| Title : | The relationship between capital structure on financial performance of commercial banks in Nepal: a comparative study of public banks, joint venture banks and private banks | | Material Type: | printed text | | Authors: | Nisha Shrestha, Author | | Publication Date: | 2017 | | Pagination: | 135p. | | Size: | GRP/Thesis | | Accompanying material: | 8/B | | Languages : | English | | Descriptors: | Capital structure
| | Class number: | 658.1522 | | Abstract: | In order to finance firm’s overall operations and growth by financing its assets from various sources, it is dependent upon capital structure of the firm. The capital structure of a firm is a mixture of different securities. In general, firms can choose among many alternative capital structures. The capital structure decision is the vital one since the financial performance of an enterprise is directly affected by such decision.In reality, establishing an optimal capital structure is a difficult task. A firm may require an optimal capital structure by issuing a number of securities in a mixture of exact combination of debt and equity (Siddiqui & Shoaib, 2011).Leon (2013) stated that capital structure is the most significant discipline of company’s operations. The capital structure decision is a vital decision with great implication for the firm's sustainability. The ability of the organization to carry out their stakeholders’ need is closely related to the capital structure.The capital structure affects the liquidity and profitability of a firm. Profitability indicates how efficiently management utilizes its total assets in order to generate earnings. The shareholders are concerned with the profitability of a firm because this can predict the future earnings of the firm. The traditional financial literature stated that profitable firms can employ more debt because they are exposed to lower risks of bankruptcy and financial distress (Chen & Hammes, 2004).
The relationship between capital structure and profitability cannot be ignored because the improvement in the profitability is necessary for the long term survivability of the firm. Therefore, it is important to test the relationship between capital structure and the profitability of the firm to make sound capital structure decisions. The study results revealed significantly negative relation between debt and profitability(Shubita & Alsawalhah, 2012). Gajurel (2005) explained the capital structure pattern and its determinants and found that the long term debt ratio is significantly low.Ebaid (2009) examined the capital structure and performance of firms and found that there is negative significant influence of total debt on the financial performance measured by return on assets.Abor (2005) investigated the relationship between capital structure and profitability and found negative relationship between the ratio of long term debt to total assets and ROE. Pradhan & Pokharel (2016) stated that total debt to total assets ratio, long term debt to total assets ratio and short term debt to total assets ratio are negatively related to net interest margin. Bhattarai (2016) examined the relation of capital structure and firm performance and found that the firm performance is significantly positively associated to the firm size and firm size is significantly positively related to profitability (ROA).Assets growth (AG) proposed a positive relationship with return on asset and return on equity (Goyal, 2013).
The major objective of this study is to examine the relationship between capital structure and profitability in Nepalese commercial banks. The results are based on the secondary data and contain the sample of 20 commercial banks of Nepal during the period of 2009/10 to 2014/15. Out of total sampled banks, 6 banks are joint venture, 11 banks are private, and 3 banks are public commercial banks.The data has been collected from the banking and financial statistics and bank supervision report published by Nepal Rastra Bank and annual reports of selected commercial banks.The research design adopted in this study is causal comparative type as it deals with the relationship between capital structure and profitability.
The result shows that NBB has highest average return on assets (3.4797 percent), NABIL has highest average return on equity (32.0024 percent) and ADBL has highest average net interest margin (6.11 percent) among the selected commercial banks over the study period. The study shows the decreasing trend of ROA for joint venture banks and private banks. Meanwhile, it shows the increasing trend of ROA for public banks. Similarly, it shows the decreasing trend of ROE for joint venture banks and private banks while it shows the increasing trend of ROE for public banks. Likewise, it shows the decreasing trend of NIM for joint venture banks, private banks and public banks. Overall, the study shows that ADBL has highest average short term debt ratio (10.1689 percent), NBL has highest average long term debt ratio (94.3982 percent) and average total debt ratio (118.3634 percent), RBB has highest average firm size (Rs. 25.3419 billion) and PBL has highest average assets growth (23.9138 percent).
The descriptive statistics for joint venture banks shows that the average return on assets is 2.2939 percent, average return on equity is 25.8160 percent, average net interest margin is 3.5738 percent, average short term debt ratio is 2.80412 percent, average long term debt ratio is 88.5931 percent, average total debt ratio is 91.3972 percent, average firm size is Rs. 24.6530 billion and average assets growth is 11.9928 percent. Similarly, the descriptive statistics for private banks shows that the average return on assets is 1.3938 percent, average return on equity is 15.0260 percent, average net interest margin is 3.0237 percent, average short term debt ratio is 1.8376 percent, average long term debt ratio is 87.0226 percent, average total debt ratio is 88.1653 percent, average firm size is Rs. 24.1135 billion and average assets growth is 15.6346 percent. Likewise, the descriptive statistics for public banks shows that the average return on assets is 1.9621 percent, average return on equity is -5.9368 percent, average net interest margin is 4.3568 percent, average short term debt ratio is 8.7549 percent, average long term debt ratio is 86.4029 percent, average total debt ratio is 102.1185 percent, average firm size is Rs.25.0806 billion and average assets growth is 10.9075 percent.
The correlation matrix for joint venture banks reveals that firm size and assets growth are positively correlated to return on assets while short term debt ratio, long term debt ratio and total debt ratio are negatively correlated to return on assets. The short term debt ratio, firm size and assets growth are positively correlated to return on equity while long term debt ratio and total debt ratio are negatively correlated to return on equity. The assets growth is positively correlated to net interest margin while short term debt ratio, long term debt ratio, total debt ratio and firm size are negatively correlated to net interest margin. Similarly, the correlation matrix for private banks reveals that short term debt ratio, total debt ratio, firm size and assets growth are positively correlated to return on assets while long term debt ratio is negatively correlated to return on assets. The firm size is positively correlated to return on equity while short term debt ratio, long term debt ratio, total debt ratio and assets growth are negatively correlated to return on equity. The assets growth is positively correlated to net interest margin while short term debt ratio, long term debt ratio, total debt ratio and firm size are negatively correlated to net interest margin. Likewise, correlation matrix for public banks reveals that firm size and assets growth are positively correlated to return on assets while short term debt ratio, long term debt ratio and total debt ratio are negatively correlated to return on assets. The total debt ratio, firm size and assets growth are positively correlated to return on equity while short term debt ratio and long term debt ratio are negatively correlated to return on equity. The firm size and assets growth are positively correlated to net interest margin while short term debt ratio, long term debt ratio and total debt ratio are negatively correlated to net interest margin.
The regression analysis reveals that firm size and assets growth have positive impact on return on assets whereas short term debt ratio, long term debt ratio and total debt ratio have negative impact on return on assets for joint venture banks. Similarly, short term debt ratio, total debt ratio, firm size and assets growth have positive impact on return on assets whereas long term debt ratio has negative impact on return on assets for private banks. Likewise, firm size and assets growth have positive impact on return on assets whereas short term debt ratio, long term debt ratio and total debt ratio have negative impact on return on assets for public banks. Moreover,short term debt ratio, firm size and assets growth have positive impact on return on equitywhereas long term debt ratio and total debt ratio have negative impact on return on equity for joint venture banks. Similarly, firm size has positive impact on return on equity whereas short term debt ratio, long term debt ratio, total debt ratio and assets growth have negative impact on return on equity for private banks. Likewise, total debt ratio, firm size and assets growth have positive impact on return on equity whereas short term debt ratio and long term debt ratio have negative impact on return on equity for public banks. Finally,assets growth has positive impact on net interest margin whereasshort term debt ratio, long term debt ratio, total debt ratio and firm size have negative impact on net interest margin for joint venture banks. Similarly, assets growthhas positive impact on net interest margin whereas short term debt ratio, long term debt ratio, total debt ratio and firm size have negative impact on net interest margin for private banks. Likewise, firm size and assets growth have positive impact on net interest margin whereas short term debt ratio, long term debt ratio and total debt ratio have negative impact on net interest margin for public banks.
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The relationship between capital structure on financial performance of commercial banks in Nepal: a comparative study of public banks, joint venture banks and private banks [printed text] / Nisha Shrestha, Author . - 2017 . - 135p. ; GRP/Thesis + 8/B. Languages : English | Descriptors: | Capital structure
| | Class number: | 658.1522 | | Abstract: | In order to finance firm’s overall operations and growth by financing its assets from various sources, it is dependent upon capital structure of the firm. The capital structure of a firm is a mixture of different securities. In general, firms can choose among many alternative capital structures. The capital structure decision is the vital one since the financial performance of an enterprise is directly affected by such decision.In reality, establishing an optimal capital structure is a difficult task. A firm may require an optimal capital structure by issuing a number of securities in a mixture of exact combination of debt and equity (Siddiqui & Shoaib, 2011).Leon (2013) stated that capital structure is the most significant discipline of company’s operations. The capital structure decision is a vital decision with great implication for the firm's sustainability. The ability of the organization to carry out their stakeholders’ need is closely related to the capital structure.The capital structure affects the liquidity and profitability of a firm. Profitability indicates how efficiently management utilizes its total assets in order to generate earnings. The shareholders are concerned with the profitability of a firm because this can predict the future earnings of the firm. The traditional financial literature stated that profitable firms can employ more debt because they are exposed to lower risks of bankruptcy and financial distress (Chen & Hammes, 2004).
The relationship between capital structure and profitability cannot be ignored because the improvement in the profitability is necessary for the long term survivability of the firm. Therefore, it is important to test the relationship between capital structure and the profitability of the firm to make sound capital structure decisions. The study results revealed significantly negative relation between debt and profitability(Shubita & Alsawalhah, 2012). Gajurel (2005) explained the capital structure pattern and its determinants and found that the long term debt ratio is significantly low.Ebaid (2009) examined the capital structure and performance of firms and found that there is negative significant influence of total debt on the financial performance measured by return on assets.Abor (2005) investigated the relationship between capital structure and profitability and found negative relationship between the ratio of long term debt to total assets and ROE. Pradhan & Pokharel (2016) stated that total debt to total assets ratio, long term debt to total assets ratio and short term debt to total assets ratio are negatively related to net interest margin. Bhattarai (2016) examined the relation of capital structure and firm performance and found that the firm performance is significantly positively associated to the firm size and firm size is significantly positively related to profitability (ROA).Assets growth (AG) proposed a positive relationship with return on asset and return on equity (Goyal, 2013).
The major objective of this study is to examine the relationship between capital structure and profitability in Nepalese commercial banks. The results are based on the secondary data and contain the sample of 20 commercial banks of Nepal during the period of 2009/10 to 2014/15. Out of total sampled banks, 6 banks are joint venture, 11 banks are private, and 3 banks are public commercial banks.The data has been collected from the banking and financial statistics and bank supervision report published by Nepal Rastra Bank and annual reports of selected commercial banks.The research design adopted in this study is causal comparative type as it deals with the relationship between capital structure and profitability.
The result shows that NBB has highest average return on assets (3.4797 percent), NABIL has highest average return on equity (32.0024 percent) and ADBL has highest average net interest margin (6.11 percent) among the selected commercial banks over the study period. The study shows the decreasing trend of ROA for joint venture banks and private banks. Meanwhile, it shows the increasing trend of ROA for public banks. Similarly, it shows the decreasing trend of ROE for joint venture banks and private banks while it shows the increasing trend of ROE for public banks. Likewise, it shows the decreasing trend of NIM for joint venture banks, private banks and public banks. Overall, the study shows that ADBL has highest average short term debt ratio (10.1689 percent), NBL has highest average long term debt ratio (94.3982 percent) and average total debt ratio (118.3634 percent), RBB has highest average firm size (Rs. 25.3419 billion) and PBL has highest average assets growth (23.9138 percent).
The descriptive statistics for joint venture banks shows that the average return on assets is 2.2939 percent, average return on equity is 25.8160 percent, average net interest margin is 3.5738 percent, average short term debt ratio is 2.80412 percent, average long term debt ratio is 88.5931 percent, average total debt ratio is 91.3972 percent, average firm size is Rs. 24.6530 billion and average assets growth is 11.9928 percent. Similarly, the descriptive statistics for private banks shows that the average return on assets is 1.3938 percent, average return on equity is 15.0260 percent, average net interest margin is 3.0237 percent, average short term debt ratio is 1.8376 percent, average long term debt ratio is 87.0226 percent, average total debt ratio is 88.1653 percent, average firm size is Rs. 24.1135 billion and average assets growth is 15.6346 percent. Likewise, the descriptive statistics for public banks shows that the average return on assets is 1.9621 percent, average return on equity is -5.9368 percent, average net interest margin is 4.3568 percent, average short term debt ratio is 8.7549 percent, average long term debt ratio is 86.4029 percent, average total debt ratio is 102.1185 percent, average firm size is Rs.25.0806 billion and average assets growth is 10.9075 percent.
The correlation matrix for joint venture banks reveals that firm size and assets growth are positively correlated to return on assets while short term debt ratio, long term debt ratio and total debt ratio are negatively correlated to return on assets. The short term debt ratio, firm size and assets growth are positively correlated to return on equity while long term debt ratio and total debt ratio are negatively correlated to return on equity. The assets growth is positively correlated to net interest margin while short term debt ratio, long term debt ratio, total debt ratio and firm size are negatively correlated to net interest margin. Similarly, the correlation matrix for private banks reveals that short term debt ratio, total debt ratio, firm size and assets growth are positively correlated to return on assets while long term debt ratio is negatively correlated to return on assets. The firm size is positively correlated to return on equity while short term debt ratio, long term debt ratio, total debt ratio and assets growth are negatively correlated to return on equity. The assets growth is positively correlated to net interest margin while short term debt ratio, long term debt ratio, total debt ratio and firm size are negatively correlated to net interest margin. Likewise, correlation matrix for public banks reveals that firm size and assets growth are positively correlated to return on assets while short term debt ratio, long term debt ratio and total debt ratio are negatively correlated to return on assets. The total debt ratio, firm size and assets growth are positively correlated to return on equity while short term debt ratio and long term debt ratio are negatively correlated to return on equity. The firm size and assets growth are positively correlated to net interest margin while short term debt ratio, long term debt ratio and total debt ratio are negatively correlated to net interest margin.
The regression analysis reveals that firm size and assets growth have positive impact on return on assets whereas short term debt ratio, long term debt ratio and total debt ratio have negative impact on return on assets for joint venture banks. Similarly, short term debt ratio, total debt ratio, firm size and assets growth have positive impact on return on assets whereas long term debt ratio has negative impact on return on assets for private banks. Likewise, firm size and assets growth have positive impact on return on assets whereas short term debt ratio, long term debt ratio and total debt ratio have negative impact on return on assets for public banks. Moreover,short term debt ratio, firm size and assets growth have positive impact on return on equitywhereas long term debt ratio and total debt ratio have negative impact on return on equity for joint venture banks. Similarly, firm size has positive impact on return on equity whereas short term debt ratio, long term debt ratio, total debt ratio and assets growth have negative impact on return on equity for private banks. Likewise, total debt ratio, firm size and assets growth have positive impact on return on equity whereas short term debt ratio and long term debt ratio have negative impact on return on equity for public banks. Finally,assets growth has positive impact on net interest margin whereasshort term debt ratio, long term debt ratio, total debt ratio and firm size have negative impact on net interest margin for joint venture banks. Similarly, assets growthhas positive impact on net interest margin whereas short term debt ratio, long term debt ratio, total debt ratio and firm size have negative impact on net interest margin for private banks. Likewise, firm size and assets growth have positive impact on net interest margin whereas short term debt ratio, long term debt ratio and total debt ratio have negative impact on net interest margin for public banks.
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