RATIO ANALYSIS OF KUMARI BANK LIMITED

A PROJECT WORK REPORT

Submitted by
Rim Maya Tamang
T.U Registration No.: 7-2-414-84-2018

Submitted to
The Faculty of Management

In Partial Fulfillment of the Requirement for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Kathmandu, Nepal
2023
 DECLARATION

I hereby declare that the project work entitled “RATIO ANALYSIS OF KUMARI
BANK LIMITED” submitted to the Faculty of Management, Tribhuvan University,
Kathmandu is an original piece of work under the supervision of Mr. Shambhu Shrestha,
faculty member of Manthali Sahid Smriti Multiple Campus and is submitted in partial
fulfillment of the requirements for the degree of Bachelor of Business Studies (BBS).
This project work report has not been submitted to any other university or institution for
the award of any degree or diploma.

………………………….
Rim Maya Tamang
College of Manthali Sahid Smriti Multiple Campus

ii
 Supervisor’s Recommendation

The project work report entitled “A STUDY ON RATIO ANALYSIS OF KUMARI

BANK LIMITED” submitted by Rim Maya Tamang of Manthali Sahid Smriti Multiple
Campus, Manthali, Ramechhap is prepared under my supervision as per the procedure
and format requirements laid by the Faculty of Management, Tribhuvan University, as
partial fulfillment of the requirements for the degree of Bachelor of Business Studies
(BBS). I, therefore, recommend the project work report for evaluation.

Manthali Sahid Smriti Multiple Campus

Date: 24th April, 2023

iii
 Endorsement

We hereby endorse the project work report entitled “RATIO ANALYSIS OF KUMARI
BANK LIMITED” submitted by Rim Maya Tamang of Manthali Sahid Smriti Multiple
Campus, Manthali, Ramechhap in partial fulfillment of the requirements for the degree of
the Bachelor of Business Studies (BBS) for external evaluation.

………………………….
Dr. Bharat Kumar Shrestha
Campus Chief

…………………………
Mr. Dinesh Kumar Karki
Supervisor

iv
 Acknowledgement

I would like to express my heartfelt gratitude to all those who have helped me to prepare
this Project report. Firstly, I would like to thank Tribhuvan University for providing us
the opportunity to prepare this project report which will broaden our theoretical
knowledge and understanding into practical approach.

I would like to express my gratitude towards Supervisor Mr. Dinesh Kumar Karki who
patiently and tirelessly guided me in the preparation of this project report. Thank you
very much for your constant and consistent encouragement in the task of preparing this
project even when the going proved daunting.
I am also very thankful to my parents, friends and relatives for great support in every
stage of study like financial, internet searching and printing and for providing reference
to gather information regarding the topic. I therefore express my gratitude and regards to
my friends for their unconditional support throughout my study

Rim Maya Tamang

Manthali Sahid Smriti Multiple Campus
Manthali
2023

v
 Table of Content
Cover Page …………………………………………………………………………… i
Declaration ……………………………………………………………………………. ii
Supervisor’s Recommendation………………………………………………………... iii
Endorsement …………………………………………………………………………… iv
Acknowledgement ……………………………………………………………………. v
Table of Content ………………………………………………………………………. vi
List of Table ………………………………………………………………………… vii
List of Figures ……………………………………………………………………….. vii
Abbreviation ………………………………………………………………………….. ix
CHAPTER – I
INTRODUCTION........................................................................................................................1
1.1 Background of the Study..................................................................................................1
1.2 Introduction of organization............................................................................................1
1.3 Objective of the study.......................................................................................................3
1.4 Significance of the study...................................................................................................3
1.5 Literature Review.............................................................................................................4
1.5.1 Previous Related Literature.............................................................................................4
1.5.2 Research Gap....................................................................................................................6
1.6 Research Method..............................................................................................................6
1.6.1 Population and Sample........................................................................................................6
1.6.2 Types of Data.......................................................................................................................7
A. Primary Data.................................................................................................................7
B. Secondary Data.............................................................................................................7
1.6.3 Data Collection Procedure..............................................................................................7
1.6.4 Techniques of Analysis......................................................................................................7
1.7 Limitation of Study...........................................................................................................8
CHAPTER – II.............................................................................................................................9
RESULTS AND ANALYSIS.......................................................................................................9
2.1 Data presentation..............................................................................................................9
2.1.1 Liquidity Ratio....................................................................................................................9
A. Cash Deposit Ratio........................................................................................................9

6
 B. Loan Deposit Ratio.....................................................................................................10
C. Loan to Asset Ratio.....................................................................................................11
2.1.2 Leverage Ratio.................................................................................................................12
A. Debt to Equity Ratio...................................................................................................13
B. Debt to Total Assets Ratio..........................................................................................14
C. Equity Multiplier........................................................................................................14
D. Interest Coverage Ratio..............................................................................................15
2.1.3 Profitability Ratio.............................................................................................................16
A. Net Interest Margin....................................................................................................16
B. Profit to Expense Ratio...............................................................................................17
C. Return on Deposits......................................................................................................18
D. Return on Capital Employed.....................................................................................18
E. Return on Equity........................................................................................................19
2.2 Major Findings................................................................................................................20
CHAPTER – III..........................................................................................................................22
SUMMARY AND CONCLUSION............................................................................................22
3.1 Summary.........................................................................................................................22
3.2 Conclusion.......................................................................................................................23
BIBLIOGRAPHY.......................................................................................................................24

7
 List of Table

Title No. Table No. Table Name Page No.

2.1 1 Cash Deposit Ratio 9
2.2 2 Loan Deposit Ratio 11
2.3 3 Loan to Asset Ratio 12
2.4 4 Debt to Equity Ratio 13
2.5 5 Debt to Total Asset Ratio 14
2.6 6 Equity Multiplier 14
2.7 7 Interest Coverage Ratio 15
2.8 8 Net Interest Margin 17
2.9 9 Profit to expenses Ratio 17
2.10 10 Return on Deposit 18
2.11 11 Return on Capital Employed 19
2.12 12 Return on Equity 19

List of Figures

Title No. Figure No. Figure Name Page No.

2.1 1 Cash Deposit Ratio 10
2.2 2 Loan Deposit Ratio 11
2.3 3 Loan to Asset Ratio 12
2.4 4 Debt to Equity Ratio 14
2.5 5 Debt to Total Asset Ratio 15
2.6 6 Equity Multiplier and Interest Coverage Ratio 16
2.7 7 Return on Deposit, Capital Employed and Equity 20

8
 Abbreviation
KBL : Kumari Bank Limited.
SFA : Stochastic Frontier Approach
GAAP : Generally Accepted Accounting Principal
CDR : Cash Deposit Ratio
LDR : Loan Deposit Ratio
DTAR : Debt to Assets Ratio
EM : Equity Multiplier
ICR : Interest Coverage Ratio
EBIT : Earning before interest and tax
ROA : Return on Asset
EBT : Earning before tax
EAT : Earning after tax
ROCE : Return on Capital Employed
ROE : Return on Equity

9
 1

CHAPTER – I
INTRODUCTION

1.1 Background of the Study

Investors and analysts have developed numerous analytical tools, concepts and
techniques to compare the relative strengths and weaknesses of companies. These tools,
concepts and techniques form the basis of fundamental analysis.

Ratio analysis is a tool that was developed to perform quantitative analysis on numbers
found on financial statements. Ratios help link the three financial statements together and
offer figures that are comparable between companies and across industries and sectors.
Ratio analysis is one of the most widely used fundamental analysis techniques.

Ratio analysis is used to study and evaluate various aspects of company’s financial and
operating activities in addition to the investing activities. It includes efficiency,
profitability, liquidity and solvency. In addition to the ration analysis, trend analysis is
also the important factor in the financial and performance analysis of the company which
checks whether they are improving or deteriorating over the period if the time. The
comparison of the financial factor with the different companies of the same sector is also
very helpful in analyzing the performance of the company.

However, financial ratios vary across different industries and sectors and comparisons
between completely different types of companies are often not valid. In addition, it is
important to analyze trends in company ratios instead of solely emphasizing a single
period’s figures.

1.2 Introduction of organization

Kumari Bank Limited is one of the commercial Bank established in Nepal under the
Commercial Bank act 2031. It came into existence as the fifteenth commercial bank in
the Nation. It started its business operation from 21 Chaitra, 2057 B.S. (3rd April, 2001)
with an objective of providing the competitive and modern banking service in the
Nepalese financial market. The bank has provided the good service to the customers from
the beginning of its establishment.
 2

Kumari Bank has been providing the qualitative service through its 38-branch located
inside and outside Kathmandu valley. It has 2 extension counters through the country.
The bank is pioneer in providing the latest and recolonized service like SMS banking, E-
banking services to the customer. The bank always focusses on building sound
technology driven system to cater the changing needs of the customers that enhances high
comfort and value. The adoption of modern Globus Software, developed by Temenos
NV, Switzerland and arrangement of centralized data base system enables customers to
make highly secured transaction in any branch regardless of having account with
particular branch.
The bank has been providing 365 days banking facilities, extended banking hours till
7PM in the evening. Utility Bill Payment services, inward and outward Remittance
services, Online remit Services and various other banking services. Visa Electron Debit
Card, which is assessable in entire VISA linked ATMs (including 46 own ATMs) and
POS (Point of Safe) terminals both in Nepal and India, has also added convenience to the
customers. The bank has been able to get recognition as an innovative and fast-growing
institution in striving to enhance customer value and satisfaction backing the transparent
business practices, professional management, corporate governance and total quality
management as the organization mission.

The bank has achieved trust and confidence of the customers. The bank has always
focused on the fulfillment of the unfulfilled needs of the customers with the new
strategies and technologies. The bank has been providing services to the customers of
different classes located in various part of the nation by offering modern and competitive
banking products and services in their door step. The bank has always prioritized the
priorities of the valued customers.

Vision and Mission

To deliver innovative product and services to customer, use these innovative products to
achieve financial inclusion, and do so by exemplifying good corporate governance,
proactive risk management practices and superior corporate responsibility.

To be the preferred financial partner to the customers, a center of career growth to

employees and to maximize shareholders value, while contributing to nations financial
sector and to its economic welfare. On January 01, 2023, Nepal Credit and Commerce
 3

Bank Limited has been merged with Kumari Bank Limited to jointly operate in the name
of Kumari Bank Limited. Post merger, the Bank's branch-network has now reached 304
branches, 295 ATMs, Bank's loan investment to NPR 280 billion and deposit-base to
NPR 302 billion.

Analysis and interpretation of financial statement is a regular exercise to review the

performance of the company. It is proposed to conduct a review to study the short-term
prospects as well as the long-term trends and to arrive at the conclusion on the
performance of the company. Various researchers, author and the financial experts have
made the analysis of the financial statement of the different companies. The analysis was
carried on in various time frames and phases. Most of them have derived into the similar
conclusion after the analysis of the financial statement. The conclusions derived from the
analysis of financial statement are depicted as below.
 An entity’s economic resources, obligations and equity;
 Changes in an entity’s economic resources, obligations and equity; and
 The economic performance of the entity.

1.3 Objective of the study

 To determine the Profitability, Liquidity Ratios.
 To analyze the capital structure of the bank with the help of Leverage ratio.
 To study the present and past financial system at KBL
 To offer appropriate suggestions for the better performance of the organization.

1.4 Significance of the study

The financial parameters are the ultimate performance indicator of any bank. This is
because invariability all costs and efficiency activities and solvency position of the bank
will reflect the financial status of the bank. The following are stated to be in the need for
the study:
 In short, this study is conducted so that the financial performance evaluation will serve
as an eye opener to the bank.
 4

1.5 Literature Review

A Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Financial
ratios are widely used for modeling purposes both by practitioners and researchers. The
firm involves many interested parties, like the owners, management, personnel,
customers, suppliers, competitors, regulatory agencies, and academics, each having their
views in applying financial statement analysis in their evaluations. Practitioners use
financial ratios, for instance, to forecast the future success of companies, while the
researchers' main interest has been to develop models exploiting these ratios. Many
distinct areas of research involving financial ratios can be discerned. Historically one can
observe several major themes in the financial analysis literature.

The existing themes include

 The functional form of the financial ratios, i.e., the proportionality discussion,
 Distributional characteristics of financial ratios,
 Classification of financial ratios,
 Comparability of ratios across industries, and industry effects,
 Distributional characteristics of financial ratios,
 Comparability of ratios across banking industries, and banking industry effects,
 Time-series properties of individual financial ratios,
 Explaining (other) firm characteristics with financial ratios,
 Stock markets and financial ratios,
 Estimation of internal rate of return from financial statements

1.5.1 Previous Related Literature

The measurement of bank performance using financial ratios particularly commercial

banks is well researched and has received increased attention over the past years. There
have been a large number of empirical studies on commercial bank financial ratios
around the world. However, little has been done on ratio analysis in Nepal.

Below is a summary of previous Empirical studies on ratio analysis in the context of

different countries.
 5

Berger & Humphrey (1997). assert that the whole idea of measuring bank performance
is to separate banks that are performing well from those which are doing poorly. They
further indicated that, “evaluating the performance of financial institution can inform
government policy by assessing the effects of deregulation, mergers and market structure
on efficiency”. Bank regulators screen banks by evaluating banks’ liquidity, solvency and
overall performance to enable them to intervene when there is need and to gauge the
potential for problems (Casu et al, 2006). On a micro‐level, bank performance
measurement can also help improve managerial performance by identifying best and
worst practices associated with high and low measured efficiency.
Tarawneh (2006). in his study measured the performance of Oman commercial banks
using financial ratios and ranked the banks based on their performance. The study utilized
FRA to investigate the impact of asset management, operational efficiency and bank size
on the performance of Oman commercial banks. The findings indicated that bank
performance was strongly and positively influenced by operational efficiency, asset
management and bank size.
Kiyota (2009). in a two- stage procedure investigated the profit efficiency and cost
efficiency of commercial banks operating in 29 Sub-Saharan African countries during
2000-2007. The article employs the Stochastic Frontier Approach (SFA) for the
estimation of profit and cost efficiency, financial ratios and the Tobit regression to
provide cross-country evidence on the performance and efficiency of African commercial
banks. The findings based on a range of performance ratios as well as stochastic cost and
profit frontier estimation, suggest that foreign banks tend to outperform domestic banks
in terms of profit efficiency as well as cost efficiency.
Samad (2004). investigated the performance of seven locally incorporated commercial
banks during the period 1994-2001. Financial ratios were used to evaluate the credit
quality, profitability, and liquidity performances. The performance of the seven
commercial banks was compared with the banking industry in Bahrain which was
considered a benchmark. The results revealed that commercial banks in Bahrain were
relatively less profitable, less liquid and were exposed to higher credit risk than the
banking industry, in which wholesale banks are the main component.
 6

Ahmad and Hassan (2007). analyzed the asset quality, capital ratios, operational ratios
such as net profit margin, net interest income, income to asset ratio, non-interest income
to asset ratio and liquidity ratios for seven years from 1994 to 2001. Islamic banks on an
average were the preeminent performer in terms of lowest non-performing to gross loan
ratio, capital funds to total asset ratio, capital funds to net loans ratio, capital funds to
short-term loan ratio, capital funds to liabilities ratio, non-interest expense to average
asset ratio and most of the liquidity ratios. Therefore, it can be concluded that Islamic
banks are outperforming others in capital adequacy and adequate liquidity. Except Return
on Equity Ratio, Islamic Banks were at par with the industry in all other cases.

1.5.2 Research Gap

The history of financial statement analysis dates far back to the end of the previous
century. However, the modern, quantitative analysis has developed into its various
segments during the last two decades with the advent of the electro CNAS data
processing techniques. The empiricist emphasis in the research has given rise to several,
often only loosely related research trends in quantitative financial statement analysis.
Theoretical approaches have also been developed, but not always in close interaction
with the empirical research.

1.6 Research Method

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. So, the research
methodology not only talks about the research methods but also considers the logic
behind the method used in the context of the research study.

1.6.1 Population and Sample

Out of 28 commercial banks of Nepal, Kumari Bank Ltd. has been chosen and their
performance has been analyzed by the use of Ratio Analysis. Due to lack of access, study
mainly depends on the Balance Sheet prepared by Kumari Bank Ltd, which is secondary
source. Kumari Bank Ltd. has been selected for the present study. Financial statement of
this bank for last 5 years has been considered for the analysis.
 7

1.6.2 Types of Data

A. Primary Data
The data collected for the first time is known as Primary Data. These are original in
nature. Primary Data are self-prepared by the site visit of company office and
interviewing the concerned personnel. Use of primary data is statistical investigation
which is not always practicable.

B. Secondary Data
The data collected from the published sources is known as Secondary Data. Secondary
Data are used for the purposes of investigation. These data can be divided into two parts.
In first part, the internal secondary data that can be collected from sources and materials
of the company. Similarly, in second part, the external secondary data can be collected
from essential books, journals, publications etc.

1.6.3 Data Collection Procedure

To attain the objective of the study secondary data has been used and necessary data has
been collected from various sources. Most of the calculations are made on financial
statements of the bank and the bank provided financial statement of 5 years. Some of the
information regarding to the theoretical aspects were collected by referring standards
texts and through internet.

1.6.4 Techniques of Analysis

The data collected from the above sources are classified, tabulated and interpreted for
easier study. Various technique can be used for the analysis and interpretation of data.
One of the major techniques used for the analysis of the study is Trend Analysis.
The ratios of different items for various periods are find out and then compared under this
analysis. The analysis of the ratios over a period of years gives an idea of whether the
business concern is trending upward or downward. This analysis is otherwise called
as Pyramid Method. Time Series Analysis is another important technique used for the
analysis of the study. The various ratios used for the analysis of the data are Liquidity
ratio, Leverage ratio, Activity Ratio and Profitability Ratios.
 8

1.7 Limitation of Study

The study provides an insight into the financial, personnel, marketing and other aspects
of Kumari bank. Every study will be bound with certain limitations.
 The study is done only on the Balance sheet and profit and Loss A/c.
 One of the factors of the study was lack of availability of sample information. Most of
the information has been kept confidential and as such as not assed as art of policy of
bank.
 Time is an important limitation.
 Study is based on information provided by the bank.
 The financial statement of year 2077/78 of KBL has been prepared as per NFRS due
to which it’s comparison with the financial statement of previous year prepared on
GAAP basis was not possible. So, the analysis includes the financial statement from
2078/79 to 2074/75.
 9

CHAPTER – II
RESULTS AND ANALYSIS

2.1 Data presentation

The vital purpose of this study is to analyze the financial status or performance of Kumari
Bank Ltd. mainly with the help of ratio analysis.

2.1.1 Liquidity Ratio

Liquidity refers to the ability of a concern to meet its current obligations as & when there
becomes due. The short-term obligations of a firm can be met only when there are
sufficient liquid assets. The short-term obligations are met by realizing amounts from
current, floating (or) circulating assets The current assets should either be calculated
liquid (or) near liquidity. They should be convertible into cash for paying obligations
of short-term nature. The sufficiency (or) insufficiency of current assets should be
assessed by comparing them with short-term current liabilities. If current assets can pay
off current liabilities, then liquidity position will be satisfactory. To measure the liquidity
of a firm the following ratios can be calculated

A. Cash Deposit Ratio

Cash in a bank vault is the most liquid asset of a bank. Therefore, a higher CDR indicates
that a bank is relatively more liquid than a bank, which has lower CDR. Depositors’ trust
to bank, is enhanced when a bank maintains a higher cash deposit ratio.

Cash Deposit Ratio = Cash Balance / Total Deposit

Table 2.1 Cash Deposit Ratio

Year Cash Balance Total Deposit Cash Deposit Ratio
2078/79 1,420,605,578 17,614,124,823 0.0807
2077/78 861,186,377 7,591,048,102 0.1134
2076/77 829,463,812 17,611,221,553 0.0471
2075/76 777,836,820 7,580,241,082 0.1026
2074/75 638,769,784 25,318,568,802 0.0252
 10

The above table interpret that the cash deposit ratio of Kumari Bank is gradually
increasing. Out of the sample period the highest ratio of cash deposit maintained by the
bank is 0.1026 for the year 2075/76 which decreased to 0.1134 in the year 2077/78 and to
0.1026 in the year 2075/76. However, the bank has shown the improvement during the
financial year 2078/79 with the ratio of 0.0807. Same has been presented in the bar
diagram below.
Figure 2.1 Cash Deposit Ratio
0.1200

0.1000

0.0800

0.0600

0.0400

0.0200

0.0000
2078/79 2077/78 2076/77 2075/76 2074/75

B. Loan Deposit Ratio

Loan to deposit is the most important ratio to measure the liquidity condition of the bank.
Bank with Low loan deposit is considered to have excessive liquidity, potentially lower
profits, and hence less risk as compared to the bank with high loan deposit ratio.
However, high loan deposit ratio indicates that a bank has taken more financial stress by
making excessive loans and shows risk that to meet depositors’ claims bank may have to
sell some loans at loss.

Loan Deposit Ratio = Total Loan / Total Deposit

 11

Table 2.2: Loan Deposit Ratio

Year Total Loan Total Deposit Loan Deposit Ratio
2078/79 44,088,049,895 52,037,387,304 0.8472
2077/78 29,486,505,624 37,950,525,144 0.7770
2076/77 26,246,038,476 33,421,910,946 0.7853
2075/76 21,898,115,132 27,578,376,145 0.7940
2074/75 19,369,317,883 25,318,568,802 0.7650
Average Ratio 0.7937

From the above table it can be concluded that the loan deposit ratio of the bank has
increased highly in the financial year 2078/79. For the year 2078/79, total deposit of bank
was NRs. 52,037,387,304 and the loan amount to NRs. 44,088,049,895. The loan deposit
ratio of the bank for the period was 0.8472. Average loan deposit ratio maintained by the
bank for the period of 5 years is 0.7937.

Figure 2.2: Loan Deposit Ratio

Loan Deposit Ratio

0.86
0.8472
0.84

0.82

0.8 0.794
0.7853
0.78 0.777
0.765
0.76

0.74

0.72
2078/79 2077/78 2076/77 2075/76 2074/75

C. Loan to Asset Ratio

Loan to assets ratio is also another important ratio that measures the liquidity condition of
the bank. It measures the percentage of assets that are tied up in loans. Bank with low
 12

loan to asset ratio is also considered to be more liquid as compared to the bank with
higher loan to asset ratio.
Loan to Asset Ratio =

Table 2.3 Loan to Asset Ratio

Year Total Loan Total Assets Loan to Asset Ratio
2078/79 44,088,049,895 60,993,261,002 0.7228
2077/78 29,486,505,624 42,416,507,350 0.6952
2076/77 26,246,038,476 37,374,510,826 0.7022
2075/76 21,898,115,132 31,020,602,045 0.7059
2074/75 19,369,317,883 28,222,569,756 0.6863

Average loan to asset ratio maintained by the bank for the period of 2074/75 to 2078/79
is 0.7025. The liquidity status of the bank in term of loan to asset has decreased as
compared to previous year as the loan to asset has increased to 0.7228 from 0.6952 in
financial year 2077/78.
Figure 2.3 Loan to Asset Ratio

Loan to Asset Ratio

0.73
0.7228
0.72

0.71 0.7059
0.7022
0.7 0.6952

0.69 0.6863

0.68

0.67

0.66
2078/79 2077/78 2076/77 2075/76 2074/75
2077/78 2076/77 2075/76 2074/75 2073/74

2.1.2 Leverage Ratio

The leverage or solvency ratio refers to the ability of a concern to meet its long-term
obligations. Accordingly, long term solvency ratios indicate firm’s ability to meet the
fixed interest and costs and repayment schedules associated with its long-term
borrowings.
 13

The following ratio serves the purpose of determining the solvency of the concern.

A. Debt to Equity Ratio

Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a
bank's financial standing. It is also a measure of a bank's ability to repay its obligations.
When examining the health of a bank, it is critical to pay attention to the debt/equity
ratio. If the ratio is increasing, the bank is being financed by creditors rather than from its
own financial sources which may be a dangerous trend. Lenders and investors usually
prefer low debt-to-equity ratios because their interests are better protected in the event of
a business decline. Thus, companies with high debt-to-equity ratios may not be able to
attract additional lending capital.

Debt-to-equity ratio = Total debt/ Shareholders fund

Table 2.4 Debt to Equity Ratio

Year Total Debt Shareholders Fund Debt to Equity Ratio
2078/79 40,817,616 8,080,236,593 0.0051
2077/78 52,058,841 4,033,593,878 0.0129
2076/77 32,782,142 3,347,316,176 0.0098
2075/76 22,428,891 2,966,605,956 0.0076
2074/75 21,348,138 2,656,706,231 0.0080
Average Ratio 0.0087

Debt Equity ratio of the bank has decreased highly in the financial year 2078/79 and has
maintained the ratio of 0.0051 which is lowest among the ratio of the last 5 year. The
average debt equity ratio of the bank is 0.0087.
 14

Figure 2.4 Debt to Equity Ratio

Debt to Equity Ratio

0.014
0.0129
0.012

0.01 0.0098

0.008 0.0076 0.008

0.006
0.0051
0.004

0.002

0
2078/79 2077/78 2076/77 2075/76 2074/75

B. Debt to Total Assets Ratio

It measures the amount of total debt firm used to finance its total assets. It is an indicator
of financial strength of the bank. It provides information about the solvency and the
ability of the firm to obtain additional financing for potentially attractive investment
opportunities. Higher DTAR means bank has financed most of its assets through debt as
compared to the equity financing. Moreover, higher DTAR indicates that bank is
involved in more risky business. DTAR is calculated as under:

Debt to Total Asset Ratio = Total debt / Total Assets

Table 2.5 Debt to Total Asset Ratio

Year Total Debt Total Assets Debt to Total Assets Ratio
2078/79 40,817,616 60,993,261,002 0.0007
2077/78 52,058,841 42,416,507,350 0.0012
2076/77 32,782,142 37,374,510,826 0.0009
2075/76 22,428,891 31,020,602,045 0.0007
2074/75 21,348,138 28,222,569,756 0.0008
The debt to total asset ratio of the bank has decreased tremendously in the year 2076/77.
The ratio in the mentioned year was 0.0007 which is also the lowest one in the last 5
 15

years. The ratio shows that the bank has shown a good solvency status in respect to the
debt to total asset ratio.
Figure 2.5
Debt to Total Asset Ratio

Debt to Total Assets Ratio

0.0014

0.0012 0.0012

0.001
0.0009
0.0008 0.0008
0.0007 0.0007
0.0006

0.0004

0.0002

0
2078/79 2077/78 2076/77 2075/76 2074/75

C. Equity Multiplier
Equity Multiplier (EM) indicates the amount of assets per dollar of shareholders’ equity.
Higher value of equity multiplier means that bank has used more debt to convert into
assets with share capital. Generally, the higher is the equity multiplier the greater is the
risk for a bank. It is calculated as under:

Equity Multiplier = Total Assets/ Shareholders Fund

Table 2.6 Equity Multiplier

Year Total Asset Shareholders Fund Equity Multiplier
2078/79 60,993,261,002 8,080,236,593 7.5484
2077/78 42,416,507,350 4,033,593,878 10.5158
2076/77 37,374,510,826 3,347,316,176 11.1655
2075/76 31,020,602,045 2,966,605,956 10.4566
 16

2074/75 28,222,569,756 2,656,706,231 10.6231

Bank has maintained equity multiplier of 7.5484 in the year 2078/79. The equity
multiplier of the bank in the year 2077/78 was 10.5158. This shows that the organization
has a good performance for enhancing the solvency status in last 5 years.

D. Interest Coverage Ratio

The interest coverage ratio (ICR) is a measure of a bank's ability to meet its interest
payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for
a time period, often one year, divided by interest expenses for the same time period. The
interest coverage ratio is a measure of the number of times a bank could make the interest
payments on its debt with its EBIT. It determines how easily a bank can pay interest
expenses on outstanding debt.
Interest coverage ratio is also known as interest coverage, debt service ratio or debt
service coverage ratio.

Interest coverage ratio = EBIT/ Interest Expense

Table 2.7
Interest Coverage Ratio
Year EBIT Interest Expenses Interest Coverage Ratio
2078/79 3,418,776,022 2,299,277,448 1.4869
2077/78 2,672,200,499 1,517,056,114 1.7614
2076/77 2,129,780,976 1,507,364,997 1.4129
2075/76 2,122,167,858 1,575,311,889 1.3471
2074/75 1,946,592,460 1,486,281,639 1.3097

The table and the figure shows that the interest coverage ratio has increased as compared
to the ratio maintained by the bank in the year 2074/75. However, the ratio has decreased
as compared to that of 2077/78. The table shows that the bank has shown a good
performance for increasing the interest coverage ratio till 2077/78 but the performance has
degraded in the year 2078/79 with decrease in the ratio to 1.4869 from 1.7614.
 17

Figure 2.6
Equity Multiplier and Interest Coverage Ratio
11.1655
10.5158 10.4566 10.6231

7.5484

1.4869 1.7614 1.3097

1.4129 1.3471

2077/78
2073/74
2076/77
2072/73
2075/76
2071/72
2074/75
2070/71
2073/74
2069/70
Equity Multiplier Interest Coverage Ratio

2.1.3 Profitability Ratio

Profitability ratios are generally considered to be the basic bank financial ratio in order to
evaluate how well bank is performing in terms of profit. For the most part, if a
profitability ratio is relatively higher as compared to the competitor(s), industry averages,
guidelines, or previous years’ same ratios, then it is taken as indicator of better
performance of the bank. In the banking literature, different scholars in measuring bank
performance have used many profitability ratios

A. Net Interest Margin

Net interest income is the difference between interest income and interest expense. It is
the gross margin on a bank’s lending and investment activities. The higher the ratio the
cheaper the funding or the higher the margin the bank is obtaining. A bank’s net interest
margin is a key performance measure that drives ROA.
Net Interest margin = (Interest Income - Interest Expense) / Total Assets
 18

Table 2.8 Net Interest Margin

Year Interest Income Interest Expense Total Assets Net Interest Margin
2078/79 3,596,651,286 2,299,277,448 8,080,236,593 16.06%
2077/78 2,692,488,819 1,517,056,114 4,033,593,878 29.14%
2076/77 2,433,130,920 1,507,364,997 3,347,316,176 27.66%
2075/76 2,410,784,399 1,575,311,889 2,966,605,956 28.16%
2074/75 2,464,306,976 1,486,281,639 2,656,706,231 36.81%

The above table indicates that the net interest income is in increasing trend and same
applies to total asset. But the asset is increasing in greater ratio than net interest income
which has resulted in constant decrease in net interest margin. The net interest margin of
the bank was 36.81% in year 2074/75 which has decreased to 16.06% in the year
2078/79.

B. Profit to Expense Ratio

It measures the operating profitability of the bank with regards to its total operating
expenses. Operating profit is defined as earnings before taxes and operating expenses
means total non-interest expenses. The ratio measures the amount of operating profit
earned for each Rupees of operating expense. The ratio indicates to what extent bank is
efficient in controlling its operating expenses.

Profit to Expense Ratio = (EBT/ Operating Expenses)

Table 2.9
Profit to Expense Ratio
Year EBT Operating Expenses Profit to Expense Ratio
2078/79 1,017,725,976 659,419,981 1.5434
2077/78 1,050,131,258 581,109,454 1.8071
2076/77 565,832,708 538,080,318 1.0516
2075/76 497,141,790 461,821,815 1.0765
2074/75 418,464,383 434,274,886 0.9636

The table interprets that the bank has earned NRs. 1.5434 for per rupee of operating
expense. The earning power of the bank has decrease in the year 2076/77 as compared to
 19

that of year 2077/78. The profit to expense ratio of the bank in the year 2078/79 was
1.8071 which has decreased to 1.5434. However, there has been increase in the ratio as
compared to that of year 2074/75 i.e. 0.9636

C. Return on Deposits
To most financial analysts, Return on Deposit (ROD) is one of the best measures of bank
profitability performance. This ratio reflects the bank management ability to utilize the
customers’ deposits in order to generate profits.

Return on Deposit = (EAT / Total Deposit) *100

Table 2.10 Return to Deposit

Year EAT Total Deposit Return to Deposit
2078/79 660,741,688 52,037,387,304 1.27%
2077/78 716,064,646 37,950, 525,144 1.89%
2076/77 394,788,376 33,421,910,946 1.18%
2075/76 341,654,966 27,578,376,145 1.24%
2074/75 291,448,365 25,318,568,802 1.15%

The above table shows that the profitability performance of the bank has decreased form
from that of previous year i.e. 2074/75. The return to deposit of the bank in the year
2077/78 was 1.89% and that of 2078/79 is 1.27%. This also interpret that the ability of
the bank in utilizing the customers deposit for generating profit has decreased. However,
a slight increase could be evident in the return as compared to the year 2074/75.

D. Return on Capital Employed

Return on capital employed (ROCE) is a measure of the returns that a business is
achieving from the capital employed, usually expressed in percentage terms. Capital
employed equals a bank's Equity plus Non-current liabilities (or Total Assets − Current
Liabilities), in other words all the long-term funds used by the bank. ROCE indicates the
efficiency and profitability of a bank's capital investments.

Return on capital Employed = (EBIT/ Capital employed) *100

 20

(Or)

Table
EBIT/ 2.11 net worth + loan funds
Average
Return to Capital Employed

Year EBIT Capital Employed Return on Capital Employed

2078/79 3,418,776,022 8,128,271,209 42.06%
2077/78 2,672,200,499 4,085,652,719 65.40%
2076/77 2,129,780,976 3,708,098,318 57.44%
2075/76 2,122,167,858 3,190,986,747 66.51%
2074/75 1,946,592,460 2,678,054,369 72.69%

The average return on capital employed of the bank for the period of 2074/75 to 2078/79
is 60.82%. It can be evident from the above table that the return on capital employed of
the bank has decreased sharply in the year 2078/79. The return of the bank in the year
2074/75 was 72.69% which has decreased to 42.06% in the year 2078/79. This indicates
that the efficiency and profitability of Kumari Bank’s capital investment is decreasing.

E. Return on Equity
Return on equity indicates the profitability to shareholders of the firm after all expenses
and taxes. It measures how much the firm is earning after tax for each dollar invested in
the firm. In other words, ROE is net earnings per rupee of equity capital. It is also an
indicator of measuring managerial efficiency.
-
Return on Equity = (EAT/ Shareholders Fund) *100

Return on equity of the bank has decreased tremendously in last 5 years. The maximum
return of the bank was on year 2077/78 with 17.75%. The return on year 2078/79 has
decreased to 8.18%. Same can be evident from the table and figure below.
Table 2.12
Return on Equity
Year EAT Shareholder Fund Return on Equity
2078/79 660,741,688 8,080,236,593 8.18%
2077/78 716,064,646 4,033,593,878 17.75%
2076/77 394,788,376 3,347,316,176 11.79%
 21

2075/76 341,654,966 2,966,605,956 11.52%

2074/75 291,448,365 2,656,706,231 10.97%

Figure 2.7
Return on Deposit, Capital Employed and Equity

Return to Deposit Return on Capital Employed

Return on Equity
72.69%
65.40% 66.51%

57.44%

42.06%

17.75%
11.79% 11.52% 10.97%
8.18%
1.89% 1.18% 1.15%
1.27% 1.24%

2 2077/78
073/74 2076/77
2072/73 2075/76
2071/72 2074/75
2070/71 2073/74
2069/70

2.2 Major Findings

The major findings of the research are

 The cash deposit ratio of the bank has increased in the year 2078/79 as compared
to that of the previous year. This reflects the betterment of the liquidity of bank as
compared to past years.
 Increase in the Loan deposit ratio of a bank in past years indicated that the
financial stress of the bank is increasing yearly. It also shows that the bank has
made excessive loan than deposit
 The loan to asset ratio of KBL in the year 2076/77 is 0.7228 which is more than
the ratio obtained in year 2077/78 i.e. 0.6952. This indicate that the liquidity of
the bank has decreased.
 Debt to Equity Ratio of bank is 0.0051 which is less than that of year 2075/76 i.e.
0.0129.
 22

 Debt to Total Asset Ratio of KBL for the year 2078/79 is 0.0007. Decrease in
DTAR indicates that the use of debt for financing the asset of the bank has
decreased than in past year.
 Decrease in the Equity Multiplier of bank over past year indicates comparatively
less use of debt in financing assets. The equity multiplier of KBL for the year
2078/79 is 7.5484.
 Interest Coverage ratio of KBL for the year 2078/79 is 1.4869 which is lower than
the ratio that was maintained by the bank in 2077/78.
 Net Interest Margin of KBL for the year 2078/79 is 16.06%. Net Interest income
of KBL has increased but not to the ratio in which the total asset of bank has
increased in past years.
 Profit to expense ratio of KBL for 2078/79 is 1.5434.
 KBL has not been able to utilize customers deposit in order to generate profits
which is evident from the decrease in return on deposit of bank.
 Return on Capital Employed of KBL has decreased sharply to 42.06% from
72.69% in last 5 year. This shows the decreasing performance of capital
investment in enhancing the efficiency and profitability.
 Return on Equity of KBL for the year 2078/79 is 8.18 which has decreased from
that of 2077/78 which was17.75%
 23

CHAPTER – III
SUMMARY AND CONCLUSION

3.1 Summary
Efficiency and profitability of the banking sector have assumed primal importance due to
intense competition, greater customer demands and changing banking sector reforms.
This report is an analysis of the financial operations and performance of the company.
This report will provide an assessment and analysis of the profitability, liquidity,
performance and financial position of KBL using figures from the financial statements.
Financial ratios were used to gain a critical review of the specific areas of assessment of
bank’s performance.

The summary of the ratios calculated for the analysis of the performance of the KBL has
been mentioned in table below.

Particulars 2074/75
Cash Deposit Ratio 0.0273 0.0227 0.0248 0.0282 0.0252
Loan Deposit Ratio 0.8472 0.7770 0.7853 0.7940 0.7650
Loan to Asset Ratio 0.7228 0.6952 0.7022 0.7059 0.6863
Debt to Equity Ratio 0.0051 0.0129 0.0098 0.0076 0.0080
Debt to Total Asset Ratio 0.0007 0.0012 0.0009 0.0007 0.0008
Debt to Total Asset Ratio 7.5484 10.5158 11.1655 10.4566 10.6231
Interest Coverage Ratio 1.4869 1.7614 1.4129 1.3471 1.3097
Net Interest Margin 16.06% 29.14% 27.66% 28.16% 36.81%
Return on Deposit 1.27% 1.89% 1.18% 1.24% 1.15%
Return on Capital Employed 42.06% 65.40% 57.44% 66.51% 72.69%
Profit to Expense Ratio 1.5434 1.8071 1.0516 1.0765 0.9636
Return on Equity 8.18% 17.75% 11.79% 11.52% 10.97%
Debt to Total Capital Ratio 7.5038 10.3818 10.0792 9.7213 10.5385
 24

3.2 Conclusion
This research work studied how ratio analysis can be used to measure performance of an
organization. Based on the discussions and findings in the course of this study, the
following conclusions are made:

i. Ratio analysis is a tool of financial analysis, which can be used as a predictive

tool for measuring business performance.
ii. Ratio analysis can be used to show areas of strengths and weaknesses of a
company.
iii. Ratio analysis is required for management control decisions, investment decisions
and credit control purposes.
iv. Ratio analysis is required to determine whether a company have been improving
or is deteriorating financially over a period of time.
v. Ratio analysis can be used to determine whether a company have met the required
standard within the industry.
vi. Profitability ratios are useful to the management of a company. They are used to
determine the profitability of a company and the efficiency in the utilization of the
resources of a company.
 25

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