| Title : | Determinants of assets quality and banks profitability : a comparative study of public banks, joint venture banks and private banks | | Material Type: | printed text | | Authors: | Ravi Sapkota, Author | | Publication Date: | 2016 | | Pagination: | 104p. | | Size: | GRP/Thesis | | Accompanying material: | 8/B | | Languages : | English | | Descriptors: | 6 Politics, law and economics:6.70 Finance and trade:Finance:Financial administration:Accounting:Financial statements:Profits
Banks and banking
Portfolio management
| | Class number: | 330.954 | | Abstract: | One of the most effective ways of improving the economic indicators is by decreasing the NPLs. If NPLs are retained permanently, it will affect the resources that are enclosed in the areas which are not profitable. NPL can cause huge effect to the economy and its capability to run in an efficient manner (Hou, 2007). Financial system can experience shock from company specific variables or from variables that are external to the organization i.e. macroeconomic variables. Zimmerman (1996) found that management decisions, especially regarding loan portfolio concentration are the major factors affecting bank performance.
Wall (1985) concluded that a bank’s asset and liability management, its funding management, and the non-interest cost controls all have a significant effect on the profitability record.Hou (2007) found that many financial institutions have become insolvent due to large portion of non-performing loans. Many studies have attributed the failures of banks and insolvency to the assets quality (Demirguc- Kunt, 1989 and Barr and Siems, 1994). The large size of bad loans in the banking system generally causes bank failure. An economy that is stagnant is mainly responsible for non-performing loan which is an indication of degradation of assets quality.
There are differences in public sector banks, joint venture banks and domestic private banks in terms of profitability, capital adequacy, asset quality, riskiness, size, liquidity and management effectiveness.One of the most effective ways of improving the economic indicators is by decreasing the NPLs. Boudrigaet al. (2009) found positive relationship between capital adequacy ratio and non-performing loan. , Jimenez andSaurina (2006) attributed the excessive increase in loan ratio as the main reason for high non-performing loans.Qin & Pastory(2012) revealed that liquidity and asset quality have positive impact in profitability.Demirguc-Kunt and Huizinga (1999) found that there is positive association between economic growth and financial sector profitability. According to Haggler (1977), inflation severely affects the banks’ profitability.
The major objective of the study is to identity the determinants of assets quality and profitability of the Nepalese commercial banks. The study is based on secondary data of 17 commercial banks with 187 observations for the period of 2004/05 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. . Similarly, macro-economic variables are collected from World Development Indicators maintained by World Bank.The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with identifying the determinants of assets quality and profitability of Nepalese commercial banks.
The results shows that NBBL has the highest average NPA,, and NBL has the highest average EPS among the selected commercial banks throughout the study period. Similarly, the average operating expense ratio is highest for ADBL (8.64 percent), average credit to deposit ratio is highest for LUBL (107.98 percent), average capital adequacy ratio is highest for SCBL (15.73 percent), and average total asset is highest for ADBL (Rs. 69.42 billion).
The descriptive statistics for joint venture bank shows that the average non-performing assets, earnings per share, operating expense ratio, credit to deposit ratio, capital adequacy ratio, firm size, gross domestic product, and inflation is 4.13 percent, Rs. 66.03 per share, 4.01 percent, 67.45 percent, 11.22 percent, Rs. 46.18 billion, 4.25 percent, and 8.53 percent respectively. Similarly, the descriptive statistics for the public bank reveals that the average non-performing assets, earnings per share, operating expense ratio, credit to deposit ratio, capital adequacy ratio, firm size, gross domestic product, and inflation is 11.45 percent, 94.28 percent, 7.56 percent, 79.19 percent, 0.38 percent, Rs. 66.03 billion, 4.25 percent, and 8.53 percent respectively. The results for the private banks reveals that the average non-performing assets, earnings per share, operating expense ratio, credit to deposit ratio, capital adequacy ratio, firm size, gross domestic product, and inflation is 2.54 percent, Rs. 22.43 per share, 2.53 percent, 82.63 percent, 11.48 percent, Rs. 27.79 billion, 4.25 percent, and 8.53 percent respectively.
In case of joint venture banks, capital adequacy ratio, firm size, and gross domestic product are negatively related to non-performing assets. Results also show thatcapital adequacy ratio, firm size, and gross domestic product are positively related to earnings per share. On the other hand, the study of the public banks reveals that credit to deposit ratio, capital adequacy ratio, gross domestic product, and inflation are negatively related to non-performing assets and earnings per share whereas firm size is positively related to earnings per share. Likewise, the study of private banks reveals that the operating expense ratio is negatively related to non-performing assets and earnings per share. However, results show that inflation is positively related to non-performing assets for private banks.
The regression results show that capital adequacy ratio and firm size have negative and significant impact on the non-performing assets of all categories of Nepalese commercial banks. Likewise, inflation has significant negative impact on the non-performing assets of public banks, where beta coefficients are significant at 5 percent level of significance. However, the beta coefficients are positive for inflation in the case of joint venture and private banks. Likewise, results show that credit to deposit ratio and capital adequacy ratio have positive impact on earnings per share in the context of joint venture and private banks. However, the beta coefficients are negative for public banks. On the other hand, firm size has positive impact on the earnings per share of joint venture, public, and private banks. However, non-performing loans has negative impact on the earnings per share of all categories of Nepalese commercial banks. Thus, capital adequacy ratio and firm size are the major factors determining the assets quality whereas non-performing loans is the major factor influencing the profitability of Nepalese commercial banks.
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Determinants of assets quality and banks profitability : a comparative study of public banks, joint venture banks and private banks [printed text] / Ravi Sapkota, Author . - 2016 . - 104p. ; GRP/Thesis + 8/B. Languages : English | Descriptors: | 6 Politics, law and economics:6.70 Finance and trade:Finance:Financial administration:Accounting:Financial statements:Profits
Banks and banking
Portfolio management
| | Class number: | 330.954 | | Abstract: | One of the most effective ways of improving the economic indicators is by decreasing the NPLs. If NPLs are retained permanently, it will affect the resources that are enclosed in the areas which are not profitable. NPL can cause huge effect to the economy and its capability to run in an efficient manner (Hou, 2007). Financial system can experience shock from company specific variables or from variables that are external to the organization i.e. macroeconomic variables. Zimmerman (1996) found that management decisions, especially regarding loan portfolio concentration are the major factors affecting bank performance.
Wall (1985) concluded that a bank’s asset and liability management, its funding management, and the non-interest cost controls all have a significant effect on the profitability record.Hou (2007) found that many financial institutions have become insolvent due to large portion of non-performing loans. Many studies have attributed the failures of banks and insolvency to the assets quality (Demirguc- Kunt, 1989 and Barr and Siems, 1994). The large size of bad loans in the banking system generally causes bank failure. An economy that is stagnant is mainly responsible for non-performing loan which is an indication of degradation of assets quality.
There are differences in public sector banks, joint venture banks and domestic private banks in terms of profitability, capital adequacy, asset quality, riskiness, size, liquidity and management effectiveness.One of the most effective ways of improving the economic indicators is by decreasing the NPLs. Boudrigaet al. (2009) found positive relationship between capital adequacy ratio and non-performing loan. , Jimenez andSaurina (2006) attributed the excessive increase in loan ratio as the main reason for high non-performing loans.Qin & Pastory(2012) revealed that liquidity and asset quality have positive impact in profitability.Demirguc-Kunt and Huizinga (1999) found that there is positive association between economic growth and financial sector profitability. According to Haggler (1977), inflation severely affects the banks’ profitability.
The major objective of the study is to identity the determinants of assets quality and profitability of the Nepalese commercial banks. The study is based on secondary data of 17 commercial banks with 187 observations for the period of 2004/05 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. . Similarly, macro-economic variables are collected from World Development Indicators maintained by World Bank.The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with identifying the determinants of assets quality and profitability of Nepalese commercial banks.
The results shows that NBBL has the highest average NPA,, and NBL has the highest average EPS among the selected commercial banks throughout the study period. Similarly, the average operating expense ratio is highest for ADBL (8.64 percent), average credit to deposit ratio is highest for LUBL (107.98 percent), average capital adequacy ratio is highest for SCBL (15.73 percent), and average total asset is highest for ADBL (Rs. 69.42 billion).
The descriptive statistics for joint venture bank shows that the average non-performing assets, earnings per share, operating expense ratio, credit to deposit ratio, capital adequacy ratio, firm size, gross domestic product, and inflation is 4.13 percent, Rs. 66.03 per share, 4.01 percent, 67.45 percent, 11.22 percent, Rs. 46.18 billion, 4.25 percent, and 8.53 percent respectively. Similarly, the descriptive statistics for the public bank reveals that the average non-performing assets, earnings per share, operating expense ratio, credit to deposit ratio, capital adequacy ratio, firm size, gross domestic product, and inflation is 11.45 percent, 94.28 percent, 7.56 percent, 79.19 percent, 0.38 percent, Rs. 66.03 billion, 4.25 percent, and 8.53 percent respectively. The results for the private banks reveals that the average non-performing assets, earnings per share, operating expense ratio, credit to deposit ratio, capital adequacy ratio, firm size, gross domestic product, and inflation is 2.54 percent, Rs. 22.43 per share, 2.53 percent, 82.63 percent, 11.48 percent, Rs. 27.79 billion, 4.25 percent, and 8.53 percent respectively.
In case of joint venture banks, capital adequacy ratio, firm size, and gross domestic product are negatively related to non-performing assets. Results also show thatcapital adequacy ratio, firm size, and gross domestic product are positively related to earnings per share. On the other hand, the study of the public banks reveals that credit to deposit ratio, capital adequacy ratio, gross domestic product, and inflation are negatively related to non-performing assets and earnings per share whereas firm size is positively related to earnings per share. Likewise, the study of private banks reveals that the operating expense ratio is negatively related to non-performing assets and earnings per share. However, results show that inflation is positively related to non-performing assets for private banks.
The regression results show that capital adequacy ratio and firm size have negative and significant impact on the non-performing assets of all categories of Nepalese commercial banks. Likewise, inflation has significant negative impact on the non-performing assets of public banks, where beta coefficients are significant at 5 percent level of significance. However, the beta coefficients are positive for inflation in the case of joint venture and private banks. Likewise, results show that credit to deposit ratio and capital adequacy ratio have positive impact on earnings per share in the context of joint venture and private banks. However, the beta coefficients are negative for public banks. On the other hand, firm size has positive impact on the earnings per share of joint venture, public, and private banks. However, non-performing loans has negative impact on the earnings per share of all categories of Nepalese commercial banks. Thus, capital adequacy ratio and firm size are the major factors determining the assets quality whereas non-performing loans is the major factor influencing the profitability of Nepalese commercial banks.
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