DETERMINANTS OF PROFITABILITY OF COMMERCIAL BANKS IN NEPAL

Abstract

This study's primary goal is to determine how profitability drivers affect Nepalese commercial banks' profitability. Within the framework of financial performance research, the study investigates the correlations and predictive variables influencing Return on Equity (ROE) and Return on Assets (ROA). The correlation analysis reveals positive relationships between ROA and liquidity, operating expenses, GDP, and inflation. These relationships suggest that more effective asset utilization can be achieved through improved liquidity management, increased operating expenses, larger firm sizes, favorable macroeconomic conditions, and inflation. On the other hand, nonperforming loans (NPL) significantly reduce return on assets (ROA), emphasizing the need of credit risk management. These correlations are supported by the regression analysis, which shows substantial negative coefficients for non-performing loans and the cost-to-deposit ratio (CDR) and significant positive coefficients for liquidity, operational expenditures, GDP, and inflation. Remarkably, company size had a negative influence on ROA in the regression model, indicating that larger businesses can have trouble keeping their asset efficiency. Strong capital foundations are important because they have a beneficial impact on ROA, as demonstrated by the capital adequacy ratio (CAR).These conclusions are supported by the regression analysis, which shows substantial negative coefficients for non-performing loans, the cost-to-deposit ratio, and business size, and significant positive coefficients for CAR, liquidity, GDP, and inflation. Higher equity returns may be attributed to improved capital adequacy and liquidity management, as indicated by the positive coefficients for both CAR and liquidity. Given that business size has a negative effect on ROE, larger organizations may find it more difficult to generate equity returns efficiently than smaller ones. Financial and economic elements are combined to impact both ROA and ROE. These performance parameters are positively impacted by efficient management of liquidity, operational costs, capital sufficiency, and good macroeconomic conditions. Conversely, increased non-performing loan levels and cost inefficiencies have a negative impact on ROE and ROA. It's interesting to note that although larger organizations tend to have higher equity returns and greater asset utilization, the regression analysis raises the possibility that larger firms may have difficulties being efficient.