| Title : | Capital adequacy, cost income ratio and performance of Nepalese commercial bank | | Material Type: | printed text | | Authors: | Sushan Bhanadari, Author | | Publication Date: | 2016 | | Pagination: | 86p. | | Size: | GRP/Thesis | | Accompanying material: | 7/B | | Languages : | English | | Descriptors: | Bank investments
| | Class number: | 332.1209 | | Abstract: | Banks are expected to absorb the losses from the normal earnings. But there may be some unanticipated losses which cannot be absorbed by normal earnings. Capital becomes useful on such abnormal loss situation to cushion off the losses. In this way, capital plays an insurance function. Adequate capital in banking is a confidence booster. It provides the customer, the public and the regulatory authority with confidence in the continued financial viability of the bank. According to Hughes and Mester (2002) capital are likely to be determined by the level of bank efficiency. Similarly, cost income ratio is an important way of determining a bank's value which gives a clear view of how the company is being managed. It is a measure of how efficient is a banking firm in generating income. Although the ratio is dependent on figures for both cost and income, its use trends to focus on costs. A reduction in costs, for a fixed level of revenue, should lead to increased profit, and thus increased return on equity and share price, the measure of greatest interest to investors in bank shares (Tripe 1996). Adequate capital is the least amount necessary to stir confidence in banks and effectively fulfill the principal task and enable banks to take advantage of profitable growth opportunities. It shows the internal strength of the bank to withstand losses during crisis. It has also a direct effect on profitability of banks by determining its expansion to risky but profitable ventures or areas (Sangmi and Nazir, 2010).
The major purpose of this study is to examine the relationship among capital adequacy, cost income ratio and performance of commercial banks of Nepal. The specific objectives of this study are: a) to analyze the structure and pattern of dependent (ROA, ROE and NIM) and independent variables (cost to income ratio, liquidity ratio, total equity to total assets ratio, debt equity ratio, core capital and bank size). b) to examine the relationship between core capital and bank profitability. c) to identify the impact of cost income ratio on bank performance. d) to investigate how liquidity and debt equity influence the profitability of bank.
The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the relationship among capital adequacy, cost income ratio and bank performance in the context of Nepal. The study is based on secondary data. The variables used in the study are categorized as core capital, total equity to total assets ratio, cost income ratio, debt equity ratio, liquidity ratio and
VIII
bank size. Secondary data were collected from supervision reports of NRB and various annual reports of different commercial banks. This study covers data for 7 years ranging for year 2007/08 to 2013/14. Regression models were estimated to test the significance of the liquidity management variables on banks profitability.
The core capital, total equity to total assets ratio, debt to equity ratio and bank size are positively related to return on assets whereas liquidity ratio and cost income ratio are negatively related to ROA. The liquidity ratio, debt to equity ratio and bank size are positively related to return on equity whereas core capital, total equity to total assets ratio and cost to income ratio are negatively related to ROE. The total equity to total assets ratio and bank size are positively related to net interest margin whereas core capital, cost to income ratio, debt to equity ratio and liquidity ratio are negatively related to NIM. The study observed that cost income ratio has negatively significant impact on profitability of banks. Hence, the banks willing to increase the performance need to reduce cost to income ratio. Negative and significant relationship has been observed between core capital and return on equity hence, the bank should focus to decrease core capital to increase return on equity. There is a positive and significant relationship of the debt equity ratio with return on equity and hence banks willing to increase the return on equity should increase the debt equity ratio. The banks should increase the total assets to have higher return on assets and net interest margin as the study has found positive and significant relation between them.
The major conclusion of the study is that higher the liquidity ratio, bank size and debt equity ratio, higher would be return on assets and return on equity. The study also concludes that larger the bank size and equity to total assets ratio, higher would be net interest margin. However, increase in core capital, debt to equity ratio, liquidity ratio and cost income ratio leads to decrease in net interest margin. |
Capital adequacy, cost income ratio and performance of Nepalese commercial bank [printed text] / Sushan Bhanadari, Author . - 2016 . - 86p. ; GRP/Thesis + 7/B. Languages : English | Descriptors: | Bank investments
| | Class number: | 332.1209 | | Abstract: | Banks are expected to absorb the losses from the normal earnings. But there may be some unanticipated losses which cannot be absorbed by normal earnings. Capital becomes useful on such abnormal loss situation to cushion off the losses. In this way, capital plays an insurance function. Adequate capital in banking is a confidence booster. It provides the customer, the public and the regulatory authority with confidence in the continued financial viability of the bank. According to Hughes and Mester (2002) capital are likely to be determined by the level of bank efficiency. Similarly, cost income ratio is an important way of determining a bank's value which gives a clear view of how the company is being managed. It is a measure of how efficient is a banking firm in generating income. Although the ratio is dependent on figures for both cost and income, its use trends to focus on costs. A reduction in costs, for a fixed level of revenue, should lead to increased profit, and thus increased return on equity and share price, the measure of greatest interest to investors in bank shares (Tripe 1996). Adequate capital is the least amount necessary to stir confidence in banks and effectively fulfill the principal task and enable banks to take advantage of profitable growth opportunities. It shows the internal strength of the bank to withstand losses during crisis. It has also a direct effect on profitability of banks by determining its expansion to risky but profitable ventures or areas (Sangmi and Nazir, 2010).
The major purpose of this study is to examine the relationship among capital adequacy, cost income ratio and performance of commercial banks of Nepal. The specific objectives of this study are: a) to analyze the structure and pattern of dependent (ROA, ROE and NIM) and independent variables (cost to income ratio, liquidity ratio, total equity to total assets ratio, debt equity ratio, core capital and bank size). b) to examine the relationship between core capital and bank profitability. c) to identify the impact of cost income ratio on bank performance. d) to investigate how liquidity and debt equity influence the profitability of bank.
The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the relationship among capital adequacy, cost income ratio and bank performance in the context of Nepal. The study is based on secondary data. The variables used in the study are categorized as core capital, total equity to total assets ratio, cost income ratio, debt equity ratio, liquidity ratio and
VIII
bank size. Secondary data were collected from supervision reports of NRB and various annual reports of different commercial banks. This study covers data for 7 years ranging for year 2007/08 to 2013/14. Regression models were estimated to test the significance of the liquidity management variables on banks profitability.
The core capital, total equity to total assets ratio, debt to equity ratio and bank size are positively related to return on assets whereas liquidity ratio and cost income ratio are negatively related to ROA. The liquidity ratio, debt to equity ratio and bank size are positively related to return on equity whereas core capital, total equity to total assets ratio and cost to income ratio are negatively related to ROE. The total equity to total assets ratio and bank size are positively related to net interest margin whereas core capital, cost to income ratio, debt to equity ratio and liquidity ratio are negatively related to NIM. The study observed that cost income ratio has negatively significant impact on profitability of banks. Hence, the banks willing to increase the performance need to reduce cost to income ratio. Negative and significant relationship has been observed between core capital and return on equity hence, the bank should focus to decrease core capital to increase return on equity. There is a positive and significant relationship of the debt equity ratio with return on equity and hence banks willing to increase the return on equity should increase the debt equity ratio. The banks should increase the total assets to have higher return on assets and net interest margin as the study has found positive and significant relation between them.
The major conclusion of the study is that higher the liquidity ratio, bank size and debt equity ratio, higher would be return on assets and return on equity. The study also concludes that larger the bank size and equity to total assets ratio, higher would be net interest margin. However, increase in core capital, debt to equity ratio, liquidity ratio and cost income ratio leads to decrease in net interest margin. |
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