IMPACT OF CAPITAL ADEQUACY AND COST INCOME RATIO ON PERFORMANCE OF COMMERCIAL BANKS IN NEPAL

Abstract

The banking sector plays a crucial role in a country's financial market, contributing significantly to the national economy. The profitability of commercial banks in Nepal is influenced by various internal and external factors. This study aims to investigate the impact of capital adequacy ratio, cost-to-income ratio, bank size, debt-to-equity ratio, and loan-todeposit ratio on the financial performance of Nepalese commercial banks. Financial performance is assessed through return on assets and net interest margin. To conduct this analysis, secondary data from the years 2069/70 to 2078/79 is collected from authorized websites and annual reports of nine sampled commercial banks in Nepal. The study utilizes balanced panel data and employs correlation analysis to examine the relationship between return on assets and independent variables, as well as net interest margin and independent variables separately. Additionally, regression analysis is applied to determine the direction and magnitude of the relationships. The findings reveal that the capital adequacy ratio positively impacts return on assets, while bank size has a negative and significant association with return on assets. Other variables such as cost-to-income ratio, debt-to-equity ratio, and loan-to-deposit ratio show a negative relationship with return on assets. On the other hand, all independent variables, including capital adequacy ratio, cost-to-income ratio, bank size, debtto-equity ratio, and loan-to-deposit ratio, positively influence net interest margin. The study emphasizes the significant impact of the capital adequacy ratio on the performance of commercial banks in Nepal throughout the study period. In conclusion, the research establishes that capital adequacy ratio, cost-to-income ratio, bank size, debt-to-equity ratio, and loan-to-deposit ratio are crucial factors affecting the financial performance of Nepalese commercial banks. Furthermore, these variables consistently exhibit positive effects on net interest margin. Notably, the capital adequacy ratio is identified as having a positive and significant impact on return on assets. Keywords: Capital adequacy ratio, Cost to income ratio, Return on assets, Debt to equity ratio, Loan to deposit ratio.