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

Abstract

This study examines the impact of capital adequacy and cost income ratios on the profitability of commercial banks in Nepal. The main objective of this study is to examine relationship between various variables and study the impact of Capital Adequacy, Cost to Income, Equity to Total Assets, and Debt to Equity, Liquidity and Bank Size on profitability of commercial banks in Nepal. Descriptive and causal comparative research design were used to achieve research objectives. Three commercial banks -Standard charted Bank Limited, Nepal SBI Bank Limited and Himalayan Bank Limited were selected as the research sample for the study from fiscal year 2012/13 to 2022/23 fiscal year. The study was fully based on secondary data collected from the annual reports of sample bank, number of institutions and regulatory authorities like Nepal Rastra Bank, Nepal Stock Exchange, and Security Exchange Board of Nepal. Financial metrics like the ROA and ROE efficiency ratio and statistical tools such as mean, standard deviation, coefficient of Variation, correlation, regression analysis was used. Variables like capital adequacy, cost-to income ratio, equity-to assets ratio, liquidity ratio and bank size were used as independent variables. Similarly, ROA and ROE were dependent variables of study. The study found that the Cost-Income Ratio (CIR) has a strong negative correlation with both Return on Assets (ROA) and Return on Equity (ROE), the Capital Adequacy Ratio (CAR) demonstrated a positive correlation with ROA, CAR did not show a significant impact on ROE and Bank Size (BS) was negatively correlated with both ROA and ROE. The findings of regression analysis indicate that CIR and BS are significant determinants of profitability. Other ratios such as CAR, Equity to Assets Ratio (EAR), Debt to Equity Ratio (DER), and Liquidity Ratio (LR) did not show significant effects on profitability measures in the current study. This suggests that while capital adequacy and cost management are critical, other financial ratios may have less influence on profitability or their impact may be context specific. The findings provide valuable insights for bank management, policymakers, and investors, emphasizing the need for a balanced approach to capital management and cost control to ensure sustainable profitability and financial stability.