LEVERAGE AND PROFITABILITY OF

COMMERCIAL BANK

A Project Work Report

Submitted By:
SANJAL KHATRI

T. U. REGISTRATION NO:7-2-368-168-2011

Group: Finance

PATAN MULTIPLE CAMPUS

PATANDHOKA, LALITPUR

Submitted to:

Office of Controller of Examination

The Faculty of Management

TRIBHUVAN UNIVERSITY

In partial fulfillment of the requirement for the degree of

BACHELOR OF BUSINESS STUDIES (B. B. S.)

PATANDHOKA, LALITPUR
 Declaration
I hereby declare that the project work entitled ‘Analysis of leverage and profitability of
COMMERCIAL BANK Ltd.’ Submitted to the Faculty of Management, T. U., Kathmandu is an
original piece of work under the supervision of DR. MAKSHINDRA THAPA, faculty member of
PATAN MULTIPLE CAMPUS in PATANDHOKA LALITPUR and is submitted in partial fulfillment of
the requirements for the award of degree of Bachelor’s in Business Studies. This project work
report hasn’t been submitted to any other university for the award of any Degree or diploma.

SANJAL KHATRI

Date: April 15 2024

 SUPERVISOR’S RECOMMENDATION

The project work report entitled ‘Analysis of leverage and profitability of COMMERCIAL Bank
Ltd.’ Of PATAN MULTIPLE CAMPUS, PATANDHOKA, LALITPUR, is prepared under my supervision
as per the procedure and format requirements laid by the Faculty of Management, T. U., as
partial fulfillment of the requirements for the award of the degree of bachelors of business
studies. I, therefore, recommend the project work report for evaluation.

………………………………

MAKSHINDRA THAPA

PATAN MULTIPLE CAMPUS

 Endorsement
We hereby endorse the project work report entitled ‘Analysis of LEVERAGE AND PROFITABILITY
of COMMERCIAL BANK Ltd’ by SANJAL KHATRI of PATAN MULTIPLE CAMPUS, PATANDHOKA,
LALITPUR, submitted in partial fulfillment of the requirements for award for the Bachelor of
Business Studies for external evaluation.

………………………….

MR. …………………………………….

PATAN MULTIPLE CAMPUS

April 15
 Acknowledgement
This study attempts to examine the LEVERAGE AND PROFITABILITY OF COMMERCIAL BANK Ltd,
with available data and information. It deals with the problem identification besides the field
study to acquire the reality of banking operation of COMMERCIAL BANK Ltd. For easier study
the data has been presented by tables, graphs and have been interpreted using various
statistical methods.

I express my heartiest gratitude to DR. MAKSHINDRA THAPA for guiding and inspiring me to do
this work.

Similarly, I am equally thankful to all the teacher of PATAN MULTIPLE CAMPUS, Department of
Management who helped me preparing this project. I would like to extend my gratitude to our
college Campus chief Mr.,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, for his continuous encouragement in our
study.

I would like to extend my sincere thanks to the staff of THREE BANK Ltd, for providing me
related data, information and contribution.

Finally, I want to thank my family, friends and colleagues for their continued moral support.

SANJAL KHATRI

PATAN MULTIPLE CAMPUS

March 17
 TABLE OF CONTENTS
Declaration

Supervisor’s recommendation

Endorsement

Acknowledgement

Table of contents

List of tables:

List of figure:

Abbreviation

CHAPTER I

INTRODUCTION

1.1 Background of the Study .................................................................................................... 2

1.2 Statement of the problem.................................................................................................. 3

1.3 Objectives of the study ....................................................................................................... 4

1.4 Significance of the study ...................................................................................................... 5

1.5 Limitations of the study ....................................................................................................... 6

1.6 Organization of the Study ................................................................................................... 6

1.7 Literature review ...................................................................................................12

1.8 Research methodology ..................................................................................... 16

CHAPTER – II

RESULTS AND DISCUSSION ........................................................................................ 31

CHAPTER-III

SUMMARY AND CONCLUSION.

3.1 Summary .............................................................................................................................. 32

3.2 Conclusions.......................................................................................................................... 34

3.3Implications.........................................................................................................................35

REFERENCES..................................................................................................................37
 LISTS OF TABLES
Table 1: Capital Adequacy Ratio .

Table 2: Non-performing Loan Ratios.

Table 3: Interest Expenses to Total Loan Ratios

Table 4: Return on Assets.

Table 5: Return on Equity

Table 6: Credit Deposit Ratios

 LISTS OF FIGURES

Figure 1: Capital Adequacy Ratio

Figure 2:Non-performing loan ratio

Figure 3: Interest Expenses to Total Loan Ratios

Figure 4: Return on Assets

Figure 5: Return on Equity

Figure 6: Credit Deposit Ratios

 ABBREVIATIONS
A.D. = Anno Domini

ADBL= Agricultural Development Bank Limited

ATM = Automated Teller Machine

B.S. = Bikram Sambat

BFI = Bank and Financial Institutions

C.V. = Coefficient of Variation

CAR = Capital Adequacy Ratio

CDR = Credit Deposit Ratio CRR = Cash Reserve Ratio

FY = Fiscal Year

IETTL= Interest Expenses to Total Loan

MBS = Master of Business Studies No. = Number

NPL = Non-Performing Loan

NRB = Nepal Rastra Bank

NRN = Non-Resident Nepalese

ROA = Return on Assets

ROE = Return on Equity

S.D. = Standard Deviation

S.B.L= Sanima Bank Limited

T.U. = Tribhuvan University

 CHAPTER I

INTRODUCTION
1.1 Background of the Study

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. A strong
financial system promotes investment by financing productive business opportunities,
mobilizing savings, efficiently allocating resources and makes easy the trade of goods and
services. Banking renders service to the people in financial matters, and it magnitude of action
is extending day by day. It is a major financial institutional system in Nepal. The performance
evaluation of bank is important for all parties including depositors, investors, managers and
regulators (Jha and Hui, 2012).

Banks help to the growth of agriculture, trade, commerce and industry of the national
economy. They are inevitable for the resources mobilization and economic development of the
country. Banking industries are regarded as one component of economy. They transfer the
scattered funds collected from saving of the public into various productive sectors. Economic
activities remain halt in absence of banking industries. It helps to enhance economic activities
of the country by providing capital funds for the smooth operation of business activities. People
deposit their saving in trust of banks repay their deposits promptly when they demand for it. If
one bank fails to repay the deposited amount to the public then the public do not believe the
bank and it leads to insolvency of the banks. So as the regulator and supervisor NRB always
dictate the activities of the banks in the country. It provides its directives from time to time in
order to have fair competition between the banks and to safeguards the deposits of the public.
As number of banks in the country increases NRB has to be more active towards its regulative
and supervising role. For healthy competitions of the banks, NRB planned to merge two banks
and they have to make their capital NPR 8,000,000,000.

Banking system is volatile and sensitive sector of national economy, which requires effective
monitoring and efficient supervision. Smooth and effective regulation of banking activities is a
must for sustainable economic growth of a country. The regulatory agency should always be
watchful of banking activities carried out by governmental and non-governmental and financial
institution.

Commercial banks collect deposits from the public and the largest portion of deposited money
is utilized in disbursing loan and advances. Loans and advances constitute a major portion of
the assets and deposits constitute a major portion of the liabilities of balance sheet of
commercial banks. Similarly earning of the banks depends upon the spread that it enjoys
between the interest it receives from the borrowers and that to be paid to the borrowers. An
average, bank generates sixty to seventy percent of its revenue through its lending activities.
The return that the bank enjoys of deposit mobilization through loan and advances is very
attractive but they do not come free of cost and free of risk. There is risk inherent in lending
portfolio. Banking sector is exposed to number of risk like, interest rate risk, liquidity risk, credit
risk or default risk, borrowers risk, security risk, earning risk etc. Such risk are excessive had led
many banks to go bankrupt in a number of countries. Performing loans have multiple benefits
to the society while non-performing loan erodes even existing capital.

Financial ratios based on CAMEL Framework are related to capital, assets, management,
earnings and liquidity considerations. Different ratios including return on assets (ROA), return
on equity (ROE), capital adequacy ratio (CAR)，nonperforming loan ratio (NPL), interest
expense to total loans (IETTL), net interest margin (NIM), credit to deposit ratio (CDR), were
evaluated to analyze the financial data of selected Nepalese commercial banks for the period
2075 to 2080. These ratios would help to indicate the condition of capital, assets quality,
management, earnings and liquidity position of different types of banks. Financial ratio analysis
is also used to quantitatively examine the differences in performance among public sector
banks (PVB), joint venture banks (JVB) and domestic private banks (DPB) in Nepal, and the
banks are ranked based on their financial measures and performance for each bank as a
guideline for the future trend of financial position of the banks in Nepal. Therefore, the aim of
this study is to measure the best performance among the commercial banks and to find out the
relationship between bank specific factors (ratios) on the banks’ performance. Published
financial statements are the only source of information about the activities and affairs of a
business entity available to the public, shareholders, investors and creditors, and the
governments. These various groups are interested in the progress, position and prospects of
such entity in various ways. But these statements howsoever, correctly and objectively
prepared, by themselves do not reveal the significance, meaning and relationship of the
information contained therein.

For this purpose, financial statements have to be carefully studied, dispassionately analyzed
and intelligently interpreted. This enables a forecasting of the prospects for future earnings,
ability to pay interest, debt maturities both current as well as long-term, and probability of
sound financial and dividend policies. According to Myers, “financial statement analysis is
largely a study of relationship among the various financial factors in business as disclosed by a
single set of statements and a study of the trend of these factors as shown in a series of
statements”.
1.2 Statement of the problem

There are twenty one commercial banks in Nepal in current situation. The number of
established of new banks had been increased after 2040 B.S. But now, the private commercial
banks are merging. They are trying to make their performance better. But most of the
commercial banks have their branches are only in the urban areas other But its presence is also
in urban area generally. It could not able to cover the village area satisfactory. Most of the
business is concentrated in urban area and their offices are almost confined inside of
Kathmandu valley. When even they are in to outside the valley, then they move towards urban
sectors but not in rural sector. Therefore, the high mass of rural sector is not getting the
advantages of such institutional development.

The present study basically focused on the financial performance of Agricultural Development
Bank Ltd (ADBL), Nabil Bank Ltd and Sanima Bank Ltd. (SBL).In Nepal, many banks and financial
companies have opened up within a span of few years. Although, these three banks have
managed to perform better than other local commercial banks within the short period of time
they have been facing a neck competition against one another. Therefore, it is necessary to
analyze the profitability position of ADBL, Nabil Bank Ltd and LBL. Thus the present study seeks
to explore the efficiency and comparative financial performance of ADBL, Nabil Bank LTD and
SBL. In Nepal, the profitability rate, operating expenses and dividend distribution rate among
the shareholders has been found different in the financial performance of the three banks in
different period of time. The problem of the study will ultimately find out the reasons about
difference in financial performance. A comparative analysis of financial performance of the
banks would be highly beneficial for pointing out their strengths and weaknesses. Although
banks are considered efficient, but how far are they efficient? This question does emerge in
banking sector. At present we have twenty seven commercial banks. In spite of rapid growth,
some indicators show performance is not much encouraging towards the service coverage. In
such a situation the study tries to analyze the present performance of banks, which would give
the answers of following queries.

i. What is the capital adequacy ratio of sample banks?

ii. What are the qualities of assets of sample banks?

iii. What are the management qualities of sample banks?

iv. How efficiently are the sample banks managing their liquidity?

v. At what extents the banks are able to raise and maintain their profitability?
1.3 Objectives of the study

The main objective of the study is to analyze the comparative leverage and profitability of three
commercial banks: Sanima Bank, ADBL Bank and Nabil Bank Those specific objectives of the
study are as follows:

i. To analyze the capital and assets management of sample banks.

ii. To examine the management quality of sample banks.

iii. To evaluate their liquidity position.

iv. To examine the profitability of these banks.

1.4 Significance of the study

Analysis of leverage and profitability of any company is very important. Actually, on the basis of
the financial analysis we can say that the concerned company is strong or not. The financials
published by the banks gives the meaningful picture to the public regarding the financial
position of the banks. Thus, the analysis of these statements is necessary in order to give the
full and clear-cut position and performance of the banks.

This study is mainly compare the leverage and profitability of ADBL, Nabil Bank and Sanima
Bank which compare the position of selected bank under the study, which encourage to
improve the different position and performance of the selected banks. From data presentation
and analysis researcher finds different and weakness of the selective banks which is
recommended to the banks for their further improvement.

Banking Institutions definitely contribute and play an important role for domestic resource
mobilization, economic development and maintains economic confidence of various segments
and extends credit to people.

This study has multidimensional significance in particular area of concerned banks which have
been undertaken that justifies for finding out important points and facts to researcher,
shareholders, brokers, traders, financial institution, and public knowledge. The study is the first
in its quality in comparing these to joint venture commercial banks so it adds new idea an
findings related to these bank and add the substantial knowledge literature, shareholders who
invested their money in the firm, shares are most concerned about the firms earnings, they
restore more confidence in those firms that so steady growth in earnings .The creditors are
interested in the firm's ability to meets their claims over a very short period of time. There
analysis will therefore confine to the evaluation of the firms liquidity position
This study helps and justify for finding out the leverage and profitability of concerned selected
commercial banks and Government of Nepal to make plans and policies.

1.5 Limitations of the study

The limitations of the study are as follows:

i. The study covers only five fiscal years 2075/76 to 2079/80.

ii. This study is conducted on the basis of secondary data such as annual reports of three
sample banks and other related journal, magazines, books etc.

iii. This study is conducted only to analyze the financial performance on the basis of accounting
data. It has not analyzed market based performance of sample banks.

1.6 Organization of the Study

The study has been organized into five chapters, each devoted to some aspect of the study on
“A Comparative leverage and profitability of Nepalese Commercial Banks". The titles of these
chapters are as follows:

Chapter -I Introduction

This chapter deals with the subject matter consisting Background, Focus of the Study,
Statement of Problem, Objectives of the Study, Significant of the Study, Limitation of the Study,
review of literature and research methodology of Sanima Bank Limited, Agricultural
Development Bank Limited and Nabil Bank Limited.

Chapter –II Results and Discussion

This chapter concerned with analytical frameworks. It includes the analysis of Financial
Statement of Everest Bank Limited, Bank of Kathmandu Limited and Nepal Industrial &
Commercial Bank Limited under the framework of CAMEL and comparing it with the guidelines
set by Nepal Rastra Bank and also to each other and overall findings of all three banks.

Chapter – III Summary and Conclusion

This is the last chapter, which consists of the suggestive framework that consists with the issues
and gaps, conclusion and recommendations of the study.
1.7 Review of literature

1.7.1 Introduction

Study of previous research works and books with the purpose of knowing the research issue in
detail and find out appropriate methodology is known as literate review. Various books,
articles, and research reports are available in the market. A comprehensive study of such
document and preparation of summary of such study on a topic is known as literature review.
Review of previous studies is very important in academic research and it helps to complete the
research work. Literature review can be either a part of a larger report of a research work or a
thesis or a book that is published or unpublished. Literature review is done to understand
research problem better and know the methodology that can be used in research. A researcher
should study books, journals, dissertations, research reports, government publications and
reports of financial and marketing activities to get information which are related to the topic
under the study.

The chapter literature review is related to examine and review of some related books, article,
published and unpublished different economic journals, bulletins, magazines, newspapers,
yearly published balance sheet of respective banks, NRB directives and guidelines, economic
survey, previous thesis on related subject and subject related website search.

1.7.2 Theoretical review

The theoretical literature review aids in determining what theories already exist, their
relationships, and the extent to which existing theories have been studied, as well as
developing new hypotheses to test.

1.7.2.1 Concept of Bank

The word bank has been derived from the Latin word Bancus, Italian word Banca, and French
word Banque which means a place of keeping, lending and exchanging money. The bank is
financial institutions that accepts deposits and invest the amount in the leading activities and
commercial service provide. It allows interest on the deposit made and charges interest on
loans granted. Regarding the origin of bank in the world, the first bank called the Bank of
Venice was established in Venice, Italy in 1157 A.D. Following this, the Bank of Barcelona, Spain
was established in 1401 A.D as the second bank of the world. In addition, the first central bank,
which was established in 1844 A.D, was the Bank of England.

Banking means the accepting for the purpose of lending and investment of deposits of money
from the public, repayable on demand or otherwise and withdraws by cheque, draft or
otherwise (Sayers, 2000). Bank refers to a corporate body which has been established and got
permission to perform financial transactions. It is an institute which collects money from those
who have it to spare and who are saving it out of their income and lends this money out to
those who require it. (Bank &Financial Institution Ordinance, 2060).

1.7.2.2 Meaning of Commercial Bank

The ordinary meaning of bank is commercial bank. Commercial are those banks that pool
together the saving of the community and arrange for their productive use. They supply the
financial needs of modern business by various means. They accept deposits from the public on
condition that they are repayable on demand or on short notice. In other words, a bank is a
financial intermediary, a dealer in loans and in debts. It borrows from one set of people and
lends to hiring money and hiring out again. Some banks draw their capital mainly from their
shareholders, other’s mainly from depositors. Some lend mainly to industry, others mainly to
government, central and local. Some deal in short loans, borrowings and lending for short
periods, others deal in long periods. However the business of individual bank may differ, their
essential function is to gather saving together and lend out what they collect.

(Horne, 2005: 14-120) states a bank is a business organization that receives and holds deposits
of funds others and makes loans or extends credits and transfer funds by written order of
depositors. It is a dealer in money and a substitute for money, such as cheque or bill of
exchange. It also provides a variety of financial services. The primary economic function of the
commercial bank is to hold demand deposits and to honor cheque drawn upon them. In short,
to provide us, the economies, with the most important component of the money supply.

Commercial banks are those banks which are established under this act to perform commercial
functions except those which are established for specific purpose like development banks, co-
operatives, etc. (Commercial Bank Act, 2031).

1.7.2.3 Capital Adequacy

Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets
and current liabilities. It is decided by central banks and bank regulators to prevent commercial
banks from taking excess leverage and becoming insolvent in the process.

The reason minimum capital adequacy ratios (CARs) are critical is to make sure that banks have
enough cushion to absorb a reasonable amount of losses before they become insolvent and
consequently lose depositors’ funds. The capital adequacy ratios ensure the efficiency and
stability of a nation’s financial system by lowering the risk of banks becoming insolvent.
Generally, a bank with a high capital adequacy ratio is considered safe and likely to meet its
financial obligations.
During the process of winding-up, funds belonging to depositors are given a higher priority than
the bank’s capital, so depositors can only lose their savings if a bank registers a loss exceeding
the amount of capital it possesses. Thus, higher the bank’s capital adequacy ratio, higher will be
the degree of protection of depositor's assets.

Off-balance sheet agreements, such as foreign exchange contracts and guarantees, also have
credit risks. Such exposures are converted to their credit equivalent figures and then weighted
in similar fashion on-balance sheet credit exposures. The off-balance sheet and on-balance
sheet credit exposures are then lumped together to obtain the total risk weighted credit
exposures.

CAR is critical to ensure that banks have enough cushions to absorb a reasonable amount of
losses before they become insolvent.

CAR is used by regulators to determine capital adequacy for banks and to run stress tests.

Two types of capital are measured with CAR.

The first, tier-1 capital can absorb a reasonable amount of loss without forcing the bank to
cease its trading.

The second type, tier-2 capital, can sustain a loss in the event of liquidation. Tier-2 capital
provides less protection to its depositors.

1.7.2.4 Assets quality

It is obvious from the theoretical prescription that the performance of commercial banks largely
depends on the quality of assets held by them, and quality of the assets relies on the financial
health of their borrowers.

As stated earlier, many indicators can be used to measure the quality of assets held by
commercial banks. Loans are one of the major outputs provided by a bank, but as loan is a risk
output, there is always an ex ante risk for a loan to eventually become nonperforming (Yike et
al., 2011).

However, here, only one simple indicator – non performing loan ratio was used to measure the
quality of assets being held by the banks. The increasing trend of these ratios shows the
deteriorating quality of commercial bank assets.
1.7.3 Empirical review

The trend of commercial banking is changing rapidly. Competition is getting stiffer and,
therefore, banks need to enhance their competitiveness and efficiency by improving
performance. Normally, the financial performance of commercial banks and other financial
institutions has been measured using a combination of financial ratio analysis benchmarking
performance against or a mix of these methodologies.

Jha and Hui (2012) compared the financial performance of different ownership structured
commercial banks in Nepal based on their financial characteristics and identify the
determinants of performance exposed by the financial ratios, which were based on CAMEL
Model. The finding of the study revealed that public sector banks are significantly less efficient
than their counterpart are; however domestic private banks are equally efficient to foreign-
owned (joint- venture) banks.

Kumar et al. (2012) examined the performance of 12 public and private sector banks in the
Indian banking system over eleven years (2000-2011). The use of internationally recognized
CAMEL rating metrics to assess the financial soundness and infer the convergence of
commercial banks operating in India is a relatively straightforward approach. It has been found
that private sector banks are at the top of the list, with the finest soundness performances. In
comparison, public sector banks such as Union Bank and SBI have taken a backseat and have
low economic soundness.

Desai (2013) examined the extent of relationship between banking financial position in Indian
economy. The researcher employed the camel model with public and private banks to
determine ratios relevant to the camel model. The study found that rapid growth in private
banking sector. So, Bank of India need to take corrective actions regarding CAMEL factors as
mentioned in recommendation to improve its ranking.

Rozzani and Rahman (2013) examined the performance of both Islamic and conventional banks
that are currently operating in Malaysia. This research was carried out utilizing CAMEL
parameters for this investigation, a sample of Malaysian banks was chosen. The study found
that the levels of performance for both conventional and Islamic banks in Malaysia were highly
similar. This study is hoped to provide useful information for stakeholders to make better
investment decisions and to help both conventional and Islamic banks to mark and re-evaluate
their performance based on the performance measurement used in the study.
Gupta (2014) examined the financial position and performance of India's public sector banks.
The research is a descriptive study with an analytical research approach. The research on
various banks has been undertaken in India utilizing the CAMEL framework.

Different banks are ranked based on the ratings they received on the five criteria. The results
demonstrate that there is a statistically significant difference between the CAMEL ratios of all
Public Sector Banks in India, implying that their overall performance varies. Furthermore, the
banks with the lowest ranking must improve their performance in order to meet the acceptable
requirements.

Johri and Singh (2015) analyzed the financial performance of the commercial banks in India. The
study Based on the set of indicators as defined by CAMEL framework. The study found that ICICI
bank is more efficient in terms of capital adequacy and can resists risk more effectively that SBI.

Panboli and Birda (2019) examined the fiscal execution of select private and public sector banks
by the CAMEL Model. The data source was secondary to this subject. The banks' performance
was based on their websites, yearly reports, Money Control, Equity Master, Economic Times,
and numerous periodicals and research papers on financial performance. This comparative poll
yielded the top five banks from both the public and private sectors. The study concluded that
private sector banks outperform public sector banks across the board in all of the CAMEL
Model's parameters and sub-parameters.

Shelly and Singhal (2020) measured the financial position and performance of public sector
banks, ranking them accordingly. The study is based on secondary data which has been
collected through capitalize database and annual financial statements of the respective banks.
The CAMEL model has been used to measure the performance of the banks. The findings from
the analysis indicated that Indian public sector banks are making an effort toward maintaining
adequate capital, and in years to come, all banks should strive toward achieving more than the
required level. Public sector banks need to brainstorm innovative ideas, which can help them
deploy funds after proper analysis of the risk exposure.
1.7.4 Conceptual Framework

The primary purpose of the study is comparative leverage and profitability of Nepalese
commercial banks (ADBL, Sanima Bank and Nabil Bank). Through CAMEL approach, although
there are different approach to identify the financial performance of the banking sector but
CAMEL is simplistic and reader friendly so that common man can easily identify the problem
and solution with help of data presented through this approach.

1.7.5 Research Gap

Various studies have been conducted in the past on financial analysis of commercial banks in
Nepal and as well as in other countries with different purpose and results. The research paper
done in the context of Nepal mainly emphasized liquidity, profitability and leverage of the
commercial banks. Present researcher has conducted research on evaluating the bank
performance by using CAMEL model. This research specially evaluates the bank: Sanima, ADBL
and Nabil. The total performance of commercial banks selected using various CAMEL
approaches from 2075/76 to 2079/80 is also determined in this study. Comparative analysis of
governments and private bank’s performance are analyzed through CAMEL mode.

1.8 Research methodology

Research Methodology is the method which is used in the research in collecting information
and data, analyzing and interpreting with the help of different facts and figures. It covers data
analyzing tools as well. It drives the researcher and keeps the researcher on the right track from
selecting the topic to work till recommendation.

1.8.1 Research Design

Research Design is a blue print of the study. It is a framework for completing the research work
since beginning to till the end. Different research designs are used to search the answer of the
different research questions; descriptive research design, causal comparative research design,
and experimental research design. The study based on research question, and is both the
descriptions as well as analytical analysis research. The research design followed is basically the
comparative evaluation of financial performance between ADBL, Nabil Bank Limited and
Sanima Bank Limited. Analytical as well as descriptive approaches are used to evaluate the
financial performance of the bank. Analysis is basically on the basis of secondary data. The
research design is used to measure performance of bank through collection and presentation of
facts and figures such as bar graph, pie-chart, and trend line. Mean, standard deviation,
coefficient of variation, etc. are used to analyze the data, facts and figures. The CAMEL (Capital,
Assets, Management, Earning and Liquidity) rating system used in the study.

1.8.2 Population and Sampling

The study is about the comparative financial analysis of Nepalese commercial bank. As of July,
2018 A.D. 27‘A’ class commercial banks are listed by NRB which is the population of the study.
Out of 21 commercial banks, 3 commercial banks are selected for the purpose of the study i.e.,
Sanima Bank Limited, Agricultural Development Bank limited and Nabil Bank Limited based on
convenience sampling method. Sanima Bank Ltd. is a non venture commercial bank promoted
by Non Resident Nepalese (NRNs) and Agricultural Development Bank Ltd. Is government
commercial bank in Nepal similarly, NABIL Bank Ltd. is one of the joint venture banks operating
in Nepal.

1.8.3 Sources of Data

Various data and information are collected from secondary sources while conducting the
research. The required data are collected from NRB directives, annual reports, and publications
of the selected banks. Other required information are collected from libraries, websites, and
from the prior reports related to the study.

1.8.4 Method of Data Analysis

The collected data from above stated sources are classified, tabulated and interpreted to make
study easy and meaningful. Such data are presented on various diagrams such as bar graph,
pie-chart and line graph. The statistical and financial tools and techniques such as mean,
standard deviation, coefficient of variation, return on assets (ROA), return on equity (ROE),
capital adequacy ratio (CAR), non-performing loan ratio (NPL), interest expenses to total loan
(IETTL), net interest margin (NIM), credit to deposit ratio (CDR) and others are used to analyze
the data.

1.8.5 Financial and Statistical Tools

Various collected data are analyzed by using different statistical and financial tools and
techniques. Mean, standard deviation, and coefficient of variation are the statistical tools.
Similarly, return on assets (ROA), return on equity (ROE), capital adequacy ratio (CAR), non-
performing loan ratio (NPL), interest expenses to total loan (IETTL), net interest margin (NIM),
credit to deposit ratio (CDR) are the financial tools for data analysis.
1.8.5.1 Financial Tools

Various financial tools are used to measure the financial performance of commercial banks in
Nepal by using CAMEL components.

Return on Assets (ROA)

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
ROA gives a manager, investors, or analyst an idea as to how efficient a company's
management is at using its assets to generate earnings. Return on assets is displayed as a
percentage.

ROA = Net income/ total assets

Return on Equity (ROE)

Return on equity (ROE) is a measure of financial performance calculated by dividing net income
by shareholders' equity because shareholders' equity is equal to a company’s assets minus its
debt, ROE could be thought of as the return on net assets.

ROE= Net income/ Shareholder’s equity

Capital Adequacy Ratio (CAR)

The capital adequacy ratio (CAR) is a measurement of a bank's available capital expressed as a
percentage of a bank's risk-weighted credit exposures. The capital adequacy ratio, also known
as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the
stability and efficiency of financial systems around the world. Two types of capital are
measured:

tier-1 capital which can absorb losses without a bank being required to cease trading,

and tier-2 capital which can absorb losses in the event of a winding-up and so provides a lesser
degree of protection to depositors.

CAR=banks capital/ risk weighted assets

Non Performing Loan Ratio (NPLR)

Non-performing Loan (NPL) ratio compares non-performing loans to the total loan portfolio
(loans are assets for the bank), and the higher ratio means higher risk of losses for some of the
loans. Non-performing loans are those loans that are late on payments (common term is 90
days but it may depend on the financial regulations in the market).
NPL Ratio =value or the number of loans/ total protfolio

Credit Deposit Ratio (CDR)

Credit Deposit ratio is the ratio that shows how much a bank lends out of the deposits it has
mobilized. It indicates how much a bank funds are being used for lending, the main banking
activity. A higher ratio indicates more reliance on deposits for lending, and vice versa.

CDR = D*K/ P

Interest Expenses to Total Loan (IETTL) Ratio

The Interest Expense to Total Debt ratio measures the estimated interest rate the company is
paying on its total debt. This ratio assumes both Short Term Debt and Long Term Debt are
summed together, as the Interest Expense figure is usually shown on the income statement as a
summation of short and long-term interest expenses.

IETTL = Interest expenses/ total loan

1.8.5.2 Statistical tools

Arithmetic Mean (A.M.)

The mean is the average of sum of total values to the number of observations in the given
sample. It represents the entire data, which lies almost between the two extremes. For this
reason as mean is frequently referred as a measure of central tendency. It is calculated with
following relationship.

Mean= Sum of all value/ total number

Where,

X= Arithmetic mean

∑x = Sum of all the values of the variable X

n = Number of observations
Standard Deviation (S.D.)

The standard deviation is the absolute measure of dispersion in which the drawback present in
other measure of dispersion as it satisfied most of the requisites of a good measure of
dispersion. Standard deviation is defined as the positive square root of the mean as square of
the deviation takes from the arithmetic mean. Higher the standard deviation higher will be the
variability and vice versa. In other words, it helps to analyze the quality of data regarding its
variability. It is calculate as:

Standard deviation= √[(∑(d')2 /n) - (∑d'/n)2] × i

Where, = Arithmetic Mean return

X = Set of Observation

n = Total number of Observation

Coefficient of Variation (C.V.)

Standard deviation is the absolute measure of dispersion. The relative measure of dispersing
based on the standard deviation is known as the measurement of coefficient of standard
deviation. Less CV is the more uniformity and consistency and vice versa. Only standard
deviation is not appropriate to compare two pairs of variables but also CV is capable to
compare two variables independently in terms of their variability.

C.V= SD/MEAN *100%

 CHAPTER II

RESULTS AND DISCUSSION

This chapter deals with the presentation and analysis of data collected from different sources
with the focus on the camel components. As stated in the theoretical presentation, the
leverage and profitability of Agricultural Development Bank Limited, Nabil Bank Limited and
Sanima Bank Limited are concentrated in the five components of CAMEL i.e. Capital Adequacy,
Assets Quality, Management Soundness, Earning Quality and Liquidity. The data collected from
annual reports of respective banks has been analyzed with the application of financial
performance.

2.1 Data Presentation and Analysis

The collected data are analyzed by using different statistical and financial tools and techniques
and presented on various diagrams such as bar graph, pie-chart and line graph. Mean standard
deviation and coefficient of variation are the statistical tools. Similarly, Capital Adequacy Ratio
(CAR), Return on Assets (ROE), Return on Equity (ROE). Nonperforming loan Ratio (NPLR), Credit
Deposit Ratio (CAR) are the financial tools for data analysis.

2.1.1 Capital Adequacy Ratio (CAR)

Banks have to make decisions about the amount of capital they need to hold for three reasons.
First, bank capital helps prevents bank failures, a situation in which the bank cannot satisfy its
obligations to pay its depositors and other credits and so goes out of business. Second, the
amount of capital affects returns for the owners (equity holder) of the bank. Third, a minimum
amount of bank capital is required by regulatory authorities. Commercial banks will have to
maintain capital adequacy ratio (CAR) of 8.5% as Nepal Rastra Bank (NRB) on 2080. Minimum
Total Capital (including conservation buffer) is to be maintained 11%.
 Figure 2.1

Capital adequacy ratio

Fiscal year ADBL SANIMA NABIL

2075/76 0.1949 0.2841 0.1058

2076/77 0.1900 0.2079 0.1101

2077/78 0.1634 0.1487 0.1159

2078/79 0.1509 0.1254 0.1124

2079/80 0.1399 0.1108 0.1157

MEAN 0.1808 0.1542 0.1180

SD 0.0229 0.0532 0.0082

CV 0.1266 0.3447 0.0697

Table 1 shows capital adequacy ratio of ADBL Bank Ltd, Nabil Bank Ltd and Sanima bank Ltd. the
average CAR of ADBL, Sanima and Nabil are 18.08%, 15.42% and 11.80% respectively. The data
shows the average capital adequacy ratio of ADBL is higher than Nabil Bank and Sanima Bank.
The table shows that all the banks have maintain the minimum CAR all over the period. ADBL
has maintained more excessive CAR than other banks. On other hand, Nabil has been able to
maintain the just CAR as per NRB. Sanima has the highest fluctuation and Nabil has the lowest
fluctuation on maintaining CAR as compared to other banks.
 Figure 1

0.3

0.25

0.2

ADBL
0.15
SANIMA
NABIL
0.1

0.05

0
2075/76 2076/77 2077/78 2078/79 2079/80

Figure 1 reveals that the Capital Adequacy Ratio of ADBL is increasing trend, Sanima Bank is
decreasing trend and Nabil have fluctuating trend.

The trend lines of all banks are above the CAR trend line of NRB. It represents that all the banks
have maintained CAR as per the NRB. Sanima bank has decreasing trend line at the beginning
and fluctuating trend thereafter. Similarly, the trend line of ADBL is also in fluctuating trend.
However, the trend line of Nabil seems to be parallel with x-axis which indicates the bank has
been maintaining almost same CAR over the period.

2.1.2 Assets quality

Commercial bank holds their assets in the form of liquid assets like cash and bank balance and
short term investment etc. through this lending bank generated interest.

Assets quality ratio is also known as activity ratio as well as turnover ratio be converted in to
cash and equivalent to cash. This is only profit if the bank is efficient enough to earn profit. For
identifying the assets quality we need to calculated non-performing loan ratio.

Non-performing Loan

Non-performing loan refers to those which are not paying its principle interest in time or
overdue more than three months. So it consists of sub-standard loan, doubtful loan and bad
loan. The non-performing loan ratio indicated the relationship between nonperforming loan
and total loan; it measures the proportion of non-performing loan in total loan and advances.
Higher non-performing loan ratio indicates that the bank’s assets are not doing well or loan
department is not so conscious while passing loan. So lower ratio will be preferred regarding
non-performing loan ratio.

Table 2

Non- performing loan

Fiscal year ADBL SANIMA NABIL

2075/76 0.08990 0.00004 0.01770

2076/77 0.08980 0.00480 0.02330

2077/78 0.05850 0.00027 0.02130

2078/79 0.05460 0.00017 0.02230

2079/80 0.05350 0.00073 0.01820

MEAN 0.05248 0.00119 0.01449

SD 0.02207 0.00184 0.00678

CV 0.42051 1.54869 0.46796

 Figure 2

Non-performing loan ratios

0.1

0.09

0.08

0.07

0.06
ADBL
0.05
SANIMA
0.04 NABIL

0.03

0.02

0.01

0
2075/76 2076/77 2077/78 2078/79 2079/80

Table 2 and figure 2 represent non performing loan ratio of ADBL Bank Ltd., Nabil Bank Ltd and
Sanima Bank Ltd. during ten fiscal years from FY 2075/76 to FY 2079/80. NPL ratios of ADBL are
8.99%, 8.98%, 5.85%, 5.46%, 5.35% in FY2075/76, 2076/77, 2077/78, 2078/79, 2079/80,
respectively. The NPL ratio of ADBL bank is in decreasing trend. Similarly, NPL ratios of Sanima
bank are 0.004%, 0.48%, 0.027%, 0.017%, 0.073%, in FY 2075/76, 2076/77, 2077/78, 2078/79,
2079/80, respectively. The ratio of Sanima bank is also in fluctuating trend. Likewise Nabil Bank
are 1.77%, 2.33%, 2.13%, 2.23%, 1.82%, in FY 2075/76, 2076/77, 2077/78, 2078/79,
2079/80,respectively. The ratio of Nabil bank is fluctuating trend.

The average NPL ratio of ADBL (5.248%) is higher than Sanima Bank (0.119) and Nabil Bank
(1.449%). Similarly standard deviation on NPL ratio of ADBL (2.207%) is also higher than and
Sanima Bank (0.184%). Nabil Bank (0.678%) It indicates that Sanima Bank has very low risk
investment. However, coefficient of variation on NPL of Sanima Bank is 154.87% which is higher
than of Nabil Bank (46.796%) and ADBL (42.051%).
2.1.3 Management Quality

The board of directors and top-level managers are the key persons who are responsible for the
successful functioning of the banking operations. Through this parameter, the effectiveness of
the management is checked out such as, how well they respond to the changing market
conditions, how well the duties and responsibilities are delegated, how well the compensation
policies and job descriptions are designed, etc. For identifying the management quality we need
to calculate interest expenses to total loan ratio (IETTL)

Interest Expenses to Total Loan Ratio (IETTL)

The Interest Expense to Total Debt ratio measures the estimated interest rate the company is
paying on its total debt. This ratio assumes both Short Term Debt and Long Term Debt are
summed together, as the Interest Expense figure is usually shown on the income statement as a
summation of short and long-term interest expenses.

Table 3

Interest expenses to total loan ratios

Fiscal year ADBL SANIMA NABIL

2075/76 0.0452 0.0943 0.0552

2076/77 0.0505 0.0650 0.0546

2077/78 0.0448 0.0523 0.0379

2078/79 0.0523 0.0107 0.0244

2079/80 0.0368 0.0100 0.0210

Mean 0.0492 0.0503 0.0356

SD 0.0110 0.0267 0.0145

CV 0.2236 0.5296 0.4068

 Figure3

Interest expenses to total loan ratios

ADBL
3
SANIMA
NABIL
2

0
2075/76 2076/77 2077/78 2078/79 2079/80

Table 3 and Figure 3 show the Interest Expenses to Total Loan Ratio of ADBL, Nabil Bank Ltd.,
and Sanima Bank Ltd. during different FIVE years from FY 2075/76 to FY 2079/80. Interest
Expenses to Total Loan Ratio of ADBL are 4.52%, 5.05%, 4.48%, 5.23%, 3.68%, in FY 2075/76,
2076/77, 2077/78, 2078/79, 2079/80, respectively. The interest expenses to total loan ratios of
ADBL bank is in fluctuating trend. Similarly interest expenses to total loan ratios of Sanima Bank
are 9.43%, 6.50%, 5.23%, 1.07%, 1%, in FY 2075/76, 2076/77, 2077/78, 2078/79, 2079/80,
respectively. The interest expenses to total loan ratio of Sanima Bank is in fluctuating trend.
Likewise interest expenses to total loan ratios of Nabil Bank are 5.52%, 5.46%, 3.79%, 2.44%,
2.10%, in FY2075/76, 2076/77, 2077/78, 2078/79, 2079/80,respectively. The interest expenses
to total loan ratio of Nabil Bank is in fluctuating trend.

The average interest expenses to total loan ratio of Sanima Bank (5.03%) is higher than ADBL
(4.92%) and Nabil Bank (3.56%). Similarly, standard devation (2.67%) and coefficient of variation
(52.96%) of Sanima Bank is higher than ADBL (S.D 1.10%, C.V. 22.36%) and Nabil Bank (1.45%,
40.68%). It indicates Sanima Bank is more risky then ADBL and Nabil Bank.
2.1.4 Earning

Earnings help to evaluate an institution’s long term viability. A bank needs an appropriate
return to be able to grow its operations and maintain its competitiveness. The examiner
specifically looks at the stability of earnings, return on assets (ROA), return on equity (ROE) and
future earnings prospects under harsh economic conditions. While assessing earnings, the core
earnings are the most important. The core earnings are the long term and stable earnings of an
institution that is affected by the expense of one-time items.

Return on Assets

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
ROA gives a manager, investor or analyst an idea as to how efficient a company's management
is at using its assets to generate earnings. Return on assets is displayed as a percentage.

Table 4

Return on assets

Fiscal year ADBL SANIMA NABIL

2075/76 0.0399 0.0166 0.0243

2076/77 0.0290 0.0089 0.0280

2077/78 0.0297 0.0139 0.0325

2078/79 0.0172 0.0146 0.0265

2079/80 0.0357 0.0155 0.0206

Mean 0.0254 0.0159 0.0245

SD 0.0063 0.0033 0.0046

CV 0.2464 0.2086 0.1889

 Figure4

Return on assets

0.045

0.04

0.035

0.03

0.025
ADBL
SANIMA
0.02
NABIL
0.015

0.01

0.005

0
2075/76 2076/77 2077/78 2078/79 2079/80

The table 4 and Figure 4 shows return on assets of ADBL, Nabil Bank Ltd., and Sanima Bank Ltd.
during ten years fiscal years from FY 2075/76 to 2079/80. Return on assets of ADBL are 3.99%,
2.90%, 2.97%, 1.72%, 3.57% in FY2075/76, 2076/77, 2077/78, 2078/79, 2079/80, respectively.
The return on assets of ADBL bank is in decreasing trend. Similarly return on assets ratios of
Sanima Bank are 1.66%, 0.89%, 1.39%, 1.46%, 1.55%, in FY 2075/76, 2076/77, 2077/78,
2078/79, 2079/80, respectively. The return on assets ratio of Sanima Bank is in decreasing
trend. Likewise Nabil Bank are 2.43%, 2.80%, 3.25%, 2.65%, 2.06%, in FY 2075/76, 2076/77,
2077/78, 2078/79, 2079/80 respectively. The return on assets of Nabil Bank is in also in
fluctuating and decreasing trend as the ratio of ADBL.

The average return on assets ratio of ADBL, Sanima Bank and Nabil Bank are 2.54%, 1.59% and
2.45% respectively. Standard deviation of ADBL, Sanima Bank and Nabil Bank are 0.63%, 0.33%
and 0.46% respectively. And coefficient of variation of ADBL, Sanima Bank and Nabil Bank are
24.64%, 20.86% and 18.89% respectively. It shows ADBL has more profitability than Nabil Bank
and Sanima Bank in terms of ROA.
Return on Equity

The Return on Equity ratio essentially measures the rate of return that the owners of common
stock of a company receive on their shareholdings. Return on equity signifies how good the
company is in generating returns on the investment it received from its shareholders.

The denominator is essentially the difference of a company’s assets and liabilities. It is the
amount left over if an organization decides to settle its liabilities at a given time. So if a bank has
an ROE of say 1, it means Re 1 of common shareholding generates a net income of Re 1. This
metric is especially important from an investor’s perspective. Investors generally prefer bank
with higher ROEs. However this can be used as a benchmark to pick stocks within the same
sector only. Across sectors, profit and income levels vary significantly. Even within the same
sector, the ROE levels may vary if a company chooses to give dividends and not keep the profit
generated as idle cash.

Table 5

Return on equity

Fiscal year ADBL SANIMA NABIL

2075/76 0.1898 0.1141 0.2902

2076/77 0.1418 0.0110 0.3025

2077/78 0.1610 0.1432 0.3278

2078/79 0.1009 0.1764 0.2797

2079/80 0.2221 0.2203 0.2273

Mean 0.1451 0.1662 0.2431

SD 0.0391 0.0548 0.0595

CV 0.2696 0.3299 0.2450

 Figure 5

Return on equity

0.35

0.3

0.25

0.2
ADBL
SANIMA
0.15 NABIL

0.1

0.05

0
2075/76 2076/77 2077/78 2078/79 2079/80

Table 5 and figure 5 showed the Return on equity of ADBL, Sanima Bank, and Nabil Bank Ltd.
during ten years fiscal years from FY 2075/76 to 2079/80. Return on equity of ADBL are 18.89%,
14.18%, 16.10%, 10.09%, 22.21%, in FY 2075/76, 2076/77, 2077/78, 2078/79, 2079/80,
respectively. The return on equity of ADBL is fluctuating trend. Similarly Return on Equity of
Sanima Bank Ltd are 11.41%, 1.10%, 14.32%, 17.64%, 22.03%, in FY 2075/76, 2076/77, 2077/78,
2078/79, 2079/80, respectively. The Return on equity of Sanima Bank is fluctuating trend.
Likewise Return on Equity of Nabil Bank Ltd are 29.29%, 30.25%, 32.78%, 27.97%, 22.73%
respectively. The Return of Equity of Nabil Bank is decreasing trend.

The average Return of Equity of Nabil Bank (24.31%) is greater than ADBL (14.51%) and Sanima
Bank (16.62%). Standard deviation of ADBL, Sanima Bank and Nabil Bank Ltd. are 3.91%, 5.48%,
and 5.95% respectively. And coefficient of variation of ADBL, Sanima Bank ank Nabil Bank Ltd. is
26.96%, 32.99%, 24.50% respectively. It shown Nabil Bank is more profitably then ADBL and
Sanima Bank Ltd.
2.1.5 Liquidity

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the
market without affecting the asset's price. Market liquidity refers to the extent to which a
market, such as a country's stock market or a city's real estate market, allows assets to be
bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and
collectibles are all relatively illiquid.

Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank
lending finances investments in relatively illiquid assets, but it funds its loans with mostly short
term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all
reasonable conditions.

Credit deposit ratio (CDR)

The credit to deposit ratio (CDR) is a major tool to examine the liquidity of a bank and measures
the ratio of fund that a bank has utilized in credit out of the deposit total collected. Higher the
CDR more the effectiveness of the bank to utilize the fund it collected.

Table 6

Credit deposit ratio

Fiscal year ADBL SANIMA NABIL

2075/76 1.1738 1.0125 0.7830

2076/77 1.0406 0.8625 0.7790

2077/78 1.0081 0.8572 1.1760

2078/79 0.9480 0.8290 1.1435

2079/80 0.9377 0.8397 1.1167

Mean 0.9743 0.8802 0.9179

SD 0.0850 0.0518 0.1898

CV 0.0872 0.0589 0.2068

 Figure 6

Credit deposit ratios

1.4

1.2

0.8
ADBL
SANIMA
0.6 NABIL

0.4

0.2

0
2075/76 2076/77 2077/78 2078/79 2079/80

Table 4.6 and figure 4.6 showed the Credit Deposit Ratio (CDR) of ADBL, Sanima Bank Ltd. and
Nabil Bank Ltd. for the period of ten years from Fiscal Year 2075/76 to Fiscal Year 2079/80.
Credit Deposit Ratio of ADBL are 117.38%, 104.06%, 100.81%, 94.80%, 93.77%, in fiscal year
2075/76, 2076/77, 2077/78, 2078/79, 2079/80, 2015/16, respectively. The credit deposit ratio
of ADBL is decreasing trend. Similarly Credit Deposit Ratio of Sanima Bank Ltd. are 101.25%,
86.25%, 85.72%, 82.90%, 83.97%, in fiscal year 2075/76, 2076/77, 2077/78, 2078/79, 2079/80,
respectively. The credit deposit ratio of sanima bank is fluctuating trend. Likewise Credit
Deposit Ratio of Nabil Bank are 78.30%, 77.90%, 117.60%, 114.34%, 111.67%, in fiscal year
2075/76, 2076/77, 2077/78, 2078/79, 2079/80, respectively. The credit deposit ratio of Nabil
bank is fluctuating trend.

The average Credit Deposit Ratio of ADBL (97.43%) is greater than Sanima bank (88.02%) and
Nabil Bank (91.79%). It showed that ADBL is maintained to high liquidity then Sanima Bank and
Nabil Bank. Standard deviation of ADBL, Sanima Bank, and Nabil Bank are 8.50%, 5.18%, and
18.98% respectively. Similarly correlation of coefficient of ADBL, Sanima Bank and Nabil Bank
are 8.72%, 5.89% and 20.68% respectively. It showed that Nabil bank is high riskier then ADBL
and Sanima Bank.

2.2 Major findings

The study is concerned with a comparative financial analysis of Nepalese commercial banks
with references to Sanima Bank Limited, Agricultural Development Bank Limited and Nabil Bank
Limited in different ten years from FY 2075/76 to FY 2079/80. Secondary sources of data have
been used to collect the required data and information to meet the objectives of the study.
Annual reports provided by the concerned banks and NRB directives provided by Nepal Rastra
Bank over the study period are the main sources of secondary data in the study. Capital
adequacy ratios (CAR), credit deposit ratio (CDR), non-performing loan ratio (NPL), return on
assets (ROA), return on equity (ROE), and interest expenses to total loan (IETTL) ratio. Are used
the indicators to measure banks performance. Similarly, mean, standard deviation and
coefficient of variation are the e statistical tools used for supporting the result over the ten
years. Line graphs and bar graphs have been used to present the data on various diagrams.

After analyzing various data through using different financial and statistical tools and
techniques, and presenting them on various diagrams, following major findings have been
found:

1. NRB has set directives to maintain capital adequacy ratio (CAR) at minimum 11% each fiscal
year and all selected banks have been able to maintain the ratio. Sanima bank has higher C.V.
than other banks which indicates Sanima bank has more fluctuation in maintaining its CAR than
other banks over the period indicating the bank has poor capital adequacy than other banks.
However, NABIL has been able to maintain its CAR with less fluctuation (i.e. lowest CV) which
indicates better capital adequacy than other banks.

2. However, here, only one simple indicator – nonperforming loan ratio was used to measure
the quality of assets being held by the banks. The increasing trend of these ratios shows the
deteriorating quality of commercial bank assets. Sanima bank is considered to be better than
other banks with respect to Non-Performing Loan ratios. The management system of Sanima
bank is considered to be efficient then ADBL and Nabil bank taking total expenses to debt
(IETTL) ratios.

3. The earnings of Nepal ADBL and Nabil Bank are considered to be better than Sanima banks
regarding ROA and ROE respectively. The results of the study show that Sanima bank has poor
earning capability then ADBL and Nabil bank.

4. The liquidity position of ADBL is better than Nabil bank and Sanima bank because ADBL has
higher Credit Deposit Ratio (CDR). Nabil bank has higher C.V. it indicates that Nabil bank has
high fluctuation.

5. The higher fluctuation on capital adequacy ratio and return on equity of Sanima bank has
shown poor performance. Similarly, Non-performing loan ratio and Interest expenses to total
loan ratios of Sanima bank has better than other banks.
6. Both standard deviation and coefficient of variation on credit deposit ratio of Nabil bank is
higher than ADBL and Sanima bank. It indicates Nabil bank has high variability and high degree
of volatility or risk in credit deposit ratio than ADBL and Sanima.

2.3 Discussion

The study is about performance analysis of Nepalese commercial bank with reference of ADBL,
Sanima bank and Nabil bank. The study has identified capital adequacy ratio, non-performing
loan ratio, interest expenses to total loan ratio, return on assets, return on equity, and credit
deposit ratio as the financial tools to measure performance analysis of the bank over the
different fiscal year FY 2075/76 to FY 2079/80. The following discussion can be made after
major finding of study:

Capital adequacy ratios of the three banks have met the NRB standard. In comparison of the
banks, ADBL has higher average than Sanima bank and Nabil bank. This data says that ADBL can
absorb the balance sheet stock better than Sanima bank and Nabil bank.

The study has supported the findings of most past studies conducted by previous researcher
that the financial performance of public sector bank (ADBL) is better than joint venture and
non-venture bank. ADBL is public bank in Nepal in the study. There are various aspects and
many variables should be considered to analyze the financial performance of commercial
banks. As per the study Nabil Bank a joint venture bank considered in the study has poor
financial performance than other commercial banks. The lower Capital Ratio, higher non-
performing loan ratio and lower interest expenses to total loan ratio shown the Nabil Bank is
poor performance than ADBL bank. Similarly Sanima bank has poor return from assets and
equity and poor credit deposit ratio, it shown Sanima has poor earning capability and poor
liquidity then ADBL. The article of a comparison of financial performance of commercial banks:
A case study of Nepal has found different result the overall performance of public sector banks
was not observed sound because other financial ratios including ROE, CDR, and CAR of most of
the joint venture and domestic public banks were found superior.

ADBL has a greater non-performing loan ratio than Nabil Bank and Sanima Bank. In each fiscal
year, the NPL ratio of Sanima Bank is quite low. It reveals that Sanima has a lower risky
investment portfolio than Nabil and ADBL, as well as a better credit risk management strategy
than both ADBL and Nabil bank. Similarly, Nabil bank has a lower NPL ratio than ADBL in each
fiscal year, indicating that Nabil bank has less risky investments. The similar research ( jha & hui
2012) they found The share of public sector banks in nonperforming loans (NPL) was unusually
high, implying deterioration in credit quality and concentration.

In their own unique ways, ADBL, Sanima Bank, and Nabil Bank are able to manage their
performance effectively and efficiently. ADBL appears to be able to outperform Nabil bank and
Sanima bank in terms of capital adequacy ratio (CAR), return on assets (ROA), and credit
deposit ratio (CDR). Similarly, in terms of non-performing loan (NPL) ratio, Sanima Bank appears
to be able to perform better than ADBL and Nabil Bank. Similarly, Nabil bank appears to be able
to manage their good performance better than ADBL and Sanima bank in terms of interest
expenses to total loan (IETTL) ratio and return on equity (ROE).

CHAPTER-III

SUMMARY AND CONCLUSION

3.1 Summary
The major issue on this paper is investor who invests on any kinds of bank and other project is
to analyze best investment project. To analyze different investment project, different related
research article paper need to be publish. This kind of research will help that kind of investor
who invests in bank and other project. So our issue will minimize their effort to find risk on
investment. The objective of this research is to analyze the Leverage and probalaity of three
Nepalese commercial banks. (ADBL, Sanima bank and Nabil bank) by using CAMEL Approach.
This research is essential for those who want to invest in share market and other investment. It
gives an opportunity to evaluate benefits and challenges of bank management system. The
study will allowed us to explore my interest in analysis of different bank in the area of
performance of bank. This study is conducted only to analyze the financial performance on the
basis of accounting data; it is not analyzed market based performance of sample banks. The
study covers only five fiscal years.

No researcher has done any related research only on leverage and profitability of Sanima Bank
Limited, ADBL and Nabil Bank Limited. So this research studies only the financial performance
of three banks. This research is based on CAMEL model analysis of different bank with 5 fiscal
years. This study examines the leverage and profitability of sample banks in terms of CAMEL,
which stands for Capital Adequacy, Assets Quality, Management, Earnings, and Liquidity. It was
designed by regulatory agencies. The purpose of financial statement analysis is to get a better
understanding of the bank's condition and performance. In order to obtain significant results
and achieve the research objectives, this study employed a variety of financial and statistical
approaches.

The conceptual review included the following areas: historical development of the financial
system and evolution of commercial banks in Nepal, idea of commercial banks, role of
commercial banks, and CAMEL components. Aside from that, research reviewers conducted
reviews of other theses. ADBL, Sanima Bank, and Nabil Bank are able to manage their
performance effectively and efficiently. ADBL appears to be able to outperform Nabil bank and
Sanima bank in terms of capital adequacy ratio (CAR), return on assets (ROA), and credit
deposit ratio (CDR). Similarly, in terms of non-performing loan (NPL) ratio, Sanima Bank appears
to be able to perform better than ADBL and Nabil Bank. Similarly, Nabil bank appears to be able
to manage their good performance better than ADBL and Sanima bank in terms of interest
expenses to total loan (IETTL) ratio and return on equity (ROE).

3.2 Conclusions

The study has compared performance analysis of ADBL, Sanima bank limited and Nabil bank
limited using various indicators such as capital adequacy ratio, non-performing loan ratio using
CAMEL model, interest expenses to total loan ratio, return on assets , return on equity and
credit deposit ratio. The data have been collected from secondary sources mainly from annual
reports and NRB directives. After analyzing the data through various financial and statistical
tools, presenting the analyzed data in different diagrams such as bar graph and trend line, and
interpreting them, following conclusions can be drawn:

ADBL, Sanima bank and Nabil bank are able to manage their performance effectively and
efficiency in their own way. In terms of capital adequacy ratio (CAR), return on assets (ROA) and
credit deposit ratio (CDR), ADBL seems to be able good performance then Nabil bank and
Sanima bank. Similarly Sanima bank seems to be able in good performance more efficiently
than ADBL and Nabil bank in terms of non-performing loan (NPL) ratio. Likewise in terms of
interest expenses to total loan (IETTL) ratio and return on equity (ROE), Nabil bank seems to be
able to managing their good performance than ADBL and Sanima bank.

Non-performing loan ratio of ADBL is higher then Nabil bank and Sanima bank. NPL ratio of
Sanima bank is very low in each fiscal year. It shows Sanima has lower risky investment than
Nabil and ADBL and has managed credit risk more efficiently then ADBL and Nabil bank.
Similarly, Nabil bank has low NPL ratio than ADBL in every fiscal year it shows Nabil bank has
lower risky investment than ADBL. This calculation defines the capital and asset management of
bank which cover first objective of the research according to our research. so the assets and
capital management of ADBL is high.

Interest expenses define the bank management system, which cover the second objective of
our research. Interest expenses to total loan ratio of Sanima bank is higher than ADBL and Nabil
bank. A higher ratio indicates that a company has a better capacity to cover its interest
expense. It indicates that Sanima bank has well managed the quality of management then ADBL
and Nabil bank.

CDR will find the liquidity of bank. Credit deposit ratio of ADBL is higher than Nabil bank and
Sanima bank. It means ADBL has maintained to higher liquidity than Nabil bank and Sanima
bank. Sanima bank has lower credit deposit ratio than ADBL and Nabil bank, Sanima has
maintained lower liquidity than ADBL and Nabil bank. Liquidity of the ADBL is high so we can
invest and bank can further invest.

Return on assets find earning which calculate profitability of bank .ROA of ADBL is higher then
Nabil bank and Sanima bank. It shown that ADBL is well managed the investment of assets then
Sanima and Nabil bank. Sanima bank has lower return on assets than Nabil bank and ADBL it
means Sanima has poor managed their assets than ADBL and Nabil bank. Return on equity
(ROE) of Nabil bank has higher then Sanima bank and ADBL. It shown Nabil bank has well
managed their equity than ADBL and Sanima bank. ADBL has lower return on equity than Nabil
and Sanima. This mean ADBL has poor managed their equity than Nabil bank and Sanima. So we
can invest a trust Sanima bank.
From the study, comparative leverage and profitability analysis of Nepalese commercial banks
(ADBL, Sanima Bank and Nabil Bank) which were based on CAMEL Model framework, concluded
that ADBL is show high performance comparatively Sanima Bank ltd. And Nabil Bank ltd.

3.3 Implications

This study examines the impact on the financial performance of commercial Banks in Nepal.
Three commercials banks were taken as a sample for the purpose of analysis of financial
performance. The study has observed different financial tools such as and capital adequacy
ratio (CAR), non-performing loan (NPL) ratio, interest expenses to total loan (IETTL) ratio, return
on assets (ROA), return on equity (ROE) and credit deposit ratio (CDR) for the analysis of
performance of banks over different fiscal years from FY 2075/76 to FY 2079/80. Based on
major findings, discussions, summary and conclusions drawn from the study, the study has
several significant implications on various fields.

The study has compared the leverage and profitability of three commercial banks i.e. ADBL,
Nabil and Sanima. These commercial banks may improve their performance on CAMEL
management on the following data understanding how banks are managing their performance.
Similarly, the trend lines of various ratios determined through collected data help them in
predicting their future performance and take necessary actions if any improvements are
required on the area of CAMEL analysis. Furthermore, the study has observed the
implementation of NRB directives on mitigation of credit risks by these banks which may help
the internal audit and compliance department of the sample banks to ensure that the directives
are properly implemented.

The future researchers who have interest on financial performance area can conduct their
research reviewing the study. The study would be important as it provide theoretical as well as
conceptual framework of different aspect of financial performance analysis. The study has
observed ten different fiscal years from FY 2075/76 to FY 2079/80. The future researcher can
focus on any other related bank in their wish in which there is no study conducted. The model
that can be used to calculate can be different. Other relevant data can be used to perform
these kinds of research study. Primary data can be collected among customer investor and
employee of the banker. Further carry out their research on upcoming fiscal years.

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