divided into two groups: exploratory and conclusive.
Exploratory research, according to its name merely aims to explore specific aspects of
the research area. Exploratory research does not aim to provide final and conclusive
answers to research questions. The researcher may even change the direction of the study
to a certain extent, however not fundamentally, according to new evidences gained
during the research process.

3.2 Population and Sample

A population is the entire group that you want to draw conclusion about. A sample
is the specific group object or items that are taken from a larger population for
 24

measurement. This study mainly intends to profitability analysis of the commercial banks
taken by the convenience sampling method. In the present context, there are twenty Seven
commercial banks operating in Nepal. Out of twenty Seven commercial banks only three
banks were chosen as the sample for the analysis, interpretation and representation of the
population of the commercial banks. As convenience sampling, RBB Bank was totally
government ownership, Nabil was joint venture sector bank and Everest Bank was issued
common stock as well as preferred stock, So EBL has both types of share sources of capital
fund.

3.3 Sources of Data

The research is mainly based on the secondary data which may include the
annual reports of the banks under study, Economic Report Published by Nepal Rastra
Bank. So the major sources and types of data include these published sources are
Journals, newspaper, magazines and unpublished master degree thesis related to this
research.

3.4 Data Collection Method

Data collection is the process of gathering and measuring information on

variables of interest, in an established systematic fashion that enables one to answer
stated research questions, test hypotheses, and evaluate outcomes. The data collection
component of research is common to all fields of study including physical and social
sciences, humanities and business. While methods vary by discipline, the emphasis on
ensuring accurate and honest collection remains the same. The goal for all data
collection is to capture quality evidence that then translates to rich data analysis and
allows the building of a convincing and credible answer to questions that have been
posed. Regardless of the field of study or preference for defining data (quantitative,
qualitative), accurate data collection is essential to maintaining the integrity of research.
Both the selection of appropriate data collection instruments (existing, modified, or
newly developed) and clearly delineated instructions for their correct use reduce the
likelihood of errors occurring. Data collection is one of the most important stages in
conducting a research. You can have the best research design in the world but if you
cannot collect the required data you will be not be able to complete your project. Data
collection is a very demanding job which needs thorough planning, hard work, patience,
 25

perseverance and more to be able to complete the task successfully. Data collection starts
with determining what kind of data required followed by the selection of a sample from
a certain population. After that, you need to use a certain instrument to collect the data
from the selected sample (Kabir, 2016).
It includes the approaches adopted to examine the determinants of bank
profitability, the type of data used, the techniques employed to collect data, the method
utilized to manage the data and the process to construct empirical model with
measurement of its components. The secondary data is gathered for the purpose of
completing this research. The secondary data composed of the journals of previous
studies and annual reports of the three banks which are Everest Bank, Rastriya Banijya
Bank and Nabil Bank. The secondary data has been collected through various published
and unpublished documents of the concerned authorities. The sources of secondary data
are as follows.
1. Journals, newspaper and magazines.
2. Unpublished master degree thesis related to this research.
3. Different websites.

3.5 Data Analysis Tools

This study is quantitative in nature and analysis is based on the historical data.
Under the descriptive statistics, the central tendency has been measured through
arithmetic mean. To measure the consistency, standard deviation and coefficient of
variation have been used. Similarly, to observe the data nature in terms of normality, In
addition, correlation coefficients between the variables have also been examined through
the simple correlation coefficient. In this study, all the statistical parameters are planned
to compute with the help of computer via Microsoft Excel, the data analysis tool pack.

3.5.1 Financial Tools

Financial tools are more useful they help to identify the financial strength and
weakness of the firm in spite of various financial tools available the research has
primarily stressed on ratio analysis assuming it the most suitable tools.

3.5.1.1 Ratios
 26

Ratio analysis is a commonly used tool of financial statement analysis. It is a

technique of analysis & interpretation of financial statement. To evaluate the
performances of an organization by creating the ratios from the figure of different
accounts consisting in balance sheet & income statement is known as ratio analysis.
Ratio analysis is also very helpful for decision making. From the information provided
by ratio analysis with the help of financial statement are very useful for making decision
on any financial activity. It helps management in evolving future market strategies for
this study, ratios are categorized into the following major headings. Ratio can be
established the relationship between two variables.

Financial ratios are the main diagnostic tools of financial analysis the use of
financial ratios helps to evaluate a firm’s financial health and performance, to check its
‘financial vital signs. Ratios need to be applied with care and more importantly their
results should be interpreted with care. Financial ratios only tell one part of the story as
far as a firm’s overall business performance is concerned (Mcmenamin, 2005). Under
this study the following ratios are considered.

Return on Total Assets (ROA)

Return on total assets explains the contribution of assets to generating net profit.
This ratio indicates efficiency towards of assets mobilization. In other words return on
total assets ratio is an overall profitability rate, which measures earning power and
overall operation efficiency of a firm. This ratio helps the management in identifying the
factors that have a bearing on overall performance of the firm.

NPAT
ROA=
Total Assets

Return on Equity (ROE)

ROE measures the rate of return on the ownership interest (shareholders equity)
of the common stock owner. It measures a firm's efficiency at generating profits from
every unit of ROE show how well a company uses investment funds to generate earnings
growth ROEs between 15 percent and 20 Percent are considered desirable. Return on
equity (ROE) is the ratio of net income to total equity.
Net Income
ROE =
Total Equity Capital
 27

Deposit Ratio
Customer deposit is a liability to the bank. It is the main source of funding for
banks. Banks have more deposits; the bank can provide more loan opportunities to
customers. Then it will be able to create profits in future. Generally supposed that
customer deposits positively related to bank profitability, if there is a satisfactory
demand for loan opportunities in the market. Additional deposits can generate more
profits and lower level of deposits negatively impact on bank profitability. By the way,
banks have additional deposits bank can get more loan opportunities. Hence bank can
generate higher profits. Therefore, customer deposits are positively related to bank
profitability
Net Profit
Deposit Ratio =
Total Deposit
Loan Ratio
Loan to asset s ratio (LAR) as an indicator of liquidity that reflects credit and
shows the percentage of bank assets to total debt in a year (Sufian&Habibullah, 2010;
Sufian, 2011). Loan to assets ratio (LAR) is ratio that is used for measure the level of
bank liquidity that shows the ability of banks to meet the demand for credit with total
assets owned (Martono, 2004). According to Rivai (2007), loan to assets ratio (LAR) is
the ratio used to demonstrate the ability of banks to meet the demand for loans by using
the total assets owned by banks. The higher this ratio the better the credit performance
level because the greater the loan component given in the total structure of the assets.
However, it has a negative effect on liquidity, because the higher this ratio means that
existing funds are widely used for credit allocation and less for short- term liabilities.

Net Profit
Loan ratio =
Loan∧ Advance
Return on Investment

Return on investment ratio is financial measurement of profitability. ROI is

popular profitability metric used to evaluate how well an investment has performed.
ROI is expressed as a percentage and is calculated by dividing an investment's net profit
by its initial cost or outlay.

Net Income
RO I =
Cost Of Investment
 28

Bank efficiency

Efficiency is the ability to achieve a higher amount of output by using a lower

amount of output. Efficiency banks can use minimum inputs to generate maximum
outputs, which could raise the sustainability of commercial banks.

Operating Expenses
Efficiency Ratio =
Total Income

Credit risk

Credit risk is the possibility of a loss resulting from a borrower's failure to repay
a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender
may not receive the owed principal and interest, which results in an interruption of cash
flows and increased costs for collection.

Total Debt
Credit risk ratio =
Total Income

Non-performing Loan

The odds of loan repayment decrease significantly after 90 days, which is why the
nonperforming loan designation uses this standard. Loans can be classified as
nonperforming if the borrower defaults on the loan, declares bankruptcy or loses the
income she needs to repay the debt. This ratio indicates the portion of nonperforming
loan out of total loan. Low level of ratio is preferable for financial institutions.

Nonperforming Loan
Non-performing Loan Ratio (NPLR) =
Gross Loan∧advance

3.5.2 Statistical Tools

Although various statistical tools are available to analyze the obtained data,
the researcher has selected the most suitable and commonly usable tools to extract
trustworthy financial decision.

a. Arithmetic mean
b. Standard Deviation
c. Co-efficient of Variance
 29

d. Correlation Coefficient (r)

A. Arithmetic Mean
Arithmetic Mean of a given set of observations is the sum of he observation
divided by the number of observations. In such as case all the items are equally
important. Simple Arithmetic Mean is used in this study as per necessary for analysis.

We have,
Σx
X
Mean ( ) = n
Where x = sum of all values of the observations
n = Number of observation
x = Value of variables

B. Standard Deviation
Standard deviation is the measure of dispersion of a set of data from its mean. It
measures the absolute variability of a distribution; the higher the dispersion or
variability, the greater is the standard deviation and greater will be the magnitude of the
deviation of the value from their mean. The concept of Standard Deviation was
introduced by Karl Pearson in 1893. It is by far the most important and widely used
measure of dispersion. Its significance lies in the fact that it is free from those defects
which afflicted earlier methods and satisfies most of the properties of a good measure of
dispersion. Standard Deviation is also known as root-mean square deviation as it is the
square root of means of the squared deviations from the arithmetic mean. In financial
terms, standard deviation is used -to measure risks involved in an investment instrument.
Standard deviation provides investors a mathematical basis for decisions to be made
regarding their investment in financial market. Standard Deviation is a common term
used in deals involving stocks, mutual funds, ETFs and others. Standard Deviation is
also known as volatility. It gives a sense of how dispersed the data in a sample is from
the mean. The measurement of the scatterings of the mass of figure in a series about an
average is known as dispersion. The standard deviation measures the absolute
dispersion. The greater the amount of dispersion, larger will be the standard deviation. A
small standard deviation means a high degree of uniformity of the observation as well as
 30

home gently of a series; a large standard deviation means just the opposites. (Tiwari,
Ghimire, & Gaire, 2006).

We have,

Standard Deviation () = √ Σ ( x−x ) 2

n

C. Coefficient of Variation (C.V.)

The relative measure of dispersion based on standard deviation is called
coefficient of standard deviation and 100 time coefficient of standard deviation is called
coefficient of variation. It is denote by C.V. Thus,
σ
x 100 %
C.V. = x
Where
 = Standard Deviation
X = Mean Value of Variables

The distribution having less C.V. is said to be less variable or more consistent. A
distribution having greater C.V. is said to be more variable or less consistent.

D. Correlation Coefficient (r)

Correlation can be defined as a degree of linear relationship existing between two
or more variables. Correlation can be classified into three types. They are simple, partial
and multiple correlations. Correlation may be positive, negative and zero. Correlation
can be classified as linear and nonlinear. Coefficient of correlation is an important
measure to describe how one variable explains another. It is the simplest of ascertaining
the correlation between two variables. It is not influenced by the size of the extreme
items. Karl Pearson coefficient of correlation is usually denoted by ’r’.
r=
 31

Where,
n = number. of observation of X and Y.
∑XY=sum of the product of the observations in series X and Y.
∑X = sum of the observations in series X.
∑Y = sum of the observations in series Y.
∑X2 = sum of the square of the observations in series X.
∑Y2 = sum of the square of the observations in series Y.
Interpretation of Correlation Co-efficient:-
i. It lies always between +1 and -1.
ii. When r = +1; there is perfect positive (+ve) Correlation.
iii. When r = -1; there is perfect negative (-ve) Correlation.
iv. When r = 0; there is no Correlation.
v. When r lies between 0.7 to 0.999 or -0.7 to -0.999; there is a high
degree of +ve Correlation (or high degree of –ve Correlation).
vi. When r lies between 0.5 to 0.699; there is a moderate degree of
Correlation.
vii. When r is less than 0.5; there is a low degree of Correlation.

E. Probable Error of Correlation

Probable error of correlation is an old testing the reliably of an observed value
of correlation coefficient. It is calculated to find the extent to which correlation
coefficient is dependable as it depends upon the condition of random sampling
probable error of correlation coefficient denoted by P.E (r) is obtained as

Where, r = correlation coefficient

P.E. (r) = probable error of correlation coefficient

n= no. of pairs of observation

P.E. (r) is used to test it an observed value of sample correlation coefficient is

significant of any correlation in population.
 32

If the coefficient of correlation is less than its probable error, it is

not at all significant.

If the coefficient of correlation is more than six times of probable

error, it is significant.

If the probable error is not much and the coefficient of correlation

is 0.5 or more, it is generally to be significant.

CHAPTER FOUR: RESULTS

This Chapter deals with Presentation and analysis of data collection from annual
reports of the bank. The raw data collected has been organized and processed using
various tools discussed in the previous chapter “Research Methodology”. In this chapter
data and information are presented and analyzed using different financial and statistical
tools in order to achieve the objective of the study. In data presentation and analysis, the
study was focused on Determinants of Profitability.

4.1 Analysis of Profitability Position

An analysis of cost and revenue of the organization shows whether it is profiting
or not. Profitability is a relative term. It is hard to say what percent of profits represent a
profitable organization unless it is subjected to industry standard. Bank profitability is
usually expressed as a function of internal and external factors. The internal
determinants are bank-specific determinants while the external determinants are
macroeconomic variables.
4.1.1 Return on assets

This ratio can be obtained dividing net profit by total assets. Ratios and statistical
calculations are given as under:

Return on Assets = Net profit

Total Assets
 33

Table: 1
Return on Assets Ratio
NABIL
1.18
1.49
1.65
1.69
1.50
1.50
0.18
12.02
Source: Appendix I, II & III

Table 1 shows the Return on assets ratio of EBL, RBB and NABIL bank for the
five years period. The average ROA of sample banks are 1.90, 3.29, and 1.50
respectively. The ratio of EBL was decreasing trend from F.Y. 2015/16 to 2018/19, and
The Ratio of RBB and Nabil bank was increasing trend. The standard deviation and
coefficient variation of NABIL is lower which mean on the basis of risk NABIL is more
consistent than other sample banks. Average mean of RBB is higher than other two
banks. In overall on the basis of return RBB is better performance and EBL is slightly
weak than among sample banks.

Nabil
1.8
1.6
1.4
1.2
Nabil
1
0.8
0.6
0.4
0.2
0
2015/16 2016/17 2017/18 2018/19 2019/20

Figure 1: Structure of Return on Assets (ROA)

 34

Figure 1 shows that the sample banks are able to increase their total assets each
year besides NBL. The return on assets of NBL is maximum and minimum is in fiscal
year 2015/16 and 2018/19. The return on assets of RBB bank is maximum is in fiscal
year 2017/18 and minimum in fiscal year 2015/16. This shows fluctuating trend of return
on assets. Similarly, the return on assets of NABIL is maximum in fiscal year 2018/19
and minimum in fiscal year 2015/16 respectively.

Higher the ROA, higher in profitability. If the banks have to invest their capital
on assets expansion, they would be generated extra earning which directly impact on
profitability or the bank increases assets mobilization capacity for future profit.
Khan et.al, (2015) concluded that ROA directly or positively impact on
profitability. Similarly the sample bank's ROA is higher in particular financial year has
higher profitability Khan et.al, conclusion is fitted under this study.
4.1.2 Return on Equity

This ratio can be obtained dividing net profit by no of shareholder equity. Ratios and
statistical calculations are given as under:

Return on Equity = Net profit

Total Equity Capital
Table: 2
Return on Equity Ratio
Banks NABIL
2015/16 20.37
2016/17 20.16
2017/18 17.33
2018/19 21.17
2019/20 14.41
Mean 18.69
S.D 2.50
CV 13.39
Source: Appendix I, II & III
 35

Table 2 shows the Return on equity of NABIL Bank for the five years period.
The average ROE ratios of sample banks is 18.69 respectively The ratio of NABIL bank
was decreasing trend from 2015/16 to 2017/18.

Nabil
25

20

15 Nabil

10

0
2015/16 2016/17 2017/18 2018/19 2019/20

Figure 2: Structure of Return on Equity (ROE)

Figure 2 presents the Return on equity of the sample banks. The maximum ratio
of Everest bank was 30.46 in 2015/16 and minimum ratio was 19.85 in 2019/20 and it
was decreasing trend for the whole period. The Ratio of RBB had increased from 21.57
to 57.77 in F.Y 2016/17 and started to slightly fluctuated. The ratio of NABIL was
higher in 2015/16 and lower in 2019/20 and it was fluctuating for the whole periods
increasing and decreasing trend. RBB had higher ROE ratio than others, it means RBB
had been generating more income from the equity available. The main causes of
decrease in ROE ratio might be of depending on external factor such as competition.

4.1.3 Total deposits Ratio

This ratio can be obtained dividing net profit by total deposits. Ratios and statistical
calculations are given as under:

Total Deposit = Net profit

Total Deposits
 36

Table: 3
Total Deposit Ratio
Years NABIL
2015/16 2.29
2016/17 1.67
2017/18 1.89
2018/19 2.04
2019/20 1.84
Mean 1.75
S.D 0.25
CV 14.65
Source: Appendix I, II & III

Table 3 shows that Net profit to Total deposit ratio of NABIL for the five year
period. The ratio of EBL was the higher i.e.2.54 percent in 2015/16 and the ratio was
lower i.e.1.84 in year 2018/19. The ratio of RBB was highest i.e. 9.88 in years 2015/16
and lowest in 1.98 in year 2017/18. It was decreasing trend of EBL and RBB from
F.Y.2015/16 to 2018/19. Similarly, the ratio of NABIL bank was fluctuating over the
five years study period. The overall average ratio was 2.24, 4.49 & 1.75 respectively.

12

10

EBL
6
RBB
Nabil
4

0
2015/16 2016/17 2017/18 2018/19 2019/20

Figure 3: Structure of Net profit Total Deposit

Figure 3 helps to understand the status of selected banks Net profit to deposit Ratio
for the five years study period. The ratio of EBL and RBB was decreasing trend and slightly
increased in year 2019/20. Similarly, the ratio of NABIL bank was fluctuating over the five
 37

years study period. It states the bank had been facing problems in mobilizing its deposits.
According to average ratio RBB was better than others. The high positive ratio shows the
bank ability to pay interest and mobilize find generating income.

Pradhan (2016) concluded that total deposit directly influenced by its profitability.
Similarly EBL and Nabil bank have same conclusion but RBB has negative direction. It
does not reflect its profitability. The result of RBB shows that, it has not properly utilized
total deposit to generate more profit.

4.1.4 Loan & advances Ratio

This ratio is computed dividing net profit (loss) by the total amount of loan and
advances and can be mentioned as,

Loan & Advances = Net Profit

Loan & Advances
Table: 4
Loan and Advances Ratio
Years EBL RBB NABIL
2015/16 3.38 2.85 2.65
2016/17 3.26 6.43 2.59
2017/18 2.89 2.56 2.44
2018/19 2.55 2.90 2.83
2019/20 2.96 3.62 2.38
Mean 3 3.67 2.58
S.D 0.29 1.42 0.16
CV 9.82 38.75 6.19
Source: Appendix I, II & III

Table 4 shows that Loan and Advances Ratios of EBL, RBB & NABIL Bank for
the five year period. The ratio of EBL was highest i.e.3.38 in year 2015/16 and lowest
i.e. 2.55 in 2018/19. The ratio of RBB was highest i.e. 6.43 in years 2016/17 and lowest
i.e. 2.56 in years 2017/18. Similarly, the ratio of NABIL Bank was highest i.e. 2.65 in
years 2015/16 and lowest i.e.2.38 in year 2019/20. The overall average ratio of sample
banks was 3, 3.67 & 2.58 respectively.
 38

4
EBL
RBB
3
Nabil
2

0
2015/16 2016/17 2017/18 2018/19 2019/20

Figure 4: Structure of Loan & Advance

Figure 4 helps to understand the status of selected bank’s loan and advance ratio.
The loan and advances ratio of EBL was decreasing trend and RBB & NABIL bank was
fluctuating trend over the five years study period. During the study period The
Coefficient of variation of RBB was higher than that of EBL and NABIL bank. As loan
was one of the main sources of income of a bank, the ratio was expected to affect
profitability positively unless an unacceptable level of risk.
Maharjan (2014) concluded that loan and advance negatively impact on
profitability. If loan ratio increases, return on assets decreases. It means profitability of
bank also decreases. As per the theory all the selected sample banks have same
conclusion. This result shows that if loan ratio increases net profit will be decreases.

4.1.5 Return on Investment Ratio

Return on investment ratio is financial measurement of profitability. ROI is

popular profitability metric used to evaluate how well an investment has performed. ROI
is expressed as a percentage and is calculated by dividing an investment's net profit by
its initial cost or outlay.
 39

ROI= Net profit

Cost of Investment

Table: 5
Return on Investment Ratio
Years EBL RBB NABIL
2015/16 15.87 24.98 2.95
2016/17 23.82 54.01 5.16
2017/18 10.42 19.57 10.49
2018/19 95.08 21.05 6.90
2019/20 19.15 30.15 7.16
Mean 32.87 29.96 6.53
S.D 31.40 12.57 2.48
CV 95.54 41.97 38.08
Source: Appendix I, II & III

Table 5 shows investment Ratios of EBL, RBB & NABIL Bank for the five year
period. The average net profit to investment ratio of EBL, RBB & NABI bank was
32.87, 29.96 and 6.53 respectively. The ratios of all selected bank had fluctuating trend
over the study period from year 2015/16 to 2019/20. The mean ratio of NABIL is lower
than that of EBL and RBB .It means that NABIL has maintained the lower net profit to
investment ratio which means it operates with lower risk for higher profit.
100
90
80
70
60
EBL
50
RBB
40 Nabil
30
20
10
0
2015/16 2016/17 2017/18 2018/19 2019/20
 40

Figure 5: Structure of Return on Investment (ROI)

Figure 5 express the combine presentation of the investment ratio of EBL RBB,
and Nabil Bank for the five year study periods. The ratios of all banks were fluctuating
for the whole periods from 2015/016 to 2019/20. The Standard deviation and coefficient
variation of NABIL was lower than other two banks.
Shrestha and Pradhan(2016) concluded that, increase in return on investment
leads to an increase the performance of the banks. It means higher the ROI, higher the
profitability. Under this study ROI ratio of sample banks are fluctuating trend over the
study period. From the study period, the result is not perfectly fitted on above analysis.
Some of income year is near to fit but some of others are not similar.

4.1.6 Bank efficiency Ratio

Efficiency is the ability to achieve a higher amount of output by using a lower amount of
output. Efficiency banks can use minimum inputs to generate maximum outputs, which
could raise the sustainability of commercial banks.

Efficiency Ratio= Operating Expenses

Total Income

Table: 6
Bank Efficiency Ratio
Banks EBL RBB NABIL
2015/16 17.46 20.06 18.91
2016/17 17.87 14.93 20.18
2017/18 20.72 20.56 23.19
2018/19 21.42 21.90 23.53
2019/20 20.01 16.31 21.75
Mean 19.5 18.75 21.51
S.D 1.56 2.66 1.75
CV 8.01 14.21 8.17
Source: Appendix I, II & III

Table 6 shows that Bank efficiency ratio of Everest Bank Limited, Rastriya
Banijya Bank, and NABIL Bank for the five year study period. The mean ratio of EBL,
RBB and NABIL Bank was 19.5, 18.75 & 21.51 respectively. The ratio of EBL was
 41

highest i.e.21.42 in year 2018/19 and lowest i.e.17.46 in year 2015/16. The ratio of RBB
was highest i.e.21.90 in year 2018/19 and lowest i.e.14.93 in year 2016/17. Similarly, the
ratio of NABIL bank was highest i.e.23.53 in year 2018/19 and lowest i.e.18.91 in year
2015/16. Average Efficiency ratio of NABIL was higher than other banks i.e.21.51
percent.

25

20

15
EBL
RBB
10 Nabil

0
2015/16 2016/17 2017/18 2018/19 2019/20

Figure 6: Structure of Bank Efficiency

Figure 6 helps to understand the status of selected bank’s efficiency ratio. The
operating expenses to total income ratio of EBL, RBB, and NABIL had been slightly
fluctuating trend over the five year study period. The bank efficiency ratio indicates a
key performance metric used to assess a bank's profitability.

Dangol (2015) concluded that, operating expenses negatively affects the

operating income or lower the expenses leads to higher profit. Similarly, the sample
bank's efficiency ratio is lower in particular financial year, has higher profitability. From
the study period this result is fitted on above analysis.

4.1.7 Credit risk Ratio

Credit risk is an investor's risk of loss arising from a borrower who does not
make payments as promised. Such an event is called a default. Another term for credit
risk is default risk. Investor losses include lost principal and interest, decreased cash
flow, and increased collection costs, which arise in a number of circumstances. Credit
risk is the major risk that banks are exposed to during the normal course of lending and
 42

credit underwriting. In other term, the risk associated for nonpayment of interest and
principal for credit facilities extended to the clientele is credit risk.

Credit Risk = Total Debt

Total Income

Table 7
Credit Risk Ratio
Banks EBL RBB NABIL
2015/16 0.78 0.72 0.88
2016/17 0.67 0.75 0.85
2017/18 0.75 0.8 0.80
2018/19 0.83 0.84 0.75
2019/20 0.76 0.87 0.70
Mean 0.756 0.794 0.798
S.D 0.052 0.055 0.06
CV 6.867 6.971 7.479
Source: Annual Report of EBL, RBB & NABIL F.Y 2015/16 to 2019/20

Table 7 shows that credit risk ratio of Everest Bank Limited, Rastriya Banijya
Bank, and NABIL Bank for the five year period. The average ratios of sample banks are
0.756, 0.794, and 0.798 respectively. The ratio of EBL was highest i.e.0.83 in year
2018/19 and lowest i.e. 0.67 in years 2016/17. The ratio of RBB was highest i.e. 0.87 in
year 2019/20 and lowest i.e.0.72 in year 2015/16. Similarly, the ratio of NABIL bank
was highest i.e. 0.88 in years 2015/16 and lowest i.e. 0.70 in years 2019/20. Average
credit risk ratio of EBL was lower than other sample banks i.e.0.756. Standard deviation
and CV of EBL is lower than other banks so EBL is more consistency on the basis of
risk.
 43

1
0.9
0.8
0.7
0.6
EBL
0.5
RBB
0.4 Nabil
0.3
0.2
0.1
0
2015/16 2016/17 2017/18 2018/19 2019/20

Figure 7: Structure of Credit Risk

Figure 7 helps to understand the status of selected bank’s credit risk ratio. The
Total debt to total income ratio of EBL was slightly fluctuating and RBB was increasing
trend over the study period. Similarly, NABIL bank was decreeing trend over the study
period. Credit risk management is to maximize a bank's risk adjusted rate of return by
maintaining credit risk exposure within acceptable parameters.

Ali.et.al (2011) revealed that, profitability seems to have been negatively affected
by credit risk. It means lower the credit risk intends the higher profitability. But under
this study credit risk ratio of EBL and RBB had been increasing over the study period
due to the mishandling of total debt, it indicates that these two banks seems to credit risk
influencer. Ali.et.al (2011) conclusion is fitted under this study.

4.1.8 Non-performing Loan Ratio

The probability of loan repayment decrease significantly after 90 days, which is
why the nonperforming loan designation uses this standard. Loans can be classified as
nonperforming if the borrower default on the loan declares bankruptcy or loses the
income she needs to repay the debt. This ratio indicates the portion of nonperforming
loan out of total loan. Low level of ratio is preferable for financial institutions.

NPLR= Nonperforming Loan

Gross loan and advance

Table: 8
 44

Nonperforming Loan Ratio

Banks EBL RBB NABIL
2015/16 0.97 1.96 1.77
2016/17 0.66 3.22 1.25
2017/18 0.38 1.23 0.68
2018/19 0.25 0.85 0.83
2019/20 0.2 1.4 1.36
Mean 0.414 1.56 1.112
S.D 0.287 0.825 0.389
CV 69.425 52.911 35.02
Source: Annual Report of EBL, RBB & NABIL F.Y 2015/16 to 2019/20

Table 8 shows that Non- Performing loan ratio of Everest Bank, Rastriya Banijya
Bank, and NABIL Bank for the five year study period. The average ratios of sample
banks are 0.414, 1.56, and 1.112 respectively. The ratio of EBL was highest i.e.0.97 in
year 2015/16 and lowest i.e. 0.20 in years 2019/20. The ratio of RBB was highest i.e.
3.22 in year 2016/17 and lowest i.e.0.85 in year 2018/19. Similarly, the ratio of NABIL
bank was highest i.e. 1.77 in years 2015/16 and lowest i.e. 0.68 in years 2017/18. The
Average ratio of RBB was higher than other two banks. Higher ratio indicates the
worsening position of the bank.
3.5

2.5

2
EBL
RBB
1.5
NABIL

0.5

0
2015/16 2016/17 2017/18 2018/19 2019/20

Figure 8: Structure of Nonperforming Loan

 45

The figure 8 helps to understand the status of selected bank’s non-performing

loans ratio. The NPL ratio of EBL was slightly decreasing and RBB and NABIL was
fluctuating over the study period. The Coefficient of variation of EBL was higher than
RBB and NABIL. NPL is affected by credit terms and bank risk preferences. The
diagram shows the inconsistency of RBB rather than NABIL and EBL regarding the
non-performing loans. Non-performing loan ratio was the major determinants
profitability of commercial banks.

Karki (2016) concluded that, nonperforming loan ratio has negative and
insignificant impact on net interest margin. If nonperforming loan increases net interest
margin decreases, it means profitability also decreases. The NPL ratio is lower in
particular financial year has higher the profitability.

4.2 Examination of relationship

The statistical tools such as coefficient of correlation analysis between different
variables like net profit to total assets, net profit to total equity capital, net profit to
deposit and deposit to loan & advance.

4.2.1 Coefficient of Correlation

The correlation coefficient is a statistical measure of the strength of the
relationship between the relative movements of two variables. The values range between
-1.0 and1.0.A calculated numbers greater than 1.0 or less than -1.0 means that there was
an error in the correlation measurement. A correlation of -1.0 shows a perfect negative
correlation, while a correlation of 1.0 shows a perfect positive correlation. A correlation
of 0.0 shows no linear relationship between the movements of the two variables. Karl
Pearson’s coefficient of correlation has been used to find out the relationship between
loan and advances, deposit and equity capital to total assets. Value to coefficient of
correlation lays between-1 to +1. If value of coefficient of correlation is positive then
there is positive relation between dependent variable and independent variable, i.e. as
increment in independent variable dependent variable also increase and vice versa. If
value of coefficient of correlation is negative then there is negative relation between
dependent variable and independent variable, i.e. increment in independent variable
 46

dependent variable decreases and vice versa. Under this study, Karl' Pearson's coefficient
is being used.

Table: 9
Coefficient of Correlation between Net Profit and Total assets
Evaluation Criterions Remarks
Bank
r r² P.E.(r) 6P.E. (r)
EBL 0.739 0.5461 0.1368 0.8208 Insignificant
RBB 0.67 0.4489 0.1662 0.9972 Insignificant
NABIL 0.89 0.7921 0.062 0.3723 Significant
Source: Appendix IV

The coefficient of correlation 'r' between net profit and total assets of selected
sample banks has 0.739, 0.67, and 0.89 respectively. Similarly the probable error 6P.E(r)
of EBL, RBB and NABIL bank has 0.828, 0.9972, and 0.3723 respectively. If
correlation coefficient came lower than 6P.E(r) it shows that there is significant
relationship between net profit and total assets of sample banks.

Table: 10
Coefficient of Correlation between Net Profit and Equity capital
Evaluation Criterions Remarks
Bank
r r² P.E.(r) 6P.E. (r)
EBL 0.9589 0.9195 0.024 0.144 significant
RBB 0.5477 0.2999 0.2112 1.2672 Insignificant
NABIL 0.9153 0.8377 0.048 0.288 significant
Source: Appendix V

The coefficient of correlation 'r' between net profit and equity capital of EBL and
NABIL have 0.9589, 0.5477 which is Higher than 6 P.E(r). It is cleared that there is a
significant correlation between net profit and equity capital. By considering the value of
'r' of RBB is lower than 6P.E(r), it shows that there is insignificant correlation between
these two variables.

Table: 11
Coefficient of Correlation between Net Profit and Total deposit
Evaluation Criterions Remarks
Bank
r r² P.E.(r) 6P.E. (r)
 47

EBL 0.729 0.5314 0.1413 0.8478 Insignificant

RBB 0.6464 0.4178 0.1756 1.0536 Insignificant
NABIL 0.8376 0.7016 0.0899 0.5394 significant
Source: Appendix VI

The coefficient of correlation 'r' between net profit and total deposit in case of
NABIL bank has 0.8376, which is higher than its 6P.E(r). It indicates that there is
significant relationship between these two variables. The correlation 'r' of EBL and RBB
have 0.729 and 0.6464 which is lower than its 6 P.E(r). It shows that there is an
insignificant correlation between net profit and total deposits.

Table: 12
Coefficient of Correlation between Total deposit and loan & advance
Evaluation Criterions Remarks
Bank
r r² P.E.(r) 6P.E. (r)
EBL 0.9348 0.8738 0.038 0.228 significant
RBB 0.4881 0.2382 0.2297 1.3782 Insignificant
NABIL 0.8594 0.7385 0.078 0.468 significant
Source: Appendix VII

The coefficient of correlation 'r' between net profit and total deposit and loan &
advance of EBL and NABIL has 0.9348 & 0.8594, which is higher than 6P.E(r). It is
cleared that there is a significant relationship between total deposit and loan & advance
of EBL and RBB. This result shows that change in total deposit highly affects the loan &
advance policy.

4.3 Major Findings

The findings of the study are as follows:

i .Average ROA of sample banks are 1.90, 3.29, and 1.50 respectively and lowest
coefficient variation of NABIL is 12.02 which means NABIL is more consistent on the
basis of risk than other sample banks.
 48

ii. Average return on equity (ROE) of EBL, RBB, and NABIL is 24.38, 29.22, and 18.69
respectively and average ROE of RBB is higher than other which value is 29.22 percent.
CV of NABIL is lower than other selected banks which mean EBL is more consistency
on the basis of risk than other banks.

iii. Average deposit ratio of selected sample banks are 2.24, 4.49 and 1.75 respectively.
It shows that net profit to total deposit ratio of EBL, RBB and NABIL are in fluctuating
trend during the five years study period.

iv. Average loan and advance ratio of EBL, RBB, and NABIL is 3, 3.67 and 2.58
respectively. Average loan ratio of RBB is higher than other which value is 3.67 percent.
The CV of NABIL is lower than other selected banks which mean NABIL is more
consistency than other banks.

v. EBL has average investment ratio 32.87 and investment ratio of RBB is 29.96.
Similarly, the average ROI ratio of NABIL Bank is 6.53 percent. NABIL bank has
Lowest CV than EBL and RBB; it indicates that NABIL is more consistency.

vi. Average efficiency ratio of EBL, RBB, and NABIL bank has 19.5, 18.75 and 21.51
respectively. Average efficiency ratio of NABIL is higher than other two banks. The CV
of EBL is lower than other selected banks which mean EBL is more consistency than
other banks.

vii. Average Credit risk ratio of Everest Bank, Rastriya Banijya Bank, and Nabil Bank
are 0.756, 0.794, and 0.798 respectively. Average and SD credit risk ratio of EBL is
lower than other sample banks which value is 0.756 and 0.052 and CV of EBL is lower,
so EBL is more consistency than other sample banks.
viii. Average Non- Performing loan ratio of Everest Bank Limited, Rastriya Banijya
Bank Limited, and NABIL Bank have 0.414, 1.56 and 1.112 respectively. CV of NABIL
bank is lower than others, So, NABIL is more consistency than other sample banks.

ix. There is insignificant relationship between net profits and total assets of EBL and
RBB. NABIL bank has significant relationship between net profit and total assets; it
 49

indicates that profitability policy indicator is significantly positively correlated with net
profit and total assets.

x. The coefficient of correlation between net profit and equity capital in case of EBL and
NABIL Bank are 0.9589 and 0.9153, it shows that there is positive correlation between
two variables. The results indicate that bank financial policy indicator is significantly
positively correlated with bank efficiency and credit risk ratio. Similarly, correlation
between net profit and equity in case of RBB is 0.5477, which is less than its 6P.E(r). It
indicates that there is insignificant relationship between two variables. The result
indicates that these two variables may significantly affect financial policy of Nepalese
commercial banks.

xi. The coefficient of correlation between net profit and total deposit in case of EBL and
RBB Bank are 0.729 and 0.6464, which is less than its 6P.E(r). It shows that there is
insignificant relationship between two variables. Similarly, correlation between net
profit and total deposit in case of NABIL is 0.8376 which is more than its 6P.E(r). It
indicates that there is significant relationship between two variables.

xii. The coefficient of correlation between total deposit and loan & advance in case of all
EBL and NABIL Bank are 0.9348 and 0.8594, which is more than its 6P.E(r). It shows
that there is significant relationship between these two variables. Similarly, correlation
between total deposit and loan & advance in case of RBB is 0.4881 which is less than its
6P.E(r). It indicates that there is insignificant relationship between two variables.

4.4 Discussion
Banks, which deal with commercial activities, are known as commercial banks.
These financial institutes help to integrate every financial activity of the community.
The main objective of a commercial bank is to play a vital role in the development of
good trade. Commercial banks are mechanisms of mobilizing funds in returnable
resources. They offer financial support to all types of business through providing
various types of loans and other financial services. Commercial banks aid the
economic development of the nation. Commercial banks pool together the savings of
the community and use the funds productively through prudent investments.
 50

Integrated and speedy developed of the country is possible only when competitive
banking service reach every nooks and corners of the country. Today number of
commercial bank are concentrated in only few places because lack of
development of infrastructure in remote places. Government must give attention toward
remote places.

Rayamajhi (2015) has found that the analysis of liquidity position of these
commercial banks shows different position here, the average current ratio of NRB is
greater than that of NBB. Therefore, the liquidity position of RBB is in normal position.
From the analysis of turnover of these two banks, NBB has better turnover than RBB in
terms of loans and advances to total deposit ratio. Thus NBB has better utilization of
resources income generating activities than RBB bank. Despite the fluctuating trend in
the ratio of cash and bank balance to total deposit RBB bank is more efficient than NBB
in cash management i.e. it is more able to keep more cash balance against its various
deposits.

Shrestha (2018) has found the correlation and the signification of their
relationship between different ratios related to capital structure and found study was the
banks are operating in Nepal as commercial merchant banks. The growth is still going on
as so many new banks are coming into existence after this study. It is operating with
higher technology and new efficient methods in banking sector. However, this study has
been undertaking only three JVB’s viz. SCBNL and NBBL to examine and evaluation
the financial data. The findings of the study are as JVB’s have used high percentage of
total debt in raising the assets. The higher ratio constitutes that the outsider’s claim in
total assets of the bank is owner’s claim.

Parajuli (2019) has found the analysis that NBBL has been successfully utilized
their total deposits in terms of extending loan and advances for profit generating purpose
on compared to NRB and RBB. But NRB is also better than RBB. It has concluded that
net profit to total assets ratio in case of RBB is found better performance by utilizing
overall resources but the generated profit is found lower for the overall resources in three
joint venture commercial banks. In this study and previous research findings are
difference due to choose the sample of banks, bank performance, return on assets, net
profit margin ratio, return on equity, years to be choose the data and annual report
 51

financial indicator so the study finding's is different to previous study findings so this
study is contradictory.

To validate our studies we have tested relationship between independent

variables by karl Pearson Correlation test. Further, the study employs Return on assets
(ROA), Return on equity (ROE) deposit ratio and credit risk ratio as the dependent
variables. The result generally indicated that profitability has a positive impact with
ROA and ROE. The positive effect states that banks are following more risk seeking
approach. Further, Credit Risk has a negative effect with ROE but seems to have a
positive effect with ROA. This shows that banks are giving high loans which in turn has
a very high rate of interest attached to it in order to increase profitability.

CHAPTER FIVE: CONCLUSION

The last chapter of this study is summary, conclusion and implications

developed from the study of the profitability analysis of sample banks. Conclusion and
recommendation consist of two parts, the first one is conclusion which is drawn from
the major findings of this study and the second one is implications to the sample banks
to solve the problems found on the basis of analysis and conclusion.

5.1 Summary
Profit is essential for survival and growth of business organization. The
determinants of profitability are empirically well explored although the definition of
profitability varies among studies. The organization makes a profit by earning or
generating more money than what they are paying in expenses. The main part of the
profit of bank comes from the service fees, charged for its service and the earned
interest from its assets
 52

With main objectives of examining bank profitability in the context of three

commercial banks of Nepal, focuses the internal factors of bank profitability. The
study is undertaken with objectives like to measure the ROA, ROE, deposit, loan,
ROI, bank efficiency, credit risk, &NPL ratio and to examine the relationship between
ROA, ROE, deposit, loan & advance and bank's profitability The study has covered
only five years data from 2015/16 to 2019/20 of Everest Bank, Rastriya banijya Bank
and NABIL Bank Limited. In this study, Among 27 commercial bank only three
commercial banks are selected as sample. The study has been organized in five main
chapters consisting introduction, literature review, research methodology, results and
conclusion..

The theories of profitability that have taken from previous research and thesis
are like market -power theories, efficient -structure theory and economies of scale
theory. The factors that determine the bank's profitability in Nepalese commercial
bank, considering the variables ROA, ROE, deposit, bank efficiency and credit risk.
Whether there is a relationship between net profit and total assets, net profit and equity
capital, net profit and total deposit and total deposit and loan & advance analyzing
whether loans contribute to banking profitability, identifying factors affecting
commercial banks profitability.
The research was based on secondary data that are collected from the journals,
articles and annual report of sample banks. To reveal the problems, financial as well as
statistical tools are applied. To find the profitability, various variables taken as internal
factors are Return on assets, Return on equity, Deposit ratio, Loan & advance, Return
on investment, Bank efficiency, Credit risk and Nonperforming loan ratio. For data
processing only required data are taken from the secondary sources (bank publication)
are presented. Different figures and tables are used, and graphical presentation is also
made. The computation is made with the help of computer software program. The
analysis of data has been done using simple analytical tools such as coefficient of
correlation and financial tools. The analysis of secondary data is done through
quantitative analysis and major findings are presented.

Based on the finding study return on assets of NABIL bank was better than RBB
and EBL, because the ratio was increasing trend over the study period. It implies that
NABIL bank has higher efficiency in the utilization of the total assets. The average
 53

return on equity and deposit ratio of RBB was higher than others; this result shows that
RBB was able to generate more profit from deposit. On the basis of average return on
investment ratio and credit risk ratio of EBL was better than that of RBB and NABIL
bank. Similarly, based on the finding correlation, Nabil bank had high degree of positive
correlation between net profit with total assets, total equity, total deposit and loan.

The bank-specific factors such as equity capital, deposits, loan, and capital are
considered as major factors that affect bank profitability. With regards to the factors
affecting bank profitability, DePamphilis (2019), market power theory suggests that
firms merge to improve their ability to set product prices by reducing output or by
organizing. Similarly, Jeon and Miller (2005), efficient structure theory analyzes
higher profits come first in a timing sense followed by increasing concentration. That
is, better managements and practices lead to higher profits and that better performance
then leads to rising market share and concentration over time.

5.2 Conclusion

The average return on assets of RBB was higher than EBL and NABIL bank. It
shows that return on assets ratio position of RBB was higher than other banks. EBL and
NABIL bank had lower ROA ratio than Rastriya Banijya bank. It indicates that these
two banks were not able to make maximum use of assets for generating more profit.

Net profit to total equity capital of Everest bank limited was decreasing trend
from fiscal year 2015/16 to 2019/20. The ROE ratio of RBB and Nabil bank was
fluctuating trend over the study period. The average return on equity of RBB was higher
than EBL and NABIL bank; it means RBB was generating more income from the using
of equity capital.
 54

Net profit to Total deposit ratio of EBL was in decreasing trend from fiscal year
2015/16 to 2018/19 and increased in year 2019/20. The deposit ratio of RBB was
decreasing and started to slightly increase from year 2018/19. Likewise, NABIL bank
was fluctuating trend over the study period; it indicates that RBB and EBL had lower
money supply.

The mean of Net profit to Loan and advance ratio of EBL, RBB and Nabil Bank
was 3, 3.67 and 2.58 respectively. The average ratio of RBB was higher than EBL and
NABIL Bank. It indicates the RBB was better performance to make profit.

The mean of return on investment ratio of EBL was higher than RBB and NABIL
bank limited. The higher the return on investment ratio, the more efficiently the bank
using its assets base to generate sales. The average ROI ratio of Nabil bank was lower
than that of EBL and RBB i.e. 6.53<29.96<32.87.

The efficiency ratio of EBL and NABIL bank was increasing and ratio of RBB
was fluctuating trend over the study period. RBB had lower mean ratio than other two
banks. Lower efficiency ratio indicates that RBB was earning more than spending.

The average credit risk ratio of EBL was lower than RBB and NABIL bank.
Total debt to total income ratio of RBB was increasing and NABIL bank was decreasing
trend from fiscal year 2015/16 to 2019/20, it indicates that total debt was not maintained
by the RBB.

The Nonperforming loan ratio of EBL was decreasing trend from fiscal year
2015/16 to 2019/20, and RBB and Nabil bank was fluctuating trend over the study
period. The average nonperforming loan ratio of EBL was lower than RBB and Nabil
Bank limited, and it also indicates that the risk of EBL was lower than other two banks.

The result of study reveals that majority of investors and depositors viewed that
increase in deposit helps increase the profit of banks. Financial institutions possess the
important expects from the profitability. Similarly, out of total respondents, majority of
respondents viewed that those banks collecting high deposit can generate more profit
among banks. With regards to the relation between loan ratio and profitability, this
results depict that majority of investors viewed that higher loan ratio does tend to have
higher profit in banks. However, majority of depositors perceived that bank can
increase the bank profit by increasing the loan. In response regarding the lending
 55

activity and income generating capability, the results show that all investors responded
that bank lending activity and income generating capability affect bank profitability.
However, majority of depositors agreed that bank lending activity and income
generating capability affect profitability and performance in Nepalese commercial
banks.

5.3 Implications
Based on its analysis and findings, the study tries to put forward the following
suggestions to the bank under study for betterment in the field of its profitability
position.

Implication to bank

The research was to investigate the Profitability analysis of the commercial

banks in Nepal. This dissertation is therefore important for guiding banking sector
policy improvements. The bank should keep up the act of wealth maximization of the
shareholders as they are true owners of the bank. The banks should always abide the
directives given by NRB. To generate more profit, bank should emphasize an efficient
utilization of total assets because return on total assets of sample banks seems not very
good. Deposit has positive and significant relation with bank profitability in terms of total
deposits to total assets. So, the Nepalese banks should examine the deposit ratio and
should try to increase the size of deposits of the banks to improve bank performance. The
fluctuation of ratio must be stabilizes after proper diagnosis of the quality.
For bank profitability determinants, the research points out to the need for
bank managers to gear towards optimum utilization of resources, observe prudent
risk management procedures for sound and competitive services for better returns.
Results also confirm the importance of bank level as well as macroeconomic factors
to the bank total factor productivity growth. This would suggest that banks should
ensure efficient and effective supervisory and related service for optimum utilization
of resources. This would include equitable investment of resource gains from
different investments such as earning bonds and securities banks trade in, prudent
resource management to avoid high levels of liquidity risk, increased supervision to
avoid high levels of non-performing loan ratios, ensure sound competitive
 56

environment and excellence in services to maintain competitive bank total factor

productivity growth.

Implications to further scope

This study was to empirically investigate the factors that determine the bank’s
profitability in Nepal, considering the internal variables (return on assets, return on
equity, deposit, bank efficiency and credit risk) where it was neutralizing impact of other
internal variables (bank size, net interest margin, liquidity ratio, operating cost) as well
as external factors (customer care, GDP growth rate, and inflation rate).

The researcher reviewed a number of theoretical and previous empirical studies

related to the determinants of profitability using financial tools and statistical tools where
it was neutralizing other quantitative test like hypothesis, t test and z test. This study has
assumed linear relationship between bank profitability and explanatory variables. In
emerging markets, it is expected that there exists non-linearity. The future studies are
suggested to apply non-linear models to test the predictive power of explanatory variables.
Future longitudinal research can be done to more successfully investigate the influence
of significant variables. An added route would be the addition of other pragmatic and
non-pragmatic methods of research on the banking sector, as this will unfold added
aspects of profitability.

1.5 Limitations of the Study

Since only one banks is taken as a sample, it has excluded other twenty-Four "A"
Class banks limiting its study area. This report is prepared simply for the partial
fulfillment of the requirement for the Bachelor of Business Studies (BBS). The main
limitations are as follows:-
1. Only limited statistical tools (Mean, Standard deviation, Coefficient of variance
and correlation) and financial tools (Ratio Analysis) were used for data analysis.
2. As the report only focuses on the Profitability aspect of the bank, it does not
cover all the aspects of the bank.
3. This study is based on secondary data sources such as annual report of the sample
bank. Therefore, the accuracy of the calculation is fully dependent on the
accuracy of the data provided by the sample bank.
 57

4. Only the five years data have been collected of Sangrila Developmentl Bank
(i.e., from 2074/75 to 2078/79) to analysis.

1.6 Organization of the Study

The chapter one highlights the background of the study, statement of the
problem, objectives of the study, limitations of the study, significance of the study and
organization of the study.

The Chapter Two Presents the conceptual framework and the review of literature
on Profitability; its determinants, types, and applicability in the bank regarding the
review of journals, articles, review of the previous thesis, review of articles, journals and
research gap.

The Chapter Three deals how the data can be collected while preparing this
dissertation. In this chapter, the dissertation has been dealt with the research design,
population and sample, source of data, data collection method, and data analysis tools.

The Chapter Four made presentations and analysis of data collected from
secondary sources by using statistical and financial tools. This chapter is also including
major findings of the analysis.

Chapter Five deals with the elaboration of the summary of the study, conclusion
made from the analysis of data and implications made on the basis of the major findings.
 58

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Website:
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www.nrb.org.np