CAPITAL ADEQUACY AND ITS IMPACT ON PROFITABILITY

OF JOINT VENTURE BANKS IN NEPAL

BY

Milan Kunwar

Roll No:

25214/19

TU Registration no: 7-2-528-150-2020

A Summer Project

Report Submitted to

Faculty of Management, Tribhuvan University

In partial fulfillment of requirement for the degree of
Bachelor of Business Studies(BBS)

At the
Kathmandu College of
Central State

Tribhuvan University

Kalimat, Kathmandu

Febraury, 2025
 STUDENT'S DECLARATION

This is to certify that I have completed the Summer Project entitled “CAPITAL
ADEQUACY AND ITS IMPACT ON PROFITABILITY OF JOINT VENTURE
BANKS IN NEPAL” under the guidance of “Ms. Bindu Gnawali” in partial
fulfillment of the requirements for the degree of Bachelor of Business Studies at
Faculty of Management, Tribhuvan University. This is my original work and I have
not submitted it earlier elsewhere.

………………….
Milan Kunwar

february,2025

ii
 CERTIFICATE FROM THE SUPERVISOR

This is to certify that the summer project entitled “CAPITAL ADEQUACY AND
ITS IMPACT ON PROFITABILITY OF JOINT VENTURE BANKS IN
NEPAL” is an academic work done by Mr. Milan Kunwar (TU Reg. No: 7-2-528-150-
2020) submitted in the partial fulfillment of the requirement for the degree of
Bachelor of Business Studies at Faculty of Management, Tribhuvan University
under my guidance and supervision. To the best of my knowledge, the
information presented by him in the summer project report has not been submitted
earlier.

………………………..…

Signature of the Supervisor

Ms. Bindu Gnawali

Designation: Lecturer Date:

……………………..

iii
 VIVA - VOCE SHEET

We have conducted the viva - voce examination of the summer project report

presented by

Milan Kunwar
Kathmandu College
of Central State
Kalimati, Kalanki
TU Registration Number: 7-2-528-150-2020

Entitled

“CAPITAL ADEQUACY AND ITS IMPACT ON PROFITABILITY OF

JOINT VENTURE BANKS IN NEPAL”
And found the report to be original work of the student and written according to
the prescribed format. We recommend the report to be accepted as partial
fulfillment of the requirements for the degree of
Bachelor of Business studies (BBS)

Viva - Voce Committee

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

Member (Report Supervisor): …………………………

Member (External Expert): ……………………………

Date: …………………………………………………

iv
 ACKNOWLEDGEMENTS

This research entitled “Capital adequacy and its impact on profitability of joint
venture banks in Nepal” been prepared for partial fulfillment of Bachelor of Business
Studies (BBS) of Tribhuvan University. It is directed to find out the relationship
between Capital adequacy and its impact on profitability of joint venture banks.

I would like to express my deep sense of gratitude to the faculty members of

Kathmandu college of central state who fully support to make it easy for completing
this project. My limitless thanks to my supervisor Ms. Bindu Gnawali and BBS
Director Mr. Kabiraj Acharya, the leading faculty of our campus, for painstakingly
seeing me through the arduous task of Bachelor level in Management studies, and also
for his unflinching support and relentless advice to ensure the completion of the
project of my studies.

I would like to appreciate all my family members and friends for their affection and
emotional support that has inspired me to achieve every success including this study. I
would also like to take full responsibility of any kind of deficiency presented in this
study.

v
 TABLE OF CONTENTS

STUDENT'S DECLARATION.....................................................................................ii

CERTIFICATE FROM THE SUPERVISOR............................................................iii

VIVA - VOCE SHEET..................................................................................................iv

ACKNOWLEDGEMENTS............................................................................................v

TABLE OF CONTENTS..............................................................................................vi

LIST OF TABLES......................................................................................................viii

LIST OF FIGURES.....................................................................................................ix

LIST OF ABBREVIATIONS........................................................................................x

EXECUTIVE SUMMARY...........................................................................................xi

CHAPTER I INTRODUCTION................................................................................1

1.1. Context information.........................................................................................1

1.2. Statement of Problem.......................................................................................2

1.3. Purpose of the study.........................................................................................3

1.4. Significance of the study..................................................................................4

1.5. Literature Review.............................................................................................5

1.6. Conceptual Review...........................................................................................5

1.6.1. Review of Related Studies......................................................................10

1.6.2. Concluding Remarks...............................................................................12

1.7. Research Methods..........................................................................................12

1.7.1. Research Design.....................................................................................12

1.7.2. Source of Data........................................................................................12

1.7.3. Population and Sample...........................................................................13

1.7.4. Data Collection Procedure......................................................................13

1.7.5. Data Analysis Tools................................................................................13

1.7.5.1. Descriptive Statistics.......................................................................14

vi
 1.7.6. Study Variables.......................................................................................17

1.7.6.1. Independent Variables.....................................................................18

1.7.6.2. Dependent variable..........................................................................19

1.8. Limitations of the study.................................................................................20

1.9. Organization of the Study..............................................................................21

CHAPTER-II PRESENTATION AND ANALYSIS OF DATA...........................22

2.1. Organization profile.......................................................................................22

2.2. Data Presentation and Analysis......................................................................24

2.2.1. Capital adequacy ratio............................................................................24

2.2.2. Debt- Equity Ratio..................................................................................26

2.2.3. Loans and Advances to Assets ratio.......................................................28

2.2.4. Non-Performing Loan Ratio of the selected commercial ratio...............30

2.2.5. Return on Assets ratio (ROA).................................................................32

2.2.6. Return on Equity Ratio (ROE)................................................................34

2.3. Descriptive Statistics of Study Variables.......................................................37

2.4. Co-relation Analysis.......................................................................................38

2.5. Regression Analysis.......................................................................................39

2.6. Findings and Discussion................................................................................42

CHAPTER-III CONCLUSION AND ACTION IMPLICATIONS.....................44

3.1. CONCLUSION..............................................................................................44

3.2. ACTION IMPLICATIONS...........................................................................45

REFERENCES

APPENDICES

vii
 LIST OF TABLES

Table 1: Sample banks and Year of the study...........................................................................13

Table 2: Data analysis of capital adequacy ratio of joint venture Banks..................................25
Table 3: Data analysis of Debt-Equity Ratio of joint venture Banks........................................27
Table 4: Data analysis of Debt/Assets Ratio of joint venture Banks........................................29
Table 5: Data analysis of non-Performing loan Ratio of joint venture Banks..........................31
Table 6: Data analysis of ROA of joint venture Banks.............................................................33
Table 7: Data analysis of ROE of joint venture Banks.............................................................35
Table 8: Aggregate Analysis of CAR, D/E ratio, non-performing loan, D/A ratio,
ROA and ROE..........................................................................................................................37
Table 9: Pearson Correlation coefficient of joint venture banks..............................................38
Table 10: Regression Analysis of Dependent Variable ROA...................................................40
Table 11: Regression Analysis of Dependent Variable ROE..................................................41

viii
 LIST OF FIGURES

Figure 1. Independent and Dependent variables...........................................................17

Figure 2. Trend Chart of CAR of Joint Venture Banks................................................26
Figure 3. Trend Chart of D/E Ratio of Joint Venture Banks........................................28
Figure 4. Trend Chart of D/A Ratio of Joint Venture Banks........................................30
Figure 5. Trend Chart of non-Performing Loan Ratio of Joint Venture Banks............32
Figure 6. Trend Chart of ROA of Joint Venture Banks................................................34
Figure 7. Trend Chart of ROE of Joint Venture Banks................................................36

ix
 LIST OF ABBREVIATIONS

CAR Capital Adequacy Ratio

CV Coefficient of variation
D/A Debt-Assets Ratio
D/E Debt- Equity ratio
EBL Everest Bank Limited
F/Y Fiscal year
HBL Himalayan Bank Limited
i.e. That is
MAX Maximum
MIN Minimum
N Number of Observation
NABIL Nabil Bank Limited
NEPSE Nepal Stock Exchange
NMB Nepal Merchant Banking and Finance
Limited
NPLR Non-Performing Loan Ratio
NRB Nepal Rastra Bank
NSBI Nepal State Bank of India
P Significance Level
r Correlation coefficient
ROA Return on Assets
ROE Return on Equity
SBI State Bank of India
SCB Standard Chartered Bank Limited
SD Standard Deviation

x
 EXECUTIVE SUMMARY

The main objective of this study is to investigate the impact of capital adequacy on
profitability of joint venture banks. This study has considered Capital Adequacy ratio,
debt/equity ratio, non-performing loan ratio, loan and advances to assets ratio as
independent variables whereas return on assets (ROA) and return on equity (ROE) are
considered as dependent variable. The bank should hold an adequate capital secure the
interest of depositors. The aim of this study is to quantify the impact and
simultaneously, the results is corroborating with the hypothesis that there is no
significant impact of capital adequacy variables on the profitability of joint venture
banks in Nepal. Among 6 joint venture banks Standard Chartered Bank (SCB),
Himalayan Bank (HBL), Everest Bank Ltd (EBL), State Bank of India (SBI), Nepal
Arab Bank (NABIL), Nepal Merchant Banking and Finance Ltd. (NMB) in Nepal, all
of them are taken as sample with 54 observations. Secondary data are collected for the
study from selected banks for the period of 2070/71 to 2079/80 which have been used
for the analysis. These data are analyzed using regression model. This study will be
focusing on the impact of cash dividend per share and stock dividend in the market
value per share in the context of joint venture banks in Nepal only.

The descriptive statistics shows that, Joint venture banks are earning satisfactory profit
with average variation of return. The average capital adequacy ratio (CAR) higher
than regulatory requirement of 10%. It the evidence of the compliance of NRB
directives and Basel III requirement. The annual average return (AAR) shows that
aggressiveness of bank in lending funds which ultimately results in better profitability.
The government securities to total investment ratio (GS-TIR) ratio shows that the
commercial banks are investing in risk free assets, they are risk averter non-
performing loan ratio (NPLR) shows low return and high risk in non-performing loan.

xi
 CHAPTER I

INTRODUCTION

1.1. Context information

Capital adequacy is the amount of capital a bank or other financial institution has to
hold as required by its financial regulator. In order to create a sound and healthy
financial system, wise and efficient regulation is important. The financial sector is
primarily the means for transferring and transforming the saving of an economy into
its investment. Financial institutions are those institutions that hold financial assets
such as loan and advances, investment etc. and that obtain the fund for these
investments by issuing liabilities such as shares, collecting deposit etc. Risks are
involved when the financial system channels resources from savers to investors.
Therefore, the well-functioning financial sector tries to make the most productive use
of savings and monitor closely to ensure that the productivity is ascertained.

In Nepal, the pace of financial liberalization started in the mid-1980s, when the
government allowed the entry of commercial bank and joint venture with foreign
banks. Liberalization has pushed banks into new areas of competition. The banks are
presently facing various types of financial and non-financial risks in every kind of
activities. If such risks are handled properly, they results to a greater opportunities for
banker. Thus, risk management has become integral part of strategic planning process
of bankers (Raghavan, 2004).

The central bank is responsible for establishing regulatory and supervisory framework
for the smooth operation of banking and financial institution in every country. In our
country, Nepal Rastra Bank plays the role of central bank. NRB lays down various
rules and regulation for bank and the bank need to follow them. Generally, to bring
uniformity and to amend the rules and regulation, NRB issues directives to the
commercial banks and joint venture banks from time to time and amend them on the
basis of need. The commercial bank and joint venture bank has to modify their
functions accordingly. The NRB directive no1 includes the capital adequacy norms
for the commercial banks representing the requirements of maintaining capital fund to

1
the prescribed ratios. The directives are said to be based on the internationally
accepted norms of Basel Committee. The Basle committee on banking supervision is a
committee of banking supervisory authorities which was established by the central
bank Governors of the Group of Ten countries in 1997. The Basle committee on
banking supervision in 1988 has developed an internationally accepted standard for
capital adequacy based on what is known as the “Risk assets” approach.
The committee consists of senior representatives of bank supervisory authorities and
central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg,
Netherlands, Sweden Switzerland, the United Kingdom and the United States. Widely
accepted, though national authorities are free to impose higher standards on their
banks and often do so. As originally designed, this approach was only concerned with
credit risk, but at the beginning of 1996 the Basle Committee published proposal to
bring market risks into the calculation of capital requirements (NRB, 2001).
The concept of capital adequacy refers to the requirement that bank holds adequate
capital to protect them against insolvency. Therefore, capital must be sufficient to
protect bank's deposit and counter parties from the risks.

1.2. Statement of Problem

With the prevailing economic recession in the country, there has been lower
investment in the agriculture, manufacturing, industrial and financial sectors. Despite
the better performance of commercial bank, there are still problem, which need to be
resolved.
Every business form can take advantage through appropriate capital mix because long
run profitability depends on its capital structure besides other factors. The depositors
deposit their money in a bank for security of their money. Banking and financial
statistics (2015) shows that the amount deposited in various banks of the country is
Rs. 1787959 million in Mid-July of 2015. But the question arises, if the bank go
bankrupted, what will happen to the depositors of such money? Thus an adequate
capital fund is required to safeguard the money of depositors. NRB issued a new set of
directives to commercial banks consisting of twenty-three parts. Out of twenty-three
directives, the directives no.1 has been issued for norms on capital adequacy to be
followed by commercial banks. The capital adequacy ratio is based on the total risk
weighted assets. According to NRB directives; commercial banks should maintain

2
their core capital at 4.5% as on fiscal year 2018/19 and capital fund at 8.5% of the
total risk weighted assets as of FY 2018/19, Capital adequacy framework (2015).
Due to the lack of capital adequacy structure, Nepalese banks are under the
international standards. It will obviously increase competition for the survival which
might leads to keen rivalry among them to occupy the larger market share. Such
situation may endanger the deposits of general public and brings economic instability
in the country. In order to safe guard the public deposit and ensure economic stability
in the country. NRB issues directive from time to time to commercial banks. The
directives are related to various performances of the banks and the bank need to
follow the directives. There are sixteen directives related to the bank supervision and
regulations. Every part of financial sector is facing one or more problems which
ultimately affect the development and enhancement of deposit mobilization sectors in
Nepalese banking sector. Due to differences in economic, political and financial
situations, legal and other restrictions, government policies, risky business,
management ownership and control and other environmental variables, provisions of
capital adequacy may be different in different years. The main questions are addressed
as follows:
1.What is the structure and pattern of capital adequacy and its impact on profitablity of
joint venture bank ?
2.Is there any relationship between capital adequacy and its impact on profitability of
joint venture bank in nepal?
3.Does the impact of capital adequacy on the profitablity of joint
venture bank in nepal?

For smooth operation of the financial institution, NRB has been playing a vital role
since its establishment. The NRB directives are foremost guidelines for any financial
institutions to operate in an effective manner. Also implementing these directives
becomes must for all financial institutions.

1.3. Purpose of the study

The main objective of the study is to analyze, examine and interpret the capital
adequacy adopted by selected joint venture banks. NRB has under taken various
activities for the banking and financing development since its establishment. It has

3
issued various directives for regulation, supervision and monitoring. The special
attention is given to the capital adequacy and its impact on the profitability under this
study. The study also compares the profitability performance measured in terms of
Return on Assets (ROA) and Return on Equity (ROE) of selected joint venture banks.
The specific objectives of this study are given below:
1. To examine the capital adequacy and its impact on profitability of joint venture bank
in nepal.
2. To analysis the relationship between capital adequacy on the profitablity of joint
venture bank.
3. Assess the impact on capital adequacy on profitablity of joint venture bank in nepal.

1.4. Significance of the study

Banks are the essential support to the financial sector, which facilitate the proper
utilization of financial resources of the country. The banking sector is increasingly
growing and has witnessed a huge flow of investment. Sundararajan (2002) argues
that the financial system, the bank in particular, is exposed to a variety of risks that are
growing more complex nowadays. In order to cope with the complexity and the mix
of risk exposure to banking system properly, responsibly, beneficially and sustainably,
it is of great importance to evaluate the overall performance of banking supervision
framework. One of such measure of supervisory information is the capital adequacy
framework as per NRB. The findings of this research provide a valuable contribution
to the development and enhancement of deposit mobilization sectors in Nepalese
banking sector through various means as follows:
i. This research is useful for decision makers and policy planners both at banking
and other financial sectors.
ii. This study is useful for future researches and reference purpose.

iii. This study offers overall background of Nepalese financial sector and NRB
regulation on commercial banks for commercial joint venture banks to mitigate
risk.
iv. It analyzes how the banks are complying with various policies and legislations
regulating the financial sector.

4
 v. Customers aided by this study to know best who should keep their money
for them in terms of banks offering best customer series satisfaction.
vi. It helps the management of various banks to know where they fall behind
and where they are doing better.

Actually, the banks should have adequate capital fund though there are plenty of
investment opportunities. Currently, raising capital is a tough task. The increasing
nonperforming assets, being the main headache of commercial banks, meeting the
capital adequacy is very tough, however it is not impossible. It has been observed that
any study has not been undertaken regarding the capital adequacy norms for
commercial bank. Raising capital is a tough task at present. The increasing
nonperforming assets, is the main problem of commercial banks due to which
meeting the capital adequacy is very tough, although it is not impossible.

1.5. Literature Review

Literature review includes reviews of relevant and pertinent research conduct till date
by other researches and makes an attempt to relate this research with them. It presents
summary and finding of previous researches carried out by other researches. Review
of literature means reviewing past studies which include the current knowledge
including substantive findings, as well as theoretical and methodological contributions
to a particular topic. It also includes the relevant propositions in the related area of the
study so that all the past studies, their conclusions and deficiencies may be known,
and further research can be conducted. A short glance of past studies regarding
dividend payout practices and its impact on market share price are presented in this
report. Dividend payout practices has great importance in financial management
because it affects the financial structure, the flow of fund, corporate liquidity
requirement and investors attitude. The review of literature is divided into two parts
one is conceptual framework and other one is review of different studies

1.6. Conceptual Review

Capital adequacy is the amount of capital a bank or other financial institution has to
hold as required by its financial regulator. In order to create a sound and healthy
financial system, wise and efficient regulation is important. The financial sector is
primarily the means for transferring and transforming the saving of an economy into

5
its investment. Financial institutions are those institutions that hold financial assets
such as loan and advances, investment etc. and that obtain the fund for these
investments by issuing liabilities such as shares, collecting deposit etc. Risks are
involved when the financial system channels resources from savers to investors.
Therefore, the well-functioning financial sector tries to make the most productive use
of savings and monitor closely to ensure that the productivity is ascertained.

Concept of capital and Capital Adequacy

“Capital is adequate either when it reduces the chances of future insolvency of an
institution to some predetermine level of alternately when the premium paid by the
banks to an insurer is ‘fair’, that is, when it fully covers the risks borne by the insurer.
Such risks, in turn, depend upon the risk in the portfolio selected by the bank, on its
capital and on term of the insurance with respect to when insolvency will be
determined and when loss will be paid.” (Maisel, 1982)
Rosenbergas (1982) has defined capital in relation with banking as a long-term debt
plus owner's equity. The efficient functioning of markets requires participants to have
confidence in each other's stability and ability to transact business. Patheja (1994) has
defined banks capital as common stock plus surplus undivided profits plus reserves
for contingencies and other capital reserves.
According to Nzotta (2004), to a very large extent, the strength of a bank depends on
the capital funds available to it. A bank’s capital can be defined as the equity value of
a bank equated to the present value of its future net earnings. Generally, banks capital
represents the owners’ net worth in a bank and it includes the pay in capital and all
additions to the capital resources of the bank. Bank capital also ensures the safety of a
bank, it helps the bank to avoid the risk of insolvency, and also to support the credit
risk a bank is called upon to assume in a normal business leading. Here, the larger the
capital resources, the more loans and advances the bank could grant both on the
aggregate and for single individuals. A bank’s capital resources help the supervisory
authorities in assessing the adequacy of its capital in relation to its loans and
investments. Therefore, capital adequacy represents the amount of capital resources
needed by banks for its operations, consistent with the amount of risks and risk assets
it is assuming. Capital adequacy is the level of capital necessary for a bank as
determined by the regulatory and supervisory authorities to assume the banks financial
health and soundness. Capital adequacy, the measure of the solvency of a bank, tells

6
whether a bank has enough capital to support the risks in its balance sheet. Adequate
capitalization is an important variable in business, and is more so in the business of
using other peoples’ money such as banking.
Adequate capital is required to the efficient operating and functioning of the firm in
the modern competitive environment, is always the matter of controversial debate. In
one hand holding excess capital keeps the firm in low profit position, on the other
hand inadequate capital limits the firm to meet the public demand of loan and low
earning capacity. Capital adequacy aims at setting minimum level of capital as a
function of risks. Thus capital should be risk base, (NRB Directives, 2004)
Capital adequacy is one of the bank specific factors that influence the level of bank
profitability. Capital is the amount of own fund available to support the bank's
business and act as a buffer in case of adverse situation (Athanasoglou 2005). Banks
capital creates liquidity for the bank due to the fact that deposits are most fragile and
prone to bank runs. Moreover, greater bank capital reduces the chance of distress
(Diamond, 2000).Capital Adequacy reflects the overall financial condition of the
banks and also the ability of the management to meet the need for additional capital. It
also indicates whether the bank has enough capital to absorb unexpected losses.
Capital Adequacy ratios act as indicators of banks’ leverage (Chishty, 2011). Capital
Adequacy Ratio (CAR) shows the banks’ ability to maintain sufficient capital. The
main activity of the bank is to collect funds and channel them back in the form of
loans. If a bank has enough capital or meet the requirements, it can operate to create
profit. In addition, the bank can provide large loans and it has enough assets as
collateral for third party funds deposited in the bank so that it will increase public
trust. The higher the CAR better the performance of a bank. This is supported by
Saeed (2014).Capital Adequacy is important for a bank to maintain depositors’
confidence and preventing the bank from going bankrupt. Capital is seen as a cushion
to protect depositors and promote the stability and efficiency of financial system
around the world, Khalid (2015). The study investigates the impact of capital
adequacy on the profitability of commercial banks in Nepal, utilizing secondary data
from all commercial banks spanning 2013 to 2022.

7
 Independent variable

i. Capital to Risk Weighted Assets Ratio (CRAR): In Nepal, as per the capital
adequacy framework 2015, all the commercial banks were required to maintain a
CRAR of 8.5%, otherwise the bank will be treated as undercapitalized. Higher the
CRAR, lower the need to external funding and therefore higher profitability. It is
also seen that well capitalized banks face lower costs of going bankrupt and then
cost of funding is reduced. Berger (1995) and Dermerguc-Kunt and Huizingua
(1999) find a positive relationship between Bank Performance and Capitalization.

ii. Debt-Equity Ratio: This ratio indicates the degree of leverage of a bank. It
indicates how much of the bank business is financed through debt and how much
is financed through equity. It is arrived by dividing total borrowing and
shareholders net worth which includes equity capital and Reserves & Surplus. It
indicates how much times are debt to equity. Higher ratio indicates less protection
for the creditors and depositors of the bank, Chishty (2011)

iii. Loans and Advances to Assets Ratio: This ratio shows the aggressiveness of
bank in lending funds which ultimately results in better profitability. This ratio is
arrived at by dividing Advances by Assets. It indicates how much proportion or
alternative percentage of Total Assets is utilized in the form of Advances. Higher
ratio means that there are more advances as proportion of total assets. Advancing
being the core function of banks so higher ratio of Advances/ Assets is preferred
to lower one, Chishty (2011)

iv. Non-Performing loan: The bank's asset is another bank specific variable that
affects the profitability of a bank. The bank asset includes among others current
assets, credit portfolio, fixed assets, and other investments (Athmanasoglous
2005). The quality of loan portfolio determines the profitability of banks. The
loan portfolio quality has a direct bearing on bank profitability. The highest risk
facing a bank is the losses derived from delinquent loans (Dang, 2011). The non-
performing loan ratios are the best proxies for asset quality. This ratio portrays the
bank's ability to keep the risk of loan repayment by the debtor. After credits are
given, banks should monitor the use of the credits as well as the debtors’ ability
and compliance to meet their obligations cause if there is a failure of the debtor to
pay, it will decrease bank’s profitability. Frederick (2014) proved that the NPL
8
 has a significant negative effect on profitability. But Duraj & Moci (2015) proved
that the NPL has no significant effect on profitability. While Buchory (2015)
proved that the NPL has a significant positive effect on performance.

Profitability Indicators
The quality of earnings is very important criterion which determines the ability of a
bank to earn consistently. It basically determines the profitability of the banks. It also
explains the sustainability and growth in earnings in the future.
i. Return on Assets (ROA): The performance of banks is measured through Return
on Assets (ROA). It reflects the ability of the bank to generate profit from the
bank's assets (Naceur, 2006). ROA emerges as the key ratio for the evaluation of
bank profitability (IMF, 2002). ROA is defined as the net profit divided by total
assets. ROA measures the ability of the management to convert the assets of the
bank into net earnings. (Sarkar, 1998). The ROA reflects the ability of a bank’s
management to generate profits from the bank’s assets. It shows the profits earned
per birr of assets and indicates how effectively the bank’s assets are managed to
generate revenues, although it might be biased due to off-balance-sheet activities.
This is probably the most important single ratio in comparing the efficiency and
operating performance of banks as it indicates the returns generated from the assets
that bank owns (Tan et al. 2012). It measures the ability of the bank management to
generate income by utilizing company assets at their disposal. In other words, it
shows how efficiently the resources of the company are used to generate the
income. It further indicates the efficiency of the management of a company in
generating net income from all the resources of the institution (Khrawish, 2011).
Wen (2010), state that a higher ROA shows that the company is more efficient in
using its resources.

ii. Return on Equity (ROE): The ROE is said to measure the rate of return on the
bank's shareholders equity and it is calculated by dividing banks net income after
tax by total equity capital which includes common and preferred stock, surplus,
undivided profits, and capital reserve (Molyneux & Thornton, 1992). According to
Dietrich (2009), banks with a lower leverage ratio (higher equity) report a higher
ROA, but a lower ROE. However, the ROE disregards the higher risk that is
associated with a higher leverage.

9
 The measures of profitability gives an indication of what the banks earns on the
shareholder's investment (Rasiah, 2010). According to Anthony Karkrah and
Amwyaw (2010) many researcher have presented ROA as an appropriate measure
of bank profitability. Among them are Rivard and Thomas (1997), who argued that
bank profitability is best measured by ROA in the sense that, ROA cannot be
distorted by high equity multiplier. However, Hassan and Bashir (2003) also claims
that ROA tend to be lower for financial intermediaries, most banks heavily utilized
financial leverage to increase their ROE to competitive levels.
This measured the net profits before tax divided by capital and reserves. It
measures the earning power of shareholders investments. Shareholders and
investors will be pay attention to this measure and will want to maximize it for
their benefit. Return on equity is the return to shareholders on their equity. This
means that, return on equity reflects the capability of a bank in utilizing its equity
to generate profits (Tan 2012). Even if ROE is commonly used in different studies,
it is not the best measure of profitability (Ghazouani 2013).ROE is a financial ratio
that refers to how much profit a company earned compared to the total amount of
shareholder equity invested or found on the balance sheet. ROE is what the
shareholders look in return for their investment. A business that has a high return
on equity is more likely to be one that is capable of generating cash internally.
Thus, the higher the ROE the better the company is in terms of profit generation. It
is further explained by Khrawish (2011) that ROE is the ratio of Net Income after
Taxes divided by Total Equity Capital. It represents the rate of return earned on the
funds invested in the bank by its stockholders. ROE reflects how effectively a bank
management is using shareholders’ funds. Thus, it can be deduced from the above
statement that the better the ROE the more effective the management in utilizing
the shareholders capital.

1.6.1.1. Review of Related Studies

capital adequacy is crucial for banks’ stability and risk management. Joint venture
banks, with their foreign collaboration, can capitalize on better infrastructure and
investment practices. Liquidity, management efficiency, and other bank-specific
factors play pivotal roles in determining financial strength. These studies provide
valuable insights for policymakers, regulators, and practitioners in Nepal’s banking
industry. Some recent studies related to the impact on profitability due to capital
adequacy practices have been reviewed here:

10
Athanasoglous (2006) Capital is essential and critical to the perpetual continuity of
bank as a going concern. A minimum amount of capital is required to ensure safety
and soundness of the bank. It is also required to build trust and confidence of the
customers. A bank with a sound capital position is able to pursue business
opportunities more effectively and has more time and flexibility to deal with
problems arising from unexpected losses thus achieving increased profitability.
(NRB,2006) A capital is required by a bank as a cushion to absorb losses, which
should be done by shareholder and to finance the infrastructure of the business.
Chishty (2011) Capital adequacy is important for a bank to maintain depositor's
confidence and presenting bank from going bankrupt. Capital is seen as a strong
support to protect depositors and promote the stability and efficiency of financial
system around the world. Capital adequacy reflects the overall financial conditions of
the bank and also the ability of the management to meet the need for additional
capital. It also indicates whether the bank has enough capital to absorb unexpected
loss. It also acts as indicators of bank leverage. (NRB, 2007) Capital adequacy
measure the financial strength of the financial institution. It tells how much capital it
has relative (as the percentage of) the
money it has lent out i.e. its assets.Chishty (2011) Capital adequacy ratio (CAR) is a measure of
bank's capital. It isexpressed as a percentage of bank's risk weighted credit exposures and also
known as capital- to-risk-weighted assets ratio (CRAR). It is used to protect depositors and
promote the stability and efficiency of financial systems around the world. There are
two types of capital: tier one, which can absorb losses without a bank being required
to end trading, and tire two, which can absorb losses in the event of a winding-up
and so provides a lesser degree of protection to depositors.

Capital is a fundamental component for any organization's existence and operation. It serves as
the lifeblood for initiating and sustaining businesses, regardless of their scale. The purpose of the
research is to evaluate the financial performance of Nepalese commercial banks' capital
adequacy ratios. Considering the performance of Nepalese commercial banks, it explicitly
investigates the impact of capital adequacy ratio, cost income ratio, debt to equity ratio, equity
capital to assets, bank size, and liquid ratio.Methods: The study investigates the impact of
capital adequacy on the profitability of commercial banks in Nepal, utilizing secondary data from
all commercial banks spanning 2013 to 2023. Analyzing 20 commercial banks, the research
reveals that Nepalese commercial banks, on average, generate a respectable profit with typical
return variance. The Capital Adequacy Ratio (CAR) consistently surpasses the 10% regulatory
threshold, ensuring compliance with Basel III requirements and NRB directives .
11
1.6.2. Concluding Remarks

Thus, from the review of such studies it can be observed that there is positive and
significant relationship between capital adequacy and profitability. It also indicates
that capital adequacy ratio is not only the factor that influences the profitability
indicator such as ROA and ROE, there are many other factors that influence
Profitability.

1.7. Research Methods

This study is based on the descriptive research design that uses secondary data.
Descriptive statistics are used to describe the basic features of the data in a study.
They provide simple summaries about the sample and the measures. Together with
simple graphics analysis, they form the basis of virtually every quantitative analysis
of data.

1.7.1. Analytical research

A research design is simply the framework or plan for a study used as a guide in
collecting and analyzing data. This study uses descriptive and analytical research
design, in order to examine the impact of capital adequacy on the profitability of
commercial bank in case of Nepal from the fiscal year 2013/14 to 2022/23.
Descriptive research design helps to describe characteristics of variables and involves
in the evaluation of facts and information. The descriptive study defines a subject by
constructing a profile of people, group or events through tabulation and the collection
of data on the frequencies on studied variables (Cooper & Schindler, 2007). Various
analytical tools such as Correlation and regression are used to examine the
performance of the banks.

1.7.2. Source of Data

To comply with the objective, the study is based on the secondary data. The required
data for this study such as balance sheet, profit and loss statement etc. are collected
through annual report of the sample commercial banks and other structured document
review.
Mostly the annual reports of the selected sample banks and NRB reports is used as a
major source of data. Beside the annual reports of sample banks, information is be
supplemented from various publications of Nepal Stock Exchange (NEPSE) and
browsing of official web site of sample banks, NRB and NEPSE.

13
1.7.3. Population and Sample

A small portion chosen from the population for studying its properties is called a
sample and the number of units in the sample is known as the sample size. Since the
research topic is about the share prices of Joint Venture Banks of Nepal, so, all the
joint venture banks of Nepal are the member of population study. The population for
the study comprises 6 joint venture banks. All of them are taken as the sample of the
study from the fiscal year 2070/71 to 2079/80.

Table 1

Sample banks and Year of the Study

S. N BANK FISCAL YEAR OBSERVATION

1 Himalayan Bank Ltd 2070/71-2079/80 10

2 Everest Bank Ltd 2070/71-2079/80 10

3 Standard Chartered Bank 2070/71-2079/80 10

4 SBI Bank 2070/71-2079/80 10

5 NABIL BANK 2070/71-2079/80 10

6 NMB Bank 2070/71-2079/80 10

Total 60

1.7.4. Data Collection Procedure

The study is based on secondary data provided by HBL, EBL, SCB, SBI Bank,
NABIL and NMB Bank. It includes the annual financial statements provided in the
form of annual report. Besides that, the banks supervision annual report of NRB is
also used.

1.7.5. Data Analysis Tools

Before analyzing the data, the data and information are shown in tables and graphs
and later on, they are analyzed and interpret. Various financial, accounting, and
statistical tools have been used to obtain the objectives of the study. The main
analytical tools and techniques used for analysis are:

14
1.7.5.1. Causal comparative

Descriptive statistics is concerned with measures of central tendency and measures of

variability. Measures of central tendency include mean, median, and mode, while
measures of variability include standard deviation or variance, the minimum and
maximum variables, and kurtosis and skewness.

i. Arithmetic Mean
Arithmetic mean is the sum of observation divided by the number of
observations. In such case all the items are equally important. It is referred some
time as average simply the mean.

∑𝑋
𝑀𝑒𝑎𝑛 (𝑋) =
𝑛

Where,
ΣX = Sum of the sizes of the items
n = Number of items
ii. Standard Deviation
The standard deviation is the best tools to measure fluctuation in any data. It is
usually denoted by sigma. The standard deviation is defined as the positive square
root of the arithmetic mean of the square deviations from their arithmetic mean of
a set of values.

Standard Deviation (S.D)

Where, d= (X- X¯)2

N = Number of items in the series
X¯ = Mean,
X = Variable
iii. Co-efficient of Variation
The coefficient of variation (CV) is a statistical measure of the dispersion of data
points in a data series around the mean. The coefficient of variation represents the
ratio of the standard deviation to the mean, and it is a useful statistic for

15
 comparing the degree of variation from one data series to another, even if the
means are drastically different from one another.

Coefficient of Variation
Standard Deviation

(C. V) = MEAN

iv. Skewness
Skewness is asymmetry in a statistical distribution, in which the curve appears
distorted or skewed either to the left or to the right. Skewness can be quantified
and define the extent to which a distribution differs from normal distribution.

3(𝑀𝑒𝑎𝑛 − 𝑀𝑒𝑑𝑖𝑎𝑛)
𝑆𝑘(𝑃) =
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛

Interpretation of calculated value of coefficient of skewness:

i. If Sk(P) = 0, then this shows that the distribution is symmetrical (non -

skewed)
ii. If Sk(P) > 0, then this shows that the distribution is positively skewed or
right skewed
iii. If Sk(P) <0, then this shows that the distribution is negatively skewed or left
skewed
v. Kurtosis
Kurtosis is statistical measure that is used to describe the distribution, of observed
data around the mean sometimes referred to as the volatility. Kurtosis is used in
statistical field to describe in the trend charts. Kurtosis can be present in a chart
with fat tails and a low, even distribution, as well as be present in a chart with
skinny tails and distribution concentrated toward mean.

1
(𝑄3 − 𝑄1)
𝐾=2
𝑃90 − 𝑃10

Where,
Q= Quartile
P=

16
Percentile

17
Interpretation style of calculated value:
i. A positive value tells you that you have heavy-tails (i.e. a lot of data in your
tails).
ii. A negative value means that you have light-tails (i.e. little data in your tails).
iii. If K = 0.263, the distribution is mesokurtic or normal
iv. If K< 0.263, the distribution is leptokurtic
v. If K > 0.263, the distribution is platykurtic

vi. Correlation Analysis

Correlation is a term that refers to the strength of the relationship between two
variables. Pearson r correlation is the most widely used correlation statistic to
measure the degree of the relationship between linearly related variables. It is
developed by Karl Pearson.
The correlation coefficient can range from -1.00 to +1.00. A value of -1.00
indicates a perfect negative correlation, which means that as the value of one
variable increases, the other decreases. While a value of +1.00 represents a
perfect positive relationship, meaning that as one variable increases in value, so
does the other. As the correlation coefficient value goes towards 0 that represents
no relationship between variables being tested. The formula used to calculate the
Pearson r correlation:

Where,

N = number of pairs of scores

∑xy =sum of the products of paired scores

∑x = sum of x scores
∑y= sum of y scores
∑x2 = sum of squared x scores
∑y2 =sum of squared y scores

18
vii. Regression Analysis
Correlation analysis tells the direction of movement but it does not tell the
relative movement in the variables under study. Regression analysis helps us to
know the relative movement in the variables. It is considered as a useful tool for
determining the strength of relationship between two or more variables. The
regression model is estimated as:
ROAit=β0+β1CAR+β2D/E+β3NPL+β3D/

A+Eit

ROEit=β0+β1CAR+β2D/E+β3NPL+β3D/A+Ei

t Where,

β0=constant

β1, 2, 3,4=Parameters of the model

ROA= Return on Assets

ROE = Return on Equity

CAR = Capital adequacy Ratio

D/E = Debt Equity Ratio

NPL = non-Performing Loan Ratio

D/A= Debt Assets Ratio and, Eit= Error term

1.7.6. Study Variables

Independent Variables Dependent Variable

Capital adequacy ratio

Debt/equity ratio
ROA

Non-performing loan ratio

ROE

Loan and advance to assets ratio

Figure 1. Independent and Dependent variables

19
 In this study, Capital adequacy ratio, debt/equity ratio, non-performing loan ratio and
Loan & advance to assets ratio are taken as independent variables whereas ROA and
ROE are considered as dependent variable. The study focuses to examine the impact
of Capital adequacy ratio, debt/equity ratio, non-performing loan ratio and Loan &
advance to assets ratio in the ROA and ROE.

1.7.6.1. Independent Variables

i. Capital to Risk Weighted Assets Ratio (CRAR): In Nepal, as per the capital
adequacy framework 2015, all the commercial banks were required to maintain a
CRAR of 8.5%, otherwise the bank will be treated as undercapitalized. Higher the
CRAR, lower the need to external funding and therefore higher profitability. It is
also seen that well capitalized banks face lower costs of going bankrupt and then
cost of funding is reduced. Berger (1995) and Dermerguc-Kunt and Huizingua
(1999) find a positive relationship between Bank Performance and Capitalization.
ii. Debt-Equity Ratio: This ratio indicates the degree of leverage of a bank. It
indicates how much of the bank business is financed through debt and how much is
financed through equity. It is arrived by dividing total borrowing and shareholders
net worth which includes equity capital and Reserves & Surplus. It indicates how
much times are debt to equity. Higher ratio indicates less protection for the
creditors and depositors of the bank, Chishty (2011)
iii. Loans and Advances to Assets Ratio: This ratio shows the aggressiveness of bank
in lending funds which ultimately results in better profitability. This ratio is arrived
at by dividing Advances by Assets. It indicates how much proportion or alternative
percentage of Total Assets is utilized in the form of Advances. Higher ratio means
that there are more advances as proportion of total assets. Advancing being the core
function of banks so higher ratio of Advances/ Assets is preferred to lower one,
Chishty (2011)
iv. Government Securities to Total investments: The percentage of investment in
government securities a very important indicator which shows the risk taking
ability of a bank. It indicates a bank's strategy as being High Profit - High Risk or
Low Profit-Low Risk. It also gives view as the availability of alternative
investment opportunities. Government securities are generally considered as the
safest debt instruments, which as a result carry the lowest return. Since
Government securities are risk free, the higher the government Securities to Total

20
 Investments ratio, the lower the risk involved in bank's investments, Chishty
(2011).
v. Non-Performing loan: The bank's asset is another bank specific variable that
affects the profitability of a bank. The bank asset includes among others current
assets, credit portfolio, fixed assets, and other investments (Athmanasoglous 2005).
The quality of loan portfolio determines the profitability of banks. The loan
portfolio quality has a direct bearing on bank profitability. The highest risk facing a
bank is the losses derived from delinquent loans (Dang, 2011). The non-performing
loan ratios are the best proxies for asset quality. This ratio portrays the bank's
ability to keep the risk of loan repayment by the debtor. After credits are given,
banks should monitor the use of the credits as well as the debtors’ ability and
compliance to meet their obligations cause if there is a failure of the debtor to pay,
it will decrease bank’s profitability. Frederick (2014) proved that the NPL has a
significant negative effect on profitability. But Duraj & Moci (2015) proved that
the NPL has no significant effect on profitability. While Buchory (2015) proved
that the NPL has a significant positive effect on performance.

1.7.6.2. Dependent variable

The quality of earnings is very important criterion which determines the ability of a
bank to earn consistently. It basically determines the profitability of the banks. It also
explains the sustainability and growth in earnings in the future.
i. Return on Assets (ROA): The performance of banks is measured through Return
on Assets (ROA). It reflects the ability of the bank to generate profit from the
bank's assets (Naceur, 2006). ROA emerges as the key ratio for the evaluation of
bank profitability (IMF, 2002).ROA is defined as the net profit divided by total
assets. ROA measures the ability of the management to convert the assets of the
bank into net earnings. (Sarkar, 1998).The ROA reflects the ability of a bank’s
management to generate profits from the bank’s assets. It shows the profits earned
per birr of assets and indicates how effectively the bank’s assets are managed to
generate revenues, although it might be biased due to off-balance-sheet activities.
This is probably the most important single ratio in comparing the efficiency and
operating performance of banks as it indicates the returns generated from the assets
that bank owns (Tan et al. 2012). It measures the ability of the bank management to

21
 generate income by utilizing company assets at their disposal. In other words, it
shows how efficiently the resources of the company are used to generate the
income. It further indicates the efficiency of the management of a company in
generating net income from all the resources of the institution (Khrawish, 2011).
Wen (2010), state that a higher ROA shows that the company is more efficient in
using its resources.
ii. Return on Equity (ROE): The ROE is said to measure the rate of return on the
bank's shareholders equity and it is calculated by dividing banks net income after
tax by total equity capital which includes common and preferred stock, surplus,
undivided profits, and capital reserve (Molyneux & Thornton, 1992). According to
Dietrich (2009), banks with a lower leverage ratio (higher equity) report a higher
ROA, but a lower ROE. However, the ROE disregards the higher risk that is
associated with a higher leverage.

1.8. Limitations of the study

Beside the mentioned above procedure and strengths, there are some limitations,
which cannot be ignored. The study has limited resources and it is difficult to
researcher to find out new aspects. Reliability of statistical tools used and lack of
research experience are the major limitation and some other limitations enlisted as
follows:
i. This study concentrates only on micro indicators, which are related with the
capital adequacy of Nepalese joint venture commercial banks. It ignores Macro
indicators like GDP, Inflation etc.
ii. The study is fully based on secondary data as the commercial bank does not
provide full internal information.
iii. Only six Nepalese joint venture commercial banks are considered for
the study.

iv. For analyzing and presenting the data only some important financial
and statistical tools has been used accordingly as per necessity.
v. The profitability of joint venture commercial banks are influenced by
several factors, however this study mainly focuses only on the capital
adequacy.
vi. The study identifies determinants of NPLs but does not establish causal
relationships.

22
1.9. Organization of the Study:
This project report is prepared for the partial fulfillment of the requirements for the
degree of Bachelor of Business Administration. In this report whole chapter is
classified into the three parts.

Chapter I: Introduction section includes Background of the study, statement of the

problem, objective of the study, significance of the study, literature review,
Research Methodology, limitation of the study and Organization of the study

Chapter II: Data presentation and analysis section includes organization profile,
Data analysis and major finding of the study.

Chapter III: Conclusion and Action Implications.

23
 CHAPTER-II

PRESENTATION AND ANALYSIS OF

DATA

2.1. Organization profile

A joint venture is a business arrangement in which two or more than two parties agree
to pool their resources for the purpose of accomplishing a specific task. A common
use of joint venture is to partner up with a local business to enter a foreign market. At
present, there are six joint venture banks operating in Nepal that includes Nepal SBI
Bank, Everest Bank, NABIL Bank, Standard Chartered Bank, Himalayan Bank and
NMB Bank. All of them have been studied here.

i. Nepal SBI Bank

Nepal SBI Bank Ltd. (NSBL) is the first Indo-Nepal joint venture in the financial
sector sponsored by three institutional promoters, namely State Bank of India
(SBI), Employees Provident Fund and Agricultural Development Bank of Nepal.
NSBL commenced operation with effect from 7 July 1993 with one full-fledged
office at Durbar Marg, Kathmandu. State Bank of India (SBI) holds 55 percent of
the total share capital of the Bank, 15 percent is held by the Employees Provident
Fund and the balance is held by the general public. Currently, SBI bank has 112
service outlets, 128 ATM terminals, 4 cash deposit machines, 9 Branchless
banking ATM. NSBL is working in 93 branches, 21 extension counters, 7
Provincial offices and a Corporate office.

ii. Himalayan Bank Ltd.

Himalayan bank ltd (HBL) is one of the largest private banks of Nepal, founded in
January 18, 1993 in partnership with Employees Provident Fund and Habib Bank
Ltd of Pakistan. Himalayan Bank is also the first commercial bank of Nepal with
most of its shares held by the private sector of Nepal. Besides commercial banking
services, the bank also offers industrial and merchant banking service. With its
head and corporate office at Kamaladi. The bank has 175 branches Himalayan
Bank offers a variety of personal banking service. From savings and fixed deposit
account to home and consumer loans chock-full of convenient options and features..

24
HBL has also been serving Nepali citizens living in the country and abroad through
remittance,service.

25
iii. Everest Bank Ltd.

Everest bank ltd is the commercial bank of Nepal founded in 1994 which is the
joint venture of Punjab National Bank, India holding 20% equity shares of bank.
This is the first Nepalese bank which have representative office in India. Everest
Bank Limited (EBL) provides customer-friendly services through its wide Network
connected through ABBS system, which enables customers for operational
transactions from any branches. The bank has 128 Branches, 164 ATM Counters,
31 Revenue Collection Counters and 3 Extension Counters across the country
making it a very efficient and accessible bank for its customers, anytime,
anywhere.

iv. Standard Chartered Bank

SCBL has been in operation in Nepal since 1987 when it was initially registered as
a joint venture operation. Today the Bank is an integral part of Standard Chartered
Group having an ownership of 70.21% in the company with 29.79% shares owned
by the Nepalese public. The Bank enjoys the status of the largest international bank
currently operating in Nepal.

With 15 points of representation, 34 ATMs across the country and with more than
504 local staff, Standard Chartered Bank Nepal Ltd. is in a position to serve its
clients and customers through an extensive domestic network. In addition, the
global network of Standard Chartered Group gives the Bank a unique opportunity
to provide truly international banking services in Nepal.

v. Nabil Bank Ltd.

Nabil bank ltd. is the first joint venture bank of Nepal established in July 1984.It
has 50% foreign ownership, 30% ownership of general public and 10% share of
bank by Nepalese institutions. In its 38 years of operations in the Nepalese
banking sector it is the leading commercial bank of Nepal with the highest
profit among private banks for several years. The bank made a profit of Rs 7.52
arba in F.Y 2079/80. Currently, the bank has 268 branches and 313 ATM across
Nepal. Its head office is at Durbarmarg, Kathmandu. The bank has also a
subsidiary company named- Nabil investment banking Limited which performs
the task of merchant banker.

26
vi. NMB Bank Ltd.

NMB Bank is licensed as an “A” class financial institution founded in May 2008.
In September 2016, The Bank has a foreign joint venture agreement with FMO,
Netherlands which has 17% shareholding, the largest foreign investment to be
made in the Nepali banking industry till date. Its head office is in Babarmahal,
Kathmandu. NMB is the only Nepali Bank to earn membership of the Global
Alliance for Banking on Values (GABV). Serving more than half a million
customers across the country through its network strength of 201 branches, 137
ATMs and 11 Extension counters, the Bank remains committed to its vision to be
the catalyst for bringing in progressive change to the lives of the Nepalese people
through simplified banking solution. NMB is the brainchild of leading Nepali
entrepreneurs with dream of framing the ultimate in Merchant Banking and
Financial Services.

2.2. Data Presentation and Analysis

This section of the study is concerned with achieving the objectives, which have been
mentioned in the first chapter by analyzing and interpreting the data that have been
collected. In this chapter, the effort has been made to analyze impact of capital
adequacy on the profitability of joint venture banks. For the purpose of the study 9
years data from fiscal year 2070/71 to fiscal year 2078/80 of 6 joint venture
commercial banks have been taken into consideration.

This section consists presentation and analysis of secondary data related with different
variables using both financial and statistical tools explained in the first chapter.

2.2.1. Capital adequacy ratio

Capital adequacy ratio is the ratio which determines the capacity of the bank in term
of meeting the time liabilities and other risk such as credit risk, market risk,
operational risk, and others. It is a measure of how much capital is used to support the
bank’s risk assets. The capital Adequacy Ratio (CAR) is calculated by dividing
eligible regulatory capital by total risk weighted exposure. The CAR assesses how well
a bank can meet its obligations and absorb potential losses. It compares the bank’s
capital.

27
 Table 2.

Data analysis of capital adequacy ratio of joint venture Banks

YEAR HBL EBL SCB SBI NABIL NMB

2013/14 11.23 12.76 12.27 13.49 11.18 10.75

2014/15 11.14 13.33 13.1 14.03 11.57 11.13

2015/16 10.84 12.66 16.38 13.49 11.73 10.98

2016/17 12.15 14.54 21.08 15.71 12.9 12.75

2017/18 12.46 14.2 22.99 15.15 13 15.75

2018/19 12.6 13.74 19.69 14.12 12.5 15.45

2019/20 14.89 13.38 18.51 15.55 13.07 15.08

2020/21 13.89 12.48 17.17 13.86 12.77 15.08

2021/22 11.75 11.89 15.95 13.25 13.09 13.59

2022/23 13.23 13.36 17.12 12.78 12.66 13.33

Mean 12.3277 13.22 17.46 14.2944 12.4233 13.3955

S.D. 1.3365 0.8553 3.5220 0.9345 0.7334 1.9396

C.V. 0.1084 0.0646 0.2017 0.0653 0.0590 0.1447

Min 10.84 11.89 12.27 13.25 11.18 10.75

Max 14.89 14.54 22.99 15.71 13.09 15.75

Source: Annual reports of selected banks.

Table 2.1 reveals that the average CAR of SCB is the highest among all joint venture banks with CAR of
17.46 whereas the mean CAR of HBL is the lowest among all joint venture bank with CAR of 12.3275. The
coefficient of variation analysis shows that the CAR of NABIL Bank is the most consistent among all joint
venture banks. i.e. C.V. of 5.9% with S.D. of 0.7334. Similarly, EBL’s CAR is also more consistent with C.V.
of 6.46% with S.D. of 0.8353. comparing to CAR of NMB, SCB, SBI and HBL. The data shows that CAR of
SCB is less consistent among all selected banks with C.V. of 20.17% with S.D. of 3.5220.

25
The overview of the aforesaid analysis is illustrated in the trend chart. Figure 2.1 give

the glimpse of the trend of Capital adequacy ratio of HBL, SCB, SBI, NMB, EBL and
NABIL.

YEAR

Figure 2. Trend Chart of CAR of Joint Venture Banks

2.2.2. Debt- Equity Ratio

The debt-to-equity (D/E) ratio is a crucial financial metric used to evaluate a
company’s financial leverage. It compares a company’s total liabilities with its
shareholder equity. Here’s how to calculate it and interpret its significance: It is a test
of long-term solvency of the firm. The ratio indicates the relationship between debt
and equity. It is related to shareholders fund indicating the degree of protection against
long term creditors. This ratio indicates the degree of leverage of banks. Gyawali,
Subedi, Fago, & Niraula (2010). It indicates how much of bank business is financed
through debt and through equity. The debt-to-equity (D/E) ratio is a crucial financial
metric used to evaluate a company’s financial leverage. It compares a company’s total
liabilities with its shareholder equity and provides insights into how a company
finances its operations—whether through debt or its own resources. A higher D/E ratio
indicates that a company relies more on debt financing. Conversely, a lower D/E ratio
suggests that a business is primarily using its own resources (equity) to
fund its operations.

26
Table 3
Data analysis of Debt-Equity Ratio of joint venture Banks

YEAR HBL EBL SCB SBI NABIL NMB

2013/14 0.12 0.06 0.03 0.22 0.14 0.2

2014/15 0.08 0.33 0.07 0.13 0.11 0.18

2015/16 0.05 0.08 0.05 0.09 0.09 0.15

2016/17 0.06 0.04 0.01 0.07 0.08 0.16

2017/18 0.04 0.09 0.02 0.08 0.04 0.13

2018/19 0.03 0.08 0.02 0.1 0.03 0.4

2019/20 0.07 0.07 0.01 0.3 0.13 0.33

2020/21 0.06 0.08 0.01 0.61 0.12 0.6

2021/22 0.08 0.22 0.03 0.72 0.33 0.45

2022/23 0.07 0.24 0.01 0.83 0.14 0.90

Mean 0.0655 0.1166 0.0277 0.2577 0.1188 0.2888

S.D. 0.0265 0.095 0.0204 0.2442 0.0878 0.1649

C.V. 0.4043 0.8142 0.7372 0.9474 0.7386 0.5710

Min 0.03 0.04 0.01 0.07 0.03 0.13

Max 0.12 0.33 0.07 0.72 0.33 0.6

Source: Annual reports of selected banks.

Table 3 reveals that the average D/E Ratio of NMB is the highest among all joint
venture banks with D/E Ratio of 0.2888 whereas the mean D/E Ratio of SCB is the
lowest among all joint venture bank with D/E Ratio of 0.0277. The coefficient of
variation analysis shows that the D/E ratio of HBL is the most consistent among all
joint venture banks. i.e. C.V. of 0.4043 with S.D. of 0.0265. Similarly, NMB’s D/E
Ratio is also more consistent with C.V. of 0.5710 with S.D. of 0.1649 comparing to
D/E Ratio of SCB, SBI and NABIL and EBL. The data shows that D/E Ratio of SBI
is less consistent among all selected banks with C.V. of 19.74 with S.D. of 0.2442

27
The overview of the aforesaid analysis is illustrated in the trend chart. Figure 3 gives
the glimpse of the trend of Debt-Equity Ratio of HBL, SCB, SBI, NMB, EBL and
NABIL.

YEAR

Figure 3. Trend Chart of D/E Ratio of Joint Venture Banks

2.2.3. Loans and Advances to Assets ratio

This ratio shows the aggressiveness of bank in lending funds which ultimately results
in better profitability. This ratio is arrived at by dividing Advances by Assets. It
indicates how much proportion or percentage of Total Assets is utilized in the form of
Advances. The aggressive lending policy of commercial bank is one of the reasons
for the better profitability of the banks, (Chishty, 2011). The LAR represents the
proportion of a bank’s total assets that are allocated to loans.It provides insights into
the bank’s liquidity and exposure to potential defaults. A higher LAR indicates that a
larger portion of the bank’s assets is tied up in loans.Conversely, a lower LAR
suggests that the bank relies less on loans and has more diversified assets. Banks with
a high LAR may face liquidity challenges if they encounter a surge in loan defaults.On
the other hand, a low LAR may indicate conservative lending practices but could limit
potential returns. The optimal LAR varies based on the bank’s risk appetite, business
strategy, and industry norms.

28
Table 4

Data analysis of Debt/Assets Ratio of joint venture Banks

YEAR HBL EBL SCB SBI NABIL NMB

2013/14 0.03 0.02 0.01 0.05 0.01 0.05

2014/15 0.04 0.03 0.02 0.03 0.01 0.02

2015/16 0.05 0.01 0.01 0.02 0.02 0.03

2016/17 0.06 0.02 0.02 0.02 0.03 0.02

2017/18 0.01 0.01 0.02 0.01 0.01 0.02

2018/19 0.02 0.01 0.01 0.01 0.02 0.05

2019/20 0.02 0.01 0.01 0.03 0.01 0.04

2020/21 0.03 0.01 0.02 0.07 0.01 0.06

2021/22 0.01 0.02 0.01 0.08 0.04 0.03

2022/23 0.03 0.02 0.01 0.06 0.03 0.05

Mean 0.03 0.0155 0.0144 0.0355 0.0177 0.0355

S.D. 0.0173 0.0072 0.0052 0.0255 0.0109 0.0150

C.V. 0.5773 0.4670 0.3648 0.7185 0.6147 0.4244

Min 0.01 0.01 0.01 0.01 0.01 0.02

Max 0.06 0.03 0.02 0.08 0.04 0.06

Source: Annual reports of selected banks.

Table 4 reveals that the average D/A Ratio of NMB and SBI is the highest among all
joint venture banks with D/A Ratio of 0.0355 whereas the mean D/A Ratio of SCB is
the lowest among all joint venture bank with D/A Ratio of 0.0144. The coefficient of
variation analysis shows that the D/A ratio of SCB is the most consistent among all
joint venture banks. i.e. C.V. of 0.3648 with S.D. of 0.0052. Similarly, NMB’s D/A
Ratio is also more consistent with C.V. of 0.4244 with S.D. of 0.0150 comparing to
D/A Ratio of SBI, HBL, NABIL and EBL. The data shows that D/A Ratio of SBI is
less consistent among all selected banks with C.V. of 0.7185 with S.D. of 0.0255.

29
The overview of the aforesaid analysis is illustrated in the trend chart. Figure 4 gives
the glimpse of the trend of Debt-Assets Ratio of HBL, SCB, SBI, NMB, EBL and
NABIL.

YEAR

Figure 4. Trend Chart of D/A Ratio of Joint Venture Banks

2.2.4. Non-Performing Loan Ratio of the selected commercial ratio

The non-performing loan ratios are the best proxies for asset quality. This ratio
portrays the bank's ability to keep the risk of loan repayment by the debtor. After
credits are given, banks should monitor the use of the credits as well as the debtors’
ability and compliance to meet their obligations cause if there is a failure of the debtor
to pay, it will decrease bank’s profitability. The NPL ratio measures the proportion of
non-performing loans (those in default) in a bank’s total loan portfolio.It reflects the
bank’s efficiency in collecting repayments on its loans.

To calculate the NPL ratio, divide the total amount of non-performing loans by the
total outstanding loans held by the bank. It can also be expressed as a percentage of the
bank’s non-performing loans. Generally, loans are classified as non-performing when
the borrower has not made repayments of principal and/or interest for at least 90 days.

30
Table 5

Data analysis of non-Performing loan Ratio of joint venture Banks

YEAR HBL EBL SCB SBI NABIL NMB

2013/14 1.96 0.48 0.48 0.18 2.23 0.55

2014/15 3.22 0.66 0.34 0.19 1.82 0.42

2015/16 1.23 0.38 0.32 0.14 1.14 1.81

2016/17 0.85 0.25 0.19 0.1 0.8 1.68

2017/18 1.4 0.2 0.18 0.2 0.55 0.88

2018/19 1.12 0.16 0.15 0.2 0.74 0.82

2019/20 1.01 0.22 0.44 0.23 0.98 2.68

2020/21 0.48 0.12 0.96 0.23 0.84 2.27

2021/22 1.59 0.12 0.59 0.15 1.62 1.45

2022/23 0.58 0.24 1.60 0.12 3.2 2.72

Mean 1.4288 0.2877 0.4055 0.18 1.1911 1.3955

S.D. 0.7955 0.1838 0.2555 0.0430 0.5697 0.7853

C.V. 0.5567 0.6388 0.6301 0.2389 0.4783 0.5627

Min 0.48 0.12 0.15 0.1 0.55 0.42

Max 3.22 0.66 0.96 0.23 2.23 2.68

Source: Annual reports of selected banks.
Table 5
reveals that the average non-Performing Loan Ratio of HBL is the highest
among all joint venture banks with non-Performing Loan Ratio of 1.4288 whereas the
mean non-Performing Loan Ratio of SBI is the lowest among all joint venture bank
with non-Performing Loan Ratio of 0.18. The coefficient of variation analysis shows
that the non-Performing Loan Ratio of SBI is the most consistent among all joint
venture banks. i.e. C.V. of 0.2389 with S.D. of 0.0430. Similarly, NABIL’s non-
Performing Loan Ratio is also more consistent with C.V. of 0.4783 with S.D. of
0.5697 comparing to non-Performing Loan Ratio of HBL, SCB,NMB and EBL. The
data shows that non-Performing Loan Ratio of EBL is less consistent among all
selected banks with C.V. of 0.6388 with S.D. of 0.1838.
31
The overview of the aforesaid analysis is illustrated in the trend chart. Figure 5 gives
the glimpse of the trend of non-Performing Loan Ratio
of HBL, SCB, SBI, NMB,
EBL and NABIL.

YEAR

Figure 5. Trend Chart of non-Performing Loan Ratio of Joint Venture Banks

2.2.5. Return on Assets ratio (ROA)

ROA is defined as the net profit divided by total assets. ROA measures the ability of
the management to convert the assets of the bank into net earnings. (Sarkar,
1998).The ROA reflects the ability of a bank’s management to generate profits from
the bank’s assets. It shows the profits earned per birr of assets and indicates how
effectively the bank’s assets are managed to generate revenues, although it might be
biased due to off-balance-sheet activities (Tan 2012).It shows how efficiently the
resources of the company are used to generate the income. ROA measures the
effectiveness of a company in converting its invested capital (assets) into net income.It
answers the question: “How well does the company use its assets to generate profits?”
A higher ROA indicates better asset efficiency and productivity. A lower ROA
suggests room for improvement in utilizing assets effectively. ROA provides insights
into a company’s profitability and asset utilization. It’s essential to consider industry
norms when evaluating ROA. It’s a crucial metric for assessing a company’s efficiency
in utilizing its assets to generate profits.

32
 Table 6

Data analysis of ROA of joint venture Banks

YEAR HBL EBL SCB SBI NABIL NMB

2013/14 1.3 1.78 2.51 1.69 2.65 1.36

2014/15 1.34 1.85 1.99 1.64 2.06 1.21

2015/16 1.94 1.59 1.98 1.59 2.32 1.49

2016/17 2.19 1.83 1.84 1.57 2.69 1.69

2017/18 1.67 1.97 2.61 1.97 2.61 1.65

2018/19 2.21 1.94 2.61 1.94 2.11 1.67

2019/20 1.79 1.42 1.71 1.17 1.58 0.95

2020/21 1.68 0.89 1.22 0.7 1.71 1.17

2021/22 1.09 1.13 1.83 1.07 1.2 1.39

2022/23 0.47 1.24 2.52 1.23 1.44 1.20

Mean 1.69 1.6 2.0333 1.4822 2.1033 1.3977

S.D 0.3917 0.3804 0.4666 0.4204 0.5235 0.2551

C.V. 0.2318 0.2377 0.2294 0.2836 0.2489 0.1825

Min 0.47 0.89 1.22 0.7 1.2 0.95

Max 2.21 1.97 2.61 1.97 2.69 1.69

Source: Annual reports of selected banks.

Table 6 reveals that the average ROA of NABIL is the highest among all joint venture
banks with ROA of 2.1033 whereas the mean ROA of NMB is the lowest among all
joint venture bank with ROA of 1.3662. The coefficient of variation analysis shows that
the ROA of NMB is the most consistent among all joint venture banks. i.e. C.V. of
0.1854 with S.D. of 0.2533. Similarly, SCB’s ROA is also more consistent with C.V.
of 0.2294 with S.D. of 0.4666 comparing to ROA of HBL, NABIL, SBI and EBL.
The data shows that ROA of SBI is less consistent among all selected banks with C.V.
of 0.2836 with S.D. of 0.4204. It provides insights into management’s ability to utilize
economic resources effectively. ROA is valuable, it’s essential to consider other financial
ratios and performance metrics when evaluating a company’s overall health.

33
The overview of the aforesaid analysis is illustrated in the trend chart. Figure 5 gives
the glimpse of the trend of ROA of HBL, SCB, SBI, NMB, EBL and NABIL.

year

Figure 6. Trend Chart of ROA of Joint Venture Banks

2.2.6. Return on Equity Ratio (ROE)

The ROE is said to measure the rate of return on the bank's shareholders equity and it
is calculated by dividing banks net income after tax by total equity capital which
includes common and preferred stock, surplus, undivided profits, and capital reserve
( Molyneux & Thornton, 1992).ROE is a financial ratio that refers to how much profit
a company earned compared to the total amount of shareholder equity invested or
found on the balance sheet. ROE is what the shareholders look in return for their
investment. A business that has a high return on equity is more likely to be one that is
capable of generating cash internally. Thus, the higher the ROE the better the
company is in terms of profit generation. ROE reflects how effectively a bank
management is using shareholders’ funds (Khrawish, 2011). ROE is expressed as a
percentage and can be calculated for any company if net income and equity are both
positive numbers. It is a crucial financial metric that measures how efficiently a
company utilizes its equity financing to generate profits. A higher ROE indicates
better efficiency in converting equity financing into profits.

34
Table 7

Data analysis of ROE of joint venture Banks

HBL EBL SCB SBI NABIL NMB

YEAR
2013/14 16.85 13.28 26.27 17.09 27.91 9.86

2014/15 17.06 12.24 21.69 17.08 22.73 10.29

2015/16 24.53 13.69 17.18 17.46 25.61 12.32

2016/17 21.58 14.22 11.98 14.85 22.41 11.73

2017/18 14.17 17.6 18.66 15.81 20.94 13.54

2018/19 18.34 18.09 19.49 16.2 17.67 13.32

2019/20 15.4 13.88 15.15 10.44 13.61 8.94

2020/21 14.89 9.91 9.44 6.26 15.19 12.08

2021/22 10.76 11.36 14.21 9.57 9.78 12.95

2022/23 4.67 15.46 18.11 19.43 11.75 11.75

Mean 17.0644 13.8077 17.1188 13.8622 19.5388 11.67

S.D 4.0838 2.6652 5.1277 4.0601 5.9173 1.6234

C.V. 0.2393 0.1930 0.2995 0.2928 0.3028 0.1391

Min 4.67 9.91 9.44 6.26 9.78 8.94

Max 24.53 18.09 26.27 19.43 27.91 13.54

Source: Annual reports of selected banks.

Table 7 reveals that the average ROE of NABIL is the highest among all joint venture
banks with ROE of 19.5388, whereas the mean ROE of NMB is the lowest among all
joint venture bank with ROE of 11.67. The coefficient of variation analysis shows that
the ROE of NMB is the most consistent among all joint venture banks. i.e. C.V. of
0.1391 with S.D. of 1.6234. Similarly, EBL’s ROE is also more consistent with C.V.
of 0.1930 with S.D. of 2.6652 comparing to ROE of HBL, NABIL, SBI and SCB. The
data shows that ROE of NABIL is less consistent among all selected banks with C.V.
of 0.3028 with S.D. of 5.9173.

35
The overview of the aforesaid analysis is illustrated in the trend chart. Figure 7 gives
the glimpse of the trend of ROE of HBL, SCB, SBI, NMB, EBL and NABIL.

YEARS

Figure 7. Trend Chart of ROE of Joint Venture Banks

Table 8 reflects the overall relationship between CAR, D/E Ratio, non-performing
loan ratio, D/A Ratio, ROA, ROE.
The result shows that the average CAR of joint venture banks is 13.85 and D/E ratio is
0.1459. Overall, the maximum CAR of joint venture banks is 22.99 and D/E ratio is
0.72. A coefficient of variation is a statistical measure of the dispersion of data points
in a data series around the mean. The coefficient of variation represents the ratio of
the standard deviation to the mean, and it is a useful statistic for comparing the degree
of variation from one data series to another, even if the means are drastically different
from one another. Therefore, while analyzing C.V it is found that the C.V of D/E ratio
is higher than all other variables whereas the C.V of CAR is lower than all other
variables.
Recognizing the role of the nature and shape of data distribution in further statistical
analysis, the skewness and kurtosis has been measured as a part of descriptive
statistics. The rule of thumb seems to be: If the skewness is between -0.5 and 0.5, the
data are fairly symmetrical
36
 2.3. Descriptive Statistics of Study Variables
Table 8

Aggregate Analysis of CAR, D/E ratio, non-performing loan, D/A ratio, ROA and
ROE

D/E non-performing loan

Variables D/A ROA ROE
ratio ratio Ratio
CAR
Mean 13.85 0.14 0.81 0.02 1.71 15.51

S.D. 2.48 0.15 0.73 0.01 0.47 4.77

C.V. 0.17 1.08 0.90 0.69 0.27 0.30

Max 22.99 0.72 3.22 0.08 2.69 27.91

Min 10.75 0.01 0.1 0.01 0.7 6.26

Skewness 1.66 2.07 1.31 1.40 0.22 0.65

Kurtosis 3.50 4.09 1.33 1.53 0.28 0.12

Source: Appendix-II
For joint venture banks, these ratios can be particularly telling, as they often operate
under different regulatory environments and have unique capital structures compared
to wholly-owned banks. An aggregate analysis would involve collecting data on these
ratios across several joint venture banks to identify trends and averages within the
sector.
For instance, research has shown that CAR has a positive and significant influence on
credit distribution, while NPL and ROA have a negative and significant influence1.
This suggests that higher capital adequacy is associated with more lending activity, but
higher non-performing loans and lower returns on assets could indicate challenges in
credit management and profitability. This kind of analysis would typically be used by
investors, regulatory bodies, or the banks themselves to make informed decisions
about future strategies and policies. They can provide a comprehensive view of a
bank’s financial health and stability.

If the skewness is between -1 and – 0.5 or between 0.5 and 1, the data are moderately
skewed. If the skewness is less than -1 or greater than 1, the data are highly skewed.
37
It means the data of CAR, D/E ratio, non-performing loan ratio, and D/A ratio
indicates the data are highly skewed whereas the data of ROA and ROE is
moderately skewed.
Likewise, a distribution with a negative kurtosis value indicates that the distribution
has lighter tails and a flatter peak than the normal distribution. The data of ROA and
ROE indicates negative kurtosis value and the data of CAR, D/E ratio, non-
performing loan ratio, and D/A ratio have positive kurtosis value that indicates the
distribution has higher tails.

2.4. Correlation Analysis

Correlation analysis is the statistical tools that we can use to describe the degree to
which one variable is linearly related to other variables. It deals to determine the
degree of relationship between two or more variables. Its value is limited between the
range +1 & -1.
A positive correlation exists when one variable decreases as the other variable
decreases, or one variable increase while the other increases. Negative correlation is a
relationship between two variables in which one variable increase as the other
decreases, and vice versa.

Table 9 :

Pearson Correlation coefficient of joint venture banks (n=54)

non- D/A
ROA ROE
CAR D/E Ratio Performing
Ratio
Loan Ratio

CAR 1

D/E Ratio -0.11 1

non-
Performing -0.35 0.15 1
Loan Ratio
D/A Ratio -0.13 0.73 0.17 1

ROA 0.17 -0.54 -0.14 -0.38 1

ROE -0.14 - 0.06 -0.27 0.83 1
0.47
Note: Results are drawn using Excel-2016 version

38
Table 9 explains that the correlation between factors affecting Profitability of joint
venture commercial banks in Nepal. Profitability indicators are ROA and ROE. The
major focus is given to CAR, D/E ratio, non-performing loan ratio, D/A ratio, ROA
and ROE. Here, we can observe that ROA and ROE have highest influence in each
other with 0.837459 correlation score. Similarly, D/A and D/E is also highly influence
each other with 0.732729647. Correlation coefficients whose magnitude is between
0.7 and 0.9 indicate variables which can be considered highly correlated. Similarly,
D/E and ROA have 0.540998596 correlation score resulting moderate correlation with
each other. Correlation coefficients whose magnitude is between 0.5 and 0.7 indicate
variables which can be considered moderately correlated. And Correlation coefficients
whose magnitude is between 0.3 and 0.5 indicate variables which have a low
correlation. Likewise, Correlation coefficients whose magnitude is less than 0.3 have
little if any (linear) correlation. Therefore, we can conclude that CAR and ROA, D/E
and non-performing loan, and non-performing loan and ROE have little correlation
with correlation scores 0.172848574, 0.154313465, 0.0618802 respectively whereas
CAR and D/E, CAR and non-performing loan, CAR and D/A, CAR and ROE, D/E
and ROE, non-performing loan and ROA,D/A and ROA, D/A and ROE shows low
negative correlation with correlation score -0.1102, -0.3534, -0.1376, -0.1422, -
0.4780, -0.1400, -0.3896,-0.2712 respectively.

2.5. Regression Analysis

Regression analysis is set of statistical process for estimating the relationship between
variables. It includes many techniques for modeling and analyzing several variables
when the focus is on the relationship between dependent variables and independent
variables. For the finding result regression analysis was conducted without control
variables.
Test of significance was carried out for all variables studied using the t-test at 95%
level of significance. Any p-value that is greater than 0.05 will be deemed to have a
significant relationship with the dependent variable else the relationship is considered
insignificant.
The standardized coefficient and the t-statistic indicate the strength of the relationship
between the dependent and independent variables.
The adjusted R square measures the degree of variability of the dependent variable
due to the change in the independent variable.

39
Table 10

Regression Analysis of Dependent Variable ROA

Coefficients Standard Error t Stat P-value

Intercept 1.66 0.38 4.30 0.1

CAR 0.02 0.02 0.85 0.39

D/E Ratio -1.64 0.52 -3.13 0.02

non-
Performing
Loan Ratio -0.01 0.08 -0.17 0.86

D/A Ratio 0.85 4.89 0.17 0.86

adjusted F-state F-significance

R2 =0.30 2
R =0.24 =5.41 =0.001 n=54

Note: Results are drawn using Excel-2016

version.
(ROAit=β0+β1CAR+β2D/E+β3NPL+β3D/A+Eit)

Table 10 represents the regression result of profitability of joint venture commercial

banks and profitability indicator is ROA. The value of R2 and adjusted R2 are
0.306464 and 0.249849 respectively. This indicates that 30.6464% of the variation in
bank performance can be explained by the variation in the explanatory variables.

The statistic in the table shows that there is a perfect model fit with an F-statistics of
5.413116, significant at 95%. This means that the model specification is correct and
that the selected independent variables are determinants of ROA. Here significance is
less than 0.05 i.e., 0.0010865 which indicates that the model is fit and selected
variable is affected by the independent variables.

The results from Table 10 indicate that the coefficient of CAR and D/A ratio is
positive and statistically insignificant whereas the coefficient of non-performing loan
ratio is negative and also statistically insignificant. The result of the study reveals that
CAR, non-performing loan ratio, D/A ratio insignificantly affect the ROA of joint
venture commercial banks in Nepal.

40
The coefficient of D/E Ratio is negative but statistically significant. So, the findings
of the study don’t support the hypothesis that CAR, D/A ratio non-performing loan
ratio doesn’t have a significant effect on ROA of joint venture commercial banks in
Nepal.

Table 11

Regression Analysis of Dependent Variable ROE

Coefficients Standard Error t Stat P-value

Intercept 21.18 3.92 5.39 1.97E-06

CAR -0.31 0.24 -1.26 0.21

D/E Ratio -18.39 5.36 -3.43 0.001

non-Performing
Loan Ratio 0.48 0.84 0.56 0.57

D/A Ratio 39.34 49.86 0.78 0.43

F-
adjusted F-state=
R2=0.28 significance= n=54
R2=0.22 4.80
0.0023

Note: Results are drawn using Excel-2016 version.

(ROEit=β0+β1CAR+β2D/E+β3NPL+β3D/A+Eit)

Table 11 represents the regression result of profitability of joint venture commercial

banks and profitability indicator is ROE. The value of R2 and adjusted R2 are
0.281654 and 0.223013 respectively. This indicates that 28.1654% of the variation in
bank performance can be explained by the variation in the explanatory variables.

The statistic in the table shows that there is a perfect model fit with an F-statistics of
4.803059, significant at 95%. This means that the model specification is correct and
that the selected independent variables are determinants of ROE. Here significance is
less than 0.05 i.e., 0.00238689 which indicates that the model is fit and selected
variable is affected by the independent variables.

41
The results from Table 11 indicate that the coefficient of non-performing loan ratio
and D/A ratio is positive and statistically insignificant whereas the coefficient of CAR
is negative and also statistically insignificant. The result of the study reveals that
CAR, non-performing loan ratio, D/A ratio insignificantly affect the ROE of joint
venture commercial banks in Nepal.

The coefficient of D/E Ratio is negative but statistically significant. So, the findings
of the study don’t support the hypothesis that CAR, D/A ratio non-performing loan
ratio doesn’t have a significant effect on ROE of joint venture commercial banks in
Nepal.

2.6. Findings and Discussion

The data of both dependent and independent variables over nine years are obtained
from joint venture banks annual reports and they are used in this study using Excel
Spreadsheet Software. Major findings while analyzing the data are pointed out below:

i. CV of ROA in SBI and ROE in NABIL is highest among the selected banks.
There is high risk associated in ROA for the shareholders and investors of SBI
bank and ROE for the shareholder and investor of NABIL. The CV of ROA in
NMB and ROE also in NMB is low which indicates that there is low risk
involved in return on assets (ROA) and return on equity (ROE).
ii. The average CAR of SCB is higher comparing to all other joint venture banks
with C.V of 0.2017 and the average of CAR of HBL is lowest comparing other
joint venture banks with C.V. of 0.1084.

iii. The average of non-performing loan of HBL is highest comparing to all other
joint venture banks with C.V. of 0.5567 and SBI is lowest comparing other joint
venture banks with C.V. of 0.2389.

iv. NMB has highest average D/E ratio comparing other joint venture banks with
C.V. of 0.5710 and SCB has lowest average D/E ratio comparing other joint
venture banks with C.V. of 0.7372.
v. Average of D/A ratio of SBI and NMB is highest among other joint venture
banks in Nepal with C.V. of 0.7185 and 0.4244 respectively and SCB has
lowest average of D/A ratio with C.V. of 0.3648.

42
 vi. The correlation analysis shows that ROA and CAR, D/E ratio and non-
performing loan ratio, D/E and D/A ratio, non-performing loan ratio and ROE
ratio, and ROA and ROE have positive correlation whereas CAR and D/E, CAR
and non-performing loan, CAR and D/A, CAR and ROE, D/E and ROE, non-
performing loan and ROA, D/A and ROA, D/A and ROE have low negative
correlation.

vii. The simple regression analysis of Dependent Variable ROA, the coefficient of
CAR and D/A ratio is positive and statistically insignificant whereas the
coefficient of non-performing loan ratio is negative and also statistically
insignificant. The result of the study reveals that CAR, non-performing loan
ratio, D/A ratio insignificantly affect the ROA of joint venture commercial
banks in Nepal. The coefficient of D/E Ratio is negative but statistically
significant. So, the findings of the study don’t support the hypothesis that CAR,
D/A ratio non-performing loan ratio doesn’t have a significant effect on ROA of
joint venture commercial banks in Nepal.

viii. The simple regression analysis of Dependent Variable ROE, the coefficient of
non-performing loan ratio and D/A ratio is positive and statistically insignificant
whereas the coefficient of CAR is negative and also statistically insignificant.
The result of the study reveals that CAR, non-performing loan ratio, D/A ratio
insignificantly affect the ROE of joint venture commercial banks in Nepal. The
coefficient of D/E Ratio is negative but statistically significant. So, the findings
of the study don’t support the hypothesis that CAR, D/A ratio non-performing
loan ratio doesn’t have a significant effect on ROE of joint venture commercial
banks in Nepal.

Xi. In research studies, the findings section presents raw data and observations
(dependent and independent variables).

X. The discussion section interprets the meaning of results, places them in context, and
explains their significance.

XI. Researchers explore cause-and-effect relationships by manipulating variables

and observing their impact on dependent variables.

43
 CHAPTER-III

CONCLUSION AND ACTION IMPLICATIONS

3.1. CONCLUSION
After summarizing the objective of the study, market seems over-crowded and the
banks are now finding a tough competition among themselves. The joint venture
commercial banks in Nepal are doing well but they are not giving satisfactory results
due to some internal and external factors.
All Commercial banks of Nepal are bound by the directives of NRB. The directives
No. 1 has set norms on capital adequacy for any commercial banks. Every commercial
bank has to meet the requirement of capital adequacy as stated by the directives.
Capital adequacy is the portion of capital fund in regard of risk-weighted assets that
commercial banks hold. Capital adequacy is required to the money of the depositors
as the banks are playing with the money they collected from the depositors.
Based on the findings, it can be concluded that Capital adequacy ratio, have
insignificant impact on ROA at 0.05 level with negative relationship; which means
any increase/decrease on the value of these variables leads to an decrease/increase on
profitability performance of Commercial banks (ROA). And Debt-Equity ratio and
Advances to Assets ratio has significant impact on ROA at 0.05 level with positive
relationship; which means any increase/decrease on the value of variables leads to an
increase/decrease on profitability performance of commercial banks. The Non-
performing loan has significant impact on ROA at 0.05 level with a negative
relationship; which means any increase/decrease on the value of variables leads to a
decrease/increase on the profitability performance of the commercial banks (ROA).The
study examined cash flow from operating, investing, andfinancing activities.
Regulatory requirements also influenced the leverage position of these banks.
Significant factors affecting capital structure included bank size, profitability,
liquidity, and growth. Joint venture banks in Nepal face unique challenges, and
understanding their financial dynamics is crucial for sustainable growth. Prudential
regulation of the banks is supposed to prevent or at least reduce the frequency of the
disastrous consequences in financial sector. Commercial banks are legally requiring to
maintainadequate capital funds.

44
3.2. ACTION IMPLICATIONS
i. This study focused on capital adequacy, debt- equity, advances to total assets,
and nonperforming loan as the independent variables and ROE, ROA and
Spread as the dependent variables for evaluating of banks’ profitability. But the
same study could be developed by including more independent and other
dependent variables to the regression model and increasing the sample size.
ii. The current study fully employed secondary data obtained from financial reports
of banks or through Nepal Rastra Bank which can have potential bias. Thus,
future research is recommended to substantial and/or triangulate secondary by
primary data.
iii. This study can be replicated in other industries to know what the capital
adequacy indicators that affect the profitability.Thus this studies can be done in
other sectors of the economy such as manufacturing sector to determine the firm
specific factors that influence their profitability performance.
iv. The study also suggests that another study can be done in the banking industry
by covering a longer period of time in order to establish trends to determine
what factors may influence the bank profitability performance.
v. Limited statistical tools and techniques were used to analyze the data and to test
the result, therefore other various statistical tools could be used to get more
actual result.
vi. This research could be used for the creditors and depositors, in order to
investigate the situation of the joint venture commercial banks of Nepal and for
taking the best alternative.
vii. This study focused on absorptive learning capacity which plays acrucial role
in joint ventures.
viii. This study focused on implication which Foster an environment that encourages
sharing, collaboration, and continuous learning among JV partners.
xi. It focused on regularly assess and adapt the structure of your JV to align.
with changing market dynamics, technological advancements, and strategic
goals.
x. Tailor the joint venture agreement (JVA) provisions to accommodate
diverse partner intentions.
xi. It consider appointing an end-to-end senior management team to oversee
progress.

45
 REFERENCES
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2938-2950.
Abreu, M. & Mendes, V. (2002). Commercial bank interest margins and profitability.
European journal of Finance, 2:36-48.
Alkadamani, K. (2015). Capital adequacy, Bank behavior and crisis: Evidence from
Emergent Economics. European journal of suitable development, 4: 329-338.
Athanasoglou, P. P., & Delis, M. D. (2006). Determinants of bank profitability in
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Berger, A. N., Udell, G. F. (1994). Did Risk-Based Capital Allocate Bank Credit and
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Berger, A. N. (1994). The Relationship between Capital and Earnings in Banking.

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Bobakova, IV. (2003). Raising the Profitability of Commercial Banks. BIATEC 11.
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NABIL and NIBL. An Unpublished Master Degree Thesis, T.U.
Gilbert, R. A. & D. C. Wheelock. (2007). Measuring commercial bank
profitability: Proceed with caution. Federal Res. Bank St. Louis Rev, 22:
515-532.
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December 2023 International Journal of Silkroad Institute of Research
and Training 1(2):106-114
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Nepal: Central Departmental of Management;2019.

46
 APPENDICES

Appendices-I

Data of the Selected Banks for Study

non-
D/E D/A
YEA BANK CAR Performing
Rati Ratio ROA ROE
R o Loan Ratio
/
Ratio

2013/14 HBL 1 1 .2 3 0.12 1.96 0.03 1.3 16.85

2014/15 HBL 11.14 0.08 3.22 0.04 1.34 17.06

2015/16 HBL 10.84 0.05 1.23 0.05 1.94 24.53

2016/17 HBL 12.15 0.06 0.85 0.06 2.19 21.58

2017/18 HBL 12.46 0.04 1.4 0.01 1.67 14.17
2018/19 HBL 12.6 0.03 1.12 0.02 2.21 18.34

2019/20 HBL 14.89 0.07 1.01 0.02 1.79 15.4

2020/21 HBL 13.89 0.06 0.48 0.03 1.68 14.89

2021/22 HBL 11.75 0.08 1.59 0.01 1.09 10.76

2022/23 HBL 12.31 0.07 0.58 0.03 0.47 4.67

2013/14 EBL 12.76 0.06 0.48 0.02 1.78 13.28

2014/15 EBL 13.33 0.33 0.66 0.03 1.85 12.24

2015/16 EBL 12.66 0.08 0.38 0.01 1.59 13.69

2016/17 EBL 14.54 0.04 0.25 0.02 1.83 14.22

2017/18 EBL 14.2 0.09 0.2 0.01 1.97 17.6

2018/19 EBL 13.74 0.08 0.16 0.01 1.94 18.09

2019/20 EBL 13.38 0.07 0.22 0.01 1.42 13.88

2020/21 EBL 12.48 0.08 0.12 0.01 0.89 9.91

2021/22 EBL 11.89 0.22 0.12 0.02 1.13 11.36

2022/23 EBL 13.36 0.24 0.24 0.02 1.24 15.46

47
2013/14 SCB 12.27 0.03 0.48 0.01 2.51 26.2

2014/15 SCB 13.1 0.07 0.34 0.02 1.99 21.69

2015/16 SCB 16.38 0.05 0.32 0.01 1.98 17.18

2016/17 SCB 21.08 0.01 0.19 0.02 1.84 11.98

2017/18 SCB 22.99 0.02 0.18 0.02 2.61 18.66

2018/19 SCB 19.69 0.02 0.15 0.01 2.61 19.49

2019/20 SCB 18.51 0.01 0.44 0.01 1.71 15.15

2020/21 SCB 17.17 0.01 0.96 0.02 1.22 9.44

2022/23 SCB 17.12 0.01 1.60 0.01 2.52 18.11

2013/14 SBI 13.49 0.22 0.18 0.05 1.69 17.09

2014/15 SBI 14.03 0.13 0.19 0.03 1.64 17.08

2015/16 SBI 13.49 0.09 0.14 0.02 1.59 17.46

2016/17 SBI 15.71 0.07 0.1 0.02 1.57 14.85

2017/18 SBI 15.15 0.08 0.2 0.01 1.97 15.81

2018/19 SBI 14.12 0.1 0.2 0.01 1.94 16.2

2019/20 SBI 15.55 0.3 0.23 0.03 1.17 10.44

2020/21 SBI 13.86 0.61 0.23 0.07 0.7 6.26

2022/23 SBI 12.78 0.83 0.12 0.06 1.23 19.43

2013/14 NABIL 11.18 0.14 2.23 0.01 2.65 27.91

2014/15 NABIL 11.57 0.11 1.82 0.01 2.06 22.73

2015/16 NABIL 11.73 0.09 1.14 0.02 2.32 25.61

2016/17 NABIL 12.9 0.08 0.8 0.03 2.69 22.41

2017/18 NABIL 13 0.04 0.55 0.01 2.61 20.94

2018/19 NABIL 12.5 0.03 0.74 0.02 2.11 17.67

2019/20 NABIL 13.07 0.13 0.98 0.01 1.58 13.61

2020/21 NABIL 12.77 0.12 0.84 0.01 1.71 15.19

2021/22 NABIL 13.09 0.33 1.62 0.04 1.2 9.78

2022/23 NABIL 13.33 0.14 3.2 0.03 1.44 11.75
2013/14 NMB 10.75 0.2 0.55 0.05 1.36 9.86

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2014/15 NMB 11.13 0.18 0.42 0.02 1.21 10.29

2015/16 NMB 10.98 0.15 1.81 0.03 1.49 12.32

2016/17 NMB 12.75 0.16 1.68 0.02 1.69 11.73

2017/18 NMB 15.75 0.13 0.88 0.02 1.65 13.54

2018/19 NMB 15.45 0.4 0.82 0.05 1.67 13.32

2019/20 NMB 15.08 0.33 2.68 0.04 0.95 8.94

2020/21 NMB 15.08 0.6 2.27 0.06 1.17 12.08

2021/22 NMB 13.59 0.45 1.45 0.03 1.39 12.95

2022/23 NMB 13.33 0.90 2.72 0.05 1.20 11.75

Appendices –II

Descriptive Statistics
non-
Variables CAR D/E ratio performing D/A Ratio ROA ROE
loan ratio

Mean 13.85 0.14 0.81 0.02 1.71 15.51

SD 2.48 0.15 0.73 0.01 0.47 4.77

C.V. 0.17 1.08 0.90 0.69 0.27 0.30

Max 22.99 0.72 3.22 0.08 2.69 27.91

Min 10.75 0.01 0.1 0.01 0.7 6.26

Skewness 1.66 2.07 1.31 1.40 0.22 0.65

Kurtosis 3.50 4.09 1.33 1.53 0.28 0.1

2

49
Appendices –III

SUMMARY
OUTPUT (ROA)

Regression Statistics

Multiple R 0.55
R Square 0.30
Adjusted R 0.24
Square Standard 0.41
Error 54
Observations

ANOVA
Significance
df SS MS F F

Regression 4 3.69 0.92 5.41 0.001

Residual 49 8.35 0.17

Total 53 12.04

5
0
Appendices –IV

SUMMARY OUTPUT
(ROE)

Regression Statistics

Multiple R 0.53
R Square 0.28
Adjusted R
Square 0.22
Standard Error 4.20
Observations 54

ANOVA

Significance
Df SS MS F
F

Regression 4 340.24 85.06 4.80 0.0023

Residual 49 867.78 17.70

Total 53 1208.037

5
0