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Effect of liquidity risk, credit risk and market risk on profitability of Nepalese commercial banks / Pragati Kumari
Title : Effect of liquidity risk, credit risk and market risk on profitability of Nepalese commercial banks Material Type: printed text Authors: Pragati Kumari, Author Publication Date: 2019 Pagination: 139p. Size: GRP/Thesis Accompanying material: 14/B Languages : English Abstract: Liquidity risk is the potential for loss to an institution, arising from either its inability to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable cost or losses. Credit risk is the risk resulting from non-payment of all or part of the initial granted facilities and their profit, or the risk resulting from failure to return the profits of bank investment, in other words credit risk is the risk of not receiving timely cash flow from bank granted facilities. performance. Market risk can be defined as the possibility of loss to bank caused by the changes in the market variables. It is the risk that the value of on-/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market risk is the risk to the bank's earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities, of those prices. Credit risk has negative relationship with return on equity, capital adequacy ratio, gross domestic product and bank branch but positive relationship with inflation and capital to total deposit. Liquidity in commercial banks is influenced by profitability and at the same time, profitability levels are influenced by the banks’ liquidity.
The study attempts to examine the effect of liquidity risk, credit risk and market risk on profitability of Nepalese commercial banks. Profitability measured in terms of return on assets and return on equity are the dependent variables. The independent variables are loan to deposit ratio, current ratio, non-performing loan, capital adequacy ratio, net interest margin and leverage. The study is based on secondary data of 18 commercial banks with 126 observations for the period of 2011/12 to 2017/18. The secondary data and information have been collected from annual reports of selected commercial banks. The regression models are estimated to test the significance and impact of different variables on profitability of Nepalese commercial banks. The findings of the paper are largely original in the area of liquidity risk, credit risk and market risk on profitability of Nepalese banking.
The result shows that the average return on assets is highest for NABIL (2.85 percent) and lowest for MBL (1.12 percent)., average return on equity is highest for NABIL (28.09 percent) and lowest for MBL (11.44 percent)., loan to deposit ratio is highest for ADBL (95.29 percent) and lowest for SCBL (56.68 percent), average current ratio is highest for NICA (33.41 percent and lowest for SBI (10.68 percent), average non-performing loan is highest for ADBL (5.43 percent) and lowest for SBI (0.26 percent), average capital adequacy ratio is highest for ADBL (17.85 percent) and lowest for HBL (11.48 percent), average net interest margin is highest for ADBL (5.40 percent) and lowest for LBL (2.71 percent), and average leverage is highest for EBL (11.16 percent) and lowest for GIBL (3.63 percent).
The descriptive statistics shows that the return on assets ranges from a minimum of 0.15 percent to a maximum of 4.01 percent to an average of 1.74 percent. Similarly, the return on equity ranges from minimum of 1.40 percent to a maximum of 32.80 percent leading to an average of 16.90 percent. Loan to deposit ratio varies from a minimum of 48.89 percent to a maximum of 117.38 percent leading to an average of 79.44 percent. Similarly, current ratio varies from minimum of 6.00 percent to a maximum of 68.57 percent leading to an average of 18.19 percent. Non-performing loan ranges from a minimum of 0.07 percent to a maximum of 8.98 percent leading to an average of 1.68 percent. Capital adequacy ratio varies from a minimum of 10.63 percent to a maximum of 22.99 percent leading to an average of 13.08 percent, net interest margin varies from 1.97 percent to a maximum of 5.76 percent leading to an average of 3.47 percent. Likewise, leverage ranges from minimum of 1.33 percent to a maximum of 16.98 percent leading to an average of 8.57 percent.
The result shows capital adequacy ratio has a positive relationship with return on assets. It indicates that increase in capital adequacy ratio leads to increase in return on assets. Likewise, net interest margin has a positive relationship with return on assets. It indicates that increase in net interest margin leads to increase in return on assets. However, the study shows that loan to deposit ratio is negatively correlated to return on assets. It reveals that increase in loan to deposit ratio leads to decrease in return on assets. Similarly, there is a negative relationship of current ratio with return on assets. It indicates that higher the current ratio, higher would be the return on assets. Similarly, non-performing loan has a negative relationship with return on assets. It indicates that increase in non-performing loan leads to decrease in return on assets. The result also reveals that leverage has a negative relationship with return on assets. It indicates that increase in leverage leads to decrease in return on assets.
The study also reveals that loan to deposit ratio has a negative relationship with return on equity. It indicates that increase in loan to deposit ratio leads to decrease in return on equity. Similarly, the study shows that current ratio is negatively correlated to return on equity. It reveals that increase in current ratio leads to decrease in return on equity. Likewise, Capital adequacy ratio has a negative relationship with return on equity. It indicates that increase in capital adequacy ratio leads to decrease in return on equity. Similarly, non-performing loan is negatively correlated to return on equity. It indicates that increase in non-performing loan leads to decrease in return on equity. However, the study shows that net interest margin has a positive relationship with return on equity. It reveals that increase in net interest margin leads to increase in return on equity. Likewise, there is a positive relationship of leverage with return on equity. It indicates that higher the leverage, higher would be the return on equity.
The regression results of return on assets shows that leverage has negative and significant impact on return on assets. This indicates higher the leverage lower would be the return on assets. Likewise, loan to deposit ratio, current ratio and non-performing loan have negative impact on return on assets. This indicates higher the loan to deposit ratio, current ratio and non-performing loan lower would be the return on assets. However, net interest margin has positive and significant impact on return on assets. This indicates higher the net interest margin higher would be the return on assets. Likewise, capital adequacy ratio has positive impact on return on assets. This indicates higher the capital adequacy ratio higher would be the return on assets. The regression analysis of return on equity shows that beta coefficients are negative for loan to deposit ratio, current ratio, non-performing loan and capital adequacy ratio indicating that higher the loan to deposit ratio, current ratio, non-performing loan and capital adequacy ratio lower would be the profitability and vice-versa. However, it is positive for net interest margin and leverage indicating that higher the net interest margin and leverage, higher would be the profitability and vice-versa. The regression results show that market risk (in terms of net interest margin and leverage) is the most significant factor affecting the profitability (measured by ROA) of Nepalese commercial banks. The regression results show that liquidity risk (in terms of loan to deposit ratio and current ratio) and market risk (in terms of net interest margin and leverage) are the most significant factors affecting the profitability (measured by ROE) of Nepalese commercial banks.
List of abbreviations
Effect of liquidity risk, credit risk and market risk on profitability of Nepalese commercial banks [printed text] / Pragati Kumari, Author . - 2019 . - 139p. ; GRP/Thesis + 14/B.
Languages : English
Abstract: Liquidity risk is the potential for loss to an institution, arising from either its inability to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable cost or losses. Credit risk is the risk resulting from non-payment of all or part of the initial granted facilities and their profit, or the risk resulting from failure to return the profits of bank investment, in other words credit risk is the risk of not receiving timely cash flow from bank granted facilities. performance. Market risk can be defined as the possibility of loss to bank caused by the changes in the market variables. It is the risk that the value of on-/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market risk is the risk to the bank's earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities, of those prices. Credit risk has negative relationship with return on equity, capital adequacy ratio, gross domestic product and bank branch but positive relationship with inflation and capital to total deposit. Liquidity in commercial banks is influenced by profitability and at the same time, profitability levels are influenced by the banks’ liquidity.
The study attempts to examine the effect of liquidity risk, credit risk and market risk on profitability of Nepalese commercial banks. Profitability measured in terms of return on assets and return on equity are the dependent variables. The independent variables are loan to deposit ratio, current ratio, non-performing loan, capital adequacy ratio, net interest margin and leverage. The study is based on secondary data of 18 commercial banks with 126 observations for the period of 2011/12 to 2017/18. The secondary data and information have been collected from annual reports of selected commercial banks. The regression models are estimated to test the significance and impact of different variables on profitability of Nepalese commercial banks. The findings of the paper are largely original in the area of liquidity risk, credit risk and market risk on profitability of Nepalese banking.
The result shows that the average return on assets is highest for NABIL (2.85 percent) and lowest for MBL (1.12 percent)., average return on equity is highest for NABIL (28.09 percent) and lowest for MBL (11.44 percent)., loan to deposit ratio is highest for ADBL (95.29 percent) and lowest for SCBL (56.68 percent), average current ratio is highest for NICA (33.41 percent and lowest for SBI (10.68 percent), average non-performing loan is highest for ADBL (5.43 percent) and lowest for SBI (0.26 percent), average capital adequacy ratio is highest for ADBL (17.85 percent) and lowest for HBL (11.48 percent), average net interest margin is highest for ADBL (5.40 percent) and lowest for LBL (2.71 percent), and average leverage is highest for EBL (11.16 percent) and lowest for GIBL (3.63 percent).
The descriptive statistics shows that the return on assets ranges from a minimum of 0.15 percent to a maximum of 4.01 percent to an average of 1.74 percent. Similarly, the return on equity ranges from minimum of 1.40 percent to a maximum of 32.80 percent leading to an average of 16.90 percent. Loan to deposit ratio varies from a minimum of 48.89 percent to a maximum of 117.38 percent leading to an average of 79.44 percent. Similarly, current ratio varies from minimum of 6.00 percent to a maximum of 68.57 percent leading to an average of 18.19 percent. Non-performing loan ranges from a minimum of 0.07 percent to a maximum of 8.98 percent leading to an average of 1.68 percent. Capital adequacy ratio varies from a minimum of 10.63 percent to a maximum of 22.99 percent leading to an average of 13.08 percent, net interest margin varies from 1.97 percent to a maximum of 5.76 percent leading to an average of 3.47 percent. Likewise, leverage ranges from minimum of 1.33 percent to a maximum of 16.98 percent leading to an average of 8.57 percent.
The result shows capital adequacy ratio has a positive relationship with return on assets. It indicates that increase in capital adequacy ratio leads to increase in return on assets. Likewise, net interest margin has a positive relationship with return on assets. It indicates that increase in net interest margin leads to increase in return on assets. However, the study shows that loan to deposit ratio is negatively correlated to return on assets. It reveals that increase in loan to deposit ratio leads to decrease in return on assets. Similarly, there is a negative relationship of current ratio with return on assets. It indicates that higher the current ratio, higher would be the return on assets. Similarly, non-performing loan has a negative relationship with return on assets. It indicates that increase in non-performing loan leads to decrease in return on assets. The result also reveals that leverage has a negative relationship with return on assets. It indicates that increase in leverage leads to decrease in return on assets.
The study also reveals that loan to deposit ratio has a negative relationship with return on equity. It indicates that increase in loan to deposit ratio leads to decrease in return on equity. Similarly, the study shows that current ratio is negatively correlated to return on equity. It reveals that increase in current ratio leads to decrease in return on equity. Likewise, Capital adequacy ratio has a negative relationship with return on equity. It indicates that increase in capital adequacy ratio leads to decrease in return on equity. Similarly, non-performing loan is negatively correlated to return on equity. It indicates that increase in non-performing loan leads to decrease in return on equity. However, the study shows that net interest margin has a positive relationship with return on equity. It reveals that increase in net interest margin leads to increase in return on equity. Likewise, there is a positive relationship of leverage with return on equity. It indicates that higher the leverage, higher would be the return on equity.
The regression results of return on assets shows that leverage has negative and significant impact on return on assets. This indicates higher the leverage lower would be the return on assets. Likewise, loan to deposit ratio, current ratio and non-performing loan have negative impact on return on assets. This indicates higher the loan to deposit ratio, current ratio and non-performing loan lower would be the return on assets. However, net interest margin has positive and significant impact on return on assets. This indicates higher the net interest margin higher would be the return on assets. Likewise, capital adequacy ratio has positive impact on return on assets. This indicates higher the capital adequacy ratio higher would be the return on assets. The regression analysis of return on equity shows that beta coefficients are negative for loan to deposit ratio, current ratio, non-performing loan and capital adequacy ratio indicating that higher the loan to deposit ratio, current ratio, non-performing loan and capital adequacy ratio lower would be the profitability and vice-versa. However, it is positive for net interest margin and leverage indicating that higher the net interest margin and leverage, higher would be the profitability and vice-versa. The regression results show that market risk (in terms of net interest margin and leverage) is the most significant factor affecting the profitability (measured by ROA) of Nepalese commercial banks. The regression results show that liquidity risk (in terms of loan to deposit ratio and current ratio) and market risk (in terms of net interest margin and leverage) are the most significant factors affecting the profitability (measured by ROE) of Nepalese commercial banks.
List of abbreviations
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Barcode Call number Media type Location Section Status 624/D PRA Thesis/Dissertation Uniglobe Library Philosophy & Psychology Available