Kathmandu University School of Management

Internship Report
Comparative Study on “Impact of Operational Efficiency, Liquidity,
and Risk upon Profitability of PSBs in Nepal”
As part of the requirement for MBA Program
Internship Program Code: PWM 703

Internship Employer
Nepal Bank Ltd.
Work Supervisor: Mr. Arjun Lal Joshi
Address: New road, Kathmandu

Intern
Bishal Sarraf (KU Reg. No. 012882-11)
Pragalv Neupane (KU Reg. No.012876-11)

22ndSeptember, 2013
 DECLARATION

We hereby declare that the report titled “Comparative Study on Impact of

Operational Efficiency, Liquidity, and Risk upon Profitability of PSBs in Nepal”
has been submitted in order to fulfill the requirement of Masters in Business
Administration (MBA) program of Kathmandu University School of Management
(KUSOM).

This report has been completed and analysis is done through an extensive research
and is an original work which has been completed through consultation with college
and work supervisors. We state that, we will not be liable for any consequences of the
decisions and actions taken by the use of information contained in this report.

Signature

………………….... ….………………
Pragalv Neupane Bishal Sarraf

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ACKNOWLEDGEMENT

We would like to express our sincere gratitude towards Kathmandu University School
of Management and its esteemed faculties for guiding us with excellently designed
academic modules.

We would like to thank Nepal Bank Ltd. for providing us with an opportunity to
practice our academic knowledge in a professional environment. It was a privilege to
be a part of one of the oldest company and the overall experience was worthwhile.
Our special thanks go to Mr. Arjun Lal Joshi, Senior Manager and Ms. Yesodha
Shrestha (Amatya), Senior Assistant for their constant guidance and motivation. Our
research would not have been possible without the support staffs along with the staffs
in Department.

We are extremely grateful to Mr. Niranjan Phuyal, our academic supervisor, for his
invaluable insight, guidance and constructive feedback. We are also indebted to Asst.
Prof. Sabin Panta, our internship coordinator, for his help, support and understanding.

Special thanks to family and friends, Mr. Prasanna Poudel, Mr. Narendra Prasad
Pokharel, Mr. Bijay Chaudhary for their tireless support, inspiration and their efforts
to keep us upright for the entire three months.

Bishal Sarraf
Pragalv Neupane

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 EXECUTIVE SUMMARY
Nepal Bank Ltd is the oldest bank of Nepal with highest branch networks in the
country. One of the government undertaking banks apart from the other two, it is
thriving to deliver quality banking to its customers of different segments.

During our internship program, we undertook research project “Comparative Study on

“Impact of Operational Efficiency, liquidity, and Risk upon Profitability of PSBs in
Nepal” with objective of finding different banking variables affecting profitability of
bank from 2003. The findings of general researches were contradicted by the
performance and profitability of PSB, so this research intends to find specific factors
that have contributed for profitability in term of operational efficiency (sources and
uses of fund), liquidity, riskiness, and investment.

Research illustrated that Net Interest Income is one of the factor that possess high
impact on profit of bank at both industrial and individual level, with inference of high
interest rate sensitivity in PSBs. The other factor such as deposit, credit, and LLP also
had impact upon their profitability. The result contradicted with previous findings
where credit had negative whereas LLP has positive impact on profit. Insignificance
of liquidity and investment (except with negative impact for NBL) on profit illustrates
inadequacy in investment environment in both capital and money market tool.

Least CDR and high NPL ratio according to industrial benchmark suggest poor
operational efficiency had high risk position of PSBs in Nepal. No impact of CDR on
profitability measurement, further strengthen the findings of report. Banks have
recovered a significant amount out of their past NPL, has made risk factor having
positive impact upon profitability of PSBs in Nepal.

The recommendation made for improvement were targeted to interest rate

immunization, increase mobilization of deposit, improvement in credit policy, along
with other probable market segments that can positively derive profit from investment
of such banks. The report further suggests the aspect of merger between PSBs to
strengthen their position in future.

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Contents
Part One....................................................................................................................................1
INTRODUCTION....................................................................................................................1
1.1 Background.....................................................................................................................1
1.2 Goals/objectives of Internship.........................................................................................2
1.3 Roles/Jobs performed in the internship...........................................................................3
Part Two....................................................................................................................................5
INTRODUCTION OF INDUSTRY AND COMPANY............................................................5
2.1 Evolution of Banking Industry in Nepal.........................................................................5
2.2 Introduction to Nepal Bank Ltd......................................................................................5
2.3 Product Services of NBL................................................................................................7
2.4 Organizational Strategies................................................................................................7
2.5 Organization’s general and competitive environment.....................................................8
2.5.1 Internal environment....................................................................................................8
2.5.2 External Environment..................................................................................................8
Part Three...............................................................................................................................11
Presentation of Major Project Undertaken..............................................................................11
3.1.1 Introduction to the Project..........................................................................................11
3.1.2 Problem Statement.....................................................................................................12
3.1.3 Objective of project....................................................................................................12
3.1.4 Scope and Limitation of project.................................................................................13
Section II: Literature Review & Conceptual Framework........................................................15
3.2.1Literature Review.......................................................................................................15
3.2.1(a) Performance of PSBs and their profitability..........................................................17
3.2.1(b) Impact of Sources and USES of fund on profitability of bank...............................18
3.2.2 Impact of Liquidity on profitability of bank...............................................................19
3.2.3 Impact of Investment on Profitability of bank............................................................20
3.2.4 Impact of Riskiness on Profitability of Bank.............................................................20
3.2.5 Ratio to measure and compare banking performance.................................................21
3.2.6 Conceptual framework...............................................................................................22
3.2.7 Hypothesis development............................................................................................24
Section III: Methodology........................................................................................................25
3.3.1 Research Design........................................................................................................25
3.3.2 Empirical model.........................................................................................................25

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 3.3.3 Data............................................................................................................................26
3.3.4 Population and sample...............................................................................................26
3.3.5 Variable Specification: Dependent variable...............................................................26
3.3.6 Variable Specification: Independent variable.............................................................27
Section IV: Presentation and analysis of the project...............................................................28
3.4.1 Descriptive analysis for Variables..............................................................................28
3.4.2 Correlation analysis...................................................................................................29
3.4.3 Regression analysis (variable)....................................................................................30
3.4.5 Regression analysis (ratios)........................................................................................33
3.4.6 Test for Normality and autocorrelation......................................................................36
3.4.7 Empirical Findings.....................................................................................................36
Section V: Conclusion and recommendation..........................................................................39
3.5.1 Conclusion for Public sector banks............................................................................39
3.5.2 Conclusion for Individual PSB..................................................................................39
3.5.3 Recommendations......................................................................................................40
3.5.4 Action plan.................................................................................................................44
Part four: Reflection of Internship..........................................................................................46
Bibliography...........................................................................................................................48
Annexes..................................................................................................................................51

LIST OF TABLE

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Table 1 Work Schedule at internship program................................................................................3
Table 2 SWOT matrix...................................................................................................................11
Table 3Summarized descriptive analysis of banking variables.....................................................29
Table 4Summarized DESCRIPTIVE ANALYSIS OF BANKING ratios......................................29
Table 5 CorrelatioTable 6n analysis of banking variables.............................................................30
Table 7 Correlation analysis of ratios with ROE...........................................................................31
Table 8 Correlation analysis of ratios with roa..............................................................................31
Table 9 Summarized regression output for banking variables.......................................................32
Table 10 Summarized stata output for panel data regression of variables.....................................33
Table 11SUMMARIZED REGRESSION OUTPUT FOR ratio with ROE as dependent.............34
Table 12 SUMMARIZED REGRESSION OUTPUT FOR RATIO WITH ROA AS
DEPENDENT...............................................................................................................................36
Table 13: Marketing plan..............................................................................................................43

LIST OF FIGURE

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Figure 1 Conceptual framework on impact of variables upon profitablity of PSB........................23
Figure 2: Conceptual framework on impact of ratio on profitability of PSB................................24
Figure 3 Organizational structure of nbl.......................................................................................52

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 LIST OF ACRONYMS
ADBL: Agricultural Development Bank Limited
ATM: Automated Teller Machine
ARVA: Average Rate of Variable Assets
ARVL: Average Rate of Variable Liabilities
BFI: Banking and Financial Institutions
CA: Capital Adequacy
CB: Central Bank
CAR: Capital Adequacy Ratio
CDR: Credit to Deposit Ratio
CFD: Central Finance Department
EA: Earning Assets
FOREX: Foreign Exchange
FY: Fiscal Year
GDP: Gross Domestic Product
HR: Human Resource
IDFC: Infrastructure Development Finance Company
IRD: Inland Revenue Department
JVB: Joint Venture Bank
LC: Letter of Credit
LLP: Loan Loss Provision
MBA: Master’s in Business Administration
NBL: Nepal Bank Limited
NII: Net Interest Income
NIM: Net Interest Margin
NPA: Non Performing Assets
NPL: Non-Performing Loan
NRB: Nepal Rastra Bank
PDB: Private Domestic Bank
P/L: Profit/Loss
PEST: Political, Economic, Social, and Technological analysis
PSB: Public Sector Bank
RBB: Rastriya Banijya Bank

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ROA: Return on Assets
ROE: Return on Equity
RWA: Risk Weighted Assets
SMS: Short Message Service
SSA: Sub-Saharan Africa
SWIFT: Society of Worldwide Interbank Financial Telecommunication
SWOT: Strength, Weakness, Opportunities, and Threats
TL: Total Loan
TT: Telegraphic Transfer
URL: Uniform Resource Locator
VRA: Variable Rate Assets
VRL: Variable Rate Liabilities

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 Part One

INTRODUCTION
1.1 Background
This report is prepared as part of our internship credit requirement of MBA program
at Kathmandu University School of Management. It reflects the understanding of the
organization, its operation through research, information search, and task performed
in Central Finance Department of Nepal Bank Limited.

MBA program provides platform to learn theories along with practical exposure at
both ‘on’ and ‘off’ the scenario. The academic learning is exposed practically, being a
part of the organization in this internship program. This provides students with
platform to further explore organizational environment, strengthen the classroom
theories, and identify ones area of interest and expertise. This program can be
stepping stone for students to explore and understand professional environment and
work setting.

We worked at the Central Finance Department, Head Office of Nepal Bank Ltd for
twelve weeks (three months). Being specialized in financial management, we choose
this department to understand operation in financial system at organizational
environment with aim to provide a blend of practical exposure to our theoretical
knowledge. This shall further help us to identify our competencies and focus upon our
academic expertise.

Along with the technical and practical knowledge, this experience also helped us in
developing interpersonal and communication skills, proving that exposure to
corporate environment is the best way to build such skills in oneself. Along the
internship period, we gained an invaluable firsthand experience of working with
coworkers across varied ages and cultures and lessons in effectively communicating
one’s thoughts to the supervisor.

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1.2 Goals/objectives of Internship
The goals/objectives of internship program are divided into three major categories as:
personal goals, academic goals, and professional goals.

Personal Goals

Effective communication, analytical and problem solving and strong initiative and
leadership are the three most important skills required while managing an
organization. The following are our personal goals of this internship program.

 To understand organizational context and working environment and achieve

ability to cope with it.
 To strengthen interpersonal, communication skills.
 To make self-assessment about strength and weakness within that supports career
planning process in future.
 To assess difference in abilities with reference to internship/work experience after
undergraduate level.
 To build a social network that supports later in professional career.

Academic Goals

The goal here is to use theoretical knowledge gained through the formal studies and
further improve our knowledge base and blend our theoretical knowledge with the
practical implementation. Further the goals can be stated as:

 To develop ability to implement financial management academics into real work

scenario.
 To strengthen the knowledge gained from theoretical aspects relating it with
practical exposure.
 To strengthen analytical and problem solving skills learned through theories and
real times cases during MBA program.
 To develop better problem identification, and solving attribute through research
project along with the internship program.

Professional Goals

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Gain relevant experience in a career field of interest and develop networking and
professional relation with the employees of the organization.

 To understand ‘on job’ environment for financial management as a stepping stone

to professional career objective of being at managerial level of financial
management.
 To enhance knowledge on financial planning and its constraints being at
organizational environment.
 To understand more about various financial function such as procurement and
investment of banking funds.
 To understand implication and procedure of remittance and other banking function
being at central department of bank.
 To enhance knowledge on implementation of hedging strategies taken by treasurer
to hedge banks position against foreign exchange risk.

1.3 Roles/Jobs performed in the internship

During our internship, we were engaged in different aspects of Finance Department.
The work schedule of entire internship program is mentioned as follow:

Periods Asadh Shrawan Bhadra

Weeks I II III IV I II III IV I II III IV

Basic of Finance
Department

Agency Accounts

NRB Accounts
Reconciliation
SWIFT Operation

Remittance
TABLE 1 WORK SCHEDULE AT INTERNSHIP PROGRAM

The detailed description of our roles and assigned jobs are as follows:

Reconciliation

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We were assigned the task of Vostro account reconciliation at NRB including account
for Central Finance Department and Note Chest. As part of the clearing process, funds
of entire NBL transaction were done through this account at NRB. The account seems
to have enormous pending balance that was not reconciled from Baishak 2070.
Further, merge of three accounts of Kathmandu Banking Office, Government
Transaction, and Central Finance department on 15thBaishak, 2070 has created
additional pending amount on these accounts. During our three month tenure, we
reduced pending balance amount by approx. thirty five billion, developing new model
for note chest reconciliation, and reconciliation as a whole.

Voucher
We were assigned task of voucher preparation for various banking transactions like:
Banking Schedule, ATM transfer, TT, Fund Transfer from one bank to other and to
NRB. Vouchers were prepared manually by using paper based format at beginning.
We initiated electronic preparation of voucher by programming it in MS-Excel. This
was implemented in our department upon approval by chief manager, and has eased
most of the operations in CFD. (Specimen of voucher is included in Annex)

Remittance
We were assigned for preparation of schedule and vouchers for remittance through
agency banks. Here, we learned about the procedure of inward remittance and made
vouchers/schedules to transfer it to other banks, branches as per requirement.

Apart from these tasks, we monitored dealer’s operation on dealing with different
foreign banks to buy and sell foreign currency based upon negotiation of bid-ask
prices, SWIFT operations on transferring funds from different local and international
banks and its executing procedures, and capital restructuring process. We just
monitored these processes as they are sensitive in nature and require concerned
authorities to perform the task under their consent.

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 Part Two
INTRODUCTION OF INDUSTRY AND COMPANY

2.1 Evolution of Banking Industry in Nepal

The evolution of modern commercial banking industry started from the period of
1937 AD in which Nepal Bank Limited was incorporated. Fifty one percent of the
share was of Government which made them to control the bank. The bank was
headquartered in Kathmandu and had branches in other parts of the country as well.

The use of money was not much regulated at that time which made the economy
vulnerable to fluctuations in currency value. Nepal Rastra Bank was created in 1956
as the central bank to address this issue. The function of NRB was to supervise
commercial banks and to guide the basic monetary policy of the nation. Its major
functions were to regulate the issue of paper money; secure countrywide circulation of
Nepalese currency and achieve stability in its exchange rates; mobilize capital for
economic development and for trade and industry growth; develop the banking
system in the country, thereby ensuring the existence of banking facilities; and
maintain the economic interests of the general public.

Due to the new policy of the government to liberalize the Nepalese economy, the
private sector rushed into the banking and financial industry after the restoration of
democracy in 1990. Many commercial banks like Himalayan Bank, Everest bank, etc
were established during this decade. At present there are 31 commercial banks in
Nepal.

2.2 Introduction to Nepal Bank Ltd

His Majesty King Tribhuvan inaugurated Nepal Bank Limited on Kartik 30, 1994
which marked the beginning of an era of formal banking in Nepal. Until then all
monetary transactions were carried out by private dealers and trading center. It was

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formed under the principle of Joint venture (Joint venture between govt. & general
public). The authorized capital of NBL was Rs. 10 million & issued capital Rs. 2.5
million of which paid-up capital was Rs. 842 thousand with 10 shareholders.
During the start of formal banking with NBL, very few understood or had confidence
in this new concept of formal banking. Rising equity shares were not easy and
mobilization of deposits even more difficult. This was evident when the bank floated
equity shares worth NRs. 2,500,000, but was successful only in raising NRs. 842,000.

The total deposits for the first year was NRs. 17,02,025 where current deposits was
about NRs. 12,98,898 fixed was about NRs. 3,88,964 and saving was NRs. 14,163.
Loan disbursed and outstanding at the end of the first year was NRs. 1,985,000. From
the very conception and its creation, Nepal Bank Ltd, was as joint venture between
the government and the private sector. Out of 2500 equity shares of NRs. 100 face
value, 40% was subscribed by the government and the balanced i.e. 60% was offered
for the sale to private sector. (Organization hierarchy is included in Annex 1)

Vision Statement

"Pioneer Bank with complete banking solution"

Mission Statement

Network for inclusion: Use bank's network to increase its reach all over the country
from urban areas to rural areas and help in improving the lifestyle of rural population
and in turn become the bank of choice of corporate, medium businesses and rural
market.
Enhancing the value: To employees, shareholders, government and customers.
World class banking services: Provide world class banking services by achieving
excellence in customer service and adopting high level technology standards.

Values Statement

Segmented business approach: For risk management and enhancement of efficiency.

Partnership: With all stakeholders including the Government, employees,
shareholders and customer.
Innovation: Of business areas and processes for providing Advanced banking
services, and enhance competitiveness.
Responsiveness: responding to the changing need of the market/society/business on
timely basis.

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Integrity: Uphold trustworthiness and business ethics in the business process.
Total banking solutions: To cater the need of all sections of society.
Objectives

Nepal Bank Limited has the following objectives:

 To focus on building the positive net worth and meeting capital requirement over
the coming five years.
 To focus on increasing the customer base and market share.
 To maximize the potential efficiency of bank’s staff.
 To minimize the risk associated with the business.
 To focus on providing world class business solutions.
 To focus on increasing profit.

* The vision, mission, values and objectives are extracted from Nepal Bank Website

2.3 Product Services of NBL

NBL offers a range of banking services in terms of both deposits and loans. This bank
has wide network of branches throughout the nation, including E-channels of banking
as internet banking, SMS banking. Some of the deposit schemes at NBL are: fixed
deposit account, saving account, current account, premium saving account, and
Mahila Bisesh Account. Some of the loan products offered by NBL are: corporate
loan, retail/consumer loans, and small and medium enterprise loan.
Other than this, bank also facilitates international trade financing through LC. Fee and
charge structure for such services are one of the lowest among commercial banks in
Nepal, with wide range of branch network.

2.4 Organizational Strategies

NBL has major stake of Government, thus primary focus of bank is on penetrating
into untouched market segment. The bank also had policy to promote agricultural
based industries providing subsidized loan to such sector. Some of the strategies
undertaken by bank are listed as following:

Market Development
From its establishment, the bank has targeted locations that were deprived of banking
operations. This led to huge branch network of branch (117 branches) throughout the
nation. The branch network is also used to facilitate NRB function of currency
circulation through note chest created within branches. The bank also focuses on rural

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banking with small transaction center present in smaller and remote location with
motive to facilitate people rather earning profit.

Product Development
The bank focuses on new product for individual and corporate customers. Apart from
it, bank has also introduced special products to facilitate government transactions: like
pension fund of Nepal Army, different government schools. It also receives utility
fund on behalf of Nepal Telecom. NBL has also developed special banking product to
collection tax fund on behalf of IRD, to facilitate tax collection from big agents.

Capital Restructuring Strategy

Since the bank’s non-performing loan have accumulated to around 60%, it has not
been able to recover it. Recently, it had issued 1:9.5 right shares in order to increase
its capital base to 4 billion. This strategy leads to positive net worth in capital
structure. The issue worth Rs 3.61 billion was managed through Citizens Investment
Trust and Civil Capital. The right issue was bit under-subscribed, which has been
called for auction by bank authority.

2.5 Organization’s general and competitive environment

The external and internal environments that affect Banking are as follows:

2.5.1 Internal environment

Internal environment has a direct impact on the business. It consists of factors such as
personnel, physical facilities, machinery and equipment, organizational culture,
management systems, leadership styles, employee morale, organizational structure
and so on.

The internal environment of bank facilitates staff with a proper working environment.
The banking operation is mix of electronic and manual functions. Electronic functions
include posting transactions in banking software. Documentation is still done
manually. Overstaffing is one of the major sources of creating inefficiencies in
banking operation Moreover with the presence of trade unions affiliated to seven
political parties have made the internal environment of bank more politicized.

2.5.2 External Environment

Regarding the external environment, a PEST analysis has been conducted as follows:
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Political factors: Politics have always been a vital problem for the Nepalese business
industries and banking is also not an exception. The unstable environment directly or
indirectly affects the investors, creditors and even depositors. Nepal bank also being
government undertaking bank have also been affected by politics. On contrary, during
period of civil war, bank had good business in remote area, but with peace agreement,
Bank faced competition from other DPB, and JVB that reduced business of NBL in
those areas. Moreover the labor unions affiliated to various parties have exerted huge
pressure on the management. This is one reason behind inefficiency of the union
affiliated employee.

Economic factors: Nepal has not been able to achieve its targeted growth of 5.5% as
it ended up at a growth rate of only 3.6%. Similarly, national saving has decreased,
while every Nepali citizen’s per capita GDP has reached Rs.62500. These data shows
that in the coming future there may be competitive banking environment as the BFI
are merging which creates some large institutions in terms of capital and assets. Being
a PSB, the bank also must support agro based economy of country. More focus is
directed towards agro sector rather industrial sector for most of PSB. The recent
closure of accounts by foreign agency banks like Citi Bank, JP Morgan Chase Bank
and others because of money laundering issues has imposed problem in operations of
international financing and remittance. These factors have imposed direct challenge to
bank to operate among these economic variables. Nepal Bank has much to do to
compete.

Social factors: The factors such as demographic, culture, and population social status
determines various aspects which affect the banking as well. For example, emergence
of entrepreneurs mean more demand for loan, increase in income may lead to more
saving habit, more adult population may mean more economic activity. In case of our
country, agriculture is the backbone, supported by massive remittances because of
flow of labor force to other countries. Saving is prevalent in our country compared to
the western countries.

Technological factors: The rapid change in the technology is a symptom for the
organizations either to change and adapt to the changing technology or to fade away.
The banking sector is not an exception. Being the first bank of Nepal, there are still
many employees who are not adapted to the technology which is creating hurdles to

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attain efficiency in the banking operations. Moreover, rapid development of new
banking software adds efficiency in daily operation and other analytical tasks. Banks
failing to adopt according to these technological changes lag far behind in business.
The banking operations must be updated accordingly with the technological changes,
to remain competitive through operational efficiency.

To summarize the strengths and weaknesses of NBL considering all environmental

factors, the following SWOT matrix is constructed:

Strengths Weaknesses

 Strong public trust  Less marketing efforts

 Huge deposits, liquidity  Overstaffing
 Largest branch networks  Lack of Human Resource
Development Programs
 Slow in technology adaptation
Opportunities Threats

 Exploit the large networks  Unstable political situation

 Strong bargaining power of labor
through strong marketing
 Mobilize huge deposits into unions
 Cut-throat competition with
productive sectors
 Improve technology and HR private banks and financial
capacity to reduce cost and institutions
increase efficiency
TABLE 2 SUMMARIZED SWOT MATRIX

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 Part Three
Presentation of Major Project Undertaken

Section I: Introduction
3.1.1 Introduction to the Project
Banking and financial institutions have now become an integral part of economy. The
major function of financial system is to promote investment through financing
productive business opportunities, mobilizing savings, efficient allocating resources
and making easy the trade of goods and services[ CITATION Aco \l 1033 ]. A sound
banking withstands confrontational conditions and adds performance based value in
the financial system[ CITATION Ath08 \l 1033 ].Banking industry are integral part of
economy as it collects savings and funds from individual and institutional level, and
mobilize it as funding for other sectors. It transfers the excess fund from sectors
having excessive of it, to needy sector collectively from sum of deposits.

In Nepal, banking and financial institutional system has contributed upon

development of different sectors of economy as: agricultural sector, industrial sector,
and trade sector. A study illustrated that 70% of the total assets of all the financial
system has been accounted by banking sector. The dominance of banking and
financial institutions in capital market accounts for almost 75% of total companies.
The measure to evaluate of a performance of such institutions depends upon how well
they can use their assets, and shareholder’s equities in terms of returns associated with
it. Financial ratio is one of the methods to perform comparative analysis against
benchmark of different time period and helps to improve their performances. (Paudel,
2005; Jha & Hui, 2012; Lin, Li, & Chu, 2005)

The history of financial services sector in Nepal was started with the establishment of
Nepal Bank Limited in 1937[ CITATION Bar \l 1033 ]. Since then, there are 31
commercial banks, including three public sector banks, and six joint venture banks,
and twenty two domestic private banks. Among them, public sector banks are the old
banks in history possessing substantial asset base and branch networks across the
country. The public sector banks of country includes: Nepal Bank Limited (NBL),
Rastriya Banijya Bank Limited (RBB), and Agricultural Development Bank Limited

11
(ADBL). The public sector banks are believed to be large in comparison to others in
terms of their operational size (deposits and credits), and branch network across the
country. [ CITATION Aco \l 1033 ].

Fourth quarter analysis of FY2069/70 by IMS Investment Management Service,

ADBL was high earner among other commercial banks in terms of net profit followed
by RBB in fourth position. NBL had 348.80% growth in its net profit, and was highest
earner of operating profit. RBB and NBL shared 15.1% of total market share in terms
of total deposit whereas; ADBL and RBB shared 13.66% of total market share in
terms of loans and advances. RBB had highest investment among other commercial
banks, whereas ADBL had one of the highest CD ratio and ROA among other banks.

This project aims at finding the factors that affect profitability of public sector banks
in Nepal. Since, public sector banks hold substantial market share, assets, and
business among BFI, profitability of such institutions have huge impact upon
economy of country. This study includes the impact of factors contributing towards
sources and uses of fund, liquidity, and riskiness for bank.

3.1.2 Problem Statement

Some studies illustrated that there was 37.04% growth in net profit of commercial
banks compared to the corresponding quarter of the previous fiscal year. But
increment in deposit of FY 2069/70 increased by 17.62% compared to last fiscal year,
whereas loans and advances increased by 17.75%. On the other hand, net interest
income of banking industry increased by 37.19% compared to corresponding quarter
of FY 2068/69, where no significant changes in investment module. But still banks
have huge change in terms of profit including 300% plus change in profit of one of
the PSB.
The major problem statement identified for this report is: What are the major factors
that have accounted for profitability of PSB in Nepal and what are comparative
factors that have contributed for profitability of each PSB in Nepal?

3.1.3 Objective of project

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This report aims at finding the impact of both external and internal determinants upon
profitability of public sector commercial banks in Nepal. The major objectives of this
project are listed as follow:
 To determine internal factors affecting profitability of PSBs in Nepal.
 To understand the position of individual PSB in comparison to others PSBs in
Nepalese market.
 To understand financial position of individual PSB and PSBs on benchmark of
different banking standards defined by NRB.
 To analyze position of PSBs and recommend different measures from academic
perspective to strengthen their position in future.

3.1.4 Scope and Limitation of project

The scope of this project is:

 To understand the impact of different operational and performance parameters of

banking on the profitability of PSB in Nepal. The finding of this study illustrates
the impact analysis of mentioned factors of NBL, RBB, and ADBL upon their
profitability. The scope of the study further elaborates the factors that have most
and least impact upon profitability of public sector which further helps to maintain
the strengths and strengthen weaknesses which shall increase the profitability of
banks in future
 This study suggests a measure that increases government revenue in either term of
tax revenue and dividend income strengthening position of PSBs, as government
is one of the major investors in public sector banks.
 This study further compares the position of PSBs in terms of ratio that measures
operation efficiency, liquidity, risk positions, and investment suggested by NRB,
that provides comparative findings for investors, and customers of such banks.
Later, the findings can be compared with such studies conducted on JVB, and
PDB which helps to find the competitive position of banks that helps investors,
customers, and other stakeholders for further analysis.
 This report helps the management of banks to find their competitive positions, so
that they can take corrective measures to strengthen their competitive position in
term of efficiency, liquidity, and risk position.

13
The major limitations of this project are mentioned as follow:

 The study has been limited because of availability of data. Quarterly data of all the
required variables were available from third quarter of FY 2003-2004 in case of
NBL and RBB, but in case of ADBL, data was available from fourth quarter of FY
2008-2009. This restricted the proper impact study among two PSB: NBL, and
RBB. Complete data would have strengthened scope of the study.
 The limited availability of time has limited the scope of study that restricted us
from further detailing of project. This project can be a research topic that shall
detail the impact and comparative analysis of PSB, along with other JVB and
PDB.

14
 Section II: Literature Review & Conceptual Framework
3.2.1Literature Review
A Book by Shrestha & Bhandari (2008) states that “Commercial banks are one of the
major financial intermediaries, whose primary function is the transfer of monetary
resources from the savers to the users.”These institutes are leading financial entities
responsible for issuing of demand liabilities and making loan to business in as
tradition that goes back several years. This concept of banking at local level has now
advanced to cross border in order to facilitate import and export operation involved in
trade financing facilitated through different level of commercial banks [ CITATION
Eun11 \l 1033 ]. One of the literatures accumulates the functions of commercial banks
in broad category of primary and secondary functions. It writes, the primary function
of commercial banks include: acceptance of deposits, advancing loans, creation of
credit, clearing of cheques, financing foreign trade, and remittance of funds; whereas
secondary services are agency services (collection and payments of credit
instruments, purchase and sale of securities, collection of dividends on shares,
correspondents, income-tax consultancy, execution of standing orders, acting as
trustee and executor), and general utility services (lockers facility, traveller’s cheques
and credit cards, letter of credit, collection of statistics, acting referee, underwriting
securities, gift cheques, accepting bills of exchanges on behalf of customers, merchant
banking) that creates sources of incomes for banks as interest on loan, interest on
investments, discounts, commissions, and brokerages[ CITATION Scr13 \l 1033 ].

The book “Financial Markets & Institutions” by Shrestha & Bhandari (2008) suggest
that commercial banks should manage their assets and liabilites effectivelyin order to
achieve better results in long term with profit. It further discusses about the
management of assets and liabilites of bank from the perspective of sources and uses
of that is used to match the level of assets and liabilities.It further discuss about the
liability management of bank, which includes equity & reserves, deposits,
borrowings, and other liabilities (subjected to day to day fluctuations). On the other
hand, it also incorporates about the asset management of banks that is responisble for
efficient operations of all the commercial bank that includes efficinet operation and
profitability that converts liabilites into earning assets. The assets here includes: cash,
investments, loan and advances, fixed assets, and other assets.Proper management of

15
assets and liabilities is responsible for profitability, efficiency, and viability.. The book
further discusses about the concept of maturity structure of assets and liabilities which
shows the transformation effects on the best use of assets and effective utilization of
funds under as specified maturity structure. It further states the mismatch in assets
liabilities shall lead to problems in liquidity, credit recovery, fluctuations in interest
rates, and many other contingent financial catastrophe.

Balachandher , Staunton, & Shanmugam(2008) identifies profitability of banks are

dependent upon internal determinants (that are within control of management), and
external determinants (macro-economic factors that are beyond the control of
management). It further details about the internal factors, where bank management
policies and decisions about sources and uses of fund management, capital and
liquidity management, and expenses management analyzed through books of accounts
of organization.

The combined research findings by Bourke (1988), Molyneux & Thornton (1992),
Williams & Thornton (1994), Williams, Molyneux, & Thornton(1994), and
Allen(1997) further elaborates the internal determinants as capital ratios, liquidity
ratios, assets and liability portfolio mix, and overhead expenses. It further states that
banks should focus on areas where they do have competitive advantages in endeavor
to maximize efficiency in credit policy, and related customer-service. This further
leads to bank’s concentration by geography, industry, demographics, and other market
characteristics that possess differential impacts upon bank riskiness and profitability
with respect to dynamics of economic condition of different regions and sectors. In
contrast, the research explains about the external determinants of bank’s profitability
subdivided into categories of environment related factors (market structure,
regulation, inflation, interest rate, and market growth), and firm specific factors (firm
size and ownership).

A study on the determinant of bank net interest rate margins in 10 SSA countries by
(Al-Hashimi (2007) found that credit risk and operation inefficiencies is responsible
for significant variation in net interest margins across the region. The study further
states that macroeconomics risk is accounted for limited effects on net interest margin.

Other study on banking environment by Demirgüç-Kunt & Huizinga(1998) illustrated

that bank appearances and its overall environment that affects both interest rate

16
margins and bank returns shall decompose income effects that shall further affect the
behavior of depositors and borrower. The paper further elaborates that the
macroeconomic and regulatory conditions possess impact upon margins and
profitability of banks.

A study on the determinants of the Tunisian Bank’s performance during the period of
1980-1995 by Naceur and Goaied(2001), explained about the best performing banks
on grounds of their improvement in labor and capital productivity, maintenance of
high level of deposit account relative to their assets, and reinforcement equity.

An accumulated finding from different researches suggested the determinants of

profitability of banks under: pricing of banking services, cost/earning efficiency of
bank’s operation, high return investments, reducing idle assets, benefiting from
economies of scale, compliance with institutional process for the flow of information
to management to make timely decision. Other research paper suggested ratios such
as: Return on Assets (ROA), Non-Performing Loan ratio (NPL), net interest margin
(NIM), and Credit to Deposit Ratio (CDR) as measures to analyze asset quality,
management, and earning and liquidity position of different banks in Nepal. It further
states that the financial ratio analysis is one of the better investment options for
investors as it basis for fundamental analysis of any company or corporations. A
methodology suggested by another research paper for predicting bank performance is
multiple linear regression technique with variables as liquidity, credit risk, cost to
income ratio, size and concentration ratio to measure impact upon the profitability.
This further helped in understanding the linear relationship between mentioned
independent variable and dependent variable.(Kahf, 2004; Jha & Hui, 2012;
Gopinathan, 2009; Tahir, 2009)

With respect to literatures on different forms of banks in financial system, Public

sector bank (on which significant share is held by government) has different identity.
These banks are known for having large asset base and wide branch networks.
Literature findings on performance of PSBs are mention as:

3.2.1(a) Performance of PSBs and their profitability

An assessment by Rao, Rezvanian, & Nyadroh(2003) on profitability of Banks in
India, suggested about a tremendous change in the ownership structure of the banking
industry especially with reference to ones in developing countries during the last

17
decade. The assessment categorizes them into three major categories of privately
owned domestic banks, publicly-owned domestic banks, and foreign-owned banks. A
statistics on Indian banks presented by La Porta, Lopez-De-Silanes, & Shleifer(2002)
report that the government owned banks were larger than in the other categories bank
in accounts of production and investment, despite the privatization wave of the 1980s
reduced government ownership of banks from 58.9% in 1970 to 41.6% in 1995. A
research by Ataullah & Le(2002)argued on noticeable improvement on efficiency of
privately owned banks and foreign banks in comparision to publically owned banks.
This research compared the postion of public banks with respect to other categories of
banks.

A paper by Jha & Hui(2012) on Nepalese Commercial banks suggested that Public
sector banks hold substantial shares in the total assets of industry with enormous
assets base including wide branch networks around the country. It further argues that
the public sector banks are the largest banks in Nepalese context from all the aspects
of deposits and credits to number of branches in operations.

A paper by Panta(2007) on challenges in banking in Nepal argued that private sector

banks have achieved more efficient and sound performance in comparison to public
sector banks in terms of efficiency. The reasons it suggested behind it were: aggress to
perform, thrive to compete and grow, through quality manpower, proper risk
management and innovate to lead approach. It further added on strengthened
manipulation by the debtors using political influence and weak governance has added
Non-performing assets on public banking system, which illustrates a symptom of
unhealthy banking system. It stated same reasons for huge industrial bad debt of
Nepalese Public Sector banks.

The findings of different researches on factors affecting profitability are as follows:

3.2.1(b) Impact of Sources and USES of fund on profitability of bank

Gackle (1994) explains that the profitability of bank is highly dependent upon bank’s
ability to increase its deposits and other investment funds. The increment is because
of its expansion on deposits that accounts for its capacity to invest more in investment
assets. La Porta, Lopez-De-Silanes, and Shleifer, (2002) explains that the long term
profitability of bank grows with the growth of sources of funds, such as deposits and

18
other funds’ resource elements that give the bank the opportunities to have profit-
generating invested assets.

Naceur & Goaied (2001) studied the factors that affected the Tunisian Bank’s
performances during the period 1980-1995. The scope of studies includes the banks
that have maintained a high level of deposits accounts comparative to their assets.
Findings of a research illustrated that deposits have the positive and significant impact
on the profitability that deposits for funds can achieve better return on assets.

Gul, Irshad, and Zaman (2011)stated that loans has positive and significant
relationship with profitability as increase in loans possess high changes of increase in
return on assets. Ritz (2012) combined impact of both deposit and loans together and
stated that an increase in bank’s deposit base reduces the funding risk exposure of
further loan commitments. This makes loans themselves more attractive with more
concentration on asset-liability management function.

3.2.2 Impact of Liquidity on profitability of bank

Shrestha and Bhandari(2008) on their book Financial Markets and Institution stated
that for efficient performance, commercial banks have to maintain satisfactory level
of liquid assets that are easy to sale at market price with less transaction cost. It
further stated that commercial banks should maintain sufficient cash balance in order
to meet the day-to-day needs of customers and overcome the withdrawal vulnerability
of large deposits. The book further states about Miller and Orr model, which
recommends buying of securities when firm has too much cash and selling it when
firm, are in shortage in order to maintain liquidity.

Bordeleau and Graham (2010) stated that liquid assets such as cash and government
securities generally possess a relatively low return in comparison to other money
market tools. Holding of such assets imposes opportunity cost an opportunity cost. It
further argues that banks are expected to hold liquid assets only to that optimum level
where they can maximize the firm’s profitability. Despite of these findings, an
instance during the crisis in banks in Canada and United States, banks held liquid
assets with opportunity cost, but they recognized the operational benefit of having
more liquidity that could represent robust bank to investors and funding markets

19
Morris and Shin(2010) arguedon impact on profitability of a bank’s holding of liquid
assets (i.e. cash reserves) is dependent on contingencies. The bank’s holding priorities
of liquidity depends on the funding that comes due in the short-term in general state
of economic cycle. This is to avoid the risk “sudden stop” or freeze in funding market.

3.2.3 Impact of Investment on Profitability of bank

Matei and Geambaşu (2010 discussed about the functions of commercial banks as: the
mobilization and allocation of financial resources by crediting the economy, whereas
they have extended their reach in to the capital market with real competition for
brokerage companies, pension funds, mutual fund, and insurance companies,
developing new products and services and using tools and techniques specific for
these new markets. It further detailed that banks have pool of investments in capital
market, through which they can diversify their portfolios, hedge risks, and obtain
profit following speculative strategies. For this, banks use both fixed income
instruments and instruments with higher level of risk. It further states that bank enter
such capital market with expectation of high return on their huge capital.

Kahf (2004) stated positive relationship between growth in investment and growth in
profit of bank. Here, growth in investment indicates the bank’s ability to generate
earnings as growth in asset increases bank’s ability to invest in projects with higher
returns.

3.2.4 Impact of Riskiness on Profitability of Bank

Flamini, McDonald, and Schumacher(2009) argued on standard asset a pricing model,
which implies riskier assets are remunerated with higher returns. It states that bank’s
profitability should reflect unsystematic risk (bank-specific risk), as well as risks
systematic risk (through macroeconomic environment). It further suggest that credit
risk of bank is measured using the ratio of loans to deposits and short term funding.

Brissimis, & Delis(2008) produced an empirical study on profitability behavior of the

South Eastern European banking industry over period of 1998-02, which suggested
the enhancement of risk management standards and operation efficiency affects
profits.

20
Miller & Noulas(1997) argued about negative relationship between credit risk and
profitability. The risk here maximized with loans, higher level of loan loss supplies
that troubles profit maximizing strength of a bank.

Accord Implementation Group, NRB(2007)states that the total risk weighted exposure
shall comprise of risk weights calculated in respect of bank’s credit, operational and
market risks reflected by the capital adequacy conditions of banks.

Some other researchers have used loan loss provisions to measure credit risk, whereas
some consider it as accounting breakdown of the revenue with negative correlation
between two variables

3.2.5 Ratio to measure and compare banking performance

Baral(2005) stated that the quality of assets held by a bank depends on exposure to
specific risks, trends in non-performing loans, and the health and profitability of bank
borrowers.

A paper by IDFC Mutual Fund (2013)suggested about Credit-Deposit ratio. The

proportion of loan created by banks from deposits it receives reflects bank’s capacity
to lend. Higher ratio indicates higher generation of credit out of its deposits. This ratio
reflects the impact of ratios such as: credit-deposit growth, cash reserves and
investment by bank as bank’s credit are residuals after cash reserves and investments.
Thus, cash reserve and investment possess negative impact upon CDR.

International Financial Management by Eun & Resnick (2011) discusses about capital
adequacy and its impact upon the risk position of bank. Capital Adequacy here, refers
to the amount of equity capital and other securities a bank holds as a reserves against
risky assets to reduce the probability of a bank failure. The basel accord defines the
minimum capital adequacy ratio for banks is 8 percent of risk-weighted assets for
internatioanlly active banks. It further breaks capital into two categories of: Tier I core
capital (shareholders equity and retained earnings), and Tier II supplemental capital
(preferred stock, and subordinated bonds). Accord Implementation Group,
NRB(2007) states that Nepalese commercial banks need to maintain at least 6% Tier-
1 capital and 10% total capital (Tier 1 and Tier 2). Tier 1 capital consists of paid-up
capital, share premium, non-redeemable preference share, general reserve fund,
accumulated profit, capital redemption reserve, capital adjustment fund, and other free

21
reserves. The Tier 2 capital comprises of general loan loss provision, assets
revaluation reserve, hybrid capital instruments, subordinated term loan, exchange
equalization reserve, excess loan loss provision, and investment adjustment reserve.

The NRB Directives, as listed in Nepal Rastra Bank(2010)composition of assets, non-

performing loan to total loan ratio, net nonperforming loan to total loan ratio as the
indicators of the quality of assets of the are used to evaluate performance of
commercial banks in Nepal. It uses return on total assets (ROA) as an indicator of
profitability of commercial bank. In addition, NRB uses the absolute measures such as
interest income, net interest income, profitability and capital adequacy measures to
evaluate the profitability of commercial bank As per NRB directives, banks have CD
ratio ceiling up to 80%.The quality of assets is measured through compostion of
assets, non performing loan to total loan ratio for commercial bank. NPA above 5%
makes commercial banks riskier in terms of their portfolio with poor assets quality
and low level of liquidity. The Capital Adequacy Ratio (CAR) is calculated by
dividing eligible regulatory capital by total risk weighted exposure.

3.2.6 Conceptual framework

After literature survey we came up the following framework for study. At first, the
dependent variable is Profit. The independent variables that influences the profit are
Sources and Uses (Deposit, Loans and Advances, Net Interest Income), Liquidity
(Cash & banks), Riskiness (Loan Loss Provision), and Investment.

22
 Sources and Uses Deposit

Loans and Adv.

NBL
Net Int. Margin

Liquidity Cash & Banks

NetProfit ProfiNet Profit

Risk Loan Loss Prov.

Investment

Sources and Uses Deposit

Loans and Adv.

RBB

Panel proft of PSB

Net Int. Margin

Liquidity Cash & Banks Net Profit ProfiNet Profit

Risk Loan Loss Prov.

Investment

Sources and Uses Deposit

ADBL Loans and Adv.

Net Int. Margin

Liquidity Cash & Banks Net Profit ProfiNet Profit

Risk Loan Loss Prov.

Investment
FIGURE 1 CONCEPTUAL FRAMEWORK ON IMPACT OF VARIABLES UPON PROFITABLITY OF PSB

At second stage, impact of bank’s profit is measured through the variables of ratio
(according to benchmark of NRB). Here, the dependent variable is ROA or ROE for
either of the model. The independent variables for both are CDR, NPL to TL, LLP to
NPL, and CAR.

23
 CD Ratio
NBL
NPL to TL ROA/ROE

LLP to NPL

CAR

Panel Proftability of PSB

CD Ratio
RBB
NPL to TL ROA/ROE
ProfiNet Profit
LLP to NPL

CAR

CD Ratio
ADBL
ROA/ROE
NPL to TL ProfiNet Profit

LLP to NPL

CAR

FIGURE 2: CONCEPTUAL FRAMEWORK ON IMPACT OF RATIO ON PROFITABILITY OF PSB

3.2.7 Hypothesis development

The logical relationship formulated between variable based upon the literature survey
are mentioned as following:
Hypothesis 1: There is positive relationship between Deposit and Bank’s profit.
Hypothesis 2: There is positive relationship between Credit and Bank’s profit.
Hypothesis 3: There is positive relationship between CDR and Bank’s profitability.
Hypothesis 3: There is positive relationship between NII and Bank’s profit.
Hypothesis 4: There is positive relationship between Cash and Bank’s profit.
Hypothesis 5: There is negative relationship between Risk factors and Bank’s profit.
Hypothesis 6: There is positive relationship between investment and Bank’s profit.
Hypothesis 7: There is positive relationship between CAR and Bank’s profitability

24
 Section III: Methodology
3.3.1 Research Design
An explanatory study is undertaken in order to ascertain and be able to describe the
characteristics of the variables of interest in a situation.[ CITATION She12 \l 1033 ]
This study aims at finding the quantitative impact of different variables that determine
profitability of PSBs as a whole, thus purpose of study here is a descriptive study to
find impact of performance related variables. Such studies are also undertaken to
understand the characteristics of organizations that follow certain practices, where this
study too aims at comparative analysis between performances of PSBs in Nepal.

The project’s finding on operational efficiency shall be based on the sources and uses
of fund, liquidity condition of bank, risk position, and investment portfolio of bank.
The performances of PSB are compared on the basis of standard ratio allotted by
NRB, which shall further compare the performance and operational conditions of
banks. As mentioned in framework, the variables for impact and comparative analysis
are deposits, loans and advances, loan loss provision, cash and bank, investment. The
ratios taken for analysis as allotted by NRB are: CD Ratio, NPL to TL, LLP to NPL,
CA ratio.

3.3.2 Empirical model

Both Panel and individual data regression model were used to analyze the impact of
independent variable on dependent variable. The following are models in specific
format:
For impact of banking variables upon profitability
Profit = β0 + β1.Deposit + β2.Credit + β3.Investment + β4.Cash + β5.NII + µ
(Profit)it = β0 + β1.(Deposit)it + β2.(Credit)it + β3.(Investment)it + β4.(Cash)it + β5.
(NII)it + µit
Where, NII is calculated as net interest expenses subtracted from net interest income.
For impact of banking ratios upon profitability
(ROA) = β0 + β1.CDR + β2.NPL/TL + β3.LLP/NPL + β4.CAR + µ
(ROE) = β0 + β1.CDR + β2.NPL/TL + β3.LLP/NPL + β4.CAR + µ
(ROA)it = β0 + β1.(CDR)it + β2.(NPL/TL)it + β3.(LLP/NPL)it + β4.(CAR)it + µit
(ROA)it = β0 + β1.(CDR)it + β2.(NPL/TL)it + β3.(LLP/NPL)it + β4.(CAR)it + µit
Where, ROA is calculated as Net Income to total asset and ROE as Net Income to
Total Equity.

25
3.3.3 Data

Here, secondary data is considered for the study. For this purpose, quarterly data on
deposit, loans and advances, investment, cash, net interest income, profit/loss, ROA,
CD Ratio, NPL to TL, LLP to NPL and Capital fund to RWA from third quarter of
FY2003-04 to fourth quarter of FY 2012-13 is taken. Data were extracted from the
available quarterly financial highlights of different banks listed NRB website
(URL:http://bfr.nrb.-
org.np/bfrstatistics.php?tp=quart_fina_highlights&&vw=15), from third quarter of FY
2003-04 to first quarter of FY 2010-2011. Remaining are collected from respective
website of NBL (URL: http://nepalbank.com.np/financialresults/index.php), RBB (URL:
http://www.rbb.com.np/financial_reports.php), and ADBL (URL: http://adbl.gov.np-
/adbl_progress_report.html)

3.3.4 Population and sample

There are altogether 31 commercial banks in Nepal. Among them, there are three
PSB, six JVB, and twenty two DPB. Since the report aims at finding variables that
impact profitability of PSB in Nepal, we take all the population of PSB under our
study.

In term of data, we have taken available data from different source thus convenience
sampling is done. Here, for research we have taken data from third quarter of 2003-04
for NBL and RBB, whereas from fourth quarter of 2008-09 for ADBL.

3.3.5 Variable Specification: Dependent variable

Net profit after tax is a commonly used indicator of banks profitability. The value is
residual value after deducting all the expenses (staff, and various other expenses). Net
profit contains the diluted value of overall income and expenses through its
derivation. On other empirical models we consider both ROE and ROA as dependent
variable as they indicate profitability of company relative to equity and total assets.
We prefer high net profit, ROE, and ROA that illustrates the management efficiency
of bank.

3.3.6 Variable Specification: Independent variable

26
Sources and Uses of Fund: Sources and uses of fund are represented by Deposits,
and loans of bank (Naceur & Goaied, 2001; Gul, Irshad, & Zaman, 2011). Return
generate through both of the variables are represented by Net Interest Income that
represents the operational efficiency of bank in terms of lag between receipt and
payments. CDR represents banks generation of credit out of its deposit which
represents the ratio between uses and sources of fund. Positive relationship is found
between sources and uses of fund and profitability of bank.

Liquidity:Liquidity is represented by cash & bank balance held by bank.A strong

liquid asset pool could represent a more robust bank to investors and funding markets
and add operational benefit to meet operational requisites.[ CITATION Bor10 \l
1033 ] Liquidity has various impacts upon profitability of bank.

Risk: Loan Loss Provision is one of the major indicators of banks risk position as
significant risk lies is loan turning out to be non-performing one. Khizer, Farhan, &
Zafar (2011) found negative relationship between risk and profitability of bank. Risk
can further be illustrated by NPL to TL, LLP to NPL and CAR. CAR represents
banks’ ability to absorb contingent risk that has positive impact upon profitability.

Investment: Investment is another major source to generate return for Banks. Growth
in investment indicates the bank’s ability to generate earnings because of growth in
asset [ CITATION Kah04 \l 1033 ]. Thus investment possesses positive impact upon
profitability of bank.

27
 Section IV: Presentation and analysis of the project
3.4.1 Descriptive analysis for Variables
The summary of descriptive analysis for both panel and individual data of variables
illustrated the following outcome: (Detail in Annex 2, 3, 4, 5) (in ‘000)

Variables Mean Std. Dev. Min Max

Deposit 48,558,356 14722433.72 30,897,748 91,097,978
Credit 27,576,135 9386187.10 7,688,132 49,770,459
LLP 1,603,951 3767093.26 -254,086 14,955,000
Investment 12,444,110 5833053.67 2,569,253 30,048,759
Cash 7,858,781 3747348.83 3,171,000 21,363,989
NII 1,355,174 996549.09 78,539 4,611,594
Profit/Loss 705,831 578195.76 -766,000 2,259,947
TABLE 3SUMMARIZED DESCRIPTIVE ANALYSIS OF BANKING VARIABLES

The descriptive study of data illustrated that deposit has highest fluctuation during the
period of study. It is followed by credit figures. Least fluctuation is noticed in profit
and loss figure which is followed by fluctuation in NII. The highest average figure is
of deposits whereas the least average is of profit/loss. The figures further illustrated
that the highest risk is associated with deposit with higher standard deviation whereas
least in terms of profit/loss with least values.RBB has the highest standard deviation
in all of the aspects of banking variables (deposit, credit, investment, cash, and LLP).
ADBL has high variability in LLP, whereas NBL has least variance in terms of their
banking performance.

Ratios:

The descriptive analysis for variables of ratio illustrated the following outcome:
(Detail in Annex 6, 7, 8, 9)

Variables Mean Std. Dev Min Max

ROE -5.58% 53.30% -458.43% 124.98%
ROA 1.14% 0.90% -1.60% 3.13%
CDR 58.56% 17.38% 16.78% 101.86%
NPL to TL 14.84% 13% 4.11% 51.22%
LLP to NPL 131.74% 32.03% 95.94% 226.235%
CAR -16.53% 22.53% -59.89% 20.45%
TABLE 4SUMMARIZED DESCRIPTIVE ANALYSIS OF BANKING RATIOS

28
The data illustrated highest fluctuation in ROE during study period whereas least
fluctuation in ROA. Some exceptional figures were seen for CDR where credit is
greater than deposit. Data for LLP had highest standard deviation that indicates the
bank’s risk hedging position along with funds invested in loan/credit. Both indicators
for return ROA and ROE suggested lower return for overall PSB in Nepal. PSB are in
risky position with high Non-performing assets as suggested by NRB directives.
Values for CAR suggest too low values that suggest least risk absorption capacity of
PSBs over time excluding some good figures for ratio as per NRB standards.

3.4.2 Correlation analysis

Variables
The correlation analysis suggested the following result for variables:
. correlate
(obs=90)

Deposit Credit LLP Invest~t Cash Spread Profit~s

Deposit 1.0000
Credit 0.5192 1.0000
LLP -0.2544 -0.1388 1.0000
Investment 0.7082 0.0978 -0.2282 1.0000
Cash 0.6893 0.2858 -0.2628 0.4521 1.0000
Spread 0.2913 -0.0940 -0.0652 0.7783 -0.2082 1.0000
ProfitLoss 0.2534 0.2657 0.0908 0.1220 0.1413 0.0343 1.0000

.
TABLE 5 CORRELATIOTABLE 6N ANALYSIS OF BANKING VARIABLES

The hypothesis of no correlation among the variable is rejected as there existed some
degree of correlation among variables. Among variables, NII has highest degree of
positive correlation with profitability (0.6927) of banks followed by credit (0.2657)
and deposit (0.2534). LLP is negatively correlated with all the variables except for
profit with lower degree of positive correlation (0.0908). The net interest income is
negatively correlated with investment (-0.1059), and least correlated with cash
position (0.0843). Cash and investment are positive high correlation with deposit
0.6893 and 0.7083 which suggest deposit being one of the major sources of fund for
bank. Negative correlation of LLP with deposit (-0.2545) and credit (-0.1388) suggest
that with more of deposits and credits, bank must maintain least in loan loss provision.

Ratios

29
There exists a degree of correlation between the variables in terms of various banking
performance as illustrated by tables below:
. correlate
(obs=81)

ROE CDRatio NPLtoTL LLPtoNPL CA

ROE 1.0000
CDRatio 0.0536 1.0000
NPLtoTL 0.0243 -0.2994 1.0000
LLPtoNPL 0.1047 0.3660 -0.4456 1.0000
CA 0.0589 0.7865 -0.6417 0.5697 1.0000

TABLE 7 CORRELATION ANALYSIS OF RATIOS WITH ROE

There exists high positive correlation between CAR and CDR (0.7865). All of the
variables are least positively correlated with ROE between ranges of 0.02 to 0.1. LLP
to NPL is positively correlated with CDR (0.3660) and CAR (0.5697).
. correlate
(obs=81)

CDRatio NPLtoTL LLPtoNPL CA ROA

CDRatio 1.0000
NPLtoTL -0.2994 1.0000
LLPtoNPL 0.3660 -0.4456 1.0000
CA 0.7865 -0.6417 0.5697 1.0000
ROA 0.5719 -0.1898 0.4858 0.6025 1.0000

TABLE 8 CORRELATION ANALYSIS OF RATIOS WITH ROA

ROA is positively correlated with CDR (0.5719), LLP to NPL (0.4858), and CAR
(0.6025)

3.4.3 Regression analysis (variable)

The summarized STATA output for regression analysis for individual PSB illustrated
the following outcomes: (Details Annex 10, 11, 12)
Variables Coefficient(NBL) Coefficient (ADBL) Coefficient (RBB)

Deposit -0.037 -0.022 -0.007

(0.141) (0.552) (0.303)
Credit -0.048 0.001 -0.02
(0.111) (0.983) (0.013)
LLP -0.03 -0.2 -0.0006
(0.090) (0.599) (0.953)
Cash -0.0092 -0.093 0.006

30
 (0.793) (0.192) (0.615)
Investment -0.096 -0.0005 -0.003
(0.005) (0.984) (0.825)
NII 0.48 0.52 0.8
(0.000) (0.043) (0.000)
Constant 651875 223585 992774
(0.197) (0.878) (0.000)
TABLE 9 SUMMARIZED REGRESSION OUTPUT FOR BANKING VARIABLES

* Value in parenthesis is P-value of respective variable

Agricultural Development Bank Limited
Since F value is 0, the model is significant at 95% of confidence level. Only NII has
positive significant impact on profit i.e. Rs.1000 increase in NII increases profit by
Rs.520. This result accepts hypothesis 4 with inference of bank being sensitive to
interest rate. Deposit, LLP, cash and investment have negative insignificant impact on
profit whereas credit has positive insignificant impact. The bank is not able to utilize
its deposit, investment, and cash to generate adequate return. Poor credit policy makes
credit have no impact on profit. ADBL is focused more upon agro sector, which
cannot generate considerable return on their credit policy. Investment module of
banks in both long term and short term tools reduced bank’s opportunity to earn
through investment and cash.

Nepal Bank Limited

Since F value is 0, the model is significant at 95% of confidence level. The coefficient
for NII and investment are significant i.e. Rs.1000 increase in NII increases profit by
Rs.480, and Rs.1000 increase in investment decreases profit by Rs.96. This accepts
hypothesis 4; whereas rejects hypothesis 7. NRB directive on compulsory investment
on treasury bill up to 15% at nominal interest rate of 0.15%, and limit in fund
transaction with foreign banks ensured negative relationship with investment. Profit
highly dependent upon NII symbolizes bank being sensitive of interest rate change.
Deposit, credit, LLP, and cash have insignificant negative impact on profit. NBL has
not effectively mobilized deposit and cash. The bank is holding considerable amount
of fund idle. Poor credit policy and asset quality has led for such relationship between
credit and profit.

Rastriya Banijya Bank

Since F value is 0, the model is significant at 95% of confidence level. The coefficient
of NII and constant has positive impact on profit; whereas credit has negative

31
significant impact. This accepts hypothesis 4 and rejects hypothesis 2, as Rs.1000
increase in NII increases profit by Rs.800, and keeping all factors constant, profit
increases by Rs.992774. On The other hand, Rs.1000 increase in credit decreases
profit by Rs.20. High impact of NII on profit makes bank highly sensitive on interest
rate fluctuation. This model also suggests poor credit policy of bank as bank is not
generating profit from its credit investment. Negative insignificant coefficient for
deposit infers bank not being able to mobilize its deposit. Coefficient for investment
having negative but insignificant impact suggests poor investment policy of Bank.
Cash that possess positive but insignificant impact also suggest improper investment
policy.

Based on the individual regression analysis of each PSB, the interest spread is found
to be the significant factor that affects the bank’s profitability (except credit for RBB
and Investment for NBL). This makes PSBs highly sensitive of interest rate, with
inefficiencies in their operation of sources and uses, investment and risk hedging
positions.

For all PSBs

The summarized STATA output for panel data regression stated the following output:
(Details Annex 13)
Variables Deposits Credit LLP Investme Cash NII Constant
nt
Coefficient 0.013 -0.02 0.037 0.0088 -0.0055 0.5 -151174
P-Value 0.032 0.001 0.001 0.464 0.649 0.000 0.348
TABLE 10 SUMMARIZED STATA OUTPUT FOR PANEL DATA REGRESSION OF VARIABLES

Based on the panel data regression of all the PSBs, deposits, credit, LLP and NII have
been the significant factors which have contributed to the profit of PSBs. Out of these
four significant variables, increase in deposits by Rs.1000 will increase the profit by
Rs.13, increase in LLP by Rs.1000 will increase the profit by Rs.37 and increase in
NII by Rs.1000 will increase the profitability by Rs.500. Only in case of Credit which
if increase by Rs.1000 will decrease the profit by Rs.20. This result accepts
hypothesis 1 and hypothesis 4, where deposit and NII has positive impact on profit of
banks. IT rejects hypothesis 2 and hypothesis 6 where credit has negative impact on
profit whereas LLP has positive impact on it.
Deposit is one of the major sources of bank’s fund that has positive impact upon
profitability. At PSB level, the deposits are mobilized efficiently that has generated

32
return for banks. On the other hand, negative impact of credit upon profitability
indicates poor policy and credit standards of PSB. Investment and cash in hand was
not found to be significant contributors of banks profitability. Investment has positive
but non-significant contribution on profit. This infers banks ineffective investments or
macroeconomic condition that possesses limited of such investment opportunities to
ensure better return on such. Cash has negative but non-significant impact on profit.
Having least money market tools and platform makes banks inefficient in terms of
mobilizing their cash in short term tools, where excessive cash are invested
immediately and sold back at nominal transaction cost at time of shortage.
3.4.5 Regression analysis (ratios)

With ROE as dependent (Details Annex 14, 15, 16, 17)

Variables Coefficient Coefficient Coefficient Panel Data
(NBL) (ADBL) (RBB)

CAR -4.716 0.229 2.096 -0.080

(0.068) (0.780) (0.011) (0.899)
LLP to NPL 0.286 -0.051 1.641 0.567
(0.576) (0.490) (0.023) (0.427)
NPL to TL -0.711 -1.390 1.904 0.207
(0.652) (0.318) (0.010) (0.402)
CDR 3.76 0.050 0.346 0.241
(0.158) (0.805) (0.446) (0.721)
Constant -3.444 0.189 -1.736 -0.326
(0.1) (0.479) (0.077) (0.582)
TABLE 11SUMMARIZED REGRESSION OUTPUT FOR RATIO WITH ROE AS DEPENDENT

* Value in parenthesis is P-value of respective variable

In the data analysis of NBL, when ROE is taken as a dependent variable, and other
ratios as independent variables, none of the variable were significant based on the
panel regression of STATA output at 95% level of confidence. The R-square is also
found to be only 14% which shows that the model is not a better predictor of
dependent variable. This states NBL is not efficient enough to have its operation and
other parameters significant in terms of its return on equity. This study strengthens
findings from previous study that NBL is not mobilizing their deposits with effective
credit policy.

In the data analysis of RBB, we found the variables CA, LLP to NPL and NPL to TL
to are significant based on STATA output at 95% level of confidence. This accepts

33
hypothesis 8, whereas rejects hypothesis 6 for risk factors having positive impact on
profitability of bank. All of those variables have positive impact upon the ROE of the
RBB. The R-square of 54% shows that 54% of the total variation in the ROE is due to
the effects of independent variables. 1 unit increase in CA will lead to 2.09 unit
increase in ROE of the bank. Similarly the increase in 1 unit of LLP to NPL and NPL
to TL will lead to 1.64 and 1.9 unit increase in ROE respectively. This further
indicates more capitalization in form of equity capital leads for increased profit. It
also implies this bank’s success in writing back its non-performing loans and book
LLP as profit.

In the data analysis of ADBL, when ROE is taken as a dependent variable, and other
various ratios as independent variables, we found none of the variable to be
significant based on the regression of STATA output at 95% level of confidence. The
R-square is also found to be only 10% which shows that the model is not a better
predictor of dependent variable. The bank is not efficient enough in its operational and
capital parameters to generate efficient profit through it.

For panel data regression with ROE as dependent variable, Panel Ratio with ROE As
dependent, we found none of the variable to be significant based on the panel
regression of STATA output at 95% level of confidence. The overall model itself is
also insignificant as we can see the Prob.>chi2 is 0.82, where the null hypothesis of
no impact cannot be rejected. The model was insignificant in sensitivity test by
removing any of the variables so result is based upon the exact model. This implies
that PSB are unable to mobilize the fund deposit pool with non-significant CDR. NPL
seems insignificant because of poor credit policy of banks. These ratios are
insignificant in terms of defining their impact on ROE of bank.

With ROA as dependent

In sensitivity test, Panel model for ROA was significant when we remove ratio, LLP
to NPL. As the value of LLP illustrated contradicting result to LLP, we remove that
variable for this model. The summary output is as follow: (Details Annex 18, 19, 20,
21, 22)

Variables Coefficient Coefficient Coefficient Panel Data

(NBL) (ADBL) (RBB)

34
CDR -0.013 0.0133 -0.0315 0.017
(0.433) (0.747) (0.027) (0.539)
NPL to TL 0.0033 -0.243 -0.036 0.076
(0.746) (0.388) (0.096) (0.015)
LLP to NPL 0.005 -0.009 0.0125 Removed
(0.108) (0.549) (0.548)
CAR 0.055 0.064 -0.042 0.105
(0.733) (0.701) (0.077) (0.000)
Constant 0.0074 0.053 0.011 0.019
(0.574) (0.618) (0.708) (0.290)

TABLE 12 SUMMARIZED REGRESSION OUTPUT FOR RATIO WITH ROA AS DEPENDENT

* Value in parenthesis is P-value of respective variable

For NBL, none of the variable is significant at 95% level of confidence. The R-square
is only 18.46%, and prob. > F greater than 5% which also shows that the overall
model is insignificant. The overall operational and capital parameters have failed to
have impact upon ROA parameter like the model with ROE as dependent.

For RBB, With R square of 27%, at 95% level of confidence, and Prob > F is greater
than 5% which also shows that the overall model is insignificant. The overall
operational and capital parameters have failed to have impact upon ROA parameter.
Being some of the variables significant does not have impact of independent variables
upon dependent variable.

For ADBL, it is stated that none of the variable is significant at 95% level of
confidence. The R square is only 7% and Prob. > F is greater than 5%, which shows
that the model is not significant to determine impact on dependent variable similar to
ROE as dependent variable.

In panel data regression, we eliminate insignificant model with removal of LLP to

NPL from the equation. The STATA regression output that NPL to TL and CA is
found to be significant with positive impact on the ROA. This illustrated that, 1 unit
increase in NPL to TL will lead to 0.077 unit increase in ROA. Similarly 1 unit
increase in CA will increase the 0.1 unit increase in ROA. The findings accepts
hypothesis 8 and rejects hypothesis 6 as risk factors possess positive impact upon
ROA of PSBs. The findings suggest that PSBs are still under-capitalized in
comparison to their asset base. Adding equity to cover risk associated with its assets
shall have positive impact upon profitability of bank. Banks have written back

35
significant amount of NPL ratio in past that has created tendency of positive impact of
NPL over profit condition. NPL later recovered and written in form of profit made
NPL positively significant on profitability of bank. PSBs are not able to mobilize their
deposit with insignificant CDR. This finding further strengthen findings of previous
model. The poor asset quality of bank in term of poor credit policy is reflected in
ROA.

3.4.6 Test for Normality and autocorrelation

Normality Test
The graphical normality plot of different variables with Profit/Loss, Ratios with ROA
and ROE as dependent variable (Refer to Annex 23, 24, 25) has a fixed upward
moving pattern, thus they are normally distributed. The Histogram from the STATA
output (Refer to Annex 26, 27) figure shows that the residuals of banking variables
with Profit/Loss as dependent variable and ratio with ROA are normally distributed
with a symmetric bell shaped with right side skewness. That of ROE is seems not
normally distributed as it shows double top pattern. (Refer to Annex 28)

Hausman Test
Hausman test was carried out to choose between fixed and random effect model. As
the result was significant for both banking variables and ratio with ROA, so fixed
effect model was used. (Refer to Annex 29, 30, 31). In case of ROE, random effect
was chosen.

Wooldridge Test
Wooldridge test for autocorrelation in panel data of different variables with
Profit/Loss, ROA and ROE was used to check the autocorrelation. The null here is no
serial correlation. We fail to reject the null and conclude the data does not have first-
order autocorrelation for Profit/Loss (0.25>0.05), and ROE (0.0997>0.05)(Refer to
Annex 32, 33). But in case of ROA, there is first order autocorrelation (0.0054<0.05)
(Refer to Annex 34)
To remove the auto correlation, we removed independent variable LLP to NPL from
ROA regeression. The output failed to reject the null and conclude that there is no
auto correlation (0.084<0.05). (Refer to Annex 35)

3.4.7 Empirical Findings

36
The variables such as deposits, loans and advances, Loan Loss provision, and Net
Interest Income were statistically significant whereas, Cash & Banks, Investment
were statistically insignificant to have impact on PSB’s profit.

The ratios such as NPL to TL and CAR were statistically significant to have impact on
ROA (when LLP to NPL was removed) of PSBs, whereas CDR and LLP to NPL were
statistically insignificant. On the other hand, all these ratios were statistically
insignificant to have impact upon ROE of PSB’s.
At individual PSB’s level, NII is statistically significant for all PSB to have impact
upon their profit. Credit for RBB and Investment for NBL were also statistically
significant. Cash and LLP were insignificant for all the PSBs.

In terms of ratio, CAR, LLP to NPL, and NPL to TL were statistically significant to
have impact on ROE of RBB, whereas CDR has significant effect on it ROA. All the
ratios were statistically insignificant to have impact on ROE and ROA of other two
PSBs as NBL, and ADBL.

Deposits and have positive impact upon the profit of PSBs as a whole. It supports the
findings of Naceur & Goaied (2001) of deposit having positive and significant
relationship with profitability of banks. On the other hand, the findings at individual
PSB’s level contradicted the findings in literature survey where, deposits have non-
significant negative impact upon profit. On contradiction, credit has negative impact
upon profit of banks. This contradicts the finding of Gul, Irshad, and Zaman (2011).
The outcome of deposit and credit in terms of NII possess high positive impact upon
profitability of banks. The findings were strengthened by CDR not being significant
for both profit indicators (except only for ROA of RBB).

Measures proxy to Risk position has positive impact upon profitability of Banks. LLP
being statistically significant for profit of PSB with positive coefficient had
contradictory result with findings of Miller & Noulas(1997). NPL to TL having
significant positive impact upon ROA of PSB further strengthens the findings.
Significance of NPL to TL and LLP to NPL for RBB agrees with findings of
Brissimis, & Delis (2008) where risk management has positively affected profit,
contradicts the results of other findings on literature survey. Positive impact of CAR
on ROA of PSB, and ROE of RBB supports findings in literature survey.

37
Considerable amount provisioned as LLP written back as profit on other quarter had
positive impact.

Liquidity measure (cash and bank) has no significant impact on profitability of banks
both at PSB and individual level. Having negative but no significant impact on profit
of PSB, and RBB at individual level makes findings strongly contradicting against
findings of Bordeleau and Graham (2010) where more liquidity assured operational
benefits to the banks.

Investment has no significant impact upon profitability of PSBs (except for negative
impact on profit of NBL). This variable has positive but no significant impact upon
profit of PSB. The insignificance of data rejects the argument that investment has
positive impact upon profit of PSB both at individual and macro level with
contradiction to findings of Kahf(2004). Lack of investment opportunities and
platform at macroeconomic environment, and regulatory implications for mode of
investment has further supported this contradictory finding against different referred
literatures.

38
 Section V: Conclusion and recommendation
3.5.1 Conclusion for Public sector banks
For PSB, deposit, credit, LLP and NII has impact on its profitability. Among them,
NII has largest contribution upon profit that supports existing findings from recent
quarterly report. Half amount of NII, contributing on profit infers wide interest rate
spread of banks. This keeps Public Banking System under risk imposed by monetary
policy or direct regulatory actions from CB. PSB’s earnings are highly sensitive to
interest rates.

Deposits and credit being significant for profit, but credit having negative impact
suggests poor credit policy in terms of mobilizing fund. Non-significant of CDR on
both ROE and ROA illustrates large chunk of idle fund in Public Banking System.
This finding is further supported by above average ratio of NPL to TL.

PSBs are successful in terms of writing back their NPA with positive impact of proxy
risk indicators upon profitability. Further, PSBs are under-capitalized in terms of
equity to cover risk associated with holding assets. Pumping equity capital into Public
Banking System shall have positive impact upon their profitability. Insignificance of
cash and investment for industry reflects poor macroeconomic conditions for
investment in long term as well as short term instruments.

3.5.2 Conclusion for Individual PSB

RBB is found to be risky in comparison to other PSB in Nepal. The position seems
risky because of huge deposit variability, credit variability, less variability in risk
hedging position, investment variability, net income variability, and profit and loss
variability. ADBL has secured hedged position with high variability in LLP, whereas
NBL has least variance in terms of their banking performance. CD ratio for PSBs has
been very low according to standards of NRB. All three PSBs possess poor asset
quality in terms of NPL that imposed credit risk along with liquidity risk for business.
The average CA of bank is negative because of heavy accumulated loss in past.

NII has highest impact upon profit of all PSBs at or above the industry average and
this variable has highest impact upon profitability compared to other individual
variables. Thus, it concludes that all the PSBs are highly sensitive to interest rate

39
fluctuations.. None of PSBs are able to mobilize their deposit with negative return on
credit. All the PSB hold idle fund that is not mobilized in any of productive sector.
Apart from NII, negative impact of investment for NBL and credit for RBB concludes
that all PSB are lacking efficiency in their operation. Among three, ADBL hold strong
position followed by RBB and NBL in terms of both banking variables and ratios.
RBB is under-capitalized in terms of equity capital, which signifies further addition of
capital adds on its profitability. Lack of proper credit policy has reduced profitability
on further issue of profit. CA and NPL affect ROA, whereas CD ratio affects ROE for
RBB. None of ratios have impact upon profitability of other individual PSB.

3.5.3 Recommendations
The study illustrated those PSBs profitability is immensely dependent upon net
interest income generated through its operation. On the other hand, it is allocated that
they can be in better condition if they can properly utilize their deposits into some
better market segment to add profitability of bank. Thus, the primary focus of bank
should be on reducing risk that is through interest rate fluctuation and allocate
alternatives for the use of fund that contributes to add upon the profitability of bank.
Some of the recommendations for PSBs in Nepal:

a) Funding Gap and Immunization

The study illustrated that Net Interest Income is one of the major sources for
profitability of PSBs in Nepal, thus it is sensitive to changes in interest rates. Here, we
recommend PSB to formulate an immunization technique to immunize the funding
gap. A book by Shrestha & Bhandari(2008) states that funding gap is the difference
between assets and liabilites sensitive to the variation in interest rate in terms of
income and expenses. The mismatch or imbalance in their protfolio composition of
asset and liabilities. Mathematically,
GAP = Variable Rate Asset – Variable Rate Liabilities
It further adds that interest rate change over planing horizon to manage bank’s assets
and liabilities, where net interest margin can be used to immunize the net interest
income. Banks can immunize when variable rate assets equals variable rate liabilities.
Mathematically,
∆ NII =[VRA x ∆ARVA – VRL x ∆ARVL] or (RSA - RSL) ∆Ri
= (VRA – VRL) ∆r
= GAP x ∆r

40
 ∆ NIM
Thus, GAP=EA x
∆r
Where, NII – Net Interest Income, VRA/VRL – Variable Rate Assets/Liabilities,
ARVA/ AVRL – Average Variable Rate Asset/Liabilities, R – Interest Rate , EA-
Earning Assets
Thus, bank can immunize the funding GAP immunizing the value of bank’s equity by
setting it to zero. The relationship can further be illustrated by:
d x NII
E=
r
Where, E= Equity, d=dividend
Change in equity depends upon change in interest rate as it affects the present value of
dividends to shareholders. Thus, expanding formula to immunize equity against
interest rate fluctuation can be as:
d x ∆ NII E
E= – x ∆r
r r

This helps bank to immunize itself from the interest rate risk creating balance between
rate sensitive assets and rate sensitive liabilities. PSBs can immunize the gap between
such assets and liabilities and ensure return in case of both interest rate changes. This
too reduces the risk position of firm against the macroeconomic variables that
fluctuates the interest rate of the firm.

b) Improvising credit policy

The accumulated non-performing loan of bank has signified poor credit policy of
PSBs. The banks must focus on developing better credit policy to ensure quality of
their assets. Amounts in NPA reduce credibility of bank and negatively affects
profitability of bank. Since, profitability of banks is highly affected by NPA position
of PSBs. The banks should invest some money to write back those NPA into
performing one, dragging it down to the recommendable level. Some of the measures
to recover NPL for government banks can be:

 Restructuring loan: Under this strategy, the banks can negotiate with the parties
to change installment amount, interest rate, time horizon for ease of burrower.
This system can be integrated with the loan amount below 10 million.
 Mobile branch: The banks can even mobilize employees in the area with high
accumulation of bad loans to monitor, evaluate, and take necessary action against

41
 them. This team can identify the reasons behind their asset quality and suggest
measures to amend credit policy of banks.

This measure also adds strength in position of banks adding confidence on depositors,
investors and other stakeholders.

c) Develop marketing plan to mobilize deposits

Study showed that the CD ratio of PSBs is below the acceptable level, which suggests
that funds are unused within banks at significant amount. For this, bank must allocate
different sources where bank can invest upon its fund. For this, some suggested
measures are as following:

 Banks must strengthen its marketing activities that can market its products at
public level. Since, not much marketing effort is seen from PSBs, the excessive
funds can be spent for marketing activities. These banks can follow the marketing
techniques by some of the private sector and joint venture banks in electronic and
print media. The marketing activity may also include awareness program at rural
areas of country to aware people about banking and its importance. This can bring
the traditional methods of lending and borrowing into a formal banking procedure.

Product  Loans & Advances schemes

 Different deposits schemes
 Customize each products as per different market
segments
Price  Competitive pricing to capture large market share,
minimizing spread can be considered
Place  Capitalize large branch networks
 Presence in rural and underserved areas as well
Promotion  Advertise different schemes through print and electronic
media
 Communicate the brand in market as government bank
with high credibility
TABLE 13: MARKETING PLAN

42
 Research department in most of the PSBs are in almost inactive state. These banks
need to strengthen their research activities in order to allocate new products
(deposits and loans), as well as feasible market segment to expand its business.
The research must target on the feasibility analysis at rural level, where no formal
channel of banking exists. This too shall help banks to mobilize their funds in new
sector (both agro and manufacturing) creating better CD ratio.

d) Improve Capital Adequacy condition

The capital adequacy condition of PSB is not good as they are far below the
recommended level suggested by NRB. This helps to allocate the banks capacity to
meet the time liabilities, and other risks. Since the ratio is negative at both PSB level,
and individual banks level of public sector, banks can further add up capital that better
capitalizes them to meet the timely contingencies avoiding the risk. Capital restructure
plan of NBL on previous quarter have almost brought back the negative ratio in
positive figures, whereas RBB is in just positive figures. This signifies that banks can
further add up the equity to bring back net worth into positive figures thus adding
confidence in banking as well as investors by providing them timely return in form of
dividends. This too shall further strengthen position of PSBs in capital market with
huge confidence of investors. Here we suggest them to improve condition of CA by
adding Tier-1 capital (equity funds) promoting it to institutional investors, and
individual investors that shall help in adding positive figure in Capital condition of
banks.

e) Consortium Financing

Consortium financing is the best option for banks to mobilize deposits into mega
profitable projects. If significant portion of deposits are idle within banking system
without proper platform to invest them, they can go for Consortium Financing among
themselves for big projects. Hydroelectricity, telecommunication, aviation are some
prospects that have long term market demand. Such projects can add better return in
future.

43
f) Penetrate into new market segment
Different new market segment for banks has been arising in today’s context. In such,
PSBs have better fund position to launch themselves into feasible new market
segment. Once of such segment can be sector of mutual fund. Some private banks
such as Siddhartha Bank Ltd, NABIL Bank Ltd, and Nepal Investment Bank Ltd,
have already launched themselves into this new market segment. PSBs can better
launch themselves into sector of such investment banking where they can further
mobilize their funds, and add new investment opportunities apart from traditional
investment methods of government securities and interbank lending at nominal
interest rate. This too shall help in strengthening capital market position of country
creating liquidity in secondary capital market.

g) Look further for Merger in long term

The conviction of NRB emphasize on prospect of merger between two organizations,

where the synergistic effect can have positive impact on reducing inefficiencies within
organizations. Since, PSBs hold significant asset base and capitalization; they are
almost with similar vision, and are competing among self in almost same market
segment. Merging them in single entity shall strengthen the performance of entire
government banking system. This shall further strengthen capability of Nepalese
banks to compete with foreign banks, as policy of Nepal Government has opened
floor for Foreign Banks to launch their branch operation. This aspect too shall help to
restore confidence of investor as study illustrated under-capitalization of two of such
PSBs (NBL and RBB).

3.5.4 Action plan

1. Banks must immediately amend their credit policy. The credit policy should
incorporate all the fundamental aspects of riskless credit policy. Banks can form
panel of experts (from credit department and cross functional members) for
amendment of strong credit policy which may take approx two months. The
policy should have precaution against loans turning into NPL and recovery
measures in case of any. The policy should have positive impact upon newly
issued loans. It also must address measures to write back NPL (as suggested in

44
 recommendation) in parallel to credit policy as suggested in recommendation. The
performance of amended policy should be reviewed and evaluated in
corresponding next quarter.
2. Banks should study the feasibility of marketing plan and execute the same within
two months. A marketing research can be conducted to find out the gap and
efficiency of the executed plan in the next quarter and make necessary changes if
there is any deviation from the expected outcome. After that, effectiveness of
program should be analyzed every month.
3. Banks should then analyze the feasibility of fund gap immunization technique in
parallel with other action through team of finance department. This may take
panel of experts (from finance, credit, and planning department) and approximate
two month period to formulate a feasibility report. If in case, it is feasible, they
shall implement it by next quarter, in order to minimize interest related risks. The
review of policy should be made every quarter.
4. In case the marketing plan execution will not be able to capitalize the deposits and
loans, the PSBs management committee should plan for the consortium financing
with other PSBs, within the next quarter of implementation of reform plan. The
cross organizational panel should be formed in order to study on feasibility of
such financing mode. The joint committee should study the feasibility of various
mega projects and present the report to the management by a quarter after its
commencement.
5. All the three PSBs have gone through change in their paid up capital recently,
however in case of ADBL the capital adequacy is strong whereas those of RBB
and NBL are below the benchmark level. Since, capital has positive impact upon
profitability; banks should find optimal capital condition by adding Tier-1 capital
in their structure with more funds through big institutional investors. Moreover,
they should come up with new capital plan within the end of this fiscal year.
6. If companies have adequate fund position after implementing policies, they can
further penetrate themselves in investment banking being sponsor for mutual fund.
This shall provide new investment opportunities for banks in capital market. This
creates opportunities to bank to get involved in investment activities generating
efficient returns on their investment.
7. In long term, if inefficiencies are not eradicated, they must go for merger
consolidating their asset and capital base. The outcome shall be competitive,
improvised banking to compete with international banks in domestic market.

45
46
 Part four: Reflection of Internship

Three months of internship at Nepal Bank Limited has added learning and experience
in our profile. All the task and environment were considered to be new opportunities
that granted us with platform to explore our classroom theories into real time
experiences. This experience enhanced our understanding about banking and various
other processes to finance banking fund requirement.

As intern, we were stationed at Central Finance Department. We were involved in

functions of looking after Vostro accounts with NRB, and several other agency banks
abroad. First few days were the learning part where we interacted with the employees
to know various functions of CFD like Note-Chest functions, Reconciliation, Nostro
and Vostro account management, SWIFT operations, and some interesting facts about
NBL management. Being familiar with the theory part, looking at our enthusiasm
towards learning, the staffs gave us the opportunity to work on Reconciliation, and
even gave us liberty to design some model that added efficiency in working module.
Some of the major learning from internship program is as follows:

Knowledge about Financing in Banks

The Central Finance Department looks after the financial aspects of overall NBL.
Here we got opportunity to practically be in operations like dealing in FOREX, Trade
Finance, International Relationships &Remittance, Agency Management, Back office
operations, and Assets-Liability Management. Being in the department, we got
opportunity to learn about managing the funding requirement of bank branches and
maintaining appropriate level of liquidity, investing access fund to gain return and
ultimately maximizing profit. Further, we got glimpse of the fixing of deposits interest
rates for foreign and local currencies, along with fixing of exchange rate of foreign
currencies. This knowledge shall help us further in our career, as both of us have
career objective of being a banker. With this knowledge, we do have basic ideas on
what are the basic aspects of financing in bank, and how shall it be managed, which
shall help us all the way in our future career and helps us on quest of being a
successful banker.

47
Professionalism
Being a part of the organization, we got opportunity to adapt into various work ethics
like punctuality, deadlines, business etiquettes, and value of providing quality
services. Though we were not directly involved with the interaction with customers,
we showed professionalism by our formal dress-up, punctuality and quick completion
of tasks. Moreover, after completion, we are used to with the office environment and
time management, which will further be beneficial in our working career. It also gave
us an opportunity to polish our writing skills while sending out business emails, letters
and while communicating within the intra-network with other staffs in the
organization.

Market Research
A comprehensive research was conducted to study Comparative Study on Impact of
Operational Efficiency, Liquidity, and Risk upon Profitability of PSBs in Nepal. It
was an opportunity to learn the systematic process involved while conducting a
research. The process included steps like designing research through interaction with
intern supervisor, senior manager and senior staffs of the bank. Moreover, we also
learnt thoroughly the tools and techniques of research, output generation through
STATA and concrete analysis of the results. The insightful information from members
of management, and staffs shall help us further explore on similar such topics.

Adjustment in work team and environment

In NBL, we got opportunity to work with different aged work group. In our
department, almost 75% of employees were above 50 years by age at verse of
retirement. Working and adjusting with tempo of group with different age categories
has imposed challenges to us at initial stage of our internship program. During tenure,
we designed various tools like electronic vouchers, reconciliation methods, electronic
database system and other packages on office package application that eased them in
their work. Sharing our academic expertise on work has added benefit to those work
groups. This too has benefited us with additional ability to cope with different
working environment with different age group of people. This further may strengthen
our ability to cope with different working environment in our future career.

48
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51
 Annexes

Annex 1: Organizational Structure of NBL

FIGURE 3 ORGANIZATIONAL STRUCTURE OF NBL

52
Annex 2: Panel (Variables) Descriptive table and chart

. summarize

Variable Obs Mean Std. Dev. Min Max

Deposit 91 4.86e+07 1.47e+07 3.09e+07 9.11e+07

Credit 91 2.77e+07 9379719 7688132 4.98e+07
LLP 91 1594030 3688225 -254086 1.50e+07
Investment 91 1.24e+07 5833054 2569253 3.00e+07
Cash 91 7858781 3747349 3171000 2.14e+07

NetIntIncome 91 1355174 996549.1 78539 4611594

ProfitLoss 91 705830.5 578195.8 -766000 2259947

250,000,000

200,000,000

150,000,000
Deposit
Credit
LLP
100,000,000 Investment
Cash
NII
Proft/ Loss
50,000,000

0
06 08 10 12
0 5- 07- 09- 11-
20 20 20 20
-50,000,000

Annex 3: NBL Descriptive Table

53
 Variable Obs Mean Std. Dev. Min Max

Deposit 37 4.25e+07 7427411 3.41e+07 6.30e+07

Credit 37 2.10e+07 6762232 1.21e+07 3.79e+07
LLP 37 1259621 3219732 -254086 1.02e+07
Investment 37 1.21e+07 3508676 5108034 1.66e+07
Cash 37 7419796 2909164 3171000 1.42e+07

IntIncome 37 1767466 1051519 408623 4716229

IntExp 37 743634.7 508993 163077 2194326
Spread 37 1023831 622150.1 215995 2521932
ProfitLoss 37 409263.7 421797.5 -766000 1500000

Annex 4: RBB Descriptive Table

Variable Obs Mean Std. Dev. Min Max

Deposit 37 5.96e+07 1.58e+07 3.94e+07 9.11e+07

Credit 37 3.00e+07 8334102 7688132 4.90e+07
LLP 36 2135121 4848428 -49849 1.50e+07
Investment 37 1.52e+07 6930392 3142000 3.00e+07
Cash 37 9615390 4255372 3734000 2.14e+07

IntIncome 37 2160436 1407608 286212 5748969

IntExp 37 984723.7 708074.1 170447 3045590
Spread 37 1175712 791517.1 78539 3287116
ProfitLoss 37 900300.4 593257.9 77000 2032229

Annex 5: ADB Descriptive Table

Variable Obs Mean Std. Dev. Min Max

Deposit 17 3.79e+07 6952612 3.09e+07 5.44e+07

Credit 17 3.72e+07 5047429 3.26e+07 4.98e+07
LLP 17 1269790 762808.2 286425 2682234
Investment 17 7143637 2701441 2569253 1.13e+07
Cash 17 4991014 1698437 3192468 9524004

IntIncome 17 3796261 2044528 885251 7457743

IntExp 17 1329333 800482.6 174582 2850802
Spread 17 2466928 1290001 667582 4611594
ProfitLoss 17 928041.7 587353.9 256803 2259947

Annex 6: Panel Ratio Descriptive (Table and Chart)

54
. summarize ROE CDRatio NPLtoTL LLPtoNPL CA

Variable Obs Mean Std. Dev. Min Max

ROE 91 -.0584842 .5329841 -4.584289 1.249764

CDRatio 91 .5855888 .1737602 .1677904 1.0186
NPLtoTL 81 .1484099 .1299838 .0411 .5122
LLPtoNPL 81 1.317385 .320333 .9594 2.2635
CA 81 -.1652506 .2253165 -.5989 .2045

200.00%

150.00%

100.00%

ROE
50.00% ROA
CDR
NPL to TL
0.00% LLP to NPL
04 08 11 CAR
0 3- 07- 10-
20
-50.00% 20 20

-100.00%

-150.00%

Annex 7: NBL Ratio Descriptive Table

55
. summarize

Variable Obs Mean Std. Dev. Min Max

ROE 37 -.1950544 .7441604 -4.584289 .0722778

CDRatio 37 .5052842 .1154762 .3398302 .737
NPLtoTL 32 .1203781 .1229835 .0411 .4908
LLPtoNPL 32 1.336888 .3179693 1.0329 2.2635
CAR 32 -.2174312 .1419182 -.482 -.0049

ROA 37 .0081039 .0081982 -.0160489 .0287147

Annex 8: RBB Ratio Descriptive Table

. summarize

Variable Obs Mean Std. Dev. Min Max

ROE 37 .0175066 .3497179 -.5169911 1.249764

CDRatio 37 .5356775 .1106563 .1677904 .6977381
NPLtoTL 32 .2116781 .1449164 .0531 .5122
LLPtoNPL 32 1.098597 .1008962 .9594 1.3603
CA 32 -.2980656 .1524625 -.5989 .0333

ROA 37 .0131064 .0091248 .0012149 .0312715

Annex 9: ADB Ratio Descriptive Table

. summarize

Variable Obs Mean Std. Dev. Min Max

ROE 17 .0733652 .0421336 .0223038 .1467966

CDRatio 17 .869 .0791438 .7442 1.0186
NPLtoTL 17 .0820824 .0152917 .0572 .1105
LLPtoNPL 17 1.692512 .2268042 1.22 2.2212
CA 17 .1829765 .0145483 .1564 .2045

ROA 17 .0149802 .0084424 .0041686 .027574

Annex 10: NBL Regression

56
. regress ProfitLoss Deposit Credit LLP Investment Cash NetIntInc

Source SS df MS Number of obs = 37

F( 6, 30) = 6.08
Model 3.5142e+12 6 5.8570e+11 Prob > F = 0.0003
Residual 2.8907e+12 30 9.6356e+10 R-squared = 0.5487
Adj R-squared = 0.4584
Total 6.4049e+12 36 1.7791e+11 Root MSE = 3.1e+05

ProfitLoss Coef. Std. Err. t P>|t| [95% Conf. Interval]

Deposit -.037679 .0249251 -1.51 0.141 -.0885829 .0132249

Credit .0489136 .0298201 1.64 0.111 -.0119873 .1098145
LLP .0327593 .0187134 1.75 0.090 -.0054586 .0709772
Investment .096296 .0320315 3.01 0.005 .0308791 .161713
Cash -.0092519 .0349541 -0.26 0.793 -.0806376 .0621338
NetIntInc .4853427 .0990774 4.90 0.000 .2829997 .6876857
_cons -651875.8 494122.5 -1.32 0.197 -1661009 357256.9

Annex 11: RBB Regression

. regress ProfitLoss Deposit Credit LLP Investment Cash NetIntInc

Source SS df MS Number of obs = 36

F( 6, 29) = 32.43
Model 1.0889e+13 6 1.8149e+12 Prob > F = 0.0000
Residual 1.6229e+12 29 5.5963e+10 R-squared = 0.8703
Adj R-squared = 0.8435
Total 1.2512e+13 35 3.5750e+11 Root MSE = 2.4e+05

ProfitLoss Coef. Std. Err. t P>|t| [95% Conf. Interval]

Deposit -.0070422 .0067125 -1.05 0.303 -.0207708 .0066865

Credit -.0208189 .0078338 -2.66 0.013 -.0368409 -.0047969
LLP -.0006021 .0100342 -0.06 0.953 -.0211243 .0199201
Investment -.0029322 .0131042 -0.22 0.825 -.0297334 .0238689
Cash .0059044 .0116256 0.51 0.615 -.0178726 .0296813
NetIntInc .8022154 .0644869 12.44 0.000 .6703249 .9341058
_cons 992773.7 223354.9 4.44 0.000 535961.7 1449586

Annex 12: ADBL Regression

57
. regress ProfitLoss Deposit Credit LLP Investment Cash NetIntInc

Source SS df MS Number of obs = 16

F( 6, 9) = 41.02
Model 4.8632e+12 6 8.1053e+11 Prob > F = 0.0000
Residual 1.7785e+11 9 1.9761e+10 R-squared = 0.9647
Adj R-squared = 0.9412
Total 5.0410e+12 15 3.3607e+11 Root MSE = 1.4e+05

ProfitLoss Coef. Std. Err. t P>|t| [95% Conf. Interval]

Deposit -.0225067 .0337647 -0.67 0.522 -.0988877 .0538744

Credit .0012596 .0567016 0.02 0.983 -.1270084 .1295277
LLP -.2046162 .3751699 -0.55 0.599 -1.053309 .644077
Investment -.0005747 .0273917 -0.02 0.984 -.062539 .0613895
Cash .0937538 .0664518 1.41 0.192 -.0565707 .2440782
NetIntInc .5277741 .2241221 2.35 0.043 .0207747 1.034773
_cons 223585.2 1411807 0.16 0.878 -2970145 3417315

Annex 13: Panel Regression

. xtreg ProfitLoss Deposit Credit LLP Investment Cash NetInterestIncome

Random-effects GLS regression Number of obs = 91

Group variable: bankname Number of groups = 3

R-sq: within = 0.6209 Obs per group: min = 17

between = 0.7890 avg = 30.3
overall = 0.6171 max = 37

Wald chi2(6) = 135.38

corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

ProfitLoss Coef. Std. Err. z P>|z| [95% Conf. Interval]

Deposit .0129824 .0059055 2.20 0.028 .0014077 .024557

Credit -.0205722 .0063148 -3.26 0.001 -.0329489 -.0081955
LLP .0364779 .0111116 3.28 0.001 .0146996 .0582561
Investment .0078996 .0107813 0.73 0.464 -.0132314 .0290307
Cash -.0067263 .0147687 -0.46 0.649 -.0356724 .0222198
NetInterestIncome .4996099 .0476518 10.48 0.000 .4062141 .5930058
_cons -135921.6 156295.7 -0.87 0.384 -442255.6 170412.4

sigma_u 0
sigma_e 311915.64
rho 0 (fraction of variance due to u_i)

Annex 14: NBL Ratios Regression with ROE as Dependent

58
. regress ROE CDRatio NPLtoTL LLPtoNPL CAR

Source SS df MS Number of obs = 32

F( 4, 27) = 1.16
Model 2.91841424 4 .72960356 Prob > F = 0.3485
Residual 16.9199632 27 .626665305 R-squared = 0.1471
Adj R-squared = 0.0208
Total 19.8383775 31 .63994766 Root MSE = .79162

ROE Coef. Std. Err. t P>|t| [95% Conf. Interval]

CDRatio 3.763649 2.592334 1.45 0.158 -1.555381 9.082679

NPLtoTL -.7112284 1.557918 -0.46 0.652 -3.907813 2.485356
LLPtoNPL .286992 .5070567 0.57 0.576 -.7534024 1.327386
CAR -4.71695 2.478817 -1.90 0.068 -9.803062 .3691618
_cons -3.444765 2.02273 -1.70 0.100 -7.595065 .705534

Annex 15: RBB Ratios Regression with ROE as Dependent

. regress ROE CDRatio NPLtoTL LLPtoNPL CAR

Source SS df MS Number of obs = 32

F( 4, 27) = 8.05
Model 2.38424497 4 .596061244 Prob > F = 0.0002
Residual 1.99924615 27 .074046154 R-squared = 0.5439
Adj R-squared = 0.4763
Total 4.38349113 31 .14140294 Root MSE = .27211

ROE Coef. Std. Err. t P>|t| [95% Conf. Interval]

CDRatio .3456924 .447463 0.77 0.446 -.5724257 1.263811

NPLtoTL 1.904213 .6881714 2.77 0.010 .4922019 3.316224
LLPtoNPL 1.64087 .6814335 2.41 0.023 .2426837 3.039056
CAR 2.096324 .7627376 2.75 0.011 .5313154 3.661332
_cons -1.735984 .9454917 -1.84 0.077 -3.675972 .2040053

Annex 16: ADBL Ratios Regression with ROE as Dependent

59
. regress ROE CDRatio NPLtoTL LLPtoNPL CAR

Source SS df MS Number of obs = 17

F( 4, 12) = 0.36
Model .003010002 4 .000752501 Prob > F = 0.8353
Residual .025393883 12 .002116157 R-squared = 0.1060
Adj R-squared = -0.1920
Total .028403886 16 .001775243 Root MSE = .046

ROE Coef. Std. Err. t P>|t| [95% Conf. Interval]

CDRatio .0502874 .198887 0.25 0.805 -.3830501 .483625

NPLtoTL -1.390772 1.333461 -1.04 0.318 -4.296133 1.51459
LLPtoNPL -.0515713 .072476 -0.71 0.490 -.209483 .1063403
CAR .2292229 .8037576 0.29 0.780 -1.522014 1.98046
_cons .1891659 .2585941 0.73 0.479 -.3742622 .7525941

Annex 17: Panel Ratios Regression with ROE as Dependent

. xtreg ROE CDRatio NPLtoTL LLPtoNPL CAR

Random-effects GLS regression Number of obs = 81

Group variable: bankname Number of groups = 3

R-sq: within = 0.0124 Obs per group: min = 17

between = 0.2806 avg = 27.0
overall = 0.0198 max = 32

Wald chi2(4) = 1.53

corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.8209

ROE Coef. Std. Err. z P>|z| [95% Conf. Interval]

CDRatio -.0806336 .635878 -0.13 0.899 -1.326932 1.165664

NPLtoTL .5675904 .7151237 0.79 0.427 -.8340262 1.969207
LLPtoNPL .2072831 .247295 0.84 0.402 -.2774062 .6919724
CAR .24127 .6768554 0.36 0.721 -1.085342 1.567882
_cons -.3268308 .5931504 -0.55 0.582 -1.489384 .8357227

sigma_u 0
sigma_e .56619569
rho 0 (fraction of variance due to u_i)

Annex 18: NBL Ratios Regression with ROA as Dependent

60
. regress ROA CDRatio NPLtoTL LLPtoNPL CA

Source SS df MS Number of obs = 32

F( 4, 27) = 1.53
Model .00016158 4 .000040395 Prob > F = 0.2222
Residual .000713785 27 .000026436 R-squared = 0.1846
Adj R-squared = 0.0638
Total .000875365 31 .000028238 Root MSE = .00514

ROA Coef. Std. Err. t P>|t| [95% Conf. Interval]

CDRatio -.0134097 .0168374 -0.80 0.433 -.0479572 .0211378

NPLtoTL .003306 .0101188 0.33 0.746 -.017456 .0240681
LLPtoNPL .0054677 .0032934 1.66 0.108 -.0012897 .0122252
CA .0055562 .0161001 0.35 0.733 -.0274784 .0385909
_cons .0074736 .0131378 0.57 0.574 -.0194829 .0344301

Annex 19: RBB Ratios Regression with ROA as Dependent

. regress ROA CDRatio NPLtoTL LLPtoNPL CA

Source SS df MS Number of obs = 32

F( 4, 27) = 2.61
Model .000704781 4 .000176195 Prob > F = 0.0574
Residual .001819954 27 .000067406 R-squared = 0.2792
Adj R-squared = 0.1724
Total .002524735 31 .000081443 Root MSE = .00821

ROA Coef. Std. Err. t P>|t| [95% Conf. Interval]

CDRatio -.0315854 .0135006 -2.34 0.027 -.0592864 -.0038843

NPLtoTL -.0358628 .0207632 -1.73 0.096 -.0784654 .0067397
LLPtoNPL .0125089 .0205599 0.61 0.548 -.0296764 .0546943
CA -.0423468 .0230129 -1.84 0.077 -.0895655 .0048719
_cons .0107834 .0285269 0.38 0.708 -.047749 .0693158

Annex 20: ADBL Ratios Regression with ROA as Dependent

61
. regress ROA CDRatio NPLtoTL LLPtoNPL CA

Source SS df MS Number of obs = 17

F( 4, 12) = 0.25
Model .000088453 4 .000022113 Prob > F = 0.9028
Residual .001051932 12 .000087661 R-squared = 0.0776
Adj R-squared = -0.2299
Total .001140385 16 .000071274 Root MSE = .00936

ROA Coef. Std. Err. t P>|t| [95% Conf. Interval]

CDRatio .0133876 .0404796 0.33 0.747 -.0748097 .101585

NPLtoTL -.2431307 .2713998 -0.90 0.388 -.8344601 .3481987
LLPtoNPL -.0090942 .0147511 -0.62 0.549 -.041234 .0230456
CA .0644257 .1635891 0.39 0.701 -.2920044 .4208558
_cons .0269067 .0526318 0.51 0.618 -.087768 .1415815

Annex 21: Panel Ratios with ROA as dependent

. xtreg ROA CDRatio NPLtoTL LLPtoNPL CAR

Random-effects GLS regression Number of obs = 81

Group variable: bankname Number of groups = 3

R-sq: within = 0.0223 Obs per group: min = 17

between = 0.2942 avg = 27.0
overall = 0.0411 max = 32

Wald chi2(4) = 3.26

corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.5155

ROA Coef. Std. Err. z P>|z| [95% Conf. Interval]

CDRatio -.0059819 .0091604 -0.65 0.514 -.0239359 .0119721

NPLtoTL .0132085 .010302 1.28 0.200 -.006983 .0333999
LLPtoNPL .0041003 .0035625 1.15 0.250 -.002882 .0110827
CAR .0078958 .0097507 0.81 0.418 -.0112152 .0270068
_cons .0085858 .0085448 1.00 0.315 -.0081618 .0253334

sigma_u 0
sigma_e .00740383
rho 0 (fraction of variance due to u_i)

Annex 22: Panel Regression with ROA as Dependent

62
. xtreg ROA CDRatio NPLtoTL CA, re

Random-effects GLS regression Number of obs = 81

Group variable: bankname Number of groups = 3

R-sq: within = 0.0108 Obs per group: min = 17

between = 0.9893 avg = 27.0
overall = 0.4317 max = 32

Wald chi2(3) = 58.49

corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

ROA Coef. Std. Err. z P>|z| [95% Conf. Interval]

CDRatio .0170551 .0277573 0.61 0.539 -.0373482 .0714583

NPLtoTL .076134 .0313762 2.43 0.015 .0146378 .1376301
CA .1050665 .0279617 3.76 0.000 .0502625 .1598705
_cons .0193679 .0186079 1.04 0.298 -.0171029 .0558386

sigma_u 0
sigma_e .0203211
rho 0 (fraction of variance due to u_i)

Annex 23: Normality Plot with P/L as dependent

1 .0 0
N o rm a l F [(re s id s -m )/s ]
0 .2 5 0 .5 0
0 .0 0 0 .7 5

0.00 0.25 0.50 0.75 1.00

Empirical P[i] = i/(N+1)

Annex 24: Normality Plot with ROA as dependent

63
 1.00
N orm a l F [(resid s-m )/s]
0.25 0.50 0.00 0.75

0.00 0.25 0.50 0.75 1.00

Empirical P[i] = i/(N+1)

Annex 25: Normality Plot with ROE as dependent

1 .0 0
N o rm a l F [(re s id s -m )/s ]
0 .2 5 0 .5 0
0 .0 0 0 .7 5

0.00 0.25 0.50 0.75 1.00

Empirical P[i] = i/(N+1)

64
Annex 26: Histogram with P/L as dependent

1.0e-06
Density
5.0e-07
0

0 500000 1000000 1500000 2000000

Fitted values

Annex 27: Histogram with ROA as dependent

25
20
D e n s ity
5
015
10

-.02 0 .02 .04 .06

Fitted values

65
Annex 28: Histogram with ROE as dependent

6
4
Density
2
0

-.2 -.1 0 .1 .2
Linear prediction

Annex 29: Hausman Test Output with P/L as dependent

. hausman FE RE

Coefficients
(b) (B) (b-B) sqrt(diag(V_b-V_B))
FE RE Difference S.E.

Deposit -.0014418 .0129824 -.0144242 .004128

Credit -.0240379 -.0205722 -.0034657 .0052707
LLP .0198716 .0364779 -.0166062 .
Investment .0166477 .0078996 .008748 .
Cash .0013645 -.0067263 .0080908 .
Spread .5455772 .4996099 .0459672 .

b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(6) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 104.33
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)

66
Annex 30: Hausman Test Output with ROA as dependent
. hausman FE RE

Coefficients
(b) (B) (b-B) sqrt(diag(V_b-V_B))
FE RE Difference S.E.

CDRatio -.0269459 .0254177 -.0523636 .

NPLtoTL -.0070841 .0811838 -.0882679 .
LLPtoNPL .0024701 .0272857 -.0248156 .0026121
CA -.0025899 .0795114 -.0821013 .0023357

b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(4) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 21.06
Prob>chi2 = 0.0003
(V_b-V_B is not positive definite)

Annex 31: Hausman Test Output with ROE as dependent

. hausman FE RE

Coefficients
(b) (B) (b-B) sqrt(diag(V_b-V_B))
FE RE Difference S.E.

CDRatio -.3034556 -.0806336 -.222822 .229535

NPLtoTL .2481761 .5675904 -.3194143 .4100066
LLPtoNPL .3114833 .2072831 .1042002 .1684231
CAR .1858617 .24127 -.0554083 .4213147

b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(4) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 4.51
Prob>chi2 = 0.3412
(V_b-V_B is not positive definite)

67
Annex 32: Wooldridge Test Output with P/L as dependent
. xtserial ProfitLoss Deposit Credit LLP Investment Cash Spread

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation
F( 1, 2) = 2.506
Prob > F = 0.2542

Annex 33: Wooldridge Test Output with ROE as dependent

. xtserial ROE CDRatio NPLtoTL LLPtoNPL CAR

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation
F( 1, 2) = 8.554
Prob > F = 0.0997

Annex 34: Wooldridge Test Output with ROA as dependent

. xtserial ROA CDRatio NPLtoTL LLPtoNPL CA

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation
F( 1, 2) = 182.240
Prob > F = 0.0054

.
.

Annex 35: Wooldridge Test Output with ROA as dependent

(removing LLP to NPL)
. xtserial ROA CDRatio NPLtoTL CAR

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation
F( 1, 2) = 10.663
Prob > F = 0.0824

68