0cc49 a Comparative Study of Nepal Bank Limited

Visit: http://www.educationsansar.com for more resources

A Comparative Study of

Nepal Bank Limited and Nabil Bank Limited

By

Assignment Submitted to :

Madam Prerana L. Rajbhandari

Shanker Dev Campus

Tribhuvan University

In partial fulfillment of the requirements for the degree of

Master of Business Studies (M.B.S 1st year)

Kathmandu June, 2005

S.No. Name Roll No. 1. Abhishek Kharel 125 2. Dhurba Khadka 125 3. Dipendra Bhandari 542 4. Dhanesh Giri 451 5. Madhav Ghimire 541

S.No. Name Roll No. 6. Prakash Shakya 125 7. Rabin Rana 125 8. Subash Karki 542 9. Sujan 451 10. Sukra Raj Shrestha 541


ACKNOWLEDGEMENT

This is an attempt to present the comparative analysis of financial performance of the

selected commercial banks. This study will be beneficial to the students of Finance as

they relate their classroom studies and theories on finance to the practical results

derived from the study. The comparative financial results of the selected commercial

banks, on which the study has been based, will enable the shareholders and general

public to know the best forming bank in the economy.

We are also grateful to the staff members of Nepal Bank Limited and NABIL Bank

Limited for their corporation in providing necessary information. We would like to

thank our friends for their inspiration, encouragement and assistance for this

achievement.

Last but not the least, we would like to thank the persons of different sectors who

helped us a lot by getting involved in this thesis directly or indirectly.


Table of Contents

Chapter 1 : INTRODUCTION 1-5

1.1 General Background 1

1.2 Function of Commercial Bank 1

1.3 Nepal Bank Limited: A Glance 2

1.4 NABIL Bank Limited: A Glance 2

1.5 Restructuring of NBL 3

1.6 Statement of the problem 4

1.7 Objective of the study 4

1.8 Significance of the study 5

1.9 Limitation of the study 5

1.10 Chapter Plan 5

Chapter 2 : REVIEW OF LITERATURE 6-8

2.1 Conceptual Review of Financial Analysis 6

2.2 Review of Books and Journals 7

2.3 Review of Some acts relating to Banking in Nepal 7

2.4 Review of report 8

Chapter 3 : RESEARCH METHODOLOGY 9-14

3.1 Research Design 9

3.2 Sources of data 9

3.3 Population and Sample 9

3.4 Method of data analysis 9

3.5 Financial Tool 10

Chapter 4 : PRESENTATION AND ANALYSIS OF DATA 15-33

4.1 Financial Analysis/ Ratio Analysis 15

4.1.1 Liquidity Ratio 15

4.1.2 Activity of Turnover Ratio 20

4.1.3 Leverage / Capital Structure Ratio 23

4.1.4 Profitability Ratio 28

4.1.5 Valuation Ratio 31

Chapter 5 : SUMMARY CONCLUSION AND RECOMMENDATIONS 34-35

5.1 Summary 34

5.2 Findings 34

5.3 Recommendations 35

5.4 Conclusion 37

BIBLIOGRAPHY 38


List of Tables

Page No.

Table 1 Current Ratio 16 Table 2 Cash and Bank Balance to Total Deposit Ratio 17 Table 3 Cash and Bank Balance to Non-Interest Bearing Deposit Ratio 18 Table 4 Cash and Bank Balance to Interest Bearing Deposit Ratio 19 Table 5 Loan and Advances to Total Deposit Ratio 21 Table 6 Total Investment to Total Deposit Ratio 22 Table 7 Long Term Debt to Net worth Ratio 24 Table 8 Total Debt to Total Assets Ratio 25 Table 9 Capital Adequacy Ratio 26 Table 10 Total Debt to Net worth Ratio 27 Table 11 Return on Investment Ratio 29 Table 12 Commission and Discount Income to Personnel Expenses Ratio 29 Table 13 Interest Income to Interest Expenses Ratio 30 Table 14 i) Return on Shareholders Equity of NBL 31 ii) Return on Shareholders Equity of NABIL 31 Table 15 Price Earning Ratio 32 Table 16 Dividend Payout Ratio 32 Table 17 Market value per share to Book value per share 33


List of Figures

Page No Figure 1 Presentation of Current Ratio 16 Figure 2 Presentation of Total Deposit Ratio 17 Figure 3 Presentation of Cash and Bank Balance to Non-Interest Bearing Deposit Ratio 18 Figure 4 Presentation of Cash and Bank Balance to Interest Bearing Deposit Ratio 20 Figure 5 Presentation of Loan and Advances to Total Deposit Ratios 21 Figure 6 Presentation of Investment to Total Deposit Ratios 23 Figure 7 Presentation of Long Term Debt to Net worth Ratio` 24 Figure 8 Presentation of Total Debt to Total Assets Ratio 26 Figure 9 Presentation of Capital Adequacy Ratio 27 Figure 10 Presentation of Total Debt to Net worth Ratio 28


ABBREVIATIONS

BVPS : Book Value per Share

CRR : Cash Reserve Ratio

DPS : Dividend Per Share

EPS : Earning Per Share

FY : Fiscal Year

JVBs : Joint Venture Banks

MVPS : Market Value Per Share

NBL : Nepal Bank Limited

No. : Number

NPR : Nepalese Rupee

NRB : Nepal Rastra Bank

RBB : Rastriya Banijya Bank

SLR : Statutory Liquidity Ratio


CHAPTER 1

INTRODUCTION

1.1. Background As survival, development and prosperity of any organization depend on number of factors.

Every organization should give prime concern to those factors. However one of the major

determinants for effective running of a business entity is its financial operation system.

Optimum utilization of the organizations financial resource, leads the organization to the

ultimate target fulfillment so it is very important to analyze the accounting and financial

statements to know whether the financial position is sound and what kind of measures should be

applied.

In recent years due to liberal economic policy of the Government many private banks are

coming into operation. The foreign joint venture banks are enjoying competitive advantageous

factors like highly skilled personnel, modern and advanced banking technology, customer

oriented modern banking services, management expertise and global banking network.

Bank in general means an institution that deals with money. Concept of banking had developed

from the ancient history us with the effort of ancient history with the effort of ancient Goldsmith

who practiced storing peoples gold and valuables. Bank was originated from French word

Banque. In the developing countries like Nepal, Banks play vital role for domestic resource

mobilization and economic development of a country. The first commercial bank was Bank of

England (1694), central bank of Britain. The first commercial bank in Nepal is Nepal Bank

Limited, which was, established in 1937 A .D. Commercial banks are the suppliers of finance

for trade and industry and play a vital role in the economic and financial life of the country. By

investing the saving in the productive areas they help in capital formation.

According to Gillian and Soal, A sound banking system is important because of the key roles it

plays in the economy: intermediation, maturity, transformation, facilitating payment flows,

credit allocation, and maintaining financial discipline among borrowers. Banks provide

important positive externalities as gathering of saving, allocation of resources and providers of

liquidity and payment services.


Commercial Banks play the vital role in economic development of any nation. Capital is the

most important factor and foundation for not only the economic development but also for the

overall growth and prosperity of the nation.

1.2. Functions of Commercial Banks Commercial banks perform different functions however some common functions listed below.

1.2.1. Extension of Credit

The primary function of commercial bank is the extension of credit of worthy borrowers. Bank

lending contributes a lot to the economy in terms of financial, agricultural, commercial, social

services, and industrial

1.2.2. Creating Money

One of the major functions of commercial banks that differentiate them from other institutions is

their ability to create money through lending and investing activities. The power of commercial

banking system to create money is of great economic significance as it helps to create and

elastic credit system that is necessary for economic progress. It creates money through payment

mechanism i.e. through cheque, credit cards and debit cards. It also use pooling and saving tool

to create money.

1.2.3. Facilitating Foreign Trade

The commercial bank efficiently arranges the amount of foreign exchange required by business

organizations. Moreover, the issue of letter of credit has facilitated foreign trade transactions.

1.2.4. Safe keeping of valuables

Safe keeping of valuables is one of the oldest services rendered by commercial banks. They

provide locker facilities to keep valuables and they are accepted by commercial banks.

1.3. Nepal Bank Limited: A Glance Nepal Bank Limited (NBL), a pioneer commercial bank is the oldest bank in the history of

modern banking system of Nepal. It was established on 13th Kartik 1994 BS ( 1937 AD) in the

technical assistance of Imperial Bank of India under "Nepal Bank Act 1993.

With starting paid up capital Rs. 842,000,invested in 1994, has grown to Rs.38.04 crore as at

060 Kartik. Shareholdings are distributed, as 40.49% is owned by government and 59.51% by

Public. It has expanded its branches throughout the Kingdom including far remote areas having

very poor profitability and some of the parts having income not sufficient to meet breakeven.

The bank has given more priority to the service of common and poor class people rather than to

the profit and it has been able to achieve some objectives, which were set at the time of its

inception.

Accordingly, Nepal bank Limited was established to provide the services: to accept deposits, to

extend credit facilities for the promotion of trade, cottage industries and agriculture, to render


customer-related services, i.e. issue of bill of exchange, hundis etc.. to invest on government

bond and securities, to carry out agency functions and to act banker to the government.

1.4. Nabil Bank Limited: A Glance

Nabil Bank Limited (erstwhile Nepal Arab Bank Limited) was established on July 12th 1984

under a technical service agreement with Dubai Bank Limited, Dubai. The bank is managed by

a team of qualified and highly experienced professionals. Shareholders of Nabil is distributed as

50% owned by N.B. International Limited, Ireland, 20% by local financial institutions and 30%

by the Nepalese Public. The initial capital of Rs30 million, invested in 1984, has grown to

Rs1,314 million as at mid- July 2003. During this period, the Bank has paid cash dividends

totaling Rs1,2768 million. Nabil Banks Capital Adequacy Ratio stood at 13.06% as at mid-July

2003 against the statutory minimum requirement of 10%.

The Bank provides a complete range of personal, commercial and corporate banking and related

financial services through its 15 branches and 2 counters-the largest number of branches

amongst any joint venture bank in Nepal. It also was the first to introduce consortium finance in

Nepal and has had the privilege of rendering comprehensive banking services (including trade

finance) to leading Government institutions. The Bank is a major player in facilitating import

export activities with modern and efficient Trade Finance and International Trade support

services, to large multinationals as well as established business conglomerates in the private

sector.

Nabil is the sole banker to a multitude of International Aid Agencies, Non-Government

Organization. Embassies and Consulates in the Kingdom. It introduced Master card to the

Nepalese market, in Nepalese Rupees and Us Dollars and now also issues Visa Card. A growing

network ATM Facilities are available to account holders. Debit cards with PIN numbers are

issued to enable customers to avail of 24 hour ATM facility. Nabil has 190 correspondent

banking relationships and has drawing arrangements with Banks in 47 countries. Nabil is the

sole principal Agent Bank in Nepal of Western Union Financial Services and facilitates transfer

of funds, through an on-line computer system, instantly to or from more than 170,000 locations

in 196 countries and territories. The bank was awarded the title "Bank of The Year 2004".

1.5. Restructuring of NBL

Under the financial sector technical assistance program of world bank and DFID, A

management team ICCMT consisting of International bankers from Bank of Scotland

(Ireland) has been appointed in NBL in July 22, 2002 to restructure the NBL. Under the

leadership of Mr. J. Craig Mc Allister, the Management team has completed the Financial

Analysis of the NBL, the preparation of Management Plan and the Budget Plan for the Bank.

To-date, the team has come up with clear mission, vision, goals and objectives of the bank.

Asset Liability Management Committee (ALCO), Executive Committee (EXCO), Credit


Committee (CC), Relation Management Division (RMD), Credit Administration and Review

Division (CARD), Special Asset Group (SAG), and several Task Forces have been established

to create, apply and reinforce internationally accepted norms and modalities in the bank. The

norms and modalities are focused towards identifying bank risk and enhance the loan risk rating

systems in the bank. New Credit Policy Guide, Guidelines for Credit Decision Process, Problem

Loan Guide have been prepared and implemented last year. A continuous negotiation and

dialogue with big defaulters have been initiated and around Rs. 490 million of loan as

categorized on NPA has been recovered and restructured within the one half years of period.

New accounting manual and chart of accounts have been introduced. Around 300 staff in the

NBL have received the Accounting Training. The pending audits of FY 2000/01, 2001/02 have

been completed last year and the financial audit of 2002/03 has also been completed in time this

year. A detail Human Resource Master Plan has been prepared and accordingly to get the bank

in the right size first phase VRS has been launched which has reduced the staff by 1462. The

loss position of the bank has been reduced to Rs.250 million in FY 2002/03 from that of

Rs.3070 million of FY 2001/02. Its is expected that the restructuring effort would be successful

to introduce a new credit culture, sound HR development program , scientific and modern

IT/MIS platform to instill profit oriented atmosphere , an inbuilt self monitoring mechanism and

customer service culture within the contract period in NBL .

1.6. Statement of the problem

The current situation has brought a cutthroat competition in banking business. Especially the

joint venture private banks are concentrating their business in more profitable area. In this

context the NBL is in critical situation because it has to give service to the remote people where

financial benefit is low at the same time they have weaknesses also in their management and

operational activities.

The study is carried out in order to look into the comparative weaknesses and inefficiencies of

NBL and with the help of the comparative analysis of their financial statements. With the

background the present study will attempt to make assessment on the problems and recommend

solution regarding the above-mentioned ground as follows.

i. Is return provided by NBL bearing risk level satisfied?

ii. Can NBL meet its short-term obligation?

iii. What are the problems and prospect associated to NBL?

iv. Why NABIL is much more successful than NBL?

iv. Liquidity, Profitability, Leverage and activities ratio of the two banks

1.7. Objective of the study


The basic objective of this study is to analyze the financial performance of the two banks by

conducting a comparative study between NBL and NABIL through the use of different ratios.

The specific objectives of this study are as follows:-

i. To analyse the risk and return of NBL in comparison to NABIL

ii. To analyse the liquidity position of the selected banks.

iii. To evaluate the financial ratios to calculate efficiencies, valuation, profitability, capital

structure ratios.

iv. To recommend measure for the improvement of the financial performance and efficiency

on the basis of the conclusions drown from the research.

1.8. Significance of the study: This study will be important for the following groups and individuals:

i. Further researcher

ii. University students who are new generation

iii. Financial congers and analysis

iv. Government

v. All other interested individuals and parties

vi. NGOs and INGOs

vii. Researcher (myself)

1.9. Limitation of the study This report is held within the following Limitations and constraints, they are:

i. Time limitation i.e. the study is carried out in one month period.

ii. The study is limited only in the financial performance of the two banks.

iii. Due to the shortage of the time volume and budget, new method may not be developed

iv. Report is based on the data of NBL and NABIL

v. Certain periods data (5yrs.) has been taken for the analysis; result is based on this data.

vi. Because of the bank's secrecy they don't provide adequate information. Due to

availability of Limited information this study will not cover every part of the

performance aspects.

1.10. Chapter Plan This study has been organized into five different chapters.

Chapter one introduces the major issues, objectives, significance, and Limitation of the study.

Chapter two is devoted to the theoretical analysis and brief review to related literature

available. It includes a discussion of the conceptual framework and review of the major studies.

Chapter three describes the research methodology employed in the study. It consists of

research design. Sources of data, population and sample, statistical and financial tools used to

analyze the data.


Chapter Four data has been presented and analyzed in accordance with the selected research

methodology.

Chapter 5 Presents the major findings and provides some suggestions. The bibliography and

appendixes have been incorporated at the end of the study.


Chapter 2

Review of Literature

This chapter highlights and deals with the literature relevant to this study. It comprises review of

book, previous studies received, article review and review of policy documents.

2.1. Conceptual Review of Financial Analysis According to M. Pandey,Financial analysis is the process of identifying the financial strengths

and weaknesses of the firm by properly establishing relationship between the items of the

balance sheet and the profit and loss account. Management of the firm can undertake it or by

parties outside the firm. The focus of the financial analysis is on the key figure contained in the

financial statement and significant relationship existed. Management of the firm is generally

interested in every aspect of the financial analysis; they are responsible for the overall efficient

and effective utilization of the available resources and financial position of the firm.

The vertical and horizontal analysis could be done for the financial analysis. The vertical

analysis consists of financial Balance sheet, profit and loss Account of a certain period time

only, which is known as static analysis. Likewise, the horizontal analysis consists of a series of

statement relating to the number of years are reviewed and analyzed. It is also known as

dynamic analysis that measures the change of the position or trend of the business over the

number of years. In this study, the horizontal analysis has been adopted to find out the financial

indicator of the NBL and NABIL over the period of FY 1997/98 to 2001/02. The steps of

analysis are as follows.

1. Selection of the information relevant to the decision.

2. Arrangement or the selected information to highlight the significant relationship of the

financial yardsticks.

3. Interpretation and drawing of inferences and conclusions.

To evaluate the financial performance of a firm, the analyst needs a certain parameters of the

company by which the quantitative relationship and its position come out. The most widely and

effective used tool of the financial analysis is the ratio analysis. The financial ratio is the

measurement of relationship between two accounting figures, expressed in mathematical way or

the numerical relationship between two variables expressed as (i) percentage or, (ii) fraction or

(iii) in proportion of numbers.

Ratio Analysis Ratio analysis is the systematic use of financial information of the firms strength and weakness

as its historical performance, and current financial condition can be determined.


After calculating various ratios, we need to compare with the certain standard and draw out the

conclusion of the result. The comparison classified by Weston and Brigham into six types viz ,

(i)Liquidity ratios (ii) leverage ratios, (iii) Activity ratios (iv)profitability ratios (v) Growth

ratios and (vi) Valuation ratios .

In this study the following ratios are analyzed.

1. Profitability Ratio

2. Liquidity Ratio

3. Efficiency Ratio

4. Capital structure Ratio

5. Investment ratio

The details of the ratios will be discussed in detail in the next chapter.

2.2 Review of Books and Journals Further R.S .Sayers in his book Modern Banking Writers, Ordinary banking business consist of

changing cash for bank deposits and bank deposits from one person to corporation ( one

depositor to another) giving bank deposits in exchange for bill of exchange, government banks,

recurred and unsecured promises businessmen to repay.

Erich A. H. in his book has described financial analysis as Financial analysis is both an

analytic and judgmental process that helps to answer the questions that have been properly

posed to and therefore, it is a mean to an end. We can stress enough that financial analysis is an

aid that allows those responsible for results to make sound decisions.

Liquidity is other financial indicator of the business enterprises. I.M. Pandey says, "A firm

should ensure that it does not suffer from lack of liquid. And also that it is not too much highly

liquid. The failure of a company to meet its obligations, due to lock of sufficient liquidity will

result in bad credit image. Loss of creditors confidence, or even in low suits resulting in the

closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing. The

firms funds will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a

proper balance between liquidity and lack of liquid."

Liquidity is measured by the speed with which a banks assets can be converted into cash and

other current obligations. It is also important in view of survival and growth of a bank.

2.3. Review of Some acts relating to Banking in Nepal

Commercial Bank Act 2031 was formulated to facilitate the smooth run of commercial banks.

All the commercial banks are functioning under this act. This act defines the bank as, A

commercial bank is one which exchange money, deposits money, accepts deposits, grants loans

and performs commercial banking function and which is not a bank meant for co-operative ,

agriculture , industry or for specific purpose


The preamble of Nepal Bank Act 1994 clearly states the need of commercial bank in the

country, In absence of any bank in Nepal the economic progress of the country was being

hampered and causing inconvenience to the people and therefore with the objective of fulfilling

that need by providing services the people and for the betterment of the country, this law is

hereby promulgated for the establishment of the bank and its operation.

A bank shall be established under the Company Act with the recommendation of the Rastra

Bank. The bank may determine the location of its head office with the approval of the Rastra

Bank. The bank shall be an autonomous corporate body with the perpetual succession. It may

sue or be sued in its own name. Subject to this Act and other current Nepal law, the bank may

acquire, use and sell movable and immovable property. Any bank may open or shift the location

of, or close branches depots or other offices with the approval of the NRB.

In case any foreign commercial bank desires to open a branch, representative office or liaison

such branch under the company Act with the approval of NRB, and provisions of the act shall

apply to such foreign bank The NRB shall obtain the consent of His Majestys Government

before granting approval. While granting approval, NRB may prescribe condition according to

the need, and the foreign bank shall company with the conditions thus prescribed by the NRB.

2.4. Review of Thesis Various thesis works have done in different aspects of commercial banks such as lending policy,

interest rate structure investment policy, resource mobilization, and capital structure etc.

Mr. Pragun Shrestha in his study ,A comparative Analysis of Financial performance of the

Selected commercial Banks, Concluded that many of the banks are of the view that political

instability in the country is mainly responsible for the decline of the lending opportunities . Few

banks ascribed it to the economic crisis that occurred in Asia pacific region .No one felt that

higher rates on interest on lending to be a major factor. At the some time it should target not

only the urban sector, it should go to the rural sector also. They have to explore all the potential

sectors like tourism etc. in order to generate high rate of profits

Mr. Gurungs Study on A Financial Study of Joint Venture Banks in Nepal. A Comparative

Study of NGBL and NIBL. In this study, he has analyzed financial position of the banks

measuring various ratios to elaborate the financial performance. The liquidity, profitability and

dividend payout ratio of two banks are on favourable position. But NIBL seems to be slightly

better position in terms of liquidity, profitability and capital structure compared to the NGBL. In

this evidence he has concluded that the NIBL promises a better future than NGBL.

The present study tries to focus on financial performance of NBL and NABIL Bank Limited, it

is clear that there was no research work on comparative study of these banks. This is the

comparative study of commercial banks which were not cleared in previous studies.


Chapter 3

Research Methodology

Evaluating the financial performance of the selected banks in a micro level and to highlight the

efforts of the financial decisions of these banks in the economy at the macro level forms the

basic objective of this research.

3.1. Research Design Keeping in mind the objective of the study, descriptive cum analytical research design has been

followed. The study is based on the wide range of variables and factors influencing financial

decisions of the banks. Comparative data banks are presented in such a way so as to make the

report informative to the reader. Financial tools (Ratios) have been used to analyze and interpret

the balance sheet, income statement and other accounting information.

3.2 . Sources of Data For the purpose of the study, following sources, which are secondary in their nature, has been

used:

Economic Survey, Published by Research Department, NRB.

Quarterly Economic Bulletin, published by Nepal Rastra bank.

Previous Dissertations

Web-sites

Other than the above-mentioned sources, the information collected through verbal

communications with the staff of the related banks has also been used in the study.

3.3.Population and Sample Among 17 commercial banks, Nepal Bank Limited and NABIL Bank Limited have been

selected for the present study. Financial statements of latest 5 years (1997/98 to 2001/02) have

been taken as sample for the comparative analysis of financial performance. The

recommendation and suggestions, which are derived from the study, by taking the above

commercial banks as samples, will be equally useful for the other commercial banks in Nepal.

3.4 Method of Data Analysis The methods used for the financial analysis of NBL and NABIL have been outlined below:

Presentation of Data:

Tabular as well as graphical presentation have been used in order to appraise the financial

results of NBL and NABIL categorically

3.5 Financial Tool


The considerable assistance of Financial Ratios and Income and Expenditure analysis has been

taken to measure the strength and weaknesses of the NBL and NABIL.

3.5.1 Ratio Analysis Ratio analysis is one of the most commonly used techniques in the analysis of the financial

statement and evaluation of the managerial performance. Ratio analysis points out the problems

in any operational areas and provides a basis to recommend corrective actions. Ratio analysis

satisfies the interests of creditors, government institutions and other to form their opinion or

enable them to have guideline towards effective decision-making.

There is variety in ratio calculation. Data contained in financial statement as the requirement of

the types of ratios are as follows:

Liquidity Ratio Activity or Turnover ratio Leverage or Capital Structure Ratio Profitability Ratio Valuation ratio

Liquidity Ratio Liquidity Ratio reflects the short-term obligation of the firm. This ratio shows that if firm need

cash amount in short period without any notice, can firm fulfill its need or how it manage the

need.

Commercial banks need liquidity to meet loan demand and deposit withdrawals. Liquidity is

also needed for the purpose of meeting Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio

(SLR) requirements prescribed by the central Bank. The following ratios are calculated under

the liquidity ratios.

a) Current Ratio It is the ratio of total current assets to current liability. Lower current ratio creates difficulties in

meeting short run commitments as they mature. If the ratio is too high, the bank has an

excessive investment in current assets or is under utilizing short- term credit.

Current Assets

Current Liabilities

b) Cash and Bank Balance to Total Deposit Ratio The proportion of the bank's idle money with total funds collected is indicated by this ratio.

High ratio means high idle money, which shows the inefficiency of management, as well as

increased cost of capital.

Error!

Cash and bank balance Cash and Bank Balance to Total Deposit Ratio = Total Deposit

Current Ratio =


c) Cash and bank balance to Non-interest Bearing Deposit Ratio: -

This ratio indicates the proportion of liquid assets to meet non-interest bearing liabilities, which

are free cost of source of NBL and RBB. This ratio is calculated as.

d) Cash and Bank Balance to Interest Bearing (excluding Fixed ) Deposit Ratio

Saving deposit is the fixed interest bearing short-term liabilities. This ratio id calculated to

d) Cash and bank balance to interest Bearing Deposit Ratio: -

Interest bearing fixed deposit is excluded being long-term liabilities. It is inappropriate to use

current assets to meet long term high interest bearing liabilities, i.e., fixed deposit.

Activity or Turnover Ratio Activity ratio is a function of the efficiency with which the various assets components are

measured. It measures the degree of effectiveness in use of resources or funds by an enterprise.

a) Loan and Advances to Total Deposit ratio: Loan and advances are the major resources of investment to generate income in the commercial

banks. Deposits are used to grant loans and advances. Therefore, the bank should manage its

deposits efficiently. This ratio is calculated to determine the utilization of deposits for profit

generating purpose on the loans and advances. This ratio is calculated as;

b) Total Investment to Total Deposit Ratio Investment is one of the major forms of credit created to earn return. It measures the utilization

of deposits in investment. Higher the ratio, better the utilization of collected fund and generates

regular income to the banks. This ratio is calculated as:

Leverage / Capital Structure Ratio Leverage ratio shows the proportion of debt capital and equity capital. It shows the long-term

solvency of the firm. It judges the long-term financial position of the firm.

Hence the leverage ratios are calculated to measure the financial risk and the firms ability if using debt for the benefit of shareholders. Following ratios are calculated here,

a. Long term Debt to Net Worth (Shareholders equity) Ratio:

Cash & Bank Balance Cash & Bank Balance to Non-Interest Bearing Deposit Ratio = Non- interest bearing deposits.

Cash & Bank Balance Cash & Bank Balance to Interest Bearing Deposit Ratio = Interest bearing deposit

Loan and Advances to Total Deposit Ratio Loan and Advances

Total Deposit Ratio


It measures the proportion of long-term debt and equity used in the capitalization of the

banks. It is calculated as:

b) Total Debt to Total Assets Ratio:

This ratio expresses the relationship between creditors fund and owners capital. This ratio

measures the share of the total assets financed by outsider fund. This ratio is calculated as:

c) Capital Adequacy Ratio:

To operate the firm effectively and efficiently in the modern competitive environment adequate

capital is required. This ratio is one of the most significant ratio used specially to assess the banks

strength of the capital structure of the adequacy of the capital. So capital adequacy is determined as:

d) Total Debt to Net Worth Ratio

This ratio measures the proportion of interest bearing debt and owners fund. This relationship

describing the lenders contribution for each rupee of owners contribution is called debt equity

ratios. It is calculated as :

Profitability Ratio This ratio measures the capacity of generating revenue and search for the incomes of the firm. The operating efficiency of the bank and its ability to ensure adequate return to its shareholders depends ultimately on the profit earned by the bank. To measure the efficiency of the banks following major profitability ratios are calculated.

a) Return on Investment Ratio (ROI) This is an appropriate base for the assessing the effectiveness of the operating management. Return

on investment is also called return on asset. It seeks to measure the effectiveness with which the

firm has employed it total resources.

Long Term Debt Long Term Debt to Net Worth Ratio =

Net Worth

Total Debt Total Debt to Net Worth Ratio =

Net Worth

Net Operating Income/EBIT Return on Investment Ratio = Total Assets

Total Debt Total Debt to Total Assets Ratio =

Total Assets

Total Debt Capital Adequacy Ratio =

Total Assets


b) Commission and Discount Income to Personnel Expenses Ratio

This ratio measures the efficiency of the staff or cost paid for taking services from staff to earn

income by providing services to the customers.

Commission and Discount income to Personnel Commission and Discount Income

Expenses Ratio =

Personnel Expenses

c) Interest Income to Interest Expenses Ratio

This ratio measures the effective use of deposit to earn revenue in proportion of the expense accrued

on collected deposits. Bank has to pay interest on interest bearing deposits and receive interest

through its investment on loans, advances and others.

Interest Income

Interest Income to Interest Expenses Ratio =

Interest Expenses

d) Return on Common Equity Ratio( ROCE)

This ratio is also called Investors Ratio'. It measures the effectiveness of the management with

respect to both its operating and financial decision.

Net Profit after tax

Return on Common Equity Ratio=

Shareholders Equity

Valuation Ratios These ratios result the overall performance of the bank measuring the combined effect of risk

and return. The valuation ratios indicate the market value of the firm as compared to the book

value and measure the stock price relative to earnings. The following ratios are calculated.

a) Price Earning Ratio(P / E Ratio) Price earning Ratio is widely used by the security analyst to value the firms performance as

expected by investors. It shows how much investors are willing to pay per dollar of reported

profits. This ratio is calculated as:

Market Value Per Share

Price Earning Ratio=

Earning Per Share

Earning per share is calculated by dividing profit after tax by total number of common shares

outstanding.


b) Dividend Payout Ratio (DPR) The Ratio measures the relationship between earnings belonging to the ordinary shareholders

and dividend paid to them. It can be calculated as:

Dividend Per Share

Dividend Payout Ratio=

Earning Per Share

Dividend per share is calculated by dividing the earning paid to shareholder by number of common shares outstanding.

c) Market Value Per Share to Book Value Per Share Ratio

The ratio measures the price the outsiders are paying for each rupee reported by the balance

sheet of the banks. It can be calculated as:

Market Value per Share

Market Value Per Share to Book Value Per Share Ratio=

Book Value per Share

The book value per share is net worth divided by the number of shares outstanding.

After reviewing the relevant Literatures and highlighting the Research Methodology now the

Analysis part of the research is gong to be undertaken.


Chapter Four

Presentation and Analysis of Data

Subject matter and objectives of this study have been introduced in the first chapter. In order to

achieve those objectives necessary analytical tools and techniques have been discussed in unit

Research Methodology. In this unit relevant data have been presented and analyzed with

reference to financial performance of selected commercial bank

4.1 Financial Analysis:

Financial analysis is a process of evaluating relationships between component parts of financial statements, i.e., balance sheet and profit and loss account to obtain a better understanding of the banks position and performance. Various financial tools are used in this research for analysis. Although there are more than 200 ratios, only some selected ratios are used in this study.

4.1.1 Ratio Analysis: Ratio analysis is very much powerful tool of financial analysis. Financial ratios are most frequently

and widely used in practice to assess companys financial performance and condition. Important

ratios can be calculated from balance sheet and profit and loss account and thus calculated financial

ratios can be useful for analyzing and assessing the performance and position of the bank, which

reflect the relative strength and weaknesses of any particular bank over others.

4.1.1.1. Liquidity Ratio

Liquidity ratios measure a corporations ability to meet its maturing short-term obligations.

Liquidity refers to nearness to cash. With too much liquidity, the possibility of its misuse becomes

high. On the other hand, too little may lead to sever cash problems, which can result in liquidity to

pay debts in time. Following ratios are analyzed in the liquidity ratio.

This chapter is the main part of my study. This chapter will be of great relevance for my study, as all the findings, conclusions and recommendations are going to be derived from the calculations done in this section. The analysis of data consist of organizing, tabulating and performing financial as well as statistical analysis.

a) Current Ratio It measures the degree to which current assets cover current liabilities. A higher ratio indicates

greater assurance of ability to pay current liabilities. A current ratio of 2:1 is generally considered to

be an acceptable standard though it is only a rule of thumb standard. A low ratio indicates that the

corporation may not be able to meet short-term obligations. Symbolically,

Current Assets

Current Ratio=

Current Liabilities


The current ratio for the bank is slightly low in the contrast of industry average due to the nature of

the bank. The calculation of the current ratio for the NBL and NABIL can be shown by the table. Table#1

Current Ratio Table (In million)

From the above table, the average current ratios of the two banks are for below the satisfactory

level. NBL has the declining Trend of current ratio, from 1.0380 times the to 0.8196 times in the

study period of five years keeping the average ratio 0.9209 times. The shows that NBLs current

assets have been declining in comparison to its current liabilities. This means that this banks ability

to meet its short-term obligations is declining over the period of Last five years. Like NBL, NABIL

has the declining trend of current ratio, from 1.0661 times to 0.8125 times in the study period of

five years keeping the average ratio as 0.9528 times. This also shows the NABILs current assets

have declining in comparison to its current liabilities. This means that this banks ability to meet its

short-term obligations is declining over the period of Last five years.

The comparative graph of current ratios of the selected banks has been presented below.

Comparative Presentation of Current Ratios of NBL and NABIL

00.5

11.5

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Cu

rren

t R

atio

(Tim

es)

NBLNABIL

NBL NABIL

Year Current

Assets

Current

Liabilitie

s

Ratio

(Times)

Average

Ratio

(Times)

Current

Assets

Current

Liabiliti

es

Ratio

(Times)

Average

Ratio

(Times)

1997/98 33876.43 32635.80 1.0380 10802.12 10132.27 1.0661

1998/99 36793.18 37977.19 0.9688 11961.95 11249.94 1.0633

1999/00 37893.67 41603.39 0.9108 0.9209 14788.91 13977.29 1.0581 0.9528

2000/01 37513.28 43239.47 0.8676 13161.68 17226.21 0.7640

2001/02 39168.99 47787.80 0.8196 13313.40 16384.73 0.8125


Figure No. 1

b) Cash and Bank Balance to total deposit ratio: - Cash and bank balance are the most Liquid

Assets, so this ratio measures the banks ability to immediately fund the withdrawal of their

depositors. A high ratio represents a greater ability to cover their deposits and vice versa. This ratio

is determined by dividing cash and bank balance by total deposits.

Table#2

Cash and Bank Balance to Total Deposit Ratio Table ( Rs. In million)

The above table shows the cash and bank balance to total deposit ratio of NBL is in decreasing and again slowly increasing in the year 2000/01 and 2001/02. The maximum was in the FY 1997/98 which was 23.08% minimum was in the FY 1999/00 which was15.30% The average for the review period was 18.33% .The cash and bank balance of NABIL Bank is moving in a zigzag trend, firstly decreasing and increasing and soon. The maximum was in FY 1997/98 which was 13.20% and minimum was in the FY 2000/01 which was 5.13% .The average for the review period was 8.06%.

This analysis helps us to conclude that cash and bank position with respect to its total deposit of

NBL is better than NABIL. The customer of NBL bank has more safety. The graph of cash and

bank balance to total deposit ratio of the banks have been presented below.

Comparative Analysis of Cash and Bank Balance to Total Deposit Ratio of NBL and

NABIL

0102030

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(%

)

NBLNABIL

NBL NABIL

Year Cash &

Bank

Balance

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

Cash &

Bank

Balance

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

1997/98 6495.49 28138.26 23.0842 1153.75 8737.76 13.2042

1998/99 5415.76 33188.48 16.3182 630.94 9464.28 6.6665

1999/00 5471.89 35768.26 15.2982 18.3271 1088.75 12779.51 8.5195 8.0611

2000/01 6266.79 35618.59 17.5942 812.90 15839.01 5.1323

2001/02 6627.11 34264.84 19.3408 1051.82 15506.44 6.7831


Figure No. 2

c) Cash and Bank Balance to Non-Interest Bearing Deposit Ratio:- This ratio indicates the

proportion of liquid assets to meet non-interest bearing liabilities, which are cost free source of the

banks.

Table#3

Cash and Bank Balance to Non-Interest Bearing Deposit Ratio

( Rs. In million)

The above table shows that the cash and bank balance to non-interest bearing deposit ratio of NBL

is very high. It is maximum in the FY 2001/02 which was 141.65% and the minimum was 101.05%

in the FY 1999/00. The average ratio was 121.95%. The cash and bank balance to non-interest

bearing deposit of NABIL Bank is fluctuating throughout the period. The ratio ranged between

23.44% to 45.57%. The average ratio was 21.40%. The comparative graph of the above table is

presented below.

NBL NABIL

Year Cash &

Bank

Balance

Non-

Interest

Bearing

Deposit

Ratio

(%)

Average

Ratio

(%)

Cash &

Bank

Balance

Non-

Interest

Bearing

Deposit

Ratio

(%)

Average

Ratio

(%)

1997/98 6495.49 4753.06 136.66 1153.75 2531.66 45.57

1998/99 5415.76 4745.09 114.13 630.94 2691.38 23.44

1999/00 5471.89 5414.94 101.05 121.95 1088.75 3351.05 32.49 21.40

2000/01 6266.79 5389.21 116.28 812.90 3254.33 24.97

2001/02 6627.11 4678.45 141.65 1051.82 8087.53 13.00


Comparative Presentation of Cash and Bank balance to Non-Interest Bearing

Deposit Ratios of NBL and NABIL

0

50

100

150

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(%

)

NBLNABIL

Figure 3

The above analysis helps us to conclude that NBL was better in liquidity position for the payment of

its current non-interest bearing obligations. NBL Bank had enough liquidity to refund its whole

non-interest bearing deposit at any time. On the other hand, NABIL was utilizing its cost free

deposit in profit generating purpose, which yields high return as well as risk of insolvency for the

bank.

d)Cash and Bank Balance to Interest Bearing Ratio:- The cash and bank balance to interest

bearing ratio is calculated by dividing cash and bank balance by interest bearing deposits(excluding

fixed deposits). A bank must insure that it is liquid enough to face heavy deposit withdrawal. It has

to maintain adequate balance in the form of cash and bank balance in order to honor large

withdrawals by its customers.

Cash and bank balance to interest bearing deposits of NABIL and NBL tabulated in table No. 4.

Table#4

Cash and Bank Balance to Interest Bearing Deposit Ratio ( Rs. In million)


The above table shows the ratio of NBL is in decreasing trend, the review period ranged between

58.45% in the FY 1997/98 to 16.53% in the FY 2000/01. The average ratio was 25.94%.On

average again NBL has better liquidity position than that of NABIL. However, very high ratio of

NBL indicates the unwise investment decision, i.e., inability of the bank to invest in more

productive sectors like government securities, treasury bills etc to enhance its profitability. So this

analysis helps us to conclude that the depositors of NBL Bank have more margin of safety than that

of NABIL.

The comparative graph of cash and bank balance to interest earning deposit ratio has been presented

below.

Comparative Presentation of Cash and Bank Balance to Interest

Bearing Deposit Ratios of NBL and NABIL

010203040506070

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(%

)

NBL

NABIL

Figure No. 4

4.1.1.2. Activity or Turnover Ratio The ratios indicate the efficiency with which a corporation employs its resources. Activity ratios are

employed to evaluate the efficiency with which the firm manages and utilizes its assets. From these

ratios it is known that whether the funds employed have been used efficiently in the business

activities or not. These ratios are also called turnover ratios because they indicate the speed with

NBL NABIL

Year Cash &

Bank

Balance

Interest

Bearing

Deposit

Ratio

(%)

Average

Ratio

(%)

Cash &

Bank

Balance

Interest

Bearing

Deposit

Ratio

(%)

Average

Ratio

(%)

1997/98 6495.49 11112.78 58.45 1153.75 2456.79 46.96

1998/99 5415.76 14281.04 37.92 630.94 3352.62 18.82

1999/00 5471.89 18066.25 30.29 38.26 1088.75 4150.19 26.23 25.94

2000/01 6266.79 20058.24 21.24 812.90 4917.14 16.53

2001/02 6627.11 19855.12 33.38 1051.82 4972.06 21.15


which assets are being converted or turned over into profit generating assets. Following ratios are

used under activity ratio.

a) Loan and Advances to Total Deposit ratio: - Loans and advances to total deposit ratio is

calculated by dividing total loan and advances by total deposit. The core banking function is to

mobilize the funds from the depositors to the borrowers. Banks make profit by lending or utilizing

the deposited funds by charging a higher rate of interest to the borrowers than they pay to the

depositors. Hence they are known to be efficient in utilizing the funds if they can advance a greater

proportion of the deposited fund into risk assets.

The comparative ratios of the two banks have been tabulated below.

Table#5

Loan and Advances to Total Deposit Ratio (Rs. In million)

The above mentioned table shows that NBL has decreasing trend of loan and advances to total

deposit ratio. It was maximum in the FY 1997/98 which was 60.56% and minimum in the FY

2001/02 which was 25.21%. The average ratio was 42.56%. The NABIL bank has the credit deposit

ratio of 55.78% only fluctuating betweens 59.79% in the FY 1997/98 to 47.97% in FY 2001/02.

NBL NABIL

Year Loan &

Advances

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

Loan and

Advances

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

1997/98 17039.89 28138.26 60.56 5224.07 8737.76 59.79

1998/99 17206.89 33188.48 51.85 5788.93 9464.28 51.17

1999/00 14922.01 35768.26 41.72 42.56 7334.76 12779.51 57.39 55.78

2000/01 11918.94 35618.59 33.46 8324.44 15839.01 52.56

2001/02 8638.43 34264.84 25.21 7437.90 15506.44 47.97


Comparative Presentation of Loan and Advances to Total Deposit Ratios

of NBL and NABIL

020406080

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(%

)

NBLNABIL

Figure 5

This analysis helps us to conclude that NABIL had the moderate ratio over the review period of

five years. This signifies that NABIL Bank had been able to efficiently use the outsiders fund

in profit generating purpose. It had been successful in advancing the favorable position of its

deposit towards loans and advances. But NBL had not been able to use the outsiders fund in

profit generating purpose.

b)Total Investment to Total Deposit Ratio:-This ratio is calculated by dividing total

investment by total deposits. Investment function or funds management is gaining widespread

importance in the banking sector. Treasury of the bank is involved in investing the surplus fund

with the bank in the income generating investments. In order to fill this gap between borrowing

lending, bank rather go for investments such as treasury bills, government securities,

development bonds, overseas placement and inter bank lending.

These investments earned a lower rate of return in comparison to loans and advances but under

most circumstances they generate higher rate of return than their cost of funds. Hence prove to

be beneficial for the bank.

Table#6

Total Investment to Total Deposit Ratio ( Rs. In million)


The above table shows that the total investment to total deposit ratio of NBL was constant between

the FY 1997/98 in the FY 2001/02, which was 20.87%, and the minimum was in the FY 15.27% in

the year 1999/00. The average ratio was 17.314%. The ratio of NABIL was fluctuating

immoderately. NABIL had maintained the highest ratio of 52.88% in the FY 2001/02 and lowest

ratio in the FY 1999/00, which was 9.78%, and the average ratio was 27.45%. The comparative

graph of the above table is presented below.

Comparative Presentation of Total Investment to Total Deposit Ratios of

NBL and NABIL

0204060

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(%

)

NBLNABIL

Figure No. 6

This analysis helps us conclude that NBL is not relying significantly in investment to mobilize the

surplus deposit than NABIL bank. The bank with larger volume of foreign currency deposit relies

more on investment, as these deposits cannot be utilized into loans and advances easily.

4.1.1.3.: Leverage /Capital Structure Ratio

NBL NABIL

Year Total

Investment

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

Total

Investment

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

1997/98 4495.08 28138.26 15.97 954.15 8737.76 10.92

1998/99 5124.96 33188.48 15.44 1420.36 9464.28 15.01

1999/00 562.07 35768.26 15.27 17.314 1250.94 12779.51 9.78 27.45

2000/01 6776.33 35618.59 19.02 7704.31 15839.01 48.64

2001/02 7151.38 34264.84 20.87 8199.51 15506.44 52.88


The leverage ratio shows how much of a firm assets are financed by debt and equity. By studying

them, one can asses the prospects for future financing. If the firm has employed excessive debt in its

capital structure, additional debt financing will be difficult in future. The firm might have to pay

higher rate of interest. On the other hand, if the firm has employed no debt , or little debt, it reveals

the failure to use cheap borrowed capital and raise the shareholders rate of return. The use of debt

also enables the owners to maintain their control over the firm. If the capital is raised through equity

then the owners will lose control. The firm with high leverage ratios is subject to higher risks and

this would, in turn, increase their chances of getting high return. Conversely, the firm with low

leverage ratio is subject to lower risks and would in turn, decrease their return.

a)Long Term Debt to Net Worth Ratio:- Bank total fund which is invested in various income

generating assets consists of debt as well as shareholders fund. Debts for the bank usually include

deposits and borrowings from the customer whereas shareholders fund includes equity capital and

reserves.

Long-term debts in the form of fixed deposits are high cost liabilities for the bank. High ratio will

be favorable if the bank utilizes the funds on long-term loans and advances. Idle long-term debt

incurs losses due to high cost. This ratio measures the relative proportion of long-term debt in

relation to net worth. Long-term debt to net worth ratio of the selected banks has been tabulated

below.

Table#7

Long Term Debt to Net Worth Ratio Table

( Rs. In million)

The above table shows that the long-term debt to net worth ratio of NBL is very poor. The ratios

were in negative trend. The average ratio is 0.1342 times. The maximum ratio was in the FY

1997/98, which was 0.936. But NABIL had fluctuating ratio over the review period. NABIL had the

average ratio of 0.0672 times.

NBL NABIL

Year Long

Term

Debt

Net

Worth

Ratio

(Times)

Average

Ratio

(Times)

Long

Term

Debt

Net

Worth

Ratio

(Times)

Average

Ratio

(Times)

1997/98 704.82 753.03 0.9360 40.51 828.49 0.0489

1998/99 577.11 -1538.18 -0.3752 56.37 877.73 0.0642

1999/00 718.87 -4209.54 -0.1708 0.1342 62.84 984.07 0.0639 0.0672

2000/01 853.70 -6350.68 -0.1344 78.10 1062.83 0.0735

2001/02 1159.49 -9553.88 -0.1214 98.10 1146.42 0.0856


Comparative Presentation of Long Term Debt to Net Worth Ratio Table

-0.5

0

0.5

1

1.5

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(T

imes

)

NBLNABIL

Figure No. 7

From the above analysis, it can be concluded that the long-term debt to net worth ratio of NBL bank

is higher compared to NABIL. Long term financing in comparison to net worth had been

considerable for the banks. Higher proportion of long term debt debts are considered to be favorable

if the same is appropriate towards long term loans and advances, failing to do so, the cost of fund of

these debts would be higher than their return on the assets and the bank would incur losses. If this is

the case, the banks should reduce the long-term debts gradually and replace it either by interest free

current deposits or by owners fund.

b)Total Debt to Total Assets Ratio: - This ratio is calculated by dividing total outsiders fund by

total assets. The ratio of debt to total assets signifies the extent of debt financing on the total assets

and measures the financial security to the outsiders or creditors. Despite of higher risk, owners of

the bank prefer a high debt ratio because it magnifies their earnings on one hand and enables them

to maintain their concentrated control over the bank. Total debt to total assets ratio of the selected

bank over the period are tabulated below.

Table#8

Total Debt to Total Assets Ratio ( Rs. In million)


The above table shows that total debt to total assets ratio of both the banks are quite consistent

throughout the review period of five years. NBL had its average ratio as 1.1081 times while NABIL

has slightly lower ratio of 0.9299 times. This shows that the total debt of NBL is about 1.01081

times and that of NABIL is 0.9299 times to that the total debt covered about 110.81% of NBL and

92.99% of NBL of their total assets in average.

Comparative Presentation of Total Debt to Total Assets Ratios of NBL and

NABIL

00.5

11.5

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(T

imes

)

NBLNABIL

Figure No. 8

The above analysis helps us to conclude that these banks are aggressive and are using high portion

of their debt capital. About 110.81% of their assets are financed by debt capital in NBL and 92.99%

of their assets financed by debt capital in NABIL. The high total debt to total assets ratio implies the

banks success in exploiting debts to the more profitable assets. Since both the banks had been

extensively using their debt financing to finance their total assets, it can be concluded that these

banks are highly leveraged.

NBL NABIL

Year Total

Debt

Total

Assets

Ratio

(Times)

Average

Ratio

(Times)

Total

Debt

Total

Assets

Ratio

(Times)

Average

Ratio

(Times)

1997/98 33340.62 34093.66 0.9779 10172.78 11001.28 0.9247

1998/99 38554.30 37016.11 1.0416 11306.31 12184.05 0.9280

1999/00 42322.26 38112.73 1.1104 1.1081 14040.13 15024.20 0.9345 0.9299

2000/01 44093.17 37742.49 1.1683 17304.31 18367.15 0.9274

2001/02 48947.29 39393.42 1.2425 16482.83 17629.25 0.9350


c) Capital Adequacy ratio:- capital adequacy ratio is calculated by dividing total capital fund(net

worth) by total deposits. Capital adequacy has remained one of the highest issues in banking

industry and The capital adequacy ratios of the selected banks have been tabulated below.

Table#9

Capital Adequacy Ratio

The above table shows that the capital adequacy ratio of NABIL is higher than that of NBL

throughout the review period. NABIL had maintained the highest capital ratio in FY 1997/98 as

9.48%. The average ratio of NABIL bank was 8.11% which helps us to conclude that NABIL is in

safer position to absorb unexpected losses arising from various risks that can create instability in

banks earnings compared to NBL. NBLs capital adequacy ratio is very poor. The average ratio is

11.89%. The comparative graph of the above table is presented below.

Comparative Presentation of Capital Adequacy Ratios of NBL and NABIL

-30-20-10

01020

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(%

)

NBLNABIL

Figure No. 9

NBL NABIL

Year Net

worth

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

Net

Worth

Total

Deposit

Ratio

(%)

Average

Ratio

(%)

1997/98 753.03 28138.26 2.6762 828.49 8737.76 9.4817

1998/99 -1538.18 33188.48 -4.6347 877.43 9464.28 9.2709

1999/00 -4209.54 35768.26 -11.7690 -11.8875 984.07 12779.51 7.7004 8.1112

2000/01 -6350.68 35618.59 -17.830 1062.83 15839.01 6.7102

2001/02 -9553.88 34264.84 -27.88 1146.42 15506.44 7.393

Rs. In Million


d)Total Debt to Net Worth Ratio: -Total debt to net worth ratio measures the relative claim of

outsiders and owner over the bank assets, indicating the extent of debt financing in the bank

compared to net worth financing. In other words, the debt to equity ratio indicates the relative

contribution of debt and equity fund to the total investment.

Table#10

Total Debt to Net Worth Ratio ( Rs. In million)

The above table shows that the total debt to net worth ratio of NABIL is quite consistent while there

is negative ratio in NBL. NABIL had average ratio 14.0173 times but NBL had average ratio as

2.9099 times. The outsiders claim of NABIL is 14.0173 times while that of NBL is 2.9099 times.

The extensive use of debt financing by these banks is attributed to increase volume of deposits.

Comparative Analysis of Total Debt to Net Worth Ratios of NBL and NABIL

-40

-20

0

20

40

60

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Year

Rat

io(T

imes

)

NBLNABIL

Figure No. 10

NBL NABIL

Year Total Debt Net Worth Ratio

(Times)

Average

Ratio

(Times)

Total

Debt

Net

Worth

Ratio

(Times)

Average

Ratio

(Times)

1997/98 33340.62 753.03 44.2753 10172.78 828.49 12.2787

1998/99 38554.30 -1538.18 -25.0649 11306.31 877.73 12.8813

1999/00 42322.26 -4209.54 -10.0539 -2.9099 14040.13 984.07 14.2674 14.0173

2000/01 44093.17 -6350.68 -6.9431 17304.31 1062.83 16.2814

2001/02 48947.29 -9553.88 -5.1233 16482.33 1146.42 14.3777


Thus it can be concluded that the high-geared capital structure can be advantageous to the banks as

they mobilize these deposits towards the loans and advances, which pay them higher interest. But

the banks should asses the risk asset portfolios before accepting the interest bearing deposits in

order to maintain an optimum debt to net worth ratio, thereby avoiding the financial risk.

4.1.1.4 Profitability Ratio: In any firm, profitability is a major concern. Profit is the objective of all the policies framed and decisions taken by the management. Profitability ratios reveal an

interesting picture of how the individual firm has been managed. These ratios enable one to judge

the overall performance of the firm. The various profitability ratios, which reflect the operating

efficiency of the bank, have been analyzed comparatively.

a) Return on Investment (ROI):- This ratio is calculated by dividing net operating income by total

assets. This ratio measures the profitability of all financial resources with represents the utilization

of overall resources efficiently. ROI ratios of the selected banks have been tabulated below.

Table No. 11

Return on Investment Ratio Table (Rs. In Million)

Date EBIT Total Assets Ratio

(%)

Aug.

Ratio(%)

EBIT Total Assets Ratio (%) Avg.Ratio

(%)

97/98

98/99

99/00

00/01

01/02

3188.08

2975.97

2904.82

2863.99

2142.69

34093.66

37016.11

38112.73

37742.49

39393.42

9.35

8.04

7.62

7.59

5.44

7.61

1114.03

1128.93

1309.11

1573.31

1639.11

11001.28

12184.05

15024.20

18367.15

17629.25

10.13

9.27

8.71

8.57

9.30

9.20

The above table shows that the investment or return on assets ratio of NBL is in the decreasing

trend. The highest ratio was in the FY 1998 which was 9.35% and the lowest ratio was in the FY

2002 which was 5.44%. The average ratio was 7.61%. But the ratio of NABIL is higher than that of

NBL. The average ratio of NABIL was 9.20%.

The above analysis helps to conclude that the profitability with respect to the total investment /

assets of the bank has decreased with span of time. NABIL bank has been able to utilize its asset

more efficiently to generate profit than NBL.

b) Commission and Discount Income to Personnel Expenses Ratio:- This ratio is calculated by

dividing commission and discount income by personnel expenses. Personnel expenses are the

reward provided for the staff for performing organizational task. Earning of any organization is

highly influenced by the knowledge, skill and motivation of its staff. Commission and discount

income measure the cost paid for taking services from staff to generate income by providing


services to the customers. The following table shows the commission and discount income to

personnel expenses ratio of the selected banks.

Table 12

Commission and Discount Income to Personnel Expenses Ratio Table

(Rs. In Million) Commission&

Discount

Income

Personnel

EXP.

Ratio

(times)

Avg.

ratio

Commission &

Discount

Income

Personnel

Expenses

Ratio(Times) Average

Ratio

(Times)

97/98 151.11 665.33 0.2271 89.29 120.26 0.7425

98/99 208.49 763.12 0.2732 117.29 131.55 0.8916

99/00 211.35 1048.39 0.2016 0.2243 139.59 152.94 0.9127 0.7783

00/01 214.58 961.76 0.2231 146.84 198.46 0.7399

01/02 241.01 1227.85 0.1963 114.34 189 0.6050

The above table shows that commission and discount income to personnel expense ratio of NBL is

quite consistent. The highest ratio was in the FY 1998/99 which was 0.2732 times and the lowest

ratio was in the FY 2002 which was 0.1963 times. The average ratio was 0.2243 times. While the

ratio of NABIL are firstly in the increasing trend and then in the decreasing trend. Still it has

average ratio as 0.7783 times higher than that of NBL.

The analysis helps us to conclude that NABIL has higher investment for its staff than NBL. Higher

investment on staff reduces the turnover of the staff.

b) Interest Income to Interest Expenses Ratio:-The ratio measures the utilization of outsiders

fund(deposit which cost interest for the bank) for lending activities that generate revenue(interest)

for the bank. Higher percentage represents the effective utilization of debt capital. Interest Income

to interest expense ratios of the selected banks are tabulated below:-

Table 13

Interest Income to Interest Expenses Ratio Table

(Rs. In million)

The above table shows that the both the banks have been able to maintain the interest income to

interest expense ratio quite consistently. The ratio of NABIL was increasing throughout the review

period attaining its maximum ratio as 2.42 times in the FY 2001/2002. The ratio of NABIL was also

in an increasing trend except in FY 2000/2001 when its ratio slightly dropped to 2.19 times. The

NBL NABIL

Interest

Income

Interest

Expenses.

Ratio

(times)

Avg. ratio Interest Income Interest

Expense

Ratio

(Times)

Average

Ratio

97/98 2693.00 1907.50 1.4118 899.66 433.91 2.0734

98/99 2602.54 2224.70 1.1698 903.24 404.39 2.2336

99/00 2477.57 1957.23 1.2659 1.2193 1047.03 432.96 2.4183 2.2679

00/01 2368.35 1744.65 1.3575 1266.70 578.36 2.1902

01/02 1526.99 1713.20 0.8913 1120.18 462.08 2.4242


ratio of NBL was quite consistent throughout the review period but it was decreased in the FY

2001/2002 by 0.8913 times.

The above analysis helps to conclude that the interest income to interest expense ratio of NABIL

was better than that of NBL. This implies that either NABIL is using the outsiders fund properly

on the income generating activities or the fund of the bank is using in relatively less costly than that

of NBL.

d) Return to Shareholders Equity:- This ratio is calculated by dividing net profit by total

shareholders fund. One of the main objectives of any bank is its shareholders wealth

maximization. Shareholders wealth can be maximized by earning on adequate return on the

shareholders fund. This ratio expresses the capacity of the banks to utilize its owners fund. This is

an important ratio because it judges whether the firm has earned a satisfactory return for its equity

holders or not. It reveals how well the firm has deployed the resources of the owners to earn profit.

So higher the ratio, the more favorable it is for the shareholders which represents the sound

management and efficient mobilization of the owners equity. ROE ratio of the selected banks has

been tabulated below.

Shareholders equity=No of Shares Outstanding X Price per Ordinary share

Table 14(i)

Return on Shareholders Equity of NBL

(In Rs)

Table 14(ii)

Return on Shareholders Equity of NABIL

(In Rs)

The above table shows that the return of on shareholders equity of NABIL is in the increasing trend

except in the FY 01/02. The maximum return on shareholders equity of NBL was in FY 99/00

Net Profit

after tax

No of

Shares

Ordinary

Share

Ratio(%) Avg.

Ratio(%)

97/98 15920000 3803826 100 380382600 4.19

98/99 2535390000 3803826 100 380382600 -6.67

99/00 2697830000 3803826 100 380382600 -7.09 -4.67

00/01 2177900000 3803826 100 380382600 -5.73

01/02 3071290000 3803826 100 380382600 -8.07

Net Profit

after tax

No of

Shares

Ordinary

Share

Ratio(%) Avg. Ratio(%)

97/98 174800000 4916544 100 49165400 35.55

98/99 266480000 4916544 100 49165400 54.20

99/00 329120000 4916544 100 49165400 66.94 54.24

00/01 291370000 4916544 100 49165400 59.26

01/02 271630000 4916544 100 49165400 55.25


which was 66.94% and the average ratio is 54.24% while return on shareholders equity of NBL is

very poor . The ratio of NBL is in decreasing trend and average ratio is -4.67%

The above analysis helps us to conclude that NABIL was better than in earning a satisfactory return

for its equity holders. NABILs capacity to utilize its owners fund is very good while NBL was not

utilizing its owners fund efficiently.

4.1.1.5 Valuation Ratios:- Various valuation ratios like price earning ratio, dividend payout ratio and market value per share to book value per share have been calculated to indicate the

market value of the bank as compared to the book value and to measure the stock price relative to

earning.

a) Price Earning Ratio(P/E ratio) :- This ratio is calculated by dividing market value per share by

earning per share. Price earning ratio indicates investors judgement or expectation about the

firms performance. Higher the ratio more the value of the stock,

P/ E ratio of the selected banks are presented below.

Table 15

Price Earning Ratio table

(In Rs)

The P/ E ratio of NBL is in the increasing trend except in the year 2002. The average ratio is

15.0610 times. But the average P/E ratio of NBL is 9.7892 only. P/E ratio is higher of NABIL than

that of NBL. So the value of the stock of NABIL is more than that of NBL.

b) Dividend Payout Ratio:-Dividend payout ratio is calculated by dividing cash dividend by

earning per share . Profit after tax earned by the banks has to be distributed among the

shareholders. Banks usually do not distribute 100% of their earnings, they tend to retain some

portion in order to expand their business. The retained portion in relation to the dividend payout

ratio is known as retention ratio. Cash dividends paid in relation to the earning per share constitutes

the dividend payout ratio. Profits are retained in the bank if these retained earnings can earn higher

out as dividend decreasing the shareholders fund. Higher dividend payout ratio indicates lower

NBL NABIL

Market Value

Per

Earning per

Share

Ratio

(times)

Avg.

ratio

Market value

Per share

Earning

Per Share

Ratio

(Times)

Average

Ratio

97/98 535.00 10.45 51.1962 430.00 44.50 9.6629

98/99 392.00 -666.54 -0.5881 700.00 67.84 10.3184

99/00 330.00 -709.25 -0.4653 9.7899 1400.00 83.79 16.7084 15.0610

00/01 462.00315.00 -572.56 -0.8069 1500.00 57.26 25.3122

01/02 315.00 -807.43 -0.3901 735.00 55.25 13.3032


retained profit and higher cash dividends to the shareholders . Dividend payout ratios of the selected

banks are tabulated below.

Table 16

Dividend Payout Ratio Table

(In Rs)

The above table shows that NBL is not paying dividend but NABIL is paying dividend every year.

The DPS of NABIL bank is fluctuating from 30% to 55% on average NABILs DPR is higher

compared with NBL. The DPR is 65.71%.

The above analysis helps us to conclude that NABIL, being in its maturity stage is paying high

percentage of dividend while NBL is not paying dividend. The NBL is not able to pay dividend due

to loss

c) Market Value Per Share to Book Value Per Share Ratio:- This ratio is calculated by dividing

Market value per share by book value per share. This ratio is a relative measure of how the growth

option for a company is being valued opposite to its physical assets. High ratio represents greater

expected growth and value of the bank. The marker value per share to book value per share of the

selected banks is tabulated below:

Table 17

Market Value Per Share to Book Value Per Share

(In Rs)

NBL NABIL

Dividend

Per

Share

Earning

per

Share

Ratio

(%)

Avg.

ratio

Dividend

Per

Share

Earning

Per

Share

Ratio

(%)

Average

Ratio

97/98 0.00 10.45 0 30.00 44.50 67.42

98/99 0.00 -666.54 0 50.00 67.84 73.70

99/00 0.00 -709.25 0 0 55.00 83.79 65.64 65.71

00/01 0.00 -572.56 0 40.00 59.26 67.50

01/02 0.00 -807.43 0 30.00 55.25 54.30

NBL NABIL

Market

Value Per

Book

Value Per

Share

Ratio

(times)

Avg.

ratio

Market

value Per

share

Book

Value Per

Share

Ratio(Times) Average

Ratio

97/98 535.00 494.18 1.0826 430.00 210.92 2.0387

98/99 392.00 -404.38 -0.9694 700.00 223.45 3.1327

99/00 330.00 -1106.67 -0.2982 -0.7054 1400.00 250.53 5.5882 4.1701

00/01 462.00 -1169.56 -0.3950 1500.00 216.18 6.9387

01/02 315.00 -2511.67 -0.1254 735.00 233.18 3.1521


The above table shows that the market value per share to book value per share ratio of NABIL was

minimum in FY 1998(2.04 times) and maximum in FY 1998 which was 1.0826 times. On average ,

MVPS to BVPS ratio of NABIL is higher i.e. 4.17 times . This means that MVPS of NABIL is 4.17

times to its BVPS.

The above analysis helps us to conclude the NABIL is worth more than the funds put into it by the

shareholders. This clearly indicates that the NABIL is earning more than the requirement of

financial markets than NBL. The investors of NABIL are rational as the ratio increases as the book

value increases and vice versa. Comparatively the investors attitude towards NABIL is more

positive and NBL is the least.


Chapter 5

SUMMARY CONCLUSION AND

RECOMMENDATIONS In this conclusion chapter, summary, finding and some prescribed recommendations have been put

forward for the benefit of the selected banks along with conclusions derived from the study are

highlighted in order to fit the country from the present economic turmoil.

5.1 Summary Financial institutions like banks are the replica of modernization of the society and play a vital role

in the development of economic growth of the country. Economic activity could not survive without

the continuing flow of money and credit in the market. The economy of all market oriented nations

depends on the efficient operations of complex and delicately balanced system of money and credit.

Banks are indispensable element in these systems. Commercial banks furnish necessary capital

needed for trade and commerce for mobilizing the dispersed saving of the individuals and

institutions. They provide the bulk of the money supply as well as the primary means of facilitating

the flow of credit.

The present study regarding the financial performance of the two banks namely, NBL and NABIL

has been conducted to highlight the hidden implications of the figures portrayed n the balance sheet

of the banks by interpreting their cause effect relationship with regard to their financial performance

and to identify their contribution to the national economy.. The financial statement of five years

from 1997/98 to 2001/02 has been examined to fulfill the objective of the study.

5.2 Findings After summarizing the objective of the study, certain findings based on the analysis conducted

under the analytical section are going to be revealed in the following section:

To analyze the activity or turnover position, loans and advances to total deposit ratio, total investment to total deposit ratio, loans and advances to fixed deposit ratio had been calculated.

Analysis of activity ratio indicates better turnover position of NABIL. This implies that NABIL is

efficiently utilizing its deposit on loans and advances and others. While NBL is not lending its

available deposit but holding the fund and deposits to own custody and / or other banks balance. It

shows NBL is discouraging the investment of its resources which makes adverse effect to the bank

in terms of efficiency and profitability also.

Analysis of leverage or capital structure indicates that long term debt to net worth ratio of NBL is higher than NABIL and also total debt to total assets ratio of NBL is higher than that of


NBL. Unbalanced capital structure is the common situation of the banks. Banks are using excessive

debt capital. This proves both the banks are extremely leveraged.

Capital adequacy ratio calculated for the banks stood below the prescribed adequacy ratio by NRB to absorb unexpected losses than can be incurred in the bank. Comparatively, NABILs

position is better than NBL.

Profitability of these banks are reflected by the determination of return on investment, commission and discount income to personnel expenses ratio, interest income to interest expenses

ratio and return on shareholders equity. The return on investment, commission and discount

income to personnel expenses and interest income to interest expenses ratio and return on

shareholders equity of NABIL.

The valuation ratios used for analysis showed the following results. The price earning ratio; dividend payout ratio and MVPS to BVPS is better than NBL is better than NBL. So, the m