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Relationship between financial distress and financial performance of nepalese commercial banks / Salma Khatun
Title : Relationship between financial distress and financial performance of nepalese commercial banks Material Type: printed text Authors: Salma Khatun, Author Publication Date: 2020 Pagination: 124p. Size: GRP/Thesis Accompanying material: 15th Languages : English Abstract: The banking sector plays an important role in the economic growth of a country. This is made through matching surplus economic units with deficit economic units. However, this fundamental role of banks in the 'maturity transformation' of short term deposits into long term loans make banks inherently vulnerable to liquidity risk, both of an institution specific nature and that which affects markets as a whole. This is due to the fact that loans are regarded as the most profitable service yet the most risky service provided by banks (Berger and Bouwman, 2009). Financial distress is one of the most significant threats for many firms globally despite their size and nature. The term financial distress is used in a negative connotation to describe the financial situation of a company confronted with a temporary lack of liquidity and with the difficulties that ensue in fulfilling financial obligations on schedule and to the full extent (Outecheva, 2007). Financial distress does not necessarily result in the collapse and dissolution of a firm. In an economic sense it could mean that a firm is losing money – its revenues do not cover its costs. It could also mean that its earnings rate is less than its cost of capital (Weston & Copeland 1998).
This study attempts to examine the relationship between financial distress and firm performance of Nepalese commercial banks. The study is based on the secondary data which are gathered for 28 Nepalese commercial banks with 196 observations for the period of 7 years from 2011/12 to 2017/18. 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, regression models are estimated to test the significance and importance of financial distress variables on the financial performance of Nepalese commercial banks.
The result shows that the highest ROA is found for NBBL i.e. 4.01% in 2011/12. The highest return on equity is of RBB of 113.65% in year 2011/12. The liquidity ratio is highest of CCBL 97% in the year 2017/18. The highest leverage ratio is of RBB of 81.22 in 2011/12. The highest capital adequacy ratio is of SCBNL of 22.99 in 2017/18. The highest operational efficiency is of ADBL of 6.61% in year 2011/12. The highest LLP ratio is of CIVIL of 55.73% in 2015/16. The average return on asset is highest for NBBL (2.65 percent) and lowest for PRABHU (0.49 percent). The average return on equity is highest for RBB (44.61%) and lowest for NBL (-56.11%). The average liquidity ratio is highest for ADBL (89.73 percent) and lowest for RBB (60.51 percent). The average ratio of leverage is highest for RBB (27.74 times) and lowest for NBL (-55.64). The average ratio of capital adequacy ratio is highest for ADBL (89.73 percent) and lowest for RBB (5.75 percent). The average ratio of operational efficiency is highest for ADBL (6.4%) and lowest for CCBL (3.2%). The average loan loss provision is highest for PRABHU (52.56 percent) and lowest for NABIL (3.89 percent).
The descriptive analysis shows that the average return on assets of Nepalese commercial banks is 1.53 percent while the average of return on equity is 12.42 percent. The average ratio of liquidity of selected banks during the study period is noticed to be 78.96 percent. Likewise, leverage has average of 6.93 times, the average capital adequacy ratio of selected banks during the study period is noticed to be 12.73 percent. Similarly, the average of operational efficiency during the study period is noticed to be 4.16 percent. And the loan loss provision is 15.64 percent on an average of selected commercial banks.
The correlation matrix shows that liquidity, leverage, capital adequacy and operational efficiency are positively correlated to return on assets. However, loan loss provision has negative relationship with the return on assets. The study also finds that liquidity, leverage, capital adequacy and operational efficiency have positive relationship with return on equity. However, loan loss provision is negatively correlated to return on equity.
The regression result shows that liquidity has a positive impact on return on assets and return on equity. It indicates that increase in liquidity leads to increase in return on assets and return on equity. Leverage has a positive impact on return on assets and return on equity indicating that increase in leverage leads to increase in return on assets and return on equity. Similarly, there is a positive impact of capital adequacy ratio on return on assets and return on equity. It indicates that higher the ratio of capital adequacy, higher would be the return on assets and return on equity. Operational efficiency has a positive impact on return on assets and return on equity indicating that increase in operational efficiency leads to increase in return on assets and return on equity. However, loan loss provision ratio has a negative impact on return on assets and return on equity. It indicates that the higher the loan loss provision, lower would be the return on assets and return on equity. The study concludes that loan loss provision followed by operational efficiency is the most influencing factor that determine the return on assets. The study also concludes that the most dominant factor to influence return on equity is the leverage followed by capital adequacy ratio in Nepalese commercial banks.
Relationship between financial distress and financial performance of nepalese commercial banks [printed text] / Salma Khatun, Author . - 2020 . - 124p. ; GRP/Thesis + 15th.
Languages : English
Abstract: The banking sector plays an important role in the economic growth of a country. This is made through matching surplus economic units with deficit economic units. However, this fundamental role of banks in the 'maturity transformation' of short term deposits into long term loans make banks inherently vulnerable to liquidity risk, both of an institution specific nature and that which affects markets as a whole. This is due to the fact that loans are regarded as the most profitable service yet the most risky service provided by banks (Berger and Bouwman, 2009). Financial distress is one of the most significant threats for many firms globally despite their size and nature. The term financial distress is used in a negative connotation to describe the financial situation of a company confronted with a temporary lack of liquidity and with the difficulties that ensue in fulfilling financial obligations on schedule and to the full extent (Outecheva, 2007). Financial distress does not necessarily result in the collapse and dissolution of a firm. In an economic sense it could mean that a firm is losing money – its revenues do not cover its costs. It could also mean that its earnings rate is less than its cost of capital (Weston & Copeland 1998).
This study attempts to examine the relationship between financial distress and firm performance of Nepalese commercial banks. The study is based on the secondary data which are gathered for 28 Nepalese commercial banks with 196 observations for the period of 7 years from 2011/12 to 2017/18. 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, regression models are estimated to test the significance and importance of financial distress variables on the financial performance of Nepalese commercial banks.
The result shows that the highest ROA is found for NBBL i.e. 4.01% in 2011/12. The highest return on equity is of RBB of 113.65% in year 2011/12. The liquidity ratio is highest of CCBL 97% in the year 2017/18. The highest leverage ratio is of RBB of 81.22 in 2011/12. The highest capital adequacy ratio is of SCBNL of 22.99 in 2017/18. The highest operational efficiency is of ADBL of 6.61% in year 2011/12. The highest LLP ratio is of CIVIL of 55.73% in 2015/16. The average return on asset is highest for NBBL (2.65 percent) and lowest for PRABHU (0.49 percent). The average return on equity is highest for RBB (44.61%) and lowest for NBL (-56.11%). The average liquidity ratio is highest for ADBL (89.73 percent) and lowest for RBB (60.51 percent). The average ratio of leverage is highest for RBB (27.74 times) and lowest for NBL (-55.64). The average ratio of capital adequacy ratio is highest for ADBL (89.73 percent) and lowest for RBB (5.75 percent). The average ratio of operational efficiency is highest for ADBL (6.4%) and lowest for CCBL (3.2%). The average loan loss provision is highest for PRABHU (52.56 percent) and lowest for NABIL (3.89 percent).
The descriptive analysis shows that the average return on assets of Nepalese commercial banks is 1.53 percent while the average of return on equity is 12.42 percent. The average ratio of liquidity of selected banks during the study period is noticed to be 78.96 percent. Likewise, leverage has average of 6.93 times, the average capital adequacy ratio of selected banks during the study period is noticed to be 12.73 percent. Similarly, the average of operational efficiency during the study period is noticed to be 4.16 percent. And the loan loss provision is 15.64 percent on an average of selected commercial banks.
The correlation matrix shows that liquidity, leverage, capital adequacy and operational efficiency are positively correlated to return on assets. However, loan loss provision has negative relationship with the return on assets. The study also finds that liquidity, leverage, capital adequacy and operational efficiency have positive relationship with return on equity. However, loan loss provision is negatively correlated to return on equity.
The regression result shows that liquidity has a positive impact on return on assets and return on equity. It indicates that increase in liquidity leads to increase in return on assets and return on equity. Leverage has a positive impact on return on assets and return on equity indicating that increase in leverage leads to increase in return on assets and return on equity. Similarly, there is a positive impact of capital adequacy ratio on return on assets and return on equity. It indicates that higher the ratio of capital adequacy, higher would be the return on assets and return on equity. Operational efficiency has a positive impact on return on assets and return on equity indicating that increase in operational efficiency leads to increase in return on assets and return on equity. However, loan loss provision ratio has a negative impact on return on assets and return on equity. It indicates that the higher the loan loss provision, lower would be the return on assets and return on equity. The study concludes that loan loss provision followed by operational efficiency is the most influencing factor that determine the return on assets. The study also concludes that the most dominant factor to influence return on equity is the leverage followed by capital adequacy ratio in Nepalese commercial banks.
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