CHAPTER – I

INTRODUCTION

1.1 Background of the Study

It is obvious that economic development is impossible without the development of different

sectors like Agriculture, Industry, and Trade etc. of the country. So, development of these sectors
needs a regular supply of financial resources. In developing countries there is always shortage of
the capital for the development activities. It is not possible to handle and develop all the sectors
by the Government alone at a time. Private people also can not undertake large business because
per capita income of the people is very low while their propensity to consume is very high. Due
to low income their saving is very low and capital formation is very low. So their saving is not
sufficient for carrying on development works.

"Economic development demands transformation of savings or investible resources into the

actual investment. It is the financial institution that transfers funds from surplus spending units to
deficit units" (Nepal Rastra Bank, 1996: 43)

Banking sector plays an important role in the economic development of the country. Commercial
Banks are one of the vital aspects of this sector, which deals in the process of channeling the
available resources in the needed sector. It is the intermediary between the deficit and surplus of
financial resources. Financial institutions like banks are a necessity to collect scattered saving
and put them into productive channels. In the absence of such institutions it is possible that the
saving will not be safely and profitably utilized within the economy. It will be diverted aboard or
channeled into unproductive conspicuous consumption including real estate speculation.

Loans are an essential aspect of commercial bank. "First, income from loan contributes
substantially to the revenues and profit of the bank. Second, lending money to people in the
community strengthens the community- bank relationship. Third, lending money spurs business
development and supports a growing economy" (Edmister, 1980: 82). Credit being the most
important function of commercial banks, affects overall development of the country which is
essential. It is derived from very financial institutions, especially commercial banks in Nepal.
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1.2 Profile of the Organization

Citizens Bank International Limited has been established as a trustworthy partner for all financial
solutions. Institutionalized by a highly professional and experienced team, we have gained
credibility in banking sector through quality financial service.

Established on April 20, 2007 (2064/01/07) as 20th commercial bank of the nation, “Citizens
Bank International Limited”, has its corporate office at the heart of the financial sector of the
country, Narayanhiti Path, Kathmandu. It is promoted by eminent personalities, business and
industrial houses and reputed individual having high social standing and has been managed by a
team of experienced bankers and professionals. There are 67 branches and 62 ATMs all over the
country.

1.3 Statement of Problems

 What are the different ratios of the Bank?

 What is the priority sector of Bank's investment ?

 What is the relation between deposit utilization and total investment with net profit ?

1.4 Objective of the Study

The main objective of the study is to analyze the profitability ratio of CTZN Bank Ltd. However,
the specific objectives of the study are:

 To analyze the profitability of the bank,

 To analyze the bank's investment on priority sector,

 To analyze deposit utilization and its relationship with total investment and net profit of the
bank,

To be responsive to the needs of the society and taking responsibility to meet the due concerns
of the society through CSR.
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1.5 Rationale of the Study

This study mainly fills a research gap on the study of investment policy of CTZN. Definitely, the
study will provide a useful feedback to the policy makers of the bank and also becomes a useful
reference for other commercial banks of Nepal and central bank (NRB) for the formulation of
appropriate strategies. This study evaluates the investment policy of funds and finds its loopholes
and significantly contributes to make the policy sound.

1.6. Review of Literature

In this chapter, focus has been made on the review of literature that is relevant to the investment
policy of commercial banks. Review of literature is basically a stock taking of available literature
in the field of research. Every possible effort has been made to grasp knowledge and information
that is available from libraries, document collection centers, other information managing bureaus
and concerned commercial bank. This chapter helps to take adequate feedback to broaden the
information base and inputs to the study.

1.6.1 Conceptual Review

Commercial Bank Act of Nepal (1974) has defined that "A commercial bank is one which
exchanges money, deposits money, accepts deposits, grant loans and performs commercial
banking functions and which is not a bank meant for co-operative, agriculture, industries or for
such specific purpose."

Commercial bank is a corporation, which accepts demand deposits subject to check and makes
short-term loans to business enterprises, regardless of the scope of its other services (American
Institute of Banking, 1972: 345).

Optimal investment decision plays a vital role in each and every organization. But especially for
the commercial banks and other financial institutions the sound knowledge of investment is the
most because this subject is relevant for all surrounding that mobilize funds in different sectors
in view of return.
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The income and profit of the bank depend upon the lending procedure applied by the bank. As
well as lending policy and investment in different securities also affect the income and profit. In
the investment procedures and policies it is always taken in mind that "the greater the credit
created by the bank, higher will be the profitability." A sound lending and investment policy is
not only pre-requisite for bank's profitability but also crucially significant for the promotion of
commercial savings of a developing country like Nepal.

The sound policies help commercial banks maximize quality and quantity of investment and
thereby, achieve the own objective of profit maximization and social welfare. Formulation of
sound investment policies and coordinated and planned efforts pushes forward the forces of
economic growth.

Commercial banks, as financial institutions, perform a number of internal functions. Commercial

banks, as financial institutions, perform a number of internal functions. Among them, providing
credit is considered as most important one. In the words of H. D. Crosse (1963), "Commercial
banks bring into being the most important ingredient of the money supply, demand deposit
through the creation of credit in the form of loan and investments."

Features of a Sound Lending and Investment Policy

The income and profit of the bank depends upon its lending procedures, lending policy and
investment of its funds in different securities. The greater the credit created by the bank, the
higher will be the profitability. A sound lending and investment policy is not only prerequisite
for banks profitability, but also crucially significant for the promotion of commercial savings of
a backward country like Nepal. Many authors have given some necessities or some of the main
characteristics for sound lending and investment policies, which must be considered by the
commercial banks:

(I) Safety and Security

The bank should never invest its funds in those securities, which are too volatile i.e., which are
subject to too much depreciation and fluctuations because a little difference may cause a great
loss. It must not invest its funds into speculative businessman who may be bankrupt at once and
 5

who may earn millions in a minute also. Security means adequate collateral having good value,
which can be easily sold off if required at any point of time. The bank should accept that type of
securities, which are commercial, durable and marketable having fair market value. For this
purpose 'MAST' should be applied while reaching an investment decision, where MAST stands
for,

M = Marketability,

A = Ascertain ability,

S = Stability,

T = Transferability.

(II) Profitability

A commercial bank can maximize its volume of wealth through maximization of return on their
investments and lending. So, they must invest their funds where they can gain maximum profit.
The profit of commercial banks depends on the interest rate, volume of loan, its time period and
nature of investment in different securities.

(III) Liquidity

Liquidity is the ability of a firm to satisfy its short-term obligations when they become due for
payment. People deposit money at the bank in different account with confidence that the bank
will repay their money when they need. To maintain such confidence of the depositors, the bank
must keep this point in mind while investing its excess funds in different securities, so that it can
meet current or short-term obligations when they become due for payment.

(ІV) Purpose of loan

From the viewpoint of security, a banker should always be known that why a customer is in
need of loan. If a borrower misuses the loan granted by the bank, it can never repay and bank
will possess heavy bad debts. Therefore in order to avoid this situation each and every bank
 6

should demand and examine all the essential detailed information about the scheme of the project
or activities, before lending.

(V) Diversification

"A bank should not lay all its eggs on the same basket". This saying is very important to the bank
and it should always be careful not to grant loan in only one sector. To minimize risk, a bank
must diversify its investment on different sectors. Diversification of loan helps to sustain loss
according to the law of average because if securities of a company deprived, there may be
appreciation in the securities of other companies. In this way the loss can be minimized or
recovered.

(VII) Tangibility

Though it may be considered that tangible property does not yield an income apart from direct
satisfaction of possession of property, many times, intangible securities have lost their value due
to price level inflation. A commercial bank should prefer tangible security to intangible one

(VIІІ) Legality

Illegal securities will bring out many problems for the investor. A commercial bank must follow
the rules and regulations as well as different directives issued by the central bank (Nepal Rastra
Bank), Ministry of finance, Ministry of law and other relevant authorities, while mobilizing its
funds.

(IX) National Interest

In addition to its own profitability the Bank should also consider the national interest. Even
though the Bank cannot get maximum return from such investment, it should carry out its
obligation towards the society and the country. The Bank is required to invest on such sectors as
per the Government and Nepal Rastra Bank's instruction. Investment on government bonds,
priority and deprived sector lending are the examples of such investments.
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1.6.2 Review of Related Studies

There are not much articles published related to investment management in Nepal. Shiba Raj
Shrestha (1998) has given a short glimpse on the "Portfolio management in commercial banks;
theory and practice". Mr. Shrestha has highlighted following issues in the article. The portfolio
management becomes very important both for individuals as well as institutional investors.
Investors would like to select a best mix of investment assets subject to the following aspect:

 Higher return, which is comparable with alternative opportunities available according to the
risk class of investors.

 Good liquidity with adequate safety of investment.

 Maximum tax concession.

 Economic, efficient and effective investment mix.

 Flexible investment.

 Certain capital gains.

 In view of above aspect, following strategies can be adopted.

 Choose such a portfolio of securities, which ensures maximum return with minimum risk or
lower return but with added objective of wealth maximization.

 Economic, efficient and effective investment mix.

 Do not hold any single security i.e.; try to have a portfolio of different securities.

 In view of above aspect, following strategies can be adopted.

 Do not put all the eggs in one basket i.e.; to have a diversified investment.

 Choose such a portfolio of securities, which ensures maximum return with minimum risk or
lower return but with added objective of wealth maximization.
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In this section, effort has been made to examine and review of some related articles in different
economic journals, World Bank discussion papers, magazines, newspapers and other related
books and publications. Krishna D. Bhattarai (2003) has presented an article about the "Non
Performing Assets (NPA) Management". According to him, a loan is very easy term for a
borrower when he has already taken and for a lender not availed. It is equally difficult for a
borrower to avail and for lender to recover. From a banker's view, it is just like a stone to roll
down from the top of the hill while sanctioning, but too difficult to roll back the same stone to
the top of the hill while recovering. A loan not recovered within the given time frame either in
the form of interest servicing or principal repayment is called nonperforming loan (NPL). There
are other parameters as well to quantify an NPL. Security not to the extent of loan amount with
specified safety margin, value of security not realizable, possession not as per the requirement of
bank, conflict of charges are the other reason which causes difficulties while recovering the loan.

A borrowing may reflect one or all above signals causing harm to the bank's business. There are
few chances of cure to protect bank from an intentional defaulter. But for the defaulter caused by
situations we can re-schedule, re-structure their facilities and help them to meet their debt
obligation as per the cash flow they are having.

For a genuine loan which was disbursed with all good spirit may turn into bad if it is not
monitored properly and corrective measures are not taken in time. The signals of such failure
appear to borrower first and then consequences fall upon the shoulder of a bank. When a good
loan, with all effort to protect it, turn into bad and borrower ability is not enough to serve from
other source, then borrower also tries to hide the information from the bank and wants to be
relieved temporarily. Such situations give some signals to the bank and these signals are called
danger signals.

He added that a formula Know Your Customer (KYC) is to be always taken into consideration.
A bank must be clever and must collect information greater then a borrower require for
commencement of business and to be more rigid to give the loan than to give his own money
without any security. A jail and punishment doesn't satisfy the interest of bank. A borrower for
 9

commencement of business and to be more rigid to give the loan than to give his own money
without any security.

When a borrowing unit is not able to serve the debt from the source explored, the
documentations are merely a decree to enforce legal action against him. But what gets realized
when everything is lost. A jail and punishment doesn't satisfy the interest of bank. A basic know
how of NPL management is to prevent a loan to turn into loss. Therefore every possible measure
is to be implemented to keep a loan portfolio intact. Periodic meeting with the borrower and
market information is must to check the exposure against a particular business sector.

Before this, several thesis works have been conducted by various students regarding the various
aspects of commercial banks such as financial performance, lending policy, investment policy,
interest rate structure, resources mobilization, capital structure, etc. Some of them, as supposed
to be relevant for the study are presented below.

PravakarDhungana (2002) conducted a study on "Investment policy of Nepal Bangladesh Bank

Limited & other Joint Venture Banks (Himalayan Bank Limited & Nepal State Bank of India
Bank Limited)." with the objective of:

To study fund mobilization and investment policy with respect to fee based off-balance sheet
transaction and fund based on balance sheet transaction. To evaluate the liquidity efficiency of
assets management and profitability position. To evaluate the trends of deposit utilization
towards total investment and loan & advances and its projection for next five years. To evaluate
the growth ratios of loan & advances and total investment with respect to growth ratios of total
deposit and net profit.

To study the various risks in investment. The research findings of the study are as follows:

The target of 12% investment of total outstanding liabilities in priority sector and 3% out of
which has been invested in deprived sector has been met by RBB.
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Trend analysis for 10 years shows the increasing trend of investment in priority sectors which
shows that the commercial banks are giving due consideration to increase investment in priority
sector.

Trend analysis of repayment for 10 years shows that the repayment has also increased in the
following years. There is high overhead cost incurred for supervision, administration and others
in this program. Regression analysis shows positive relation between investment and repayment.
Interest charged on the loan disbursed in this sector is fairly less than the interest charge on loans
for other purposes. In addition to this, there is high overhead cost incurred for supervision,
administration and others in this program. Regression analysis shows positive relation between
investment and repayment.

The Chi square test of effectiveness of program shows that the program is more effective in rural
and semi rural areas as compared to the urban areas. Investment on agriculture is higher than
investment on industry and service sector. The study revealed that the procedure of loan
disbursing itself is complicated for the borrowers to understand it.

In fact, if the supervisors make the scheduled supervision and inspection and the frequent
contact with the borrowers, the chance of misuse of the loan can be minimized.

UpendraTuladhar (2000) conducted a study on the topic of "A study on investment policy of
Nepal Grindlays Bank Limited in comparison to other Joint venture Banks of Nepal" with the
objective of:

To study the fund mobilization and investment policy with respect to fee-based off-balance
sheet transaction and fund based on-balance sheet transactions. To study the liquidity, efficiency
of assets management and profitability position. To evaluate the growth ratios of loan and
advances and total investment with respective growth rate of total deposit and net profit. To
perform an empirical study of the customers' views and ideas regarding the existing services and
adopted investment policy of the Joint venture banks.

The study is mainly based on secondary data and in some aspects of the study primary data are
also collected through questionnaire survey of 100 respondents.
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1.7 Research Methodology

Research methodology refers to the various sequential steps to be adopted by a researcher in

studying a problem, with certain objectives in view. In other words, research methodology
describes the methods and processes applied in the entire subject of the study. Research
Methodology is a way to systematically solve the research problem. It may be understood as a
science of studying how research is done significantly. It is necessary for the researcher to know
not only the research methods / techniques but also the methodology.

Researchers not only need to know how to develop certain indices or tests, how to calculate the
mean, the mode, the research techniques, but they also need to know which of these methods or
techniques are relevant and which are not, and what would they mean and indicate and why.

The topic of the problem has been selected as "Investment Policy of CTZN Bank Limited". The
sole objective of this study is to evaluate the investment policy of CTZN Bank Limited. In order
to reach and accomplish the objectives of the study, different activities are carried out and
different stages are crossed during the study period. For this purpose the chapter aims to present
and reflect the methods and techniques those are carried out and followed during the study
period. The research methodology adopted for the present study is mentioned in this chapter
which deals with research design, sources of data, data collection, processing and tabulating
procedure and methodology.

1.7.1 Research Design

A research design is purely and simply the framework or plan for a study that guides the
collection and analysis of data. Research design is the plan, structure and strategy of
investigations conceived so as to obtain answers to research questions and to control variances.
A true research design is basically concerned with various steps to collect the data for analysis
and draw a relevant conclusion. It is the arrangement of conditions for collection and analysis of
data that aims to combine relevance to the research purpose with economy in procedure. To
achieve the objective of this study, descriptive and analytical research design has been used.
 12

Some financial and statistical tools have been applied to examine facts and descriptive
techniques have been adopted to evaluate investment policy of CTZN Limited.

1.7.2 Population and Sample

The population refers to the industries of the same nature and its services and product in general.
Thus, the total Commercial Banks constitutes the population of the data and the bank under study
constitutes the sample for the study. So, from the population of 19 Commercial Banks operating
in Nepal, CTZN Limited has been selected as the sample for the study.

1.7.3 Sources of Data

Data are only from secondary sources. The data presented in this study are of secondary type.
The secondary sources of data are those that have been used from published sources or used by
someone previously. The annual reports of the concerned Bank are the major sources of data for
the study. However, besides the annual reports of the subjected bank, the following sources of
data have also been used in the course of the study:

NRB reports and bulletins.

 Various articles published in the News Papers.

 Periodic returns submitted by the Bank's Head Office to NRB.

 The NEPSE reports, etc.

Formal and informal talks with the concerned authorities of the bank were also helpful to obtain
the additional information of the related problem.
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1.7.4 Data Collection Techniques

This study is mainly based on secondary data obtained from various sources mentioned above.
The annual reports of CTZN Bank Limited for the period of five years from fiscal year 2014/15
to 2018/19 A.D were obtained from the field visit of its shares department at its corporate office
located at Kamaladi, Kathmandu. NRB publications such as Quarterly Economic Bulletins,
Banking and Financial Statistics, Economic report, etc. have been collected by the personal visit
of concerned departments of Nepal Rastra Bank at Baluwatar. The unpublished data of sector
wise loans and advances has been collected from reporting department of CTZN. The data on
some aspects of the bank has also been obtained from the publications and websites of Nepal
Stock Exchange. Some supplementary data and information and literature review have been
collected from different Journals, magazines and other published and unpublished reports
documented by the concerned authorities.

1.7.5 Data Analysis Tools

Presentation and Analysis of the collected data is the core of the research work. The collected
raw data are first presented in systematic manner in tabular forms and are then analyzed by
applying different financial and statistical tools to achieve the research objectives. Besides these,
some graph charts and tables have been presented to analyze and interpret the findings of the
study. The tools applied are:

1.7.5.1 Financial Tools

Financial tools basically help to analyze the financial strength and weakness of a firm. Ratio
analysis is one of the important financial tools that have been used in the study. A ratio is simply
one number expressed in term of another and such it expresses the quantitative relationship
between any two numbers. Ratio can be expressed in terms of percentage, proportion and as
coefficient. Logarithmic graph and break-even chart are the graphic form of expressing a ratio.
They help to analyze the financial strength and weakness of a firm proportion and as coefficient.

Logarithmic graph and break-even chart are the graphic forms of expressing a ratio. Financial
ratio is the mathematical relationship between two accounting figures. Ratio analysis is a part of
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the whole process of analysis of financial statements of any business or industrial concern
especially to take output and credit decisions. Even though there are many ratios to analyze and
interpret the financial statement, only those ratios that are related to the investment operation of
the bank are have been covered in this study. Different types of ratios have been used in this
study.

1.7.5.1.1 Profitability ratios

Profitability ratios are used to indicate and measure the overall efficiency of a firm in terms of
profit and financial performance. For better performance, profitability ratios of firms should be
higher. Under this topic the following profitability ratios of CTZN Bank Ltd. have been studied.

(I) Interest income to total income ratio

This ratio measures the volume of interest income in total income of the bank. The high ratio
indicates the high contribution made by the lending and investing activities and vice versa. This
ratio can be computed by dividing interest income to total income presented as under

Interest income
Interest Income to total income ratio=
Total income

(ii) Total interest earned to total outside assets ratio

This ratio measures the interest earning capacity of the bank through the efficient utilization of
outside assets. Higher ratio implies efficient use of outside assets to earn interest. This ratio is
calculated by dividing total interest earned by total outside assets and can be mentioned as,

Total interest earned

Total interest earned to total outside assets ratio=
Total outside assets

The denominator includes loan and advances, bills purchased and discounted and all types of
investments. The numerator comprises total interest income from loans and advances and
investments.
 15

(iii) Interest expenses to total expenses ratio

This ratio measures the portion of total interest expenses in the volume of total expenses. The
high ratio indicates the low operational expenses and vice versa. This ratio is computed by
dividing interest expenses by total expenses, which is presented hereunder,

Interest expenses
Interest expenses to total expenses ratio=
Total expenses

(iv) Total interest earned to total working fund ratio

This ratio is calculated to find out the percentage of interest earned to total assets (working fund).
Higher ratio implies better performance of the bank in terms of interest earning on its total
working fund. This ratio is calculated by dividing total interest earned by total working fund.
This is stated as,

Total interest earned

Total Interest Earned to Total Working Fund Ratio =
Total working fund

(v) Total interest paid to total working fund ratio

This ratio is calculated to find out the percentage of interest paid on liabilities with respect to
total working fund. This ratio can be calculated by dividing total interest paid by total working
fund, which can be presented as,

Total interest paid

Total Interest Paid to Total Working Fund Ratio=
Total working fund

(vi) Total income to total expenses ratio

The comparison between total expenses and total income measures the productivity of expenses
in generating income. The amount of income that a unit of expenses generates is measured by the
ratio of total income to total expenses. The high ratio is indicative of higher productivity of
expenses and vice versa. This ratio is calculated by dividing total income by total expenses.
 Total income
Total Income to Total Expenses Ratio=
Total expenses

16

(vii) Total income to total working fund ratio

This ratio measures how efficiently the asset of a business is utilized to generate income. It also
measures the quality of assets in income generation. This ratio is calculated by dividing total
income by total assets as stated here under,

Total income
Total Income to total working fund ratio=
Total working fund

(viii) Return on loan and advances ratio

This ratio indicates how efficiently the bank has employed its resources in the form of loan and
advances. This also measures the earning capacity of its loan and advances. This ratio is
computed by dividing net profit (loss) by loan and advances. This can be expressed as,

Net profit (Loss )

Return on Loan and Advances Ratio=
Loan∧advances

(ix) Return on total working fund ratio (ROA)

This ratio measures the overall profitability of all working funds i.e. total assets. It is also known
as return on assets (ROA). This ratio is calculated by dividing net profit (loss) by total working
fund. This can be mentioned as,

Net profit ( Loss)

Return on Total Working Fund Ratio=
Total working fund

The numerator indicates the portion of income left to the internal equities after deducting all
costs, charges and expenses.

(x) Return on equity ratio (ROE)

Net worth refers to the owner's claim of a bank. The excess amount of total assets over total
liabilities is known as net worth. This ratio measures how efficiently the banks have used the
funds of the owners. This ratio is calculated by dividing net profit by total equity capital (net
worth). This can be stated as,

17

Net profit ( Loss )

Return on Equity Ratio=
Total equity capital

Here, total equity capital includes shareholder's reserve including profit and loss account, general
loan loss provision and share capital i.e. ordinary share and preference share capital

(xi) Earnings Per Share (EPS)

EPS refers to net profit divided by total number of shares outstanding. The amount of EPS
measures the efficiency of a firm in relative terms. This ratio is computed by dividing total net
profit (loss) by total number of shares,

Net profit (Loss)

Earnings Per Share=
Total number of shares

(xii) Net Interest Margin

Net interest margin in general term is the difference between the interests received from
investment on loan and advances and interest paid on deposits collected by the bank. It shows the
bank's efficiency to earn high profit to meet various costs. Higher ratio shows the higher
profitability and vice versa. This ratio is computed by dividing the difference between interest
revenues from earning assets less interest costs on borrowed funds by total earning assets.

Net Interest Margin=

Interest revenues ¿ earning assets−Interest costs on borrowed funds ¿
Total earning assets

Here, interest revenues from earning assets is the total interest income of the bank and interest
costs on borrowed funds is the total interest expenses of the bank. Total loan and advances
comprises the total earning assets of the bank.
1.7.5.1.2 Growth Ratios

To examine and analyze the expansion and growth of the banking business, following growth
ratios are calculated in this part of the study.

(i) Growth ratio of total deposits

(ii) Growth ratio of loan and advances

18

(iii) Growth ratio of total investment

(iv) Growth ratio of net profit

1.7.5.2 Statistical Tools

Some important statistical tools are used to achieve the objective of this study. In this study
statistical tool such as mean, standard deviation, coefficient of variation, coefficient of
correlation and trend analysis have been used.

1.7.5.2.1 Mean

A mean is the average value or the sum of all the observations divided by the number of
observations and it is denoted and given by the formula:

∑x
x=
N

Where, x = Mean of the values.

N = Number of Pairs of Observations.

During the analysis of data, mean is calculated by using the statistical formula 'AVERAGE' on
excel data sheet on computer.

1.7.5.2.2 Standard Deviation

 The standard deviation measures the absolute dispersion. It is said that higher the value of
standard deviation the higher the variability and vice versa. Karl Pearson introduced the concept
of standard deviation in 1823 and this is denoted by the small Greek letter σ (read as sigma).

The formulas to calculate the standard deviation are given below:

σ=
√ ∑ x2
N

Where, x = ( X − X)

19

During the analysis of data, standard deviation is calculated by using the statistical formulas
„STDEV‟ on excel data sheet on computer.

1.7.5.2.3 Trend Analysis

Among the various methods of determining trend of time series, the most popular and
mathematical method is the lease square method. Using this least square method, it has been
estimated the future trend values of different variables.

For the estimation of linear trend line following formula has been used.

y = a + bx

Where,

y= Dependent variable

x= Independent variable

a= y intercept

b= slope of the trend line

By using this method, trend analysis of following variable is conducted

(i) Trend analysis of net profit

1.8. Limitations of the Study

This study has the following limitations:

a) This is a case study of CTZN and findings of the study cannot be generalized.

b) The study is limited to five years period from 2014/2015 to 2018/2019.

c) Among many factors affecting investment decision, only certain factors i.e. liquidity,
profitability, diversification, growth etc. have been considered.

CHAPTER – II

RESULTS AND FINDINGS

In this chapter, the data collected from various sources have been presented and analyzed to
measure the various dimensions of the problems of the study and in major findings of the study
are presented systematically.

2.1 Profitability ratios

The main objective of a commercial bank is to earn profit by providing different types of
banking services to its customers. No bank can survive without profit. Profit is the indicator of
efficient operation of a bank. Profitability ratios are the best indicators of overall efficiency.
Higher profitability ratio shows the higher efficiency of a bank and vice versa. Through the
following ratios, effort has been made to measure the profit earning capacity of CTZN Bank Ltd.

2.1.1 Interest income to total income ratio

This ratio measures the volume of interest income in total income of the bank. This ratio helps to
measure the banks performance on how well they are mobilizing their fund for the purpose of
income generation. This ratio also helps to measure the banks performance on other fee-based
activities, since after investing functions fee based activities are the major source of banks
income generation. The high ratio indicates the high contribution made by the lending and
investing activities and vice versa. This ratio can be computed by dividing interest income to
total income.
 Table 1

Interest income to total income ratio

BANK FY S.D C.V

2014/15 2015/16 2016/17 2017/18 2018/19 MEAN (%)

CTZN 78.61 83.01 80.70 80.44 88.63 82.80 3.47 4.22

(Source: Annual report of CTZN)

21

90
88
86
84
82
80 Ratio
78
76
74
72
2014/15 2015/16 2016/17 2017/18 2018/19

Figure No. 1 : Interest Income to Total Income Ratio (%)

The above table 1 shows the ratios are consistent over the study period ranging from the
minimum of 78.61 % in 2014/15 to the maximum of 88.63 % in 2018/19. The mean of the ratios
is 82.28 % and the C.V. between them is 4.22 %, which shows the consistency of the ratios over
the study period. These ratios suggest that the large proportion of the income is generated from
mobilizing the fund to loan and advances and investment activities.

2.1.2 Total interest earned to total outside assets ratio

The main assets of a commercial bank are its outside assets in the form of loans and advances
and investments employed for income generation purpose. This ratio reflects the extent to which
the banks are successful to earn interest as major income from the outside assets. This ratio is
computed by dividing total interest income by total outside assets.
 Table 2:Total interest earned to total outside assets ratio

FY
S.D C.V
BANK 2014/15 2015/16 2016/17 2017/18 2018/19 MEAN
(%)
CTZN 8.16 8.28 7.00 6.58 6.31 7.26 0.81 11.20

(Source: Annual report of CTZN)

22

Ratio
9
8
7
6 Ratio
5
4
3
2
1
0
2014/15 2015/16 2016/17 2017/18 2018/19

Figure 2: Total interest earned to total outside assets ratio (%)

The above table 2 explains that the ratios are decreasing over the period ranging from 8.16% in
2014/15 to 6.31% in 2018/19. The mean of the ratio is found to be 7.26% with 11.20% C.V.
between them, which indicates that the ratios are satisfactorily consistent during the study period.

2.1.3 Interest expenses to total expenses ratio:

This ratio measures the portion of total interest expenses in the volume of total expenses. The
high ratio indicates the low operational expenses and vice versa. Interpreting in other way the
high ratio can be due to the costly sources of funds.

Table 3

Interest expenses to total expenses ratio

 FY
S.D C.V
BANK 2014/15 2015/16 2016/17 2017/18 2018/19 MEAN
(%)
CTZN 61.72 56.43 46.47 39.06 45.62 49.86 8.12 16.29

(Source: Annual report of CTZN)

23

70

60

50

40

30 Ratio

20

10

0
2014/15 2015/16 2016/17 2017/18 2018/19

Figure 3: Interest expenses to total expenses ratio (%)

Table 3 shows the ratios are in decreasing trend ranging from 61.72 % in 2014/15 to 39.06 % in
2018/19. The mean of the ratios is 49.86 % with 16.29 % C.V., which shows the ratios are
satisfactorily consistent over the study period.

2.1.4 Total interest earned to total working fund ratio:

This ratio reflects the extent to which the bank is successful in mobilizing its total assets to
generate high income as interest. A high ratio is an indicator of high earning power of the bank's
total assets and vice versa. This ratio is calculated by dividing total interest income by total
assets.

Table 4

Total interest earned to total working fund ratio (%)

 FY
S.D C.V
BANK 2014/15 2015/16 2016/17 2017/18 2018/19 MEAN
(%)
CTZN 5. 69 6.21 5.85 5.59 5.44 5.76 0.26 4.57

(Source: Annual report of CTZN)

24

Ratio
6.4
6.2
6
5.8 Ratio

5.6
5.4
5.2
5
2014/15 2015/16 2016/17 2017/18 2018/19

Figure 4: Total interest earned to total working fund ratio (%)

The above table 4 shows that the ratios are ranging between 5.44% in 2018/19 to 6.21% in
2015/16. The mean of the ratios is found to be 5.76% with 4.57% C.V. between them, which
indicates that the ratios are consistent over the study period.

2.1.5 Total interest paid to total working fund ratio:

This ratio measures the percentage of total interest expenses against total working fund. A high
ratio indicates higher interest expenses on total working fund and vice versa. This ratio is
calculated by dividing total interest expenses by total working fund.

Table 5

Total interest paid to total working fund ratio (%)

BANK FY
S.D C.V(%)
2014/15 2015/16 2016/17 2017/18 2018/19 MEAN

CTZN 4.11 3.86 3.03 2.5 2.57 3.21 0.66 20.53

(Source: Annual report of CTZN)

25

4.5
4
3.5
3
2.5
2 Ratio

1.5
1
0.5
0
2014/15 2015/16 2016/17 2017/18 2018/19

Table 5 explains that the ratios are fluctuating over the years. The ratio ranges between 4.11% in
2014/15 to 2.50% in 2018/19. The mean of the ratios is found to be 3.21% with 20.53% C.V.
between them, which means the ratios are a bit variable over the period.

2.1.6 Total income to total expenses ratio:

The comparison between total expenses and total income measures the productivity of expenses
in generating income. The amount of income that a unit of expenses generates is measured by the
ratio of total income to total expenses. The high ratio is indicative of higher productivity of
expenses and vice versa. This ratio is calculated by dividing total income by total expenses.

Table 6
 Total income to total expenses ratio (Times)

FY
MEAN S.D C.V(%)
2014/15 2015/16 2016/17 2017/18 2018/19 MEAN

CTZN 1.09 1.09 1.11 1.09 1.09 1.09 0.008 0.73

(Source: Annual report of CTZN)

26

Ratio
1.115
1.11
1.105
1.1
1.095
1.09
1.085
1.08
2014/15 2015/16 2016/17 2017/18 2018/19

Figure 5 :Total income to total expenses ratio (Times)

Table 6 explains that the ratios are consistent during the study period ranging from the minimum
1.09 times four years and 1.11 in year 2016/17. The mean of the ratios is found to be 1.09 times
with 0.73% C.V., which shows that the ratios are consistent during the study period.

2.1.7 Total income to total working fund ratio

This ratio measures how efficiently the asset of a business is utilized to generate income. It also
measures the quality of assets in income generation. This ratio is calculated by dividing total
income by total assets.

Table 7

Total income to total working fund ratios (%):

BANK FY
S.D C.V(%)
2014/15 2015/16 2016/17 2017/18 2018/19 MEAN

CTZN 7.24 7.48 7.25 6.95 6.13 7.01 0.47 6.72

(Source: Annual report of CTZN)

The above table 7 explains that the ratios are in fluctuating trend for the study period ranging
from the minimum 6.13 % in 2018/19 to the maximum 7.48 % in 2015/16 .The mean of the

27

ratios are found to be 7.01% with 6.72% C.V. between them, which indicates that the ratios over
the study period are consistent.

2.1.8 Return on loan and advances ratio:

Return on loan & advances ratio measures the earning capacity of a commercial bank through its
mobilized funds in the form of loans and advances. A high ratio indicates greater success to
mobilize fund as loans & advances and vice versa. This ratio is calculated by dividing net profit
by loan and advances. Table 27 shows the return on loan and advances ratios of NSBL for the
study period.

Table 8

Return on loan & advances ratio (%)

BANK FY
S.D C.V(%)
2014/15 2015/16 2016/17 2017/18 2018/19 MEAN

CTZN 2.05 2.03 2.18 2.14 1.81 0.042 0.13 15.71

(Source: Annual report of CTZN)

Table 8 explains that the ratios are fluctuating with overall decreasing trend ranging between
2.05% in 2014/15 to 1.81% in 2018/19. The mean of the ratios is found to be 0.042% with
15.71% C.V. between them, which indicates that, the ratios less variable during the period of
study.

2.1.9 Return on working fund ratio (ROA):

Return is the result of investment and it measures the profit earning capacity of the investable
resources into different types of assets. Total working fund of a bank means its total assets. If the
banks total working fund is well managed and efficiently utilized, return on such assets will be
higher and vice versa. This ratio is calculated by dividing net profit by total working fund. The

28

following table shows the profitability position of CTZN with respect to total assets for the study
period.

Table 9

Return on total working fund ratio (%)

FY
S.D C.V(%)
BANK 2014/15 2015/16 2016/17 2017/18 2018/19 MEAN

CTZN 0.58 0.64 0.72 0.55 0.90 0.68 0.13 18.47

(Source: Annual report of CTZN)

Table 9 explains that the ratios are fluctuating during the study period with overall increasing
trend. The ratio ranges between 0.58% in 2014/15 to 0.90% in 2018/19. The mean of the ratios is
found to be 0.68% with 18.47% C.V. between them, which indicates that the ratios are variable
and a bit consistent during the study period.

2.1.10 Return on Equity (ROE)

This ratio measures the amount profit that a rupee of shareholders fund has generated. The high
ratio is indicative of high return to shareholders equity and vice versa. This ratio is calculated by
dividing net profit by total shareholders fund.

Table 10

Return on equity (%)

FY
S.D C.V(%)
BANK 2014/15 2015/16 2016/17 2017/18 2018/19 MEAN

CTZN 17.64 18.58 16.05 16.19 15.02 16.69 1.26 13.25

(Source: Annual report of CTZN)

29

The above table 10 shows that the ratios are fluctuating during the study period with overall
decreasing trend. The ratio ranges between 17.64% in 2014/15to 15.02% in 2018/19 with the
mean ratio of 16.696%. C.V. between them is 13.25 %, which shows that the ratios are less
variable and consistent during the study period.

2.1.11 Earning Per Share (EPS):

EPS refers to net profit divided by total number of shares outstanding. The amount of EPS
measures the efficiency of a firm in relative terms. The figure is the indicative of the overall
good or bad performance of an organization. How far an organization is able to use its resources
to generate profit is determined by the profit it has earned. This ratio is computed by dividing
total net profit by total number of shares.

Table 11

Earnings per share (in Rs.)

FY
BANK S.D C.V(%)
2014/15 2015/16 2016/17 2017/18 2018/19 MEAN
CTZN 30.94 35.25 20.27 15.37 17.49 26.55 8.34 31.43

(Source: Annual report of CTZN)

Table 11 shows that EPS are fluctuating over the years in decreasing trend. It ranges between Rs
30.94 in 2014/15 to Rs.17.49 in 2018/19. This mean EPS during the study period is found to be
26.55 with 31.43% C.V. between them, which shows that the earning is less variable and a bit
consistent over the period of study.

2.1.12 Net Interest Margin:

Net interest margin in general term is the difference between the interests received from
investment on loan and advances and interest paid on deposits collected by the bank. In other
words this is the gross income in percentage from the intermediation cost of any bank. It shows

30

the bank's efficiency to earn high profit to meet various costs i.e. office expenses, staff expenses
etc. and to provide attractive return to the shareholders. Generally, net interest margin of 4% and
above is considered better. This ratio is computed by dividing the difference between interest
revenues from earning assets less interest costs on borrowed funds by total earning assets.

Table 12

Net Interest Margin (%)

FY
S.D C.V(%)
BANK 2014/15 2015/16 2016/17 2017/18 2018/19 MEAN

CTZN 2.58 3.98 4.62 5.15 4.90 4.24 0.92 21.66

(Source: Annual report of CTZN)

Table 12 shows that Net Interest Margin ratios are fluctuating in increasing trend over the years
in the study period. It ranges between 2.58% in 2014/15 to 5.15% in 2017/18. The mean NIM
during the study period is found to be 4.24% with 21.66% C.V. between them, which shows that
the net interest margin is less variable over the period of study.

2.2 Growth Ratios

To examine and analyze the expansion and growth of the banking business, following growth
ratios are calculated in this part of the study. The higher ratios represent the better performance
of the bank. Growth ratios are directly related to the fund mobilization and investments decision
of the bank. This ratio represents how well the commercial banks are maintaining their economic
and financial position. These ratios can be calculated by dividing the difference of last period
figure and the first period by the first year figure. Under these topic four types of growth ratios
namely growth ratios of total deposits, Loan and advances, total investments, and net profit of
CTZN Bank Ltd. for the studyperiod have been analyzed.

31

Table 13

Growth ratio of total deposits (Rs. In Million)

BANK FY Growth ratio(%)

2014/15 2015/16 2016/17 2017/18 2018/19

CTZN 5572.47 6522.81 7198.32 8564.77 11002.04 97

(Source: Annual report of CTZN)

Table 14

Growth ratio of total loan & advances (Rs. In Millions)

BANK FY

2014/15 2015/16 2016/17 2017/18 2018/19 Growth ratio(%)

CTZN 4299.25 4468.71 5143.66 6213.87 7626.73 77

(Source: Annual report of CTZN)

Table 15

Growth ratio of total investments (Rs. In Million)

BANK FY

2014/15 2015/16 2016/17 2017/18 2018/19 Growth ratio(%)

CTZN 599.05 1207.27 1907.52 2607.69 3610.77 503

(Source: Annual report of CTZN)

32

The above table 14 to 16 explains the growth ratios of total deposits, total loan & advances, total
investments, and net profit of CTZN Bank Limited during the study period. The analysis shows
that total deposit of the bank is in increasing trend with the net growth rate of 97.00% during the
study period. Similarly loan and advances of the bank is in also increasing trend with the net
growth rate of 77.00% during the study period. The analysis shows that the total investments of
the bank is in increasing trend over the years having net growth rate of 503.00% during the study
period. The net profit of the bank is also in increasing trend with fluctuations over the years with
the net growth rate of 186.00% during the study period.

2.3 Trend Analysis and Projection

The objective of this topic is to analyze trend of deposit collection, its utilization and net profit of
CTZN Bank Limited. Under this topic trend of deposit, total loan and advances and total net
profit are forecasted for next five years.

2.3.1 Trend analysis of total net profit:

Here, an attempt has been made to analyze the trend values of total net profit of CTZN for 4
years from 2012 to 2017 and forecasted the same for next 4 years till 2020. The following table
16 shows the trend values of total net profit of CTZN for 10 years from 2012 to 2020.

Table 16

Trend value of total net profit (Rs.)

Years 2012 2013 2014 2015 2016 2017 2018 2019 2020

Trend 32.76 48.86 64.96 81.06 97.16 113.26 129.36 145.46 161.56
Value

(Source: Annual report of CTZN)

From the above table 16, it is clear that the net profit of CTZN is in increasing trend. Other
things remaining the same, net profit of the bank in 2020 is Rs. 161.56 million, which is the
highest under the study period.

33

Trend values of net profit

180
160
140
120
100
80 Net profit
60
40
20
0
1 2 3 4 5 6 7 8 9

Figure 6 :Trend Values of Total Net Profit of CTZN

2.4 Major Findings of the Study

The preceding chapter have discussed and explored the facts and matters required for the various
parts of the study. Analytical part, which is the heart of the study, makes an analysis of various
aspects of the investment policy of commercial banks by using some important financial as well
as statistical tools.
Having completed the basic analysis required for the study, the final and most important task of
the researcher is to enlist findings issues and gaps of the study and give suggestions for further
improvement. This would be meaningful to the top management of the bank to initiate action and
achieve the desired result. The objective of the researcher is not only to point errors and mistakes
but also to correct them and give directions for further growth and improvement.

The main findings of the study that are derived on the basis of financial data analysis of CTZN
Bank Limited are presented below.

Findings from the Profitability Ratios Analysis

1) The Interest income to total income ratios are fluctuating over the study period ranging from
the minimum of 78.61% in 2014/15 to the maximum of 88.63 % in 2018/19. The mean of the
ratios is 82.28% and the C.V. between them is 4.22%, which shows the consistency of the ratios
over the study period. Income generated from loan and advances constitutes the major portion of

34

total income of the bank consistently. So, loan and advances is consistently playing major role
for the profitability of the bank.

2) Total interest earned to total outside asset ratios are consistent with decreasing trend over the
period ranging from 6.31% in 2018/19 to 8.28% in 2014/15. The mean of the ratio is found to be
7.2ratios are satisfactorily consistent during the study period. The analysis shows that CTZN has
average 7.26% income margin from outside assets. If this margin is higher than the cost of fund,
the bank will be on profit.

3) Interest expenses to total expenses ratios are in decreasing trend ranging from 61.72 % in
2014/15 to 39.06 % in 2017/18. The mean of the ratios is 49.86 % with 16.29 % C.V., which
shows the ratios are satisfactorily consistent over the study period. Interest expenses paid to the
depositors is the main expenses for the commercial 30 banks. CTZN has more than half portion
of interest expenses on total expenses. The decreasing trend of the ratios suggests that the cost of
fund of the bank is also decreasing.
4) Total interest earned to total working fund ratios are ranging between 5.44% in 2018/19 to
6.21% in 2015/16. The mean of the ratios is found to be 5.76% with 4.57%C.V. between them,
which indicates that the ratios are satisfactorily consistent over the study period. The ratios
indicate that the earning power of the total assets of CTZN is average.

5) Total interest paid to working fund ratios are decreasing over the years. The ratio ranges
between 2.50% in 2017/18 to 4.11% in 2014/15. The mean of the ratios is found to be 3.21%
with 20.53% C.V. between them, which means the ratios are less consistent over the period. The
total interest paid to working fund ratios are less than the interest earned to total working fund
ratio. This indicates that the bank is in profitable position as it is getting higher return than its
interest cost.

6) Total income to total expenses ratios are consistent during the study period ranging from the
minimum 1.09 times in four years to the maximum 1.11 times in 2016/17. The mean of the ratios
is found to be 1.09 times with 0.73% C.V., which shows that the ratios are highly consistent
during the study period. The analysis suggests that one unit of expenses is generating 1.09 unit of

35

income in average. The total income is consistently over the total expenses.

7) Total income to total working fund ratios are consistent for the study period ranging from the
minimum 6.13 % in 2018/19 to the maximum 7.48 % in 2015/16. The mean of the ratios is found
to be 7.01% with 6.72% C.V. between them, which indicates that the ratios over the study period
are consistent. So, the assets of CTZN are generating 7.01% income in average.

8) Return on loan and advances ratios is fluctuating with overall decreasing trend ranging
between 2.05% in 2014/15 to 1.81% in 2018/19. The mean of the ratios is found to be 0.042%
with 18.71% C.V. between them, which indicates that the ratios are less variable and a bit
consistent during the period of study. The earning capacity of the banks‟ loan and advances is
not satisfactorily consistent. The average ratio of 2.042 suggests that the earning capacity of the
banks‟ loan and advances is satisfactory and the ratios are in decreasing trend in overall. It is
only 0.92% for the year 2015/16, which is little bit low.
9) Return on assets (ROA) ratios is fluctuating with overall increasing trend during the study
period. The ratio ranges between 0.55% in 2017/18 to 0.90% in 2018/19. The mean of the ratios
is found to be 0.68% with 18.47% C.V. between them, which indicates that the ratios are less
variable and consistent during the study period. The return on assets of the bank is good in
average. It indicates the good earning capacity of the bank‟s assets and good utilization of its
assets and the ratios are in increasing trend but it is 0.55% for the year 2017/18, which is low.

10)Return on equity (ROE) ratios is fluctuating during the study period with overall decreasing
trend. The ratio ranges between 17.64% in 2014/15 to 15.02 % in 2018/19 with the mean ratio of
16.69%. C.V. between them is 13.25 %, which shows that the ratios are less variable and
consistent during the study period. The average ratio of 16.69% suggests that the return on
shareholders fund of NSBL is not very good and the ratios are in increasing trend.

11) Earnings per share of CTZN are fluctuating over the years in decreasing trend. It ranges
between Rs.30.94 in 2014/15 to Rs.17.49 in 2018/19. The mean EPS during the study period is
found to be Rs.26.55 with 31.43% C.V. between them, which shows that the earning is less
variable and satisfactorily consistent over the period of study.

36

12) This mean EPS of the bank is very good and the ratios are also satisfactorily consistent and
less volatile. The earning is also in increasing trend. Net Interest Margin ratios are fluctuating
with overall increasing trend over the years in the study period. It ranges between 2.58% in
2014/15 to 5.15% in 2017/18. The mean NIM during the study period is found to be 4.24% with
21.66% C.V. between them, which shows that the net interest margin is inconsistent over the
period of study.

13) The mean NIM of the bank is greater than the international standard (i.e. 4%). This shows
that the bank is doing better to recover the costs and to earn higher profit. The inconsistency of
the ratios shows that bank has not specific policy to get the consistent net interest margin over
the period.

Findings from the growth ratios analysis

1) The analysis of the growth ratios of total deposits, total loan & advances, total investments,
and net profit of CTZN Bank Limited during the study period shows that total deposits of the
bank is in increasing trend with the net growth rate of 97%. Similarly loan and advances of the
bank is in also increasing trend with the net 32 growth rate of 77% during the study period. The
analysis shows that the total investments of the bank is also in increasing trend with over the
years having net growth rate of 503% during the study period.The net profit of the bank is also in
increasing trend over the years with the net growth rate of -186% during the study period.

2) The major source of fund of the bank is deposit from its customers and it is in increasing trend
with reasonable growth rate. Similarly the bank's utilization of its funds in the form of loan and
advances and investment also are in increasing trend with satisfactory growth rate.The net profit
of the bank, which actually shows the performance of the bank in its overall operation, has the
positive growth rate with increasing trend.

37

Findings from the trend analysis:

Trend analysis of total deposit, total loan and advances, total investment and total net profit from
2012 to 2017 and projection for next 4 years till 2020 is conducted in this chapter of study and
the findings are presented as under:

1. The trend analysis of the net profit of CTZN suggests that is in increasing trend. Other things
remaining the same, net profit of the bank in 2020` is projected to be Rs. 161.56 million, which
is the highest under the study period. Since the earning assets of the bank, loan and advances and
investment, are in increasing trend and the earning of the bank is also in increasing trend. This
suggests that the quantity of the productive assets is increasing, in the same time the quality of
the assets is also in increasing trend. Bank management not only should effort towards the
increment of its total assets but also it should give due attention towards the increment of the
quality of the assets for the better productivity.

CHAPTER - III

SUMMARY AND CONCLUSION

This chapter includes two aspects of the study. First aspect of the study focuses on summarizing
the fact-findings of the study and making concluding remarks upon them. While the second
aspect of the study focuses on making some useful suggestions and recommendations based on
findings of the study to improve the investment policy of CTZN.

3.1 Summary

The development of any country largely depends upon its economic development. Economic
development demands transformation of savings or investable resources into the actual
investment. Capital formation is the prerequisite in setting the overall pace of the economic
development of a country. It is the financial institution that transfers funds from surplus spending
units to deficit units.

Banking sector plays an important role in the economic development of the country. Commercial
Banks are one of the vital aspects of this sector, which deals in the process of channeling the
available resources in the needed sector. It is the intermediary between the deficit and surplus of
financial resources. Financial institutions like banks are a necessity to collect scattered saving
and put them into productive channels. In the absence of such institutions it is possible that the
saving will not be safely and profitably utilized within the economy. It will be diverted aboard or
channeled into unproductive conspicuous consumption including real estate speculation.

Investment operation of commercial banks is very risky one. It is the most important factor from
the view point of shareholders and bank management. For this, commercial banks have to pay
due consideration while formulating Investment Policy. A healthy development of any
commercial bank depends upon its investment policy. A good investment policy attracts both
borrowers and lenders, which helps to increase the volume and quality of deposits, loans and
investment.

The major source of income of a bank is interest income from loans and investments and fee
based income. As loan and advances dominate the asset side of the balance sheet of any bank;
similarly earnings from such loan and advances occupy a major space in income statement of the

39

bank. However, it is very important to be reminded that most of the bank failures in the world are
due to the shrinkage in the value of loans and advances that most of the bank failures in the
world are due to the shrinkage in the value of loans and advances. Hence loan is known as risky
asset and investment operation of commercial banks is very risky one. Risk of non-repayment of
loan is known as credit risk or default risk. Performing loans have multiple benefits to the society
by helping for the growth of economy while non-performing loans erodes even existing capital.
Considering the importance of lending to the individual banks and also to the society it serves, it
is imperative that the bank meticulously plans its credit operations.
Though several commercial banks have been established in our country within short period of
time, stable, strong and appropriate investment policy has not been followed by the commercial
banks to earn sufficient return. They have not been able to utilize their funds more efficiently and
productively. Thus proper utilization of the resources has become relevant and current issue for
the banks. The directions and guidance provided by Nepal Rastra Bank are the major policy
statements for Nepalese commercial banks. However, a long term and published policy about
their operation is not found even in the joint venture banks.

The main objective of the study is to evaluate the investment policy of CTZN Bank Ltd and to
suggest measures to improve the profit of the bank. The study has been constrained by various
common limitations.

The study is based on secondary data from F/Y 2014/15 to 2018/19. The data have been
basically obtained from annual reports and financial statements, official records, periodicals,
journals and bulletins, various published reports and relevant unpublished master's thesis.
Besides this, personal contacts with the bank personnel have also been made.

Financial as well as statistical tools have been deployed in order to analyze and interpret the data
and information. Under financial analysis, profitability ratio and growth ratio have been analyzed
and interpreted. Under statistical analysis, relevant statistical tools i.e. trend analysis have been
used. This analysis gives clear picture of the performance of the bank with regard to its
investment operation.

40

3.2 Conclusion

Interest income to total income ratio of the bank is 82.28% on an average during the study period
and the ratios are consistent. The average interest income to total outside asset is 7.26% during
the study period and the ratios are consistent.

Interest expenses to total expenses ratio is 49.86% on average and the ratios are in decreasing
trend. This shows that the bank is decreasing its cost of fund over the year. This also shows that
bank has high proportion of operating and overhead expenses.
There is 5.76% of interest income on total asset on average. The ratios are satisfactorily
consistent also. So, the interest earning capacity of total asset is consistent.

The mean interest paid to total working fund ratio is 3.21% and the ratios are inconsistent. This
shows that the cost of funds utilizing in the form of different assets to generate income has been
inconsistent during the study period.

Total income to total expenses ratio is found to be 1.09 times on an average during the study
period and the ratios are highly consistent over the years. So the total income is consistently over
the total expenses.

Total income to total assets ratio is found to be 7.01% on an average during the study period and
the ratios are consistent. This shows that the earning power of the assets is consistent and it is
generating income at the consistent rate.

Return on loan & advances ratio is 1.13% on an average during the study period and the ratios
are fluctuating with increasing trend. This shows that the bank has not been able to formulate and
adopt the appropriate policy to increase the profitability although loan and advances has been
increasing continuously.

Return on total assets ratio is 0.68% on an average during the study period and the ratios are
variable between them. This shows that the bank has not been able to achieve stable rate of
return on its assets.

41

Return on equity ratio is 9.16% on an average during the study period and the ratios are in
increasing trend with fluctuations over the years and the ratios are satisfactorily consistent and
less variable. This shows that the mean ratio of ROE is satisfactory and it is increasing during the
recent years.

Earnings per share is Rs.26.55 on an average during the study period and the ratios are
satisfactorily consistent and in increasing trend. The mean ratio is satisfactory and the increasing
trend of the ratios suggests that the bank has stable policy to get the consistent earnings per
share.
 Net Interest Margin is 4.24% on average during the study period and the ratios are little bit
inconsistent. This shows that the bank has satisfactory net interest margin and is doing better to
recover the costs and to earn higher profit. The inconsistency of the ratios shows that bank has
not specific policy to get the consistent net interest margin over the period.

Hence, the above result shows that the bank does have specific policy to increase the
profitability of the bank. The interest earning capacity of total loan and advances, total outside
asset and total working fund are consistent. Net interest margin of the bank is also satisfactory.
The profitability ratios like return on loan and advances, return on assets, return on equity,
earning per share etc. are also in satisfactory level over the year. This shows that the non-
operating expenses of the bank like provision for loan loss is decreasing, which is increasing the
profitability of the bank. Interest income has high contribution to the total income of the bank.
This shows that the bank has less proportion of income from fee based transactions. Interest
expenses contribute about 50% of the total expenses of the bank, which shows that the bank has
high proportion overhead expenses. In overall, investment policy adopted by the bank is
satisfactory appropriate from the profitability point of view.

The growth ratio of total deposits during the study period is 97% and the amount of deposits is in
increasing trend every year. The growth ratio of total loan and advances during the study period
is found to be 77% and is in increasing trend every year. So, the total deposit and loan and
advances are increasing with almost equal proportion. The growth ratio of investments during the

42

study period is 503% with increasing trend. The net profit of the bank is also in increasing trend
with net growth rate of 186%.

Hence, the above result shows that the bank has been collecting the deposits funds in increasing
trend and it has been increasing its loans and advances and investments with the almost same
rate. So, both the sources and uses of fund is in increasing trend. At the same time net profit of
the bank has also positive growth and it is increasing over the year. It shows that the bank has
been successful to adopt the appropriate investment policy to increase the profitability of the
bank with positive growth rate of deposit and loans and advances over the year.
It shows that the bank has been successful to adopt the appropriate investment policy to increase
the profitability of the bank with positive growth rate of deposit and loans and advances.

The net profit is in increasing trend and total net profit projected till 2020 is Rs. 161.56 million.

Hence the CTZN is able to increase the profitability of the bank due to its fund collection and its
utilization is increasing. Bank is adopting the proper policy to increase the profit of the
organization. If the net profit moves in this trend, bank will be surely in good position after some
years. So the investment policy of the bank in terms of optimum utilization of its resources to
generate optimum return is well managed.

3.3. Implications

On the basis of analysis and findings of the study, following implications can be made as
suggestions to overcome the weakness and less effectiveness in the existing investment policy of
CTZN Bank Limited.

 CTZN is recommended to increase its deposit to lower the credit/deposit ratio in certain
extent. The bank has to collect a large variety of deposit schemes. The bank should explore the
new deposit products to attract the deposit considerably. For this bank should lunch the new
schemes like prize scheme, gift schemes, child deposit schemes, recurring deposit schemes etc.

 As the amount of investments made by the bank is found very little and also inconsistent
during the period, the bank is recommended to increase the investment which helps to utilize the

43

idle funds into income generation as well as minimizes risk and also helps to maintain optimal
level of liquidity.

 Income from other fee-based transactions has low proportion. The portion of OBS
transactions is found decreasing in comparison to loans and advances. Now a day most of the
commercial banks are getting more benefits and increasing their earnings through the
enhancement of the fee-based OBS transactions. So the bank is recommended to give more
priority to increase the fee-based OBS transactions to generate more income.
 The overall profitability of the bank has been increasing during the period results the sharp
increase in the return to the shareholders.

The return on loan and advances, return on total assets, return on equity, earning per share all
is increasing. The sources of fund and its utilization have been increasing and also the total
income of the bank has been increasing due to which the bank has been able to increase the
profitability. One of the reasons for this is more increase in the operating income of the bank.
Therefore the bank is recommended to decrease the expenses of the bank by controlling the
operating expenses as well as by collecting the interest free deposits.
  BIBLIOGRAPHY
Awasti, G.P. (2003) A comparative study of Financial Performance Between HBL and BOKL.
An Unpublished Masters Degree Thesis, T.U. Kathmandu, 2003 Bhattarai, K.D (2003)

Non Performing Assets (NPA) Management. Economics Journal. Kathmandu

Dahal, S. (2002) A study of Financial Performance of JVBs in Nepal: A study Between NSBL
and HBL.An unpublished Master's Degree Thesis, T.U. Kathmandu.

Dhungana, P (2002) Investment policy of Nepal Bangladesh Bank Limited & other Joint
Venture Banks (Himalayan Bank Limited & Nepal State Bank of India Bank Limited).An
Unpublished Thesis Submitted to TU. Kritipur

Faulke, R.A. (1957) Practical Financial Statement Analysis, New Yorks: McGrawHall Company

Ghimire, GP. (2003) Financial Performance of Commercial Banks: A Comparatieve Case Study
of NBBL, HBL, and EBL. An Unpublished Master's Degree Thesis, T.U. Kath, 2003

Sharma, P. (2001) An Appraisal of Financial Aspects of BOKL An unpublished Master's

Dergee Thesis, T.U. Kathmandu.

Shrestha, S. (1993) Investment Planning of Commercial Banks in Nepal. An unpublished Ph. D

Thesis, Delhi University, India

Shrestha, S.B (1998) Portfolio management in commercial banks; theory and practice. An
Unpublished Thesis Submitted to TU. Kritipur

Subedi, S. (2002) Financial Soundness of Nepalese Commercial Banks.An unpublished Master's

Degree Thesis, T.U.
 DECLARATION

I hereby declare that the project work the entitled "Profitability Ratio Analysis of Commercial
Bank ( A Case study of Citizen Bank)" submitted to the faculty of management, Tribhuvan
University, Kritipur is an original piece of Work under the supervision of Mr. Rajan Bilas
Bajracharya, People's Campus, Paknajol, and is submitted in partial fulfillment of the
requirements for the award of the degree of Bachelor of Business Studies (BBS). This project
work report has not been submitted to any other university or institution for the award of any
degree.

Sunil Thapa

T.U. Reg. No. 7-2-271-218-2016

Symbol :2710080

ii
 SUPERVISOR'S RECOMMENDATION
This is to certify that Mr. Sunil Thapa has prepared the project work report entitled
"Profitability Ratio Analysis of Commercial Bank (A Case study of Citizen Bank)" under
my supervision and guidance as per the procedure and format requirements, as partial fulfillment
of the requirements for the award of the degree of Bachelor of Business Studies (BBS).

Therefore, I recommended the project work report for evaluation.

(Mr. Rajan Bilas Bajracharya)

Project Work Supervisor

People's College

Date :2077-09-29

iii
 ENDORSEMENT

We hereby endorse the project work report entitled "Profitability Ratio Analysis of Commercial
Bank(A Case study of Citizen Bank)" submitted by Mr. Sunil Thapa People's Campus, Paknajol
partial fulfillment of the requirement for award of the Degree of Bachelor of Business Studies
(BBS) for external evaluation.

...........................

(Mr. Chhatra Mangal Bajracharya)

Campus Chief

People's Campus

Date:2077-09-29

........................

(Laxmi Das Manandhar)

Chairman

People's Campus

Date :2077-09-29

iv
 ACKNOWLEDGEMENT

I would like to express my deep gratitude to People's Campus, Paknajol, for allowing carrying
out this project work in partial fulfillment of the requirements for Bachelor of Business Studies
(BBS).

I am extremely grateful and indebted my respected project work supervisor Mr.Rajan Bilas
Bajracharya, People's campus , who in spite of his busy schedule spared his valuable moments to
provide me constructive input, in the way of guidance, inspiration, support and constant
encouragement to complete this project work. I would like to appreciate him for supervision and
inspirations to improve the quality of project work.

I wish to express my sincere gratitude to Campus Chief Mr. Chhatra Mangal Bajracharya. I
would also like to thanks all the administrative staff of People's Campus, Paknajol.

I am thankful to my family members and all my friends who provided regular inspiration and
continuous contribution for the completion of project work.

Lastly, I hearty beg sorry for my any mistake and assure to take responsibility for all comments.

Sunil Thapa.
T.U. Reg. No. 7-2-271-
218-2016
 v

Table of Contents

Contents Page No.

Title i
Declaration ii
Recommendation iii
Endorsement iv
Acknowledgement v
Table of content vi
List of Tables vii
List of Figures viii
Abbreviations ix

CHAPTER - I INTRODUCTION

1.1 Background of the Study......................................................................................1

1.2 Profile of the Organization...................................................................................2

1.3 Statement of Problems………………………………………………………….........2

1.3 Objective of the Study..........................................................................................2

1.4 Rationale of the Study..........................................................................................3

 vi

1.5. REVIEW OF LITERATURE..............................................................................3

1.6 Research Methodology.........................................................................................11

1.7. Limitations of the Study....................................................................................19

CHAPTER – II RESULTS AND FINDINGS

2.1 Profitability ratios...............................................................................................20

2.2 Growth Ratios ....................................................................................................30

2.3 Trend Analysis and Projection ...........................................................................32

2.4 Major Findings of the Study ..............................................................................33

CHAPTER - III SUMMARY AND CONCLUSION

3.1 Summary ............................................................................................................38

3.2 Conclusion..........................................................................................................40

3.3 Implication……………………………………………………………………............ 42

BIBLIOGRAPHY

APPENDIX
 vii

LIST OF TABLES

Tables Page No.

Table 1 Interest income to total income ratio (%) 20

Table 2 Total interest earned to total outside assets ratio (%) 21

Table 3 Interest expenses to total expenses ratio (%) 22

Table 4 Total interest earned to total working fund ratio (%) 23

Table 5 Total interest paid to total working fund ratio (%) 24

Table 6 Total income to total expenses ratio (Times) 25

Table 7 Total income to total working fund ratios (%) 26

Table 8 Return on loan & advances ratio (%) 27

Table 9 Return on total working fund ratio (%) 28

Table 10 Return on equity (%) 28

Table 11 Earnings per share (in Rs.) 29

Table 12 Net Interest Margin (%) 30

Table 13 Growth ratio of total deposits (Rs. In Millions) 31

Table 14 Growth ratio of total loan & advances (Rs. In Millions) 31

Table 15 Growth ratio of total investments (Rs. In Millions) 31

Table 16 Trend value of total net profit (Rs.) 32

viii
 LIST OF FIGURES

Figures Page No.

Figure 1 Interest income to total income ratio (%) 21

Figure 2 Total interest earned to total outside assets ratio (%) 22

Figure 3 Interest expenses to total expenses ratio (%) 23

Figure 4 Total interest earned to total working fund ratio (%) 24

Figure 5 Total interest paid to total working fund ratio (%) 25

Figure 6 Total income to total expenses ratio (Times) 26

Figure 7 Trend Values of Total Net Profit of CTZN 33

ix
 ABBREVIATIONS

A.D : Anno Domini

B. S. : BikramSambat

Co. : Company

CTZN : Citizen

DPS : Dividend Per Share

EPS : Earning Per Share

F/Y : Fiscal Year

LA : Loan & Advance

LTD : Limited

MPS : Market Price Share

Rs. : Rupees

x
 Profitability analysis of Commercial Bank
(A Case study of Citizen Bank Limited)

A Project Report

Submitted By:
Sunil Thapa
Symbol no:7210080
T.U. Regd. No.: 7-2-271-218-2016
Group : Finance

OF
People's Campus
Paknajol, Kathmandu

Submitted To:
The Faculty of Management
Tribhuwan University
Kathmandu

In partial fulfillment of the requirements for the degree of

Bachelors of Business Studies (BBS)
Kathmandu
Jan,2021