| Title : | Effect of credit risk and capital adequacy on profitability of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Asmita Budhathoki, Author | | Publication Date: | 2017 | | Pagination: | 99p. | | Size: | GRP/Thesis | | Accompanying material: | 11/B | | Languages : | English | | Descriptors: | Capital adequacy
Credit risk
| | Keywords: | 'capital adequacy capital adequacy bank capital financial performance' | | Class number: | 332.120 | | Abstract: | The economic development and prosperity come from the well-developed and perfect banking system. Strong banking system plays important role in efficient allocation and utilization of credit. Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the banks or otherwise to perform as agreed. Capital adequacy ratio is one of the most significant current issues in banking which evaluate the amount of a bank’s efficiency and stability. Capital adequacy generally affects all entities. But as a term, it is most often used in discussing the position of firms in the financial section of the economy, and precisely, whether firms have sufficient capital to cover the risks that they confront (Abba, 2013).
This study attempts to analyze the effect of credit risk and capital adequacy on profitability of Nepalese commercial banks. This study is based on the secondary data of 16 commercial banks of Nepal for the time period of 2007/08 to 2015/16, leading to a total of 144 observations. Data and information have been collected from the Banking and Financial Statistics, Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected commercial banks. This study has employed descriptive research design and casual comparative research design as it deals with the relationship between credit risk and capital adequacy with the profitability of Nepalese commercial banks.
The result reveals that average return on assets is highest for NBBL (5.62 percent) and lowest for SUNBL (0.88 percent). The average earnings per share is highest for NABIL (Rs. 83.21 per share) and lowest for MBL (Rs. 10.87 per share). The average loan loss provision ratio is highest for ADBL (14.19 times) and lowest for SCBL (1.49 times). The average capital adequacy is highest for ADBL (16.35 percent) and lowest for MBL (10.74 percent). The average leverage ratio is highest for EBL (12.78 times) and lowest for ADBL (6.28 times). The average non-performing loan ratio is highest for NBBL (9.47 percent) and lowest for SCBL (0.61 percent). The average credit to deposit ratio is highest for ADBL (105.50 percent) and lowest for SCBL (50.86 percent). NABIL has the highest average bank size (Rs.86.22 billion) and KBL has the lowest (Rs. 25.81 billion). Annual inflation rate is highest in the year 2009/10 (12.6 percent) and lowest in the year 2007/08 (6.7 percent). Annual GDP growth rate is highest in the year 2007/08 (6.10 percent) and lowest in the year 2015/16 (0.77 percent). The descriptive statistics for selected commercial bank shows that the average return on assets ratio is 1.89 percent, average earning per share is Rs. 38.16 per share, average loan loss provision is 3.71times, average capital adequacy ratio is 12.21percent, average non-performing loan ratio is 2.41 percent, average leverage ratio is 9.88 percent, average credit to deposit ratio is 78.58 percent, average bank size is Rs 43.79 billion, average inflation is 9.18 percent and average GDP growth is 4.13 percent.
The study shows that the capital adequacy ratio is positively related to return on assets (ROA) and earnings per share (EPS). It indicates that increase in capital adequacy ratio leads to increase in ROA and EPS. The study also shows that bank size and inflation are positively related to ROA and EPS. It indicates that higher the bank size and inflation, higher would be the ROA and EPS of Nepalese commercial banks. However, the result shows that loan loss provision and non-performing loan have a negative relationship with ROA and EPS. This indicates that increase in loan loss provision and non-performing loan leads to decrease in ROA and EPS. Likewise, the study reveals that leverage, credit to deposit ratio, and GDP are negatively related to the ROA and EPS. This indicates that increase in leverage, credit to deposit ratio, and GDP leads to decrease in ROA and EPS. The regression results also show that beta coefficients are positive for leverage, bank size and GDP for ROA and EPS whereas beta coefficients are negative for non-performing loans and credit to deposit ratio. However, the coefficients are significant only for bank size at 5 percent level.
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Effect of credit risk and capital adequacy on profitability of Nepalese commercial banks [printed text] / Asmita Budhathoki, Author . - 2017 . - 99p. ; GRP/Thesis + 11/B. Languages : English | Descriptors: | Capital adequacy
Credit risk
| | Keywords: | 'capital adequacy capital adequacy bank capital financial performance' | | Class number: | 332.120 | | Abstract: | The economic development and prosperity come from the well-developed and perfect banking system. Strong banking system plays important role in efficient allocation and utilization of credit. Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the banks or otherwise to perform as agreed. Capital adequacy ratio is one of the most significant current issues in banking which evaluate the amount of a bank’s efficiency and stability. Capital adequacy generally affects all entities. But as a term, it is most often used in discussing the position of firms in the financial section of the economy, and precisely, whether firms have sufficient capital to cover the risks that they confront (Abba, 2013).
This study attempts to analyze the effect of credit risk and capital adequacy on profitability of Nepalese commercial banks. This study is based on the secondary data of 16 commercial banks of Nepal for the time period of 2007/08 to 2015/16, leading to a total of 144 observations. Data and information have been collected from the Banking and Financial Statistics, Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected commercial banks. This study has employed descriptive research design and casual comparative research design as it deals with the relationship between credit risk and capital adequacy with the profitability of Nepalese commercial banks.
The result reveals that average return on assets is highest for NBBL (5.62 percent) and lowest for SUNBL (0.88 percent). The average earnings per share is highest for NABIL (Rs. 83.21 per share) and lowest for MBL (Rs. 10.87 per share). The average loan loss provision ratio is highest for ADBL (14.19 times) and lowest for SCBL (1.49 times). The average capital adequacy is highest for ADBL (16.35 percent) and lowest for MBL (10.74 percent). The average leverage ratio is highest for EBL (12.78 times) and lowest for ADBL (6.28 times). The average non-performing loan ratio is highest for NBBL (9.47 percent) and lowest for SCBL (0.61 percent). The average credit to deposit ratio is highest for ADBL (105.50 percent) and lowest for SCBL (50.86 percent). NABIL has the highest average bank size (Rs.86.22 billion) and KBL has the lowest (Rs. 25.81 billion). Annual inflation rate is highest in the year 2009/10 (12.6 percent) and lowest in the year 2007/08 (6.7 percent). Annual GDP growth rate is highest in the year 2007/08 (6.10 percent) and lowest in the year 2015/16 (0.77 percent). The descriptive statistics for selected commercial bank shows that the average return on assets ratio is 1.89 percent, average earning per share is Rs. 38.16 per share, average loan loss provision is 3.71times, average capital adequacy ratio is 12.21percent, average non-performing loan ratio is 2.41 percent, average leverage ratio is 9.88 percent, average credit to deposit ratio is 78.58 percent, average bank size is Rs 43.79 billion, average inflation is 9.18 percent and average GDP growth is 4.13 percent.
The study shows that the capital adequacy ratio is positively related to return on assets (ROA) and earnings per share (EPS). It indicates that increase in capital adequacy ratio leads to increase in ROA and EPS. The study also shows that bank size and inflation are positively related to ROA and EPS. It indicates that higher the bank size and inflation, higher would be the ROA and EPS of Nepalese commercial banks. However, the result shows that loan loss provision and non-performing loan have a negative relationship with ROA and EPS. This indicates that increase in loan loss provision and non-performing loan leads to decrease in ROA and EPS. Likewise, the study reveals that leverage, credit to deposit ratio, and GDP are negatively related to the ROA and EPS. This indicates that increase in leverage, credit to deposit ratio, and GDP leads to decrease in ROA and EPS. The regression results also show that beta coefficients are positive for leverage, bank size and GDP for ROA and EPS whereas beta coefficients are negative for non-performing loans and credit to deposit ratio. However, the coefficients are significant only for bank size at 5 percent level.
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