Impact of Financial Distress on Profitability of Nepalese Commercial Banks

Abstract

he study examines the impact of financial distress on the financial performance of Nepalese commercial banks. Return on assets and earnings per share are the dependent variables. The independent variables are non-performing loan, leverage, liquidity ratio, capital adequacy ratio and credit to cash plus deposits (CCD). This study is based on secondary data of 20 commercial banks with 100 observations for the period of 2013/14 to 2017/18. The data are collected from the annual reports of the selected commercial banks. The regression models are estimated to test the significance and impact of financial distress on the financial performance of Nepalese commercial banks. The result shows that leverage, liquidity ratio and CCD ratio are positively correlated to return on assets which indicates that increase in leverage ratio leads to increase in return on assets. Similarly, it indicates that higher the capital adequacy ratio, higher would be the return on assets. Likewise, increase in CCD ratio leads to increase in return on assets. The result also shows that there is a negative relationship between earnings per share and non-performing loan which reveals that higher the nonperforming loan, lower would be the earnings per share. Likewise, there is a positive

relationship between leverage and earnings per share which indicates that increase in leverage

ratio leads to increase in earnings per share. Likewise, there is positive relation between CCD ratio and earnings per share which shows that increase in CCD ratio leads to increase in earnings per share. The regression results show that the beta coefficients for non-performing loans are negative with earnings per share. The study also shows that the beta coefficients for leverage, liquidity ratio and CCD ratio are positive with return on assets and earnings per share of Nepalese commercial banks. Key words: Financial distress, financial performance, leverage, and liquidity.