“DETERMINANTS OF PROFITABILITY OF COMMERCIAL BANKS IN NEPAL”

Abstract

A research thesis is an integral part of the postgraduate study at Tribhuvan University. The study is conducted on the topic “DETERMINANTS OF PROFITABILITY OF COMMERCIAL BANKS IN NEPAL”. It has been under taken to examine and analyze the relationship of bank profitability with bank specific variables of commercial banks and to find out their impact on banks’ profitability. The banking sector’s performance is seen as the replica of economic activities of the nation as a healthy banking system acts as the bedrock of social, economic and industrial growth of a nation. Banking institutions in our country have been assigned a significant role in financing the process of planned economic growth. This study includes nine commercials bank as a sample and ten years period from 2011/12 to 2020/21 for data requirement within the framework of descriptive and analytical research design. The analysis is based on the secondary data published by Nepal Rastra Bank (NRB) and commercial banks. The paper reveals that the ROE and ROA are the major indicators of bank profitability. The trend line describes that ROA and ROE are downward sloping during the sample period. Joint venture banks have higher ROA whereas public banks have higher ROE. Among three banks, joint venture banks have higher profitability. Public banks have higher overhead but their ROE is significantly higher than joint venture and private banks but they compromise with low assets quality and also low capital adequacy ratio. Private and joint venture banks have better assets quality as well as they are able to meet the CAR norms during the sample period. ROA of private banks are lower than public and joint venture banks which reveal that income earned on each unit of shareholders capital by private banks are low. The study also uses some inferential tools and econometric models for better analysis of data. The inferential investigation of the relation between bank profitability and bank performance in Nepalese commercial bank provides several important results. In order to understand how commercial bank’s profitability relates to bank specific factors vi different models has been adopted. Model I explained the effect of ROA on bank profitability. Likewise, model II explained the effect of ROE on bank profitability. Asset size (Ln A) has negative relationship with ROA and ROE. Operating efficiency (CIR) has also negative impact on bank profitability. It shows negative association with both ROA and ROE. Capital requirement (CAR) has negative and insignificant relationship with ROE whereas it has positive and significant relationship with ROA. TL/TA (liquidity risk) has negative association with both ROA and ROE but it is significantly related with ROE. NPL/TL (Asset quality) has positive and insignificant relationship with ROA and ROE. LLP/TL (credit risk) shows negative relationship with ROA and with ROE. Finally, 12.40 percent of variations in ROA and 19.90 percent of variations in ROE are explained by bank specific control variables. These findings show that the level of bank profitability is determined by other factors which include the bank specific variables and the macroeconomic control variables. Hence, commercial banks that are keen on making high profit should concentrate on other factors. Keywords: Profitability, capital adequacy ratio, asset quality, operational efficiency, credit risk and liquidity management