Title :	The impact of net interest margin, market power and diversification strategy on banking stability of Nepalese commercial banks
Material Type:	printed text
Authors:	Samjhana Giri, Author
Publication Date:	2017
Languages :	English
Descriptors:	Banks Banks and banking Economic development Interest
Class number:	330
Abstract:	The banking industry plays a major role in the business of financial intermediation and has grown over the years with the diversity and complexity of its operations. Financial stability is a system that can be characterized as stability in the absence of excessive volatility and stress or crises. In others words, it can be defined as a condition in which the financial system- comprising financial intermediaries, markets and market infrastructure -is capable of withstanding shocks and the unraveling of financial imbalances. It therefore mitigates the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment. This study attempts to examine the impact of net interest margin, market power and diversification strategy on banking stability of Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 140 observations for the period of 2009/10 to 2015/16. The data are collected from the Banking and Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin published by Nepal Rastra Bank and annual reports of selected commercial banks. The regression models are estimated to test the significance and importance of net interest margin, market power, diversification, and banking stability of Nepalese commercial banks. The result shows that average Z-score of return on assets is highest for SCBL (7.701) and lowest for MBL (1.339), Z-score of return on equity is highest for NABIL (8.542) and lowest for MBL (1.197), net interest margin is highest for ADBL (6.12 percent) and lowest for NSBI (2.56 percent), average Herfindahl-Hirschman Index (HHI) of market power and bank concentration ratio is same for all commercial bank (0.033 and 0.018 respectively), average noninterest income is highest for NABIL (Rs. 1.091 billion) and lowest for NCC (Rs. 0.18 billion), average Herfindahl-Hirschman Index– HHI for business sector loan portfolio is highest for NSBI (0.59) and lowest for NMB (0.33), average total assets is highest for NABIL (Rs. 83.30 billion) and lowest for NCC (Rs. 22.72 billion), average loan to total assets ratio is highest for SIBL (Rs. 71.28 Billion) and lowest for SCBL (45.43 percent). viii The descriptive statistics for selected commercial bank shows that that Z-score of return on assets ranges from a minimum of 1.32 to a maximum of 7.76 leading to an average of 4.35. The average Z-score of return on equity of selected banks during the study period is noticed to be 4.17 with a minimum of 1.20 and a maximum of 8.54. The correlation matrix shows that there is a positive relationship of net interest margin with banking stability (ZROA and ZROE). This indicates higher the net interest margin, higher would be the banking stability. The result also shows that loan concentration ratio (diversification), HHISFOC, is negatively related to the banking stability (ZROA and ZROE). This indicates that higher the concentration of loans (less diversified), lower would be the banking stability. The concentration ratios of Nepalese banking industry (HHITA and CR3) are found to be positively related to the ZROA and ZROE. Similarly, the result shows that total assets of the bank is positively related to the banking stability (ZROA and ZROE). This indicates that higher the total assets, higher would be the banking stability. However, the correlation matrix shows that loan to total assets is negatively related to the banking stability (ZROA and ZROE). It indicates that the more the total assets of a bank are occupied by loans or thelesser the diversification, the lower would be the banking stability. The regression analysis shows that there is a positive relationship between net interest margin and banking stability(Z-score). It indicates that higher the net interest margin, higher would be the banking stability. However, the study shows that loan concentration ratio (HHISFOC) has a negative relationship with banking stability. It indicates that higher the concentration of loan to a single sector (or lower the diversification of loan), lower would be the banking stability (Z-score). Similarly, the results show that diversification in terms of non-interest income is positively related to the banking stability (ZROA). It indicates that higher the non-interest income, higher would be the banking stability (ZROA). Likewise, the results show that market power in terms of HHIloan and three bank concentration ratio (CR3) has a positive relationship with banking stability (ZROE). This indicates that higher the concentration ratio, higher would be the banking stability (ZROE). Similarly, results show that control variables, total assets and loan to total assets, show mixed results with banking stability. The result shows that total assets are positively related to the banking stability. This indicates that larger the bank in terms ix of total assets, higher would be the banking stability. However, the results show that loan to total assets ratio shows negative relationship with banking stability. The regression results also show that beta coefficients are positive for concentration ratio and total assets. However, the coefficients are negative for loan concentration ratio (HHISFOC). Yet, the coefficients are significant only for loan concentration ratio and total assets. Thus, the study concludes that loan diversification and total assets are the major factors affecting banking stability of Nepalese commercial banks.

The impact of net interest margin, market power and diversification strategy on banking stability of Nepalese commercial banks [printed text] / Samjhana Giri, Author . - 2017.
Languages : English

Descriptors:	Banks Banks and banking Economic development Interest
Class number:	330
Abstract:	The banking industry plays a major role in the business of financial intermediation and has grown over the years with the diversity and complexity of its operations. Financial stability is a system that can be characterized as stability in the absence of excessive volatility and stress or crises. In others words, it can be defined as a condition in which the financial system- comprising financial intermediaries, markets and market infrastructure -is capable of withstanding shocks and the unraveling of financial imbalances. It therefore mitigates the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment. This study attempts to examine the impact of net interest margin, market power and diversification strategy on banking stability of Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 140 observations for the period of 2009/10 to 2015/16. The data are collected from the Banking and Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin published by Nepal Rastra Bank and annual reports of selected commercial banks. The regression models are estimated to test the significance and importance of net interest margin, market power, diversification, and banking stability of Nepalese commercial banks. The result shows that average Z-score of return on assets is highest for SCBL (7.701) and lowest for MBL (1.339), Z-score of return on equity is highest for NABIL (8.542) and lowest for MBL (1.197), net interest margin is highest for ADBL (6.12 percent) and lowest for NSBI (2.56 percent), average Herfindahl-Hirschman Index (HHI) of market power and bank concentration ratio is same for all commercial bank (0.033 and 0.018 respectively), average noninterest income is highest for NABIL (Rs. 1.091 billion) and lowest for NCC (Rs. 0.18 billion), average Herfindahl-Hirschman Index– HHI for business sector loan portfolio is highest for NSBI (0.59) and lowest for NMB (0.33), average total assets is highest for NABIL (Rs. 83.30 billion) and lowest for NCC (Rs. 22.72 billion), average loan to total assets ratio is highest for SIBL (Rs. 71.28 Billion) and lowest for SCBL (45.43 percent). viii The descriptive statistics for selected commercial bank shows that that Z-score of return on assets ranges from a minimum of 1.32 to a maximum of 7.76 leading to an average of 4.35. The average Z-score of return on equity of selected banks during the study period is noticed to be 4.17 with a minimum of 1.20 and a maximum of 8.54. The correlation matrix shows that there is a positive relationship of net interest margin with banking stability (ZROA and ZROE). This indicates higher the net interest margin, higher would be the banking stability. The result also shows that loan concentration ratio (diversification), HHISFOC, is negatively related to the banking stability (ZROA and ZROE). This indicates that higher the concentration of loans (less diversified), lower would be the banking stability. The concentration ratios of Nepalese banking industry (HHITA and CR3) are found to be positively related to the ZROA and ZROE. Similarly, the result shows that total assets of the bank is positively related to the banking stability (ZROA and ZROE). This indicates that higher the total assets, higher would be the banking stability. However, the correlation matrix shows that loan to total assets is negatively related to the banking stability (ZROA and ZROE). It indicates that the more the total assets of a bank are occupied by loans or thelesser the diversification, the lower would be the banking stability. The regression analysis shows that there is a positive relationship between net interest margin and banking stability(Z-score). It indicates that higher the net interest margin, higher would be the banking stability. However, the study shows that loan concentration ratio (HHISFOC) has a negative relationship with banking stability. It indicates that higher the concentration of loan to a single sector (or lower the diversification of loan), lower would be the banking stability (Z-score). Similarly, the results show that diversification in terms of non-interest income is positively related to the banking stability (ZROA). It indicates that higher the non-interest income, higher would be the banking stability (ZROA). Likewise, the results show that market power in terms of HHIloan and three bank concentration ratio (CR3) has a positive relationship with banking stability (ZROE). This indicates that higher the concentration ratio, higher would be the banking stability (ZROE). Similarly, results show that control variables, total assets and loan to total assets, show mixed results with banking stability. The result shows that total assets are positively related to the banking stability. This indicates that larger the bank in terms ix of total assets, higher would be the banking stability. However, the results show that loan to total assets ratio shows negative relationship with banking stability. The regression results also show that beta coefficients are positive for concentration ratio and total assets. However, the coefficients are negative for loan concentration ratio (HHISFOC). Yet, the coefficients are significant only for loan concentration ratio and total assets. Thus, the study concludes that loan diversification and total assets are the major factors affecting banking stability of Nepalese commercial banks.