EVALUATION OF THE FINANCIAL PERFORMANCE

OF COMMERCIAL BANKS OF NEPAL

By:
SHAILU BAIDYA
Shanker Dev Campus
Campus Roll No: 357/061
T.U. Regd. No: 7-2-39-6-2001
Second Year Symbol No.: 4493

A Thesis Submitted to:

Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirement for the Degree of

Master of Business Studies (M.B.S)

Kathmandu, Nepal
March, 2010
 RECOMMENDATION
This is to certify that the Thesis

Submitted by:
SHAILU BAIDYA

Entitled:
EVALUATION OF THE FINANCIAL PERFORMANCE
OF COMMERCIAL BANKS OF NEPAL
has been prepared as approved by this Department in the prescribed format of the
Faculty of Management. This thesis is forwarded for examination.

………..………….…….….……… .……….………....……………. …….…….………….………

Dr. Shilu Manandhar Bajracharya Prof. Bisheshwor Man Shrestha Prof. Dr. Kamal Deep Dhakal
(Thesis Supervisor) (Head of Research Department) (Campus Chief)
 VIVA-VOCE SHEET

We have conducted the viva –voce of the thesis presented

by
SHAILU BAIDYA

Entitled:
EVALUATION OF THE FINANCIAL PERFORMANCE
OF COMMERCIAL BANKS OF NEPAL
And found the thesis to be the original work of the student and written
according to the prescribed format. We recommend the thesis to
be accepted as partial fulfillment of the requirement for
Master Degree of Business Studies (M.B.S.)
Viva-Voce Committee

Head, Research Department …………………….………

Member (Thesis Supervisor) …..………………………..

Member (External Expert) …..………………………..

 TRIBHUVAN UNIVERSITY

Faculty of Management

Shanker Dev Campus

DECLARATION

I hereby declare that the work reported in this thesis entitled “EVALUATION OF THE
FINANCIAL PERFORMANCE OF COMMERCIAL BANKS OF NEPAL” submitted to
Office of the Dean, Faculty of Management, Tribhuvan University, is my original work
done in the form of partial fulfillment of the requirement for the Master Degree in
Business Studies (M.B.S.) under the supervision of Dr. Shilu Manandhar Bajracharya
of Shanker Dev Campus.

………………………………
Shailu Baidya
Researcher
T.U. Regd. No. : 7-2-39-6-2001
Campus Roll No. : 357/061
Second Year Symbol No.: 4493
 ACKNOWLEDGEMENT

As the partial fulfillment of the MBS degree, I have prepared this report. During the
course, I worked with sincerity, honesty and diligence, as far as possible. However,
beside my continual efforts, I also got unforgettable support from different people and
parties. I am extremely grateful and overwhelmed by their support while completing my
work.

Firstly, I owe a debt of gratitude to my respected thesis supervisor Dr. Shilu Manandhar
Bajracharya for her help and clear guidance right from the time of selection of the topic
and throughout the course of the research. I am equally thankful to all my respected
teachers at Shankar Dev Campus for their kind support and valuable suggestions.

I owe great intellectual debt to College Library and librarian, Shankar Dev Campus and
Central Library of Tribhuvan University for providing several books and articles while
preparing this thesis.

I would like to convey my sincere thanks to my family members especially to my parents

who supported and encouraged me throughout the course of the study. My sincere thanks
also go to all friends and well wishers who helped me directly and indirectly during this
study.

Shailu Baidya
 TABLE OF CONTENTS
Recommendation
Viva-Voce Sheet
Declaration
Acknowledgement
Table of Contents
List of Tables
List of Figures
Abbreviations
Page No.
CHAPTER – I INTRODUCTION
1.1 Background 1
1.2 Background of the Nepalese Banking System 3
1.3 Focus of the Study 12
1.4 Statement of the Problem 12
1.5 Objective of the Study 13
1.6 Significance of the Study 13
1.7 Limitations of the Study 14
1.8 Organization of the Study 14

CHAPTER – II REVIEW OF LITERATURE

2.1 Industry/Organizational/Population Background & Perspectives 16
2.2 Concentrations in the Banking Sector 21
2.2.1 Nepal Bank Limited 22
2.2.2 Rastriya Banijya Bank 22
2.2.3 Nepal Investment Bank Limited 23
2.2.4 Laxmi Bank Limited 24
2.2.5 Nabil Bank Limited 24
2.2.6 Standard Chartered Bank Nepal Limited 25
2.3 Related Studies 25
2.3.1 Theoretical Review 26
 2.3.1.1Financial Statements 26
2.3.1.2 Financial Analysis 27
2.3.1.3 Objectives of Financial Analysis 30
2.3.1.4 Need of Financial Analysis / Financial Statement Analysis 31
2.3.1.5 Significance of Financial Analysis 31
2.3.1.6 Process of Financial Analysis 33
2.3.1.7 Types of Financial Analysis 33
2.3.1.8 Techniques of Financial Statement Analysis 35
2.3.1.9 Limitations of Financial Analysis 41
2.3.2 Review of Related Studies 43
2.4 Research Gap 48
CHAPTER – III RESEARCH METHODOLOGY
3.1 Introduction 49
3.2 Research Design 49
3.3 Research Variables/Measurements 50
3.3.1 Ratios 50
3.3.1.1 Capital Adequacy 50
3.3.1.2 Asset Quality 50
3.3.1.3 Non-Performing Loan Ratio 51
3.3.1.4 Earnings 51
3.3.1.5 Liquidity Ratio 53
3.3.2 Statistical Tools 56
3.3.2.1 Average 56
3.3.2.2 Standard Deviation 56
3.3.2.3 Test of Hypothesis 57
3.4 Data Collection Methodology 58
3.4.1 Sample Size 58
3.4.2 Data Collection Procedures 58
CHAPTER – IV PRESENTATION AND ANALYSIS OF DATA
A. Data Presentation 60
4.1 Capital Adequacy Ratio 60
4.2 Asset Quality 64
4.2.1 Total deposits of the Commercial Banks 64
4.2.2 Total Credit of the Commercial Banks 66
4.2.3 Non- Performing Loans and Advances of the Nepalese Commercial Banks 69
4.3 Earnings (Profitability) 75
4.3.1 Return on Assets 75
4.3.2 Return on Equity 79
4.3.3 Earnings per Share 82
4.4 Liquidity 86
4.4.1 Cash & Bank Balances to Total Deposit 86
4.4.2 Credit to Deposit Ratio 89
B. Data Analysis 92
4.5 Capital Adequacy Ratio 92
4.6 Asset Quality 93
4.6.1 Non-Performing Loans and Advances 93
4.6.2 Total Deposits 94
4.7 Profitability Ratios 95
4.7.1 Return on Assets 95
4.7.2 Return on Equity 96
4.7.3 Earnings per Share 96
4.8 Liquidity Ratios 97
4.8.1 Credit to Deposit Ratio 97
4.8.2 Cash and Bank Balance to Total Deposit Ratio 97
4.9 Major Findings under CAMEL Framework 98

CHAPTER – V SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1Summary 101
5.2 Conclusion 103
5.3 Recommendations 105
Bibliography
Annexure
 LIST OF TABLES

Table No. Title Page No.

1.1 List of Commercial Banks Operating in Nepal 8
1.2 Position of Capital Structure of Public Sector Commercial Banks in Nepal 10
1.3 Position of Capital Structure of Foreign Joint Venture Commercial
Banks in Nepal 11
1.4 Position of Capital Structure of Domestic Commercial Banks in Nepal 11
2.1 Distribution of Commercial Banks (Development Region wise) 18
2.2 Deposits and Loans & Advances of the Nepalese Financial System 19
2.3 Soundness Indicators of Nepalese Commercial Banks 20
2.4 The Nepalese Commercial Banks Under Study 22
3.1 Analysis of Variance (ANNOVA) Table 58
4.1 Minimum CAR to be maintained by Commercial Banks of Nepal as per NRB 61
4.2 Total Capital Adequacy Ratio of the Sampled Commercial Banks for the
Study Period in Percentage 62
4.3 Average Capital Adequacy Ratio of the Different Sub Groups of
Commercial Banks 62
4.4 Test of Analysis of Variance for Average CAR of Different
Sub Groups of Commercial Banks 63
4.5 Total Deposits of the Sampled Commercial Banks for the
Study Period in Million 64
4.6 Average Total Deposits of the Different Sub Groups of Commercial Banks 65
4.7 Total Credit of Sampled Commercial Banks for the Study Period in Millions 66
4.8 Average Total Credit of the Different Sub Groups of Commercial Banks 67
4.9 Non-Performing Loan of the Sampled Commercial Banks for the Study Period 69
4.10 Non-Performing Loans to Total Credits Ratio of the Sampled Commercial
Banks for the Study Period 70
4.11 Trend of NPL to Total Credit of the Different
Sub Groups of Commercial Banks 71
4.12 Average NPL to Total Credit of the Different
Sub Groups of Commercial Banks 72
4.13 Test of Analysis of Variance for Average NPL to Total Credit of the Different
Sub Groups of Commercial Banks 74
4.14 Return on Assets of the Sampled Commercial Banks for the Study Period 75
4.15 Average ROA of the Different Sub Groups of Sampled Commercial Banks 77
4.16 Test of Analysis of Variance for Average ROA of the Different
Sub Groups of Commercial Banks 78
4.17 Return on Equity of the Sampled Commercial Banks for the Study Period 79
4.18 Average ROE of the Different Sub Groups of Commercial Banks 81
4.19 Test of Analysis of Variance for Average ROE of the Different
Sub Groups of Commercial Banks 82
4.20 Earnings per Share of the Sampled Commercial Banks for the Study Period 83
4.21 Average EPS of the Different Sub Groups of Commercial Banks 84
4.22 Test of Analysis of Variance for Average EPS of the Different
Sub Groups of Commercial Banks 85
4.23 Cash & Bank Balance to Total Deposit of the Sampled Commercial Banks
for the Study Period in Percentage 86
4.24 Average Cash & Bank Balance to Total Deposits of the Different
Sub Groups of Commercial Banks 87
4.25 Test of Analysis of Variance for Average Cash & Bank Balance to
Total Deposits of the Different Sub Groups of Commercial Banks 89
4.26 Credit to Deposit Ratios of the Sampled Commercial Banks
for the Study Period 89
4.27 Average Credit to Deposit Ratios of the Different Sub Groups of
Commercial Banks 91
4.28 Test of Analysis of Variance for Average Credit to Deposits of the Different
Sub Groups of Commercial Banks 92
4.29 Ranks of the Sampled Commercial Banks on the Basis of Financial Indicators 99
4.30 Ranks of the Different Sub Groups of Commercial Banks 100
 LIST OF FIGURES

Figure No. Title Page No.

1.1 Pattern of Ownership of Commercial Banks 10
2.1 Chart of Du Pont System of Financial Analysis 38
4.1 Average Capital Adequacy Ratio of the Different Sub Groups of
Commercial Banks 63
4.2 Average Total Deposits of the Different Sub Groups of Commercial Banks 66
4.3 Average Total Loans & Advances of the Different Sub Groups of
Commercial Banks 68
4.4 Average NPL to Total Credit of the Different
Sub Groups of Commercial Banks 73
4.5 Average ROA of the Different Sub Groups of Commercial Banks 78
4.6 Average ROE of the Different Sub Groups of Commercial Banks 81
4.7 Average Cash & Bank Balance to Total Deposit of the Different
Sub Groups of Commercial Banks 88
4.8 Average Credit to Deposit Ratio of the Different Sub Groups of
Commercial Banks 91
 ABBREVIATIONS

AD = Anno Domni
ADB = Asian Development Bank
ADB/N = Agricultural Development Bank Nepal
ANNOVA = Analysis of Variance
ATM = Automated Teller Machine
Avg. = Average
BOK = Bank of Katmandu Limited
BS = Bikram Sambat
CAR = Capital Adequacy Ratio
CDR = Credit to Deposit Ratio
CIT = Citizen Investment Trust
d.f. = degree of freedom
DPS = Dividend per Share
Dr = Doctor
EBL = Everest Bank Limited
EPS = Earnings per Share
FI = Financial Institution
FSRP = Financial Sector Reform Project
FY = Fiscal Year
HBL = Himalayan Bank Limited
i.e. = That is
IFIC = International Finance and Commercial Bank
IMF = International Monetary Fund
JVB = Joint Venture Bank
LBL = Laxmi Bank Limited
Ltd = Limited
N/A = Not Applicable
NABIL = Nabil Bank Limited
NBBL = Nepal Bangladesh Bank Limited
NBL = Nepal Bank Limited
NEPSE = Nepal Stock Exchange
NGBL = Nepal Grindlays Bank Limited
NGO = Non Government Organization
NIBL = Nepal Investment Bank Limited
NPA = Non-Performing Assets
NPL = Non-Performing Loan
NPR = Nepalese Rupees
NRB = Nepal Rastra Bank
NSBI = Nepal State Bank of India
p = Page number
PDF = Power Development Fund
PM = Prime Minister
PNB = Panjab National Bank
Pvt = Private
RBB = Rastriya Banijya Bank
ROA = Return on Assets
ROE = Return on Equity
RRDB = Regional Rural Development Banks
Rs. = Rupees
SCBNL = Standard Chartered Bank Nepal Limited
TA = Total Assets
TD = Total Debt
TLA = Total Loans & Advances
US = United States
Viz = Namely
WACC = Weighted Average Cost of Capital