Determinants of Profitability of Commercial Banks in Nepal

Abstract

High revenue generation and wholesome growth of the banks are the utmost aim of a commercial bank which come with careful insight of the prevailing situation and prognosis of the upcoming hurdles. There are certain core factors that govern these and this study was conducted with the objective to analyze the bank specific factors that affect the profitability of commercial banks in Nepal. Out of prevailing 28 commercial banks, secondary data of six commercial banks from year 2011/12 to 2017/18 were considered to analyze the factors that affects profitability and tested the existing relationship between explanatory variables (capital adequacy, loan to total assets, deposit to total assets) and profitability measurement: Return on Assets and Return on Equity by using correlation analysis. The study used descriptive and analytical research approach to analyze factors that affect profitability and the significance was tested at 5% level of significance. SPSS and Excel software were used to analyze the data. Multiple regression models were used to investigate the impact of explanatory variables on bank profitability. The correlation analysis revealed that return on assets (ROA) had negative correlation with explanatory variables capital adequacy ratio (CAR), deposit to total assets (DTAR), Loan to total assets (LTAR) whereas it had positive correlation with ROA. Among these explanatory variables capital adequacy ratio (CAR) had significant positive relation with ROE where as DTAR and LTAR showed negative relationship with ROE. The empirical result revealed that capital adequacy, loan to total assets, deposit to total assets had insignificant negative impact on ROA whereas capital adequacy ratio, loan to total assets had negative impact on ROE whereas Deposit to total assets had significant positive impact on ROE.