A COMPARATIVE STUDY OF PROFITABILITY

ANALYSIS OF LAXMI SUNRISE BANK LTD

A Proposal

By
Pratima Bayalkoti
T.U. Regd. No. : 7-2-285-112-2019
Symbol No: 702850031
Drabya Shah Multiple Campus

Submitted to
Faculty of Management
Tribhuwan University
Kathmandu

In Partial Fulfillment of the Requirements for the Degree of

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

Gorkha, Nepal

July, 2024
 CHAPTER - I
INTRODUCTION
1.1 Background of the Study
Profit is the money a business pulls in after accounting for all expenses. Whether it's
a lemonade stand or a publicly-traded multinational company, the primary goal of
any business is to earn money, therefore a business performance is based on
profitability, in its various forms. Profit describes the financial benefit realized when
revenue generated from a business activity exceeds the expenses, costs, and taxes
involved in sustaining the activity in question. Any profits earned funnel back to
business owners, who choose to either pocket the cash or reinvest it back into the
business. Profit is calculated as total revenue less total expenses. (Thapa, 2014)

Some analysts are interested in top-line profitability, whereas others are interested in
profitability before taxes and other expenses. Still others are only concerned with
profitability after all expenses have been paid.

Profitability means ability to make profit from all the business activities of an
Organization, bank, firm, or an enterprise. It shows how efficiently the Management
can make profit by using all the resources available in the market. According to
Harward & Upton, “profitability is the ‘the ability of a given investment to earn a
return from its use.” However, the term ‘Profitability’ is not synonymous to the term
‘Efficiency’. Profitability is an index of efficiency; and is regarded as a measure of
efficiency and management guide to greater efficiency. However, profitability is an
important yardstick for measuring the efficiency, the extent of profitability cannot be
taken as a final proof of efficiency. Sometimes satisfactory profits can mark
inefficiency and conversely, a proper degree of efficiency can be accompanied by an
absence of profit. The net profit figure simply reveals a satisfactory balance between
the values receive and value given. The change in operational efficiency is merely one
of the factors on which profitability of an enterprise largely depends. Moreover, there
are many other factors besides efficiency, which affect the profitability. (Pandey,
2017)

Sometimes, the terms ‘Profit’ and ‘Profitability’ are used interchangeably. But in real
sense, there is a difference between the two. Profit is an absolute term, whereas, the
profitability is a relative concept. However, they are closely related and mutually
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interdependent, having distinct roles in business. Profit refers to the total income
earned by the enterprise during the specified period of time, while profitability refers
to the operating efficiency of the enterprise. It is the ability of the enterprise to make
profit on sales. It is the ability of enterprise to get sufficient return on the capital and
employees used in the business operation. As Weston and Brigham rightly notes “to
the financial management profit is the test of efficiency and a measure of control, to
the owners a measure of the worth of their investment, to the creditors the margin of
safety, to the government a measure of taxable capacity and a basis of legislative
action and to the country profit is an index of economic progress, national income
generated and the rise in the standard of living “while profitability is an outcome of
profit. In other words, no profit drives towards profitability. Firms having same
amount of profit may vary in terms of profitability. That is why has rightly stated,
“Profit in two separate business concern may be identical, yet, many a times, and it
usually happens that their profitability varies when measured in terms of size of
investment”. Shrestha, K (2016)

A bank is financial institution that accepts deposit from the public and creates credit.
Leading activities can be performed either directly or indirectly through capital
markets. Due to their impotence in the financial stability of a country, banks are highly
regulated in most countries. Most nation have institutionalized a system known as
fractional reserve banking under which bank hold liquid assets equal to only a portion
of their current liabilities. In additional to their regulation intended to ensure liquidity
banks are generally subject to minimum capital requirement based on an international
of set capital standard known as the Basel accords. (wikipedia.org)

The term 'bank' is derived from the Latin word 'bancus', Italian word 'banca' and
French word 'banque' all of which mean 'a bench'. At ancient times there used to be
some moneylenders who sat in the bench for keeping, lending and exchanging of
money in the market place.

Bank is a financial intermediary accepting deposit and granting loans. In fact, a

modern bank performs variety of function that is difficult to precise and general
definition of a bank.
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According to Kinly (2015), "A bank is an establishment which makes to individuals

such advance of money as may be required and safely made, and to which individuals
entrust money when not required by them for use."

According to Crowther, C.R. ( 2016) "A bank collects money from those who have it
to spare or who are saving it out of their incomes, and it lends this money to those
who require it".

1.2 Profile of the Organization

Laxmi Sunrise Bank Limited is a commercial bank in Nepal. The bank is an ‘A’ class
commercial bank licensed by Nepal Rastra Bank and has branches all across the
nation with its head office in Kathmandu which provides entire commercial banking
services. The bank was formed with merger between Laxmi Bank Limited and
Sunrise Bank Limited and started joints operations from July 14 2023 and renamed as
Laxmi Sunrise Bank Limited.

The bank's shares are publicly traded as an 'A' category company in the Nepal Stock
Exchange. The bank currently has 262 branches, 138 branchless banking units, 28
extension counters and 328 ATM terminals.

Correspondent Network
The bank has been maintaining correspondent relationships with various international
banks from various countries to facilitate trade, remittance, and other cross border
services. Through these correspondents, the bank is able to provide services in any
major currencies in the world.

The banking sector is experiencing rapid growth in Nepal and has expanded
significantly following the implementation of liberalization policies by the
government. Presently there are over two dozen operational banks in Nepal. Owing to
security concerns and political instability, the government has been unable to
adequately focus on the business and industry sector. The regulation and supervision
of the banking industry, like other industries has been weakened, resulting in an
increase in unfair and unhealthy competition. Costumers and stakeholders are
disheartened to learn that banks have colluded on occasion to bid on Treasury Bills.
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1.3 Objectives of the Study

The main objective of the study is to analyze financial performance of and solvency
position of this bank through use of different ratios. Other objective of this study is as
following:
i. To determine factors of profitability
ii. To evaluate profitability ratio of Laxmi Sunrise Bank Limited.

1.4 Rationale
Banking sectors has been one of the major contributor’s national providing varieties
of disbursement to different sectors, enabling to boost the GDP. Hence, the
performance of this sector needs to be above the part to any other field. This thesis
will help to know the financial performance Laxmi Sunrise Bank Limited Limited.
This study will also helpful as literature for the future study about the relating topics.
Apart from this, the institution and firm can allow the suggestion of this study to make
their policy and strategy more practical and scientific. The accounting figures
presented in the financial statements do not convey and meaningful understanding, it
need to be analyzed and interpreted to know the financial position and performance of
the banks. This study will be beneficial to different parties concerned with this bank
as well as other interested parties especially it will be beneficial to,
i. Management of bank.
ii. Lenders and borrowers of the bank.
iii. Policy maker of the bank.
iv. Concerned parties and general interested parties of the bank.
v. Customer of the bank

1.5 Review of Literature

1.5.1 Conceptual Review
Determinants of bank profitability can be split between those that are internal and
external. Internal determinants of bank profitability can be defined as those factors
that are influenced by the bank’s management decisions and policy objectives.
Management effects are the results of differences in bank management objectives,
policies, decisions, and actions reflected in differences in bank including profitability.
Management decisions, especially regarding loan portfolio concentration, were an
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important contributing factor in bank performance. Researchers frequently attribute

good bank performance to quality management. Management quality is assessed in
terms of senior officers’ awareness and control of the bank’s polices and performance.

Most of the ratios were significantly related to profitability, particularly capital ratios,
interest paid and received, salaries and wages. A number of studies have included that
expense control is the primary determinant of bank profitability. Expense
management offers a major and consistent opportunity for profitability improvement.
With the large size and the large differences in salaries and wages, the efficient use of
labour is a key determinant of relative profitability. Staff expenses, as conventional
wisdom proposes, is expected to be inversely related to profitability because these
cost reduce the ‘bottom line’ or the total operations of the bank. The level of staff
expenses appears to have a negative impact on banks’ ROA in the study. There is a
positive relationship between staffs and total profits.

External determinants of bank profitability are concerned with those factors which are
not influenced by specific bank’s decisions and policies, but by events outside the
influence of the bank. The steps of analysis are as follows
i) Selection of the information relevant to the decision.
ii) Arrangement or the selected information to highlight the significant relationship of
the financial yardsticks.
iii) Interpretation and drawing of inferences and conclusions.

To evaluate the profitability ratio of a firm, the analyst needs a certain parameters of
the company by which the quantitative relationship and its position come out. The
most widely and effective used tool of the profitability ratio is the ratio analysis. The
profitability ratio is the measurement of relationship between two accounting figures,
expressed in mathematical way or the numerical relationship between two variables
expressed as (i) percentage or, (ii) fraction or (iii) in proportion of numbers.

Factors that affect the profitability

1. The degree of competition
If a firm has monopoly power then it has little competition. Therefore demand will be
more inelastic. This enables the firm to increase profits by increasing the price. For
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example, very profitable firms, such as Google and Microsoft have developed a
degree of monopoly power, with limited competition.
However, in theory, government regulation may prevent monopolies abusing their
power, e.g. the OFT can stop firms colluding (to increase price) Regulators like
OFGEM can limit the prices of gas and electricity firms.

2. If the market is very competitive, then profit will be lower. This is because
consumers would only buy from the cheapest firms. Also important is the idea
of contestability. Market contestability is how easy it is for new firms to enter the
market. If entry is easy then firms will always face the threat of competition; even if it
is just “hit and run competition” – this will reduce profits.

3. The strength of demand. For example, demand will be high if the product is
fashionable, e.g. mobile phone companies were profitable during the period of rising
demand and growth in the market. Products which have falling demand like Spam
(tinned meat) will lead to low profit for the company. Some companies, like Apple,
have successfully carved out strong brand loyalty making customers demand many of
the new Apple products.
However, in recent years, profits for mobile phone companies have fallen because the
high profit encouraged oversupply, negating the increase in demand.

4. The state of the economy. If there is economic growth then there will be increased
demand for most products especially luxury products with a high-income elasticity of
demand. For example, manufacturers of luxury sports cars will benefit from economic
growth but will suffer in times of recession.

5. Advertising. A successful advertising campaign can increase demand and make the
product more inelastic demand. However, the increased revenue will need to cover the
costs of the advertising. Sometimes the best methods are word of mouth. For example,
it was not necessary for YouTube to do much advertising.
6. Substitutes, if there are many substitutes or substitutes are expensive then demand
for the product will be higher. Similarly, complementary goods will be important for
the profits of a company.
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7. Relative costs. An increase in costs will decrease profits; this could include labour
costs, raw material costs and cost of rent. For example, a devaluation of the exchange
rate would increase the cost of imports, and therefore companies who imported raw
materials would face an increase in costs. Alternatively, if the firm is able to increase
productivity by improving technology then profits should increase. If a firm imports
raw materials the exchange rate will be important. A depreciation making imports
more expensive. However, a depreciation of the exchange rate is good for exporters
who will become more competitive.

8. Economies of scale. A firm with high fixed costs will need to produce a lot to
benefit from economies of scale and produce on the minimum efficient scale,
otherwise average costs will be too high. For example in the steel industry, we have
seen a lot of rationalization where medium-sized firms have lost their competitiveness
and had to merge with others.

9. Dynamically efficient. If a firm is not dynamically efficient then overtime costs

will increase. For example, state monopolies often had little incentive to cut costs, e.g.
get rid of surplus labor. Therefore before privatization, they made little profit,
however with the workings and incentives of the market they became more efficient.

10. Price discrimination. If the firm can price discriminate it will be more efficient.
This involves charging different prices for the same good so that the firm can charge
higher prices to those with inelastic demand. This is important for airline firms.

11. Management. Successful management is important for the long-term growth and
profitability of firms. For example, poor management can lead to a decline in worker
morale, which harms customer service and worker turnover. Also, firms may suffer
from taking wrong expansion plans. For example, many banks took out risky
subprime mortgages, but this led to large losses. Tesco suffered from expanding into
unrelated business, like garden center. This led to over-stretching the company and
losing sight of their core business.
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12. Objectives of firms. Not all firms are profit maximizing. Some firms may seek to
increase market share, in which case profits will be sacrificed to gain market share.
For example, this is the strategy of Walmart and to an extent Amazon.

13. Exchange rate. If a firm relies on exports, a depreciation in the exchange rate will
increase profitability. A fall in the exchange rate makes exports cheaper to foreign
buyers. Therefore, the firm can sell more or choose to have a bigger profit margin. If
the firm imports raw materials, a depreciation will increase costs of production.

1.5.2 Review of Previous Studies

The profit planning in the context of particularly commercial banks seems to be a new
subject of study for research and analysis. So far this researcher could found some
studies that have been made in this topic. Here are reviewed thesis some are
manufacturing sector and some are related with financial sector which can help us to
understand about their objectives, used statistical tools and major findings about this
topic.

Sharma, (2015) is conducted a study on “Profit Planning in Commercial Banks: A

Case Study of Nepal Bangladesh Bank ” The major concern of Mr. Sharma is to study
the profit planning in commercial bank by taking a case study of Nepal Bangladesh
Bank. His major objectives and some of major findings are as follows:
Objectives:
i. To highlight the current profit planning premises adopted and its effectiveness
in NB Bank.
ii. To observe NB bank's profit planning on the basis of overall managerial
budgets developed by the bank.
iii. To analyze the variance of budgeted and actual achievements.
iv. To study the growth of the business of the bank over the period.
v. To provide suggestion and recommendation for improvements of the overall
profitability of the bank.
Major Findings:
i. NB bank has adopting a policy of keep minimum number of employees as
possible.
ii. The decision making process is highly centralized.
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iii. NB bank lacks active and organized planning department to undertake

innovative products R & D works.
iv. Lack of staff training.
v. NB bank has policy of taking highly qualified employees.
vi. The rate of expansion of branches of NB was increased.
vii. Controlling functions of the branches are so far being carried out directly by
Head Office, which may be difficult in the days to come because of its wide
geographical extend.
viii. Objectives of the Bank are expressed in literary form and not specified clearly.
ix. The major resources of NB bank are cost bearing deposit.
x. The budgeted and actual deposit mobilization by the bank has been well meet
every year.
xi. Major portion of resources has been deployed in loan and advances
xii. The budgeted and actual deployment has been met every year.
xiii. The interest expenses of the bank are fund increasing each year corresponding
to the increase in deposit. The interest expenses are perfectly and positively
correlated with deposit.
xiv. The amount of interest income is increasing every year corresponding to
increase in LDO. There is a perfect and positive correlation between interest
income and loan and advances.
xv. The other income of bank is also in increasing trend.
xvi. The bank has suffered of by loss during the first year of it's operation. It is in
constantly increasing trend afterward. As the rate of growth of spreads is
higher than burden the profitability of the bank is increasing.

Rayamajhi, (2016) is conducted a research on "Profitability of NB Bank Limited with

comparison to other J/V Banks."
Objectives:
i. To find out the profitability position of JV banks and to disseminate quality
information.
ii. To analyze the profit trend of NB Bank.
iii. To ascertain the comparative position of profitability of NB bank with respect
to other JV banks.
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Some of Major Findings:

i. NB bank has not been able to perform well the bank is in serious position.
ii. ROE, EPS, Net profit, Loan loss provision and interest payout ratio is worse in
comparison with other JV bank's average.
iii. Staff expenses per employees, Credit deposit ratio is better with comparison of
other JV Banks.
iv. The assets quality of bank is very poor.

Thapa, (2017) has conducted a research work on the topic of " A study on profit
planning and control of Nepal SBI Bank limited" his objectives and major finding are
as follows:
Objectives:
i. To identify the profit planning process and adopted by Nepal SBI bank
limited.
ii. To sketch the trend of profit and loss.
iii. To evaluate the variance between target and actual performance.
iv. To recommend the steps to be taken to improve the profit planning process.

Findings:
i. Nepal SBI does not prepare long term strategic profit plan. It only prepares
short term profit plan which is usually referred as budget time period of this
budget covers one fiscal year.
ii. The budget is not based on past performance but on targeted growth, which is
very optimistic in booth the budgeted year.
iii. Nepal SBI has not made any in depth analysis of its strength and weakness.
iv. Its mission and objectives have not clearly defined and delegated to the lower
levels.
v. The bank has not been able to maintain a minimum level of co-ordination
between the departments and staff.
vi. The profit budget is extremely ambiguous. It is not based on scientific method
or past trend analysis but based on a specific target put forward by the
governing board.
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vii. The bank is facing competition from increasing number of financial

institutions in these years. These had led to substantial decrease in interest
rates in the market thus attributing to lower yield.
viii. Budgets are prepared just to fulfill the formalities but these are not used
effectively from the profit planning process.
This researcher has reviewed some of manufacturing related profit planning too.

Dahal, (2018) is conducted a research entitled" Planning process and it's impact on
profitability " A case study of Gorkha Patra Corporation'' his objectives and some of
major findings are listed below.
Objectives:
i. To examine the present practice and effectiveness of profit planning in
Gorkhapatra corporation.
ii. To evaluate the variance between target and actual performance of this
corporation
iii. To analyze the preparation of various functional budget of Gorkhapatra
corporation.
iv. To point out the suggestion and recommendation for improving the profit
plan.
Major Findings:
i. GC does not prepare the long term strategic profit plan but it prepares
tactical short term profit plan.
ii. GC has not adequately considered controllable and non-controllable
variables affecting the corporation. They has no in depth analysis of the
corporation's strength and weakness.
iii. The objectives of the corporation are not clear, with regard to profit
making and market penetration.
iv. The plans are prepared from top level only. There is no letter
communication between the top level and lower level management
regarding the corporation's goals and objectives.
v. GC has not a system of periodical performance reports. Corporation is not
seriously conscious to it poor performance.
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vi. Actual production is made in accordance with the actual sales. Therefore
production activities are not done according to the budgeted production but
this done according to the recent data of actual sales.

1.6 Methods
Research is a systematic and organized effort to investigate a specific problem. That
needs a solution. Management research has become very necessary for organization
today. This research includes the study in variety of subject like profitability analysis
portfolio management, sources and uses of funds etc. A numbers of research methods
and design have been developed in social sconce.

1.6.1 Research design

Keeping in mind the objective of the study, descriptive cum analytical research design
has been followed. The study is based on the wide range of variables and factors
influencing profitability ratio of the bank. Comparative data banks are presented in
such a way to make the report informative to the reader.

1.6.2 Population and sample

Population of the study is 20 commercial banks operating in the country. But, it is not
possible to study all data related with these 20 commercial banks. And Laxmi Sunrise
Bank Limited is taken as a Sample by using convenience sampling method.

1.6.3 Nature and Sources of data

As to get information of Laxmi Sunrise Bank Limited, branch office of Chitwan the
data are collected from the following sources:
Secondary data
Secondary data’s have been collected by the documents relating with this field work.
Besides this the help of book also collects the information Bulletin, annual report
related to Laxmi Sunrise Bank Limited.

1.6.4 Data Collection Procedures

The necessary data collected by two ways:
i. Primary data collection method
ii. Secondary data collection method
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Secondary Data
As the secondary data the executive chief of Laxmi Sunrise Bank Limited. provided 2
years Balance sheet and P & L A/C through his personnel.

1.6.5 Data Analysis Techniques

Data gather from various sources were in raw form. They were managed processed
analyzed and presented in proper tables and formats through that use of finance
accounting and statistical tools.
a. Ratio Analysis
b. Pie Chart.

1.7 Limitation of the study

Regardless all the limitation and draw backs but with the self-effort and teacher’s
guideline the stress has been given for the completion of this field work report. But
though this field work report is prepared in small area. Many hindrances and
limitation were faced during the preparation and some them are mentioned below.
i. All the data are especially based on Bank report.
ii. This field work report only tries to study on deposit during the year
iii. Even if data are accumulated from concern Bank; here they are presented in
round figures, so, they are not absolute figure.
iv. The data are related with the fiscal year 2078/079 – 2079/080.
v. This study is totally based on secondary data.