| Title : | Income diversification and bank risk-return trade off in the Nepalese commercial banks | | Material Type: | printed text | | Authors: | Som Raj Nepali, Author | | Publication Date: | 2017 | | Pagination: | 96p. | | Size: | GRP/Thesis | | Accompanying material: | 11/B | | Languages : | English | | Descriptors: | Income
Income diversification
| | Keywords: | 'income bank risk return trade' | | Class number: | 339.4609 | | Abstract: | Banks primarily involve in financial intermediation activities in an economy. Increasing returns and minimizing risk simultaneously has always been a challenge for the banks as well as the regulatory bodies in the banking industry. Banks nowadays not only involve in credit creation and generate interest income but also do involve in other fee generating activities like: bank guarantee, remittance, foreign exchanges, insurance agencies and so on. These income sources are termed as noninterest incomes in banking and have been contributing to generate higher return and reduce earnings volatility.Non-interest income is considered an important source of diversification for the banks (Huang and Chen, 2006). Income diversification is creating pool of income sources so as to have higher and stable flow of income resulting to higher risk adjusted performances.
This study attempts to examine an impact of income diversification on the risk return trade off in the Nepalese commercial banks. The study is based on the secondary data which are gathered for 20 Nepalese commercial banks with 140 observations for the period of 7 years from 2009/10 to 2015/16. The secondary data are collected from the Banking and Financial Statistics and Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected commercial banks.The research design adopted in this study is descriptive and causal comparative research design. Therefore, s regression models are estimated to test the significance and importance of income diversification variables on the risk adjusted performance of Nepalese commercial banks.
The result shows that average risk adjusted return on assets is highest for the EBL (10.65) and lowest for MBL (1.21). The average risk adjusted return on equity is highest for the NSBI (8.10) and lowest for MBL (1.18). The average noninterest income is highest for NABIL (Rs. 1091.01 in million) and lowest for NCC (Rs. 176.42 million). ADBL has highest average Herfindahl-Hirschman Index–HHI (0.775) and NBBL has lowest average Herfindahl-Hirschman Index–HHI (0.553). ADBL has highest average equity ratio (18.334 percentage) and NSBI has lowest average equity ratio (7.118 percentage). The average loan ratio is highest for SBL (74.106 percentage) and lowest for SCBL (45.432 percentage). The average total assets (size) are highest for NABIL (82.461 billion) and lowest for NCC (22.858 billion).
The descriptive analysis shows that the average risk adjusted return of assets is 4.28, and risk adjusted return on equity are 3.96 of selected commercial banks. The results also show that the average noninterest income, HHI, equity ratio, loan ratio and size of bank are 0.51 billion, 0.64, 9.96 percent, 65.48 percent and Rs. 46.38 billion respectively for selected commercial banks.
The correlation matrix shows that noninterest income, Herfindahl Hirschman Index-HHI, foreign ownership and bank size have positive relationship with the risk adjusted return on assets whereas equity ratio and loan ratio have negative relationship with the risk adjusted return on assets. The result shows that noninterest income and Herfindahl Hirschman Index-HHI are positively correlated to risk adjusted return on equity. Furthermore, the foreign ownership is positively correlated to the risk adjusted return on equity. However, equity ratio and loan ratio are negatively related to risk adjusted return on equity.
The regression analysis shows that noninterest income has a significant and positive impact on risk adjusted return on assets indicating that higher the noninterest income, higher will be the risk adjusted return on assets. Likewise, HHI and foreign ownership have positive impact on risk adjusted return on assets which means higher the HHI and foreign ownership, higher will be the risk adjusted return on assets.The positive beta coefficient of non-interest income concludes that higher the non interest income, higher would be the risk adjusted return on equity while the negative beta coefficients of equity ratio and loan ratio concludes that higher the equity ratio and loan ratio, lower would be the risk adjusted return on equity.
Similarly, the beta coefficients are positive for HHI and foreign ownership which indicates that higher the HHI and foreign ownership, higher would be the risk adjusted return on equity. However, the results show that bank size has negative impact of the risk adjusted return on equity which indicates that bigger the bank’s size, lower would be risk adjusted return on equity.The regression results also reveal that foreign banks are more diversified than domestic banks in terms of non-interest income sources and HHI resulting higher risk adjusted ROA.The beta coefficient of income diversification, HHI, is positive and highly significant on risk adjusted ROE for the foreign banks comparing to domestic banks. The study concludes that income diversification-HHI followed noninterest income, equity to total assets ratio and foreign ownership are the most dominant factors that affect the risk return trade off in the context of Nepalese commercial banks.
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Income diversification and bank risk-return trade off in the Nepalese commercial banks [printed text] / Som Raj Nepali, Author . - 2017 . - 96p. ; GRP/Thesis + 11/B. Languages : English | Descriptors: | Income
Income diversification
| | Keywords: | 'income bank risk return trade' | | Class number: | 339.4609 | | Abstract: | Banks primarily involve in financial intermediation activities in an economy. Increasing returns and minimizing risk simultaneously has always been a challenge for the banks as well as the regulatory bodies in the banking industry. Banks nowadays not only involve in credit creation and generate interest income but also do involve in other fee generating activities like: bank guarantee, remittance, foreign exchanges, insurance agencies and so on. These income sources are termed as noninterest incomes in banking and have been contributing to generate higher return and reduce earnings volatility.Non-interest income is considered an important source of diversification for the banks (Huang and Chen, 2006). Income diversification is creating pool of income sources so as to have higher and stable flow of income resulting to higher risk adjusted performances.
This study attempts to examine an impact of income diversification on the risk return trade off in the Nepalese commercial banks. The study is based on the secondary data which are gathered for 20 Nepalese commercial banks with 140 observations for the period of 7 years from 2009/10 to 2015/16. The secondary data are collected from the Banking and Financial Statistics and Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected commercial banks.The research design adopted in this study is descriptive and causal comparative research design. Therefore, s regression models are estimated to test the significance and importance of income diversification variables on the risk adjusted performance of Nepalese commercial banks.
The result shows that average risk adjusted return on assets is highest for the EBL (10.65) and lowest for MBL (1.21). The average risk adjusted return on equity is highest for the NSBI (8.10) and lowest for MBL (1.18). The average noninterest income is highest for NABIL (Rs. 1091.01 in million) and lowest for NCC (Rs. 176.42 million). ADBL has highest average Herfindahl-Hirschman Index–HHI (0.775) and NBBL has lowest average Herfindahl-Hirschman Index–HHI (0.553). ADBL has highest average equity ratio (18.334 percentage) and NSBI has lowest average equity ratio (7.118 percentage). The average loan ratio is highest for SBL (74.106 percentage) and lowest for SCBL (45.432 percentage). The average total assets (size) are highest for NABIL (82.461 billion) and lowest for NCC (22.858 billion).
The descriptive analysis shows that the average risk adjusted return of assets is 4.28, and risk adjusted return on equity are 3.96 of selected commercial banks. The results also show that the average noninterest income, HHI, equity ratio, loan ratio and size of bank are 0.51 billion, 0.64, 9.96 percent, 65.48 percent and Rs. 46.38 billion respectively for selected commercial banks.
The correlation matrix shows that noninterest income, Herfindahl Hirschman Index-HHI, foreign ownership and bank size have positive relationship with the risk adjusted return on assets whereas equity ratio and loan ratio have negative relationship with the risk adjusted return on assets. The result shows that noninterest income and Herfindahl Hirschman Index-HHI are positively correlated to risk adjusted return on equity. Furthermore, the foreign ownership is positively correlated to the risk adjusted return on equity. However, equity ratio and loan ratio are negatively related to risk adjusted return on equity.
The regression analysis shows that noninterest income has a significant and positive impact on risk adjusted return on assets indicating that higher the noninterest income, higher will be the risk adjusted return on assets. Likewise, HHI and foreign ownership have positive impact on risk adjusted return on assets which means higher the HHI and foreign ownership, higher will be the risk adjusted return on assets.The positive beta coefficient of non-interest income concludes that higher the non interest income, higher would be the risk adjusted return on equity while the negative beta coefficients of equity ratio and loan ratio concludes that higher the equity ratio and loan ratio, lower would be the risk adjusted return on equity.
Similarly, the beta coefficients are positive for HHI and foreign ownership which indicates that higher the HHI and foreign ownership, higher would be the risk adjusted return on equity. However, the results show that bank size has negative impact of the risk adjusted return on equity which indicates that bigger the bank’s size, lower would be risk adjusted return on equity.The regression results also reveal that foreign banks are more diversified than domestic banks in terms of non-interest income sources and HHI resulting higher risk adjusted ROA.The beta coefficient of income diversification, HHI, is positive and highly significant on risk adjusted ROE for the foreign banks comparing to domestic banks. The study concludes that income diversification-HHI followed noninterest income, equity to total assets ratio and foreign ownership are the most dominant factors that affect the risk return trade off in the context of Nepalese commercial banks.
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