DETERMINANTS OF PROFITABILITY OF NEPALESE DEVELOPMENT BANKS

Abstract

This study investigates the determinants of profitability in Nepalese development banks, focusing on the role of key factors such as bank capital, deposits, lending, size, and the CAR. Using secondary data from published financial statements and reports of selected five banks, the analysis employs correlation and regression methods to examine their impact on profitability indicators: the ROA, the ROE, and the Tobin's Q, and aims to provide a comprehensive understanding of how internal and regulatory variables impact profitability and market valuation. The findings reveal significant variability across the banks in terms of size, deposits, and lending, with substantial interdependence among these variables. CAR exhibits a negative relationship with profitability measures, suggesting that regulatory compliance may impose constraints on banks' profitability. ROA demonstrates a negative association with bank capital, deposits, lending, and size, while ROE is positively correlated with ROA, underscoring the alignment between operational efficiency and shareholder returns. Notably, Tobin‘s Q shows a weak relationship with these variables, indicating the influence of external market factors on market-based valuations, but positively correlates with ROE and ROA. The findings further highlight the limited explanatory power of the selected financial variables on profitability metrics, suggesting that while operational factors like bank lending marginally impact profitability, external and qualitative factors such as market conditions, customer satisfaction, and technological innovation warrant further investigation. This research underscores the need for a multidimensional approach to enhancing the performance of Nepalese development banks. Policymakers are urged to strike a balance between regulatory compliance and profitability enhancement, while banks should prioritize efficiency, optimize resource allocation, and embrace technological advancements to remain competitive.