| Title : | Factors influencing the profitability of domestic and joint venture banks: a case of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Sita Sharma, Author | | Publication Date: | 2017 | | Pagination: | 103p. | | Size: | GRP/Thesis | | Accompanying material: | 10/B | | Languages : | English | | Abstract: | Banking sector is the backbone of any economy and plays an important role in the economic development of a country and its financial stability. The efficiency of financial intermediation can also affect economic growth. A strong banking sector is able to confront negative shocks and contribute to the stability of the financial system (Almazari, 2014). Banks act as financial intermediaries between savers and investors. In this process, banks secure reasonable return for the savers, make funds available to the investors at a cost and earn profit(Haque& Tariq, 2012). The productivity of an economy today depends largely on the soundness of the financial system.The banking system is therefore seen as an essential part of an economy and represents one of the most important components of a nation’s capital. In their basic roles, commercial banks serve as financial intermediaries between savers and investors, are the means through which the central bank (government) implements its monetary policy, and they serve as the main medium of payment for businesses (Opoku-Agyemang, 2015).
Determinants of bank profitability can be split into internal and external factors. Internal determinants of bank profitability can be defined as those factors that are influenced by the bank’s management decisions and policy objectives. External determinants of bank profitability are concerned with those factors that are not influenced by the bank’s management decisions and policies, by events outside the influence of the bank (Staikouras & Wood, 2004). Economies that have a profitable banking sector are better able to withstand negative shocks and contribute to the stability of the financial system (Panayiotiset al.,2005).
This study attempts to explore the factor influencing the profitability of selected commercial banks in context of Nepal. This study is based on the secondary data for 20 commercial banks with 120 observations for the period of 2010/11 to 2015/16. The data and information are collected from various issues of Banking and Financial Statistics, Bank Supervision Report published by NRB and annual reports of the selected commercial banks. The research design adopted in this study is descriptive and causal comparative research design as this study examines the impact of capital adequacy ratio, bank size, liquidity ratio, interest rate spread, non-performing loan ratio and debt to equity ratio and on performance of Nepalese commercial banks.
The result shows that the average return on asset is highest for ADBL (2.90 percent) and lowest for JBNL (0.62 percent). SCBL has the highest average Tobin’s Q (1.80 times) and ADBL has the lowest (0.98 times). The average capital adequacy is highest for JBNL (18.47 percent) and lowest for NBL(0.95) percent. Similarly, average bank size is highest for EBL (Rs. 25.50 billion) and lowest for JBNL (Rs. 23.46 billion). The average liquidity ratio is highest for SCBL with a mean of 31.27 percent and ADBL has the lowest liquidity ratio with a mean of 8.21 percent. Likewise, average interest rate spread is highest for NBL with a mean of 6.43 percent and JBNL has the lowest interest rate spread with a mean of 2.84 percent. The average non-performing loan ratio is highest for NBBL with a mean of 14.48 percent and SBL has the lowest liquidity ratio with a mean of 0.13 percent. The average debt to equity ratio is highest for NSBI with a mean of 15.93 times and SIDBL has the lowest debt to equity ratio with a mean of -1.62 times.
The descriptive statistics for the domestic banks reveals that the average return on assets, Tobin’s Q, capital adequacy ratio, bank size, liquidity ratio, interest rate spread, non-performing loan ratio and debt to equity ratio is 1.40 percent, 1.17 times, 12.49 percent, Rs. 24.37 billion, 16.45 percent, 4.31 percent, 2.29 percent and7.90 times respectively. Similarly, the descriptive statistics for the joint venture banks reveals that the average return on assets, Tobin’s Q, capital adequacy ratio, bank size, liquidity ratio, interest rate spread, non-performing loan ratio and debt to equity ratio is 2.04 percent, 1.41 times, 11.95 percent, Rs. 24.80 billion, 19.25 percent, 4.40 percent, 3.45 percent and12.86 times respectively.
The correlation matrix for the joint venture banks revealed that capital adequacy, liquidity ratio and interest rate spread are positively related with return on assets. Likewise, there is negative relationship of bank size, non-performing loan ratio and debt to equity ratio with return on assets.
Similarly, the correlation matrix for the joint venture banks revealed that capital adequacy, bank size, liquidity ratio and interest rate spread are positively related with Tobin’s Q. Likewise, there is negative relationship of non-performing loan ratio and debt to equity ratio with Tobin’s Q. On the other hand, the correlation matrix for the domestic banks revealed that capital adequacy, bank size, interest rate spread, non-performing loan ratio and debt to equity ratio are positively related with return on assets. Likewise, there is negative relationship of liquidity ratio with return on assets.Similarly, the correlation matrix for the joint venture banks revealed that capital adequacy ratio, bank size, liquidity ratio and debt to equity ratio are positively related with Tobin’s Q. Likewise, there is negative relationship of interest rate spread and non-performing loan ratio with Tobin’s Q.
The regression results indicate that capital adequacy ratio and liquidity ratio have positive impact on return on assets in case of both joint venture banks and domestic banks. Similarly, bank size has negative impact on return on assets for joint venture banks. However, results show that bank size has positive and significant impact on banks performance in the case of domestic banks. This study also reveals that non-performing loan ratio and debt to equity ratiohas negative impact on the return on assets for both joint venture and domestic banks. Likewise, results show that the capital adequacy ratio, bank size, liquidity ratio, non-performing loan ratio and interest rate spread have positive impact on Tobin’s Q for joint venture banks. However, results shows that the debt to equity ratio has negative impact on Tobin’s Q. Similarly, capital adequacy ratio, bank size, liquidity ratio and debt to equity ratiohave positive impact on Tobins Q for domestic banks. However, results shows that theinterest rate spread and non-performing loanratio have negative impact on Tobin’s Q.
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Factors influencing the profitability of domestic and joint venture banks: a case of Nepalese commercial banks [printed text] / Sita Sharma, Author . - 2017 . - 103p. ; GRP/Thesis + 10/B. Languages : English | Abstract: | Banking sector is the backbone of any economy and plays an important role in the economic development of a country and its financial stability. The efficiency of financial intermediation can also affect economic growth. A strong banking sector is able to confront negative shocks and contribute to the stability of the financial system (Almazari, 2014). Banks act as financial intermediaries between savers and investors. In this process, banks secure reasonable return for the savers, make funds available to the investors at a cost and earn profit(Haque& Tariq, 2012). The productivity of an economy today depends largely on the soundness of the financial system.The banking system is therefore seen as an essential part of an economy and represents one of the most important components of a nation’s capital. In their basic roles, commercial banks serve as financial intermediaries between savers and investors, are the means through which the central bank (government) implements its monetary policy, and they serve as the main medium of payment for businesses (Opoku-Agyemang, 2015).
Determinants of bank profitability can be split into internal and external factors. Internal determinants of bank profitability can be defined as those factors that are influenced by the bank’s management decisions and policy objectives. External determinants of bank profitability are concerned with those factors that are not influenced by the bank’s management decisions and policies, by events outside the influence of the bank (Staikouras & Wood, 2004). Economies that have a profitable banking sector are better able to withstand negative shocks and contribute to the stability of the financial system (Panayiotiset al.,2005).
This study attempts to explore the factor influencing the profitability of selected commercial banks in context of Nepal. This study is based on the secondary data for 20 commercial banks with 120 observations for the period of 2010/11 to 2015/16. The data and information are collected from various issues of Banking and Financial Statistics, Bank Supervision Report published by NRB and annual reports of the selected commercial banks. The research design adopted in this study is descriptive and causal comparative research design as this study examines the impact of capital adequacy ratio, bank size, liquidity ratio, interest rate spread, non-performing loan ratio and debt to equity ratio and on performance of Nepalese commercial banks.
The result shows that the average return on asset is highest for ADBL (2.90 percent) and lowest for JBNL (0.62 percent). SCBL has the highest average Tobin’s Q (1.80 times) and ADBL has the lowest (0.98 times). The average capital adequacy is highest for JBNL (18.47 percent) and lowest for NBL(0.95) percent. Similarly, average bank size is highest for EBL (Rs. 25.50 billion) and lowest for JBNL (Rs. 23.46 billion). The average liquidity ratio is highest for SCBL with a mean of 31.27 percent and ADBL has the lowest liquidity ratio with a mean of 8.21 percent. Likewise, average interest rate spread is highest for NBL with a mean of 6.43 percent and JBNL has the lowest interest rate spread with a mean of 2.84 percent. The average non-performing loan ratio is highest for NBBL with a mean of 14.48 percent and SBL has the lowest liquidity ratio with a mean of 0.13 percent. The average debt to equity ratio is highest for NSBI with a mean of 15.93 times and SIDBL has the lowest debt to equity ratio with a mean of -1.62 times.
The descriptive statistics for the domestic banks reveals that the average return on assets, Tobin’s Q, capital adequacy ratio, bank size, liquidity ratio, interest rate spread, non-performing loan ratio and debt to equity ratio is 1.40 percent, 1.17 times, 12.49 percent, Rs. 24.37 billion, 16.45 percent, 4.31 percent, 2.29 percent and7.90 times respectively. Similarly, the descriptive statistics for the joint venture banks reveals that the average return on assets, Tobin’s Q, capital adequacy ratio, bank size, liquidity ratio, interest rate spread, non-performing loan ratio and debt to equity ratio is 2.04 percent, 1.41 times, 11.95 percent, Rs. 24.80 billion, 19.25 percent, 4.40 percent, 3.45 percent and12.86 times respectively.
The correlation matrix for the joint venture banks revealed that capital adequacy, liquidity ratio and interest rate spread are positively related with return on assets. Likewise, there is negative relationship of bank size, non-performing loan ratio and debt to equity ratio with return on assets.
Similarly, the correlation matrix for the joint venture banks revealed that capital adequacy, bank size, liquidity ratio and interest rate spread are positively related with Tobin’s Q. Likewise, there is negative relationship of non-performing loan ratio and debt to equity ratio with Tobin’s Q. On the other hand, the correlation matrix for the domestic banks revealed that capital adequacy, bank size, interest rate spread, non-performing loan ratio and debt to equity ratio are positively related with return on assets. Likewise, there is negative relationship of liquidity ratio with return on assets.Similarly, the correlation matrix for the joint venture banks revealed that capital adequacy ratio, bank size, liquidity ratio and debt to equity ratio are positively related with Tobin’s Q. Likewise, there is negative relationship of interest rate spread and non-performing loan ratio with Tobin’s Q.
The regression results indicate that capital adequacy ratio and liquidity ratio have positive impact on return on assets in case of both joint venture banks and domestic banks. Similarly, bank size has negative impact on return on assets for joint venture banks. However, results show that bank size has positive and significant impact on banks performance in the case of domestic banks. This study also reveals that non-performing loan ratio and debt to equity ratiohas negative impact on the return on assets for both joint venture and domestic banks. Likewise, results show that the capital adequacy ratio, bank size, liquidity ratio, non-performing loan ratio and interest rate spread have positive impact on Tobin’s Q for joint venture banks. However, results shows that the debt to equity ratio has negative impact on Tobin’s Q. Similarly, capital adequacy ratio, bank size, liquidity ratio and debt to equity ratiohave positive impact on Tobins Q for domestic banks. However, results shows that theinterest rate spread and non-performing loanratio have negative impact on Tobin’s Q.
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