CHAPTER - I

INTRODUCTION

1.1Background of study
Introduction of Bank
A bank is a financial institution that accepts deposits from the public and
creates credit. Lending activities can be performed either directly or indirectly
through capital markets. Due to their importance in the financial stability of a
country, banks are highly regulated in most countries. Most nations have
institutionalized a system known as fractional reserve banking under which banks
hold liquid assets equal to only a portion of their current liabilities. In addition to
other regulations intended to ensure liquidity, banks are generally subject
to minimum capital requirements based on an international set of capital standards,
known as the Basel Accords.(Paul, 2005)

Types of the bank

Bank differs on the basis of their function. There are as follows (Paul, 2005)
1. Central Bank
The bank which has sole authority of issuance of currencies and chief regulator of
money supply and other financial institution. It is bank of all bank and the bank of the
government.
2. Commercial bank
A commercial bank is an institution that provides services such as accepting deposits,
providing business loans, and offering basic investment products. Commercial bank
can also refer to a bank, or a division of a large bank, which more specifically deals
with deposit and loan services provided to corporations or large/middle-sized
business-as opposed to individual members of the public/small business. It is
classified as A Grade bank according to NRB.
3. Development Bank
The banks which have certain limitation imposed on their activity level and
geographic area to be served are development bank. These are classified as B class as
per NRB.

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Profitability
Profitability is closely related to profit but with one key difference. While profit is an
absolute amount, profitability is a relative one. It is the metric used to determine the
scope of a company's profit in relation to the size of the business. Profitability is a
measurement of efficiency and ultimately its success or failure. A further definition of
profitability is a business's ability to produce a return on an investment based on its
resources in comparison with an alternative investment. Although a company can
realize a profit, this does not necessarily mean that the company is profitable.
[Link]

In the era of dynamic business environment and competitiveness, every economic

units such as individual person, investor, consumer, seller, producer and even
government has been seeking to maximize their objectives. Utility maximization for
consumer, sales and profit maximization for producer, optimal tradeoff between risk
return for investor and social welfare maximization for government are primary
objectives which lead the economy toward dynamism. So, every organization need to
know its current status with potentiality in one hand and investor also requires various
information to optimize return on their investment subject to risk involved(Weston &
Brigham, 1985).

A ratio analysis is a quantitative analysis of information contained in a company’s

financial statements. Ratio analysis is used to evaluate various aspects of a company’s
operating and financial performance such as its efficiency, liquidity, profitability and
solvency. While there are numerous financial ratios, ratio analysis can be categorized
into six main groups:
i. Liquidity Ratios: liquidity ratios measure a company's ability to pay off its
short-term debts
ii. Solvency Ratios: also called financial leverage ratios, solvency ratios compare
a company's debt levels with its assets, equity, and earnings to evaluate
whether a company can stay afloat in the long-term by paying its long-term
debt and interest on the debt.
iii. Profitability Ratios: these ratios show how well a company can generate
profits from its operations.

2
 iv. Efficiency Ratios: also called activity ratios, efficiency ratios evaluate how
well a company uses its assets and liabilities to generate sales and maximize
profits
v. Coverage Ratios: these ratios measure a company's ability to make the
interest payments and other obligations associated with its debts.
vi. Market Prospect Ratios: e.g. dividend yield, P/E ratio, earnings per share, and
dividend payout ratio. These are the most commonly used ratios in
fundamental analysis. (Brealey & Myers 1999)

Introduction of Nepal Bank Limited

Nepal Bank Limited, The first bank of Nepal was established in November 15, 1937
A.D (Kartik, 30, 1994). It was formed under the principle of Joint venture (Joint
venture between govt. & general public). NBL's authorized capital was Rs. 10 million
& issued capital Rs. 2.5 million of which paid-up capital was Rs. 842 thousand with
10 shareholders. The bank has been providing banking through its branch offices in
the different geographical locations of the country.

Corporate Vision:
"Pioneer Bank with customer service excellence"

Mission Statement: BEST

 Building trusted and united customer relationship
 Ensuring quality customer service
 Service access to all
 Technology driven banking service

Core Values:
 Honesty, transparency, integrity and ethics
 Respect to customers and fellow associates
 Learning and knowledge sharing
 Teamwork, ownership and accountability
 Contribute to society and environment
Objectives of bank
Nepal Bank Limited has the following objectives:
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 Focus on building the positive net worth and meeting minimum capital
requirement over the coming five years.
 Focus on increasing the customer base and market share.
 Maximize the potential/efficiency of bank's staff.
 Focus on minimizing the risk associated with the business.
 Focus on providing the world class business solutions.
 Focus on increasing the sustainable profit.

1.2 Statement of the Problem

Ratios are critical quantitative analysis tools. One of their most important functions
lies in their capacity to act as lagging indicators in identifying positive and negative
financial trends. The information a trend analysis provides allows to you to make and
implement ongoing financial plans and, when necessary, make course corrections to
short-term financial plans. Ratio analysis also provides ways for you to compare the
financial state of your business against other businesses within your industry or
between your business and businesses in other industries. The sheer numbers of
available financial ratios makes it important to research and choose ratios most
applicable to business. Profitability ratios expose the current profitability trends and
status of the organization. It clearly shows the status of the organization in terms of
tradeoff between stability, liquidity profitability and safeguarding the interest of
different parties such as shareholders, management and so on.
a. What has been the bank doing to analyze the profitability ratios?
b. What has been its future plan in maintaining the profitability?

1.3 Objective of Study

Primary objective of study is to analyze some important financial ratios of NBL
which reveal current status of bank. The following are objectives of the study:
a. To analyze the profitability ratios of NEPAL BANK LTD.
b. To examine the profit trends of NEPAL BANK LTD. for 5 years
1.4 Limitation of Study
This study is simply a part study for the fulfillment of BBS degree. The limitations of
this study are as follows:
i. The study is mainly based on secondary data.
ii. The study has covered only five fiscal years.
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 iii. Out of the numerous affecting factors this study concentrates only on
those factors, which are related with investment policy and available in
the required from for analyzing the different issues.

1.5 Rationale of Study

Ratio analysis can provide an early warning of a potential improvement or
deterioration in a company’s financial situation or performance. Ratio analysis
involves evaluating the performance and financial health of a company by using data
from the current and historical financial statements. The data retrieved from the
statements is used to compare a company's performance over time to assess whether
the company is improving or deteriorating; compare a company's financial standing
with the industry average; or compare a company to one or more other companies
operating in its sector to see how the company stacks up. This report will of course
help to assess the current performance of the bank and its potentiality in numerical
standard for consumer, investor and other concern parties.

1.6 Organization of the Study

The present study was organized in such way that the stated objectives can easily be
fulfilled. The structure of the study would try to analyze the study in a systematic
way. The study report has presented the systematic presentation and finding of the
study. The study report would design in five chapters which are as follows:

The first chapter describes the basic concept and background of the study. It has
served orientation for readers to know about the basic information of the research
area, statement of the problems, objectives of the study, limitation of the study,
rationale of the study.

The second chapter of the study assures that they are familiar with important research
that has been carried out in similar areas. It also establishes that the study as a link in
a chain of research that is developing and emerging knowledge about concerned field.

The third chapter research methodology refers to the various sequential steps to be
adopted by a researcher in studying a problem with certain objectives in view. It

5
describes about the various source of data related with study and various tools and
techniques employed for presenting the data.

The fourth chapter includes the presentation and analysis of data and the finding of
the study.

On the basis of the results from data analysis, the researcher concluded about the
performance of the concerned organization for better improvement.

Finally, reference of books, all published and unpublished reports, Journals and
literatures along with appendixes containing elaborated for of calculation and
presentation of detail of data will be putted down at the end.

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 CHAPTER - II
LITERATURE REVIEW

A ratio analysis is a quantitative analysis of information contained in a company’s

financial statements. Ratio analysis is used to evaluate various aspects of a company’s
operating and financial performance such as its efficiency, liquidity, profitability and
solvency. (Brealey & Myers, 1999)

2.1 Profitability Ratios

A profitability ratio is a measure of profitability, which is a way to measure a
company's performance. Profitability is simply the capacity to make a profit, and a
profit is what is left over from income earned after deducting all costs and expenses
related to earning the income. These ratios can be used to judge a company's
performance and to compare its performance against other similarly-situated
companies. The major profitability ratios are
a. Return on Assets(ROA)
b. Return on Capital Employed(ROCE)
c. Return on Shareholder’s Equity(ROSE)
d. Interest earned to Total Assets Ratio(IETA)
e. Net Profit to Total Deposit Ratio(NPTD)
f. Earnings Per Share(EPS)
g. Price Earnings Ratio(P/E Ratio) (Brealey& Myers, 1999)

2.2 Theoretical Review

In the beginning of nineteenth century essential improvement in ratio analysis
occurred. In this period few developments are very basic. First, large number of ratios
was conceived in comparison to earlier periods. Second, proper ratio criteria were
appeared. In this regard most famous was current ratio criterion. Third, different
analysts understand the need of inter-firm analysis and for that purpose it felt the need
for relative ratio criterion. Despite these developments ratio analysis has been used
for analysis in this period and those felt the need of using ratio analysis only used
current ratio.

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In 1920s, interest in ratio analysis increased dramatically. Many publications on the
topic of ratio analysis published during this period. Different credit agencies, trade
unions, universities and individuals seeking analyses compiled industry data on ratio
analysis.

Horrigan (1983) says ratios analysis has come into existence since early ages and the
main reason of the development of ratio analysis was its use in the analysis of the
properties of ratios in 300 B.C. in recent time it is used as a standard tool for the
analysis of financial statement. In nineteenth century main reasons of using ratio
analysis are power of financial institutions and shifting of management to professional
managers. Ratio analysis used for two purposes that are credit and managerial. In
managerial approach profitability and in credit approach capacity of firm to pay debts
is the main point of focus. Generally, ratio analysis is used credit analysis.

There was rapid expansion of financial knowledge in nineteenth century and to study
this rapidly expanding knowledge analyst first compared similar items then moved
further and compared current assets and liabilities as well with other ratios. In that
period current ratio was the most significant ratio among all other available ratios. To
analyze the operating results dupont analysis is also used. The result divided into three
parts and then compared with other companies to point out the problem and strong
areas of business.

Foulke (1931) create and promoted own set of financial ratios successfully. This set of
financial ratios was printed and promptly known as important and prominent group of
ratios.

Fitzpatrick (1932) with the help of thirteen different type of ratios analysis 120 failed
firms and found that three out of thirteen ratios predict the failure of firms with
precise accuracy while other ratios also shown some prediction power.

Rasmer and foster (1931) used eleven ratios to examine that the successful firms has
higher ratios than unsuccessful firms. Although this study was immature but
immaturity was ignored by considering the vital contribution this study has in the
evaluation of usefulness of ratios. Security and exchange commission of America was
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formed in 1934. This also expands the flow and number of financial statements and
with the help of this peripheral factor importance of ratio analysis further enhanced
and realized.

Marwin (1942) by using several ratios analyze financial trends of huge successful and
unsuccessful firms. Compared normal ratios of industry with mean ratios of large
unsuccessful firms and find out that the three ratios current ratio, net working capital
to total assets and net worth to debt were able to foresee failure before actual failure
happened. This study shows the actual power of prediction of ratio analysis and
results were still reliable.

Beaver (1967) also examined the prediction power of ratio analysis and point out
ratios ability to predict failure as early as five years before the collapsed. Statistical
technique used in the study was more powerful than earlier studies and fund statement
data was used to calculate ratio. This study set the foundation for future research on
ratio analysis.

Gombola and Ketz (1983) found that the fund and income statement are produced for
different purpose and profitability ratios did not has the information that cash flow
ratios provide. In other words both ratios gave important as well as different
information from one and other.

Yuga Raj Bhattarai (2016) in his article, "Effect of Credit Risk on the Performance of
Nepalese Commercial Banks" This study has examined the effect of credit risk on
performance of Nepalese commercial banks. The descriptive and causal comparative
research designs have been adopted for the study. The pooled data of 14 commercial
banks for the period 2010 to 2015 have been analyzed using regression model. The
regression results revealed that 'non-performing loan ratio' has negative effect on bank
performance whereas 'cost per loan assets' has positive effect on bank performance. In
addition to credit risk indicators, bank size has positive effect on bank performance.
Capital adequacy ratio and cash reserve are not considered as the influencing
variables on bank performance. This study concludes that there is significant
relationship between bank performance and credit risk indicators.

9
Prof. Dr. Radhe Shyam Pradhan and Smita Shakya (2016) in their article "The Impact
of Foreign Banks’ Presence on the Performance of Domestic Commercial Banks in
Nepal". This study examines the impact of foreign banks’ presence on the
performance of Nepalese commercial banks. Specifically, the study attempts to
analyze the influence of foreign banks’ presence on interest rate spreads, operating
expenses, profitability and risk. The data were collected from the Banking and
Financial Statistics and Supervision Report published by Nepal Rastra Bank and
annual reports of the selected banks. This study is mainly based on secondary data,
which were collected for fourteen commercial banks established before 2000/01 for
the period of 2001/02 to 2011/12. The multiple regression models were estimated to
examine the impact of foreign banks’ presence on the performance of Nepalese
commercial banks.

In 1940s many nations expressed interest in ratio analysis. Current ratio has used in
credit management in Australia after intense scrutiny. In England data has collected
from different organization and sort in “pyramid” in order to used that data in ratio
analysis so that decision made on more rational basis. In other wards British method
is more management oriented than American system that is credit oriented. Indian and
Canadian system is similar to American system and same kind of ratios and criteria
has been used. In Japan data is available in grouping on the basis of industry and sizes
of firms. China and Russia used several ratios as control measure in investment and
working capital. (Weston & Brigham 1985).

2.3 Empirical Review

Pinches and Mingo (1973) evaluate the structure of ratios and found that ratios can be
divided into different groups. Present general classification of financial ratios on
logical basis. Results concluded that the ratios can be divided into four groups that are
financial leverage, short-term capital intensiveness, return on investment and long-
term capital intensiveness.

Stevens (1973) also studies the topic of ratio classification and grouped the financial
ratios in four categories that include activity, liquidity, leverage and profitability.
Twelve different factors or division of financial ratios are presented in five different

10
studies. On the basis of five published studies assortment of financial ratios are very
time consuming because the results of published studies was very diverse.

Chen and Shimerda (1981) deeply examined five published studies and find out that
some of the twelve factors that have been presented in the studies has same and
simply name is changed. Therefore, twelve factors are grouped into seven factors.
Seven factors are cash position, financial leverage, inventory turnover, short-term
liquidity, return on investment, receivable turnover and capital turnover.

In context of Nepal, organizations including financial institutions are presenting such

ratios in their annual reports but this analysis lacks academic and free analysis from
outside these organizations because of small scope and negligence. It is limited in
some academic researches which have not done significantly as well.

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 CHAPTER - III
RESEARCH METHODOLOGY

Research design refers to the overall strategy utilized to carry out research that
defines a succinct and logical plan to tackle established research question through the
collection, interpretation, analysis, and discussion of data.

3.1 Research Design

Research design refers to the overall strategy utilized to carry out research that defines
a succinct and logical plan to tackle established research question through the
collection, interpretation, analysis, and discussion of data. Primarily, it will be
descriptive and analytical research based on quantitative standard of Profitability
Ratio Analysis. To examine the current status of NBL and evaluation of such status
with generally accepted of quantitative standard of different Ratios.

3.2Population and Sample

NBL is one of the prominent commercial bank with specified authorized capital by
NRB among the 27 commercial bank which are currently operating in Nepal.

3.3 Sampling Procedures

There are various methods for sampling or sample selection NBL was selected as
sample for the study based on convenient sampling.

3.4 Nature Sources and Types of Data

Since it is descriptive and analytical study of subject matter and includes technical
content as well. So, this study will rely on secondary data analysis. Annual Report
(2018/19) published by NBL is a secondary source of data in this research. Several
publications published by NBL such as annual report of previous years, publication
related to banking and financial sectors such as publication of Ministry of Finance,
Nepal Rastra Bank etc. This report was generally constructed with secondary data
analysis.

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3.5 Data Analysis Tools
Some of the financial tools used for data analysis are Return on Assets (ROA), Return
on Capital Employed (ROCE), Return on Shareholder’s Equity (ROSE), Interest
earned to Total Assets Ratio (IETA), Net Profit to Total Deposit Ratio (NPTD),
Earnings per Share (EPS), Price Earnings Ratio (P/E Ratio), Yearly Trend Analysis
of Net Profit of NBL.

Return on Total Assets (ROA)

Return on total assets or simply return on assets, measures the productivity of the
assets. It is measured in terms of relationship between net profit and assets.
Net Profit after Tax
ROA is calculated as under: ROA=
Total Assets

Return on Capital Employed (ROCE)

Return on capital employed is an overall profitability ratio. This ratio establishes
relationship between profit earned and capital employed ROCE indicates the overall
return on the capital employed in the business. It points out whether the capital
employed is being profitably and efficiently used in the business or not. Higher the
ratio better is the profit earning capacity of the enterprise. ROCE is calculated as
Net Profit after Tax
under. ROCE=
Capital Employed

Return on equity (ROSE) is the amount of net income returned as a percentage

of shareholders equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have
Net Profit after Tax
invested. ROSE = '
Shareholde r sEquity

Interest earned to Total Assets Ratio (IETA)

The primary earning of the bank is interest income earned on it disbursement of loan.
Interest earned to total assets is another important ratio to measure profitability and
Interest Earned
efficiency of the bank. IETA = x 100 %
Total Assets

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Net Profit to Total Deposit Ratio (NPTD)
It shows the net profit after tax to total deposit the bank has accepted. It is calculated
Net Profit after Tax
as: NPTD =
Total Deposit

Earnings Per Share (EPS)

Earnings per share (EPS) were the portion of a company's profit allocated to each
outstanding share of common stock. Earnings per share serve as an indicator of a
company's profitability. EPS=
Net Profit available¿ Equity Shareholders ¿
No . of ordinary shares outstanding

Price Earnings Ratio (P/E Ratio)

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures
its current share price relative to its per-share earnings. The price-earnings ratio is
also sometimes known as the price multiple or the earnings multiple.
Market Value per share
P/E Ratio =
Earning per Share

Yearly Trend Analysis

The net profit trend is analyzed with least square method as Y (Net profit) on X
(Year) and estimated the Net profit on the basis of Y= a +bx

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 CHAPTER - IV
DATA PRESENTATION AND ANALYSIS

4.1 Data Presentation and Analysis

In this chapter, data are presented, calculated and analyzed. Secondary data collected
from Annual Report from 2071/072 to 2075/076 of the Bank itself is used for this
purpose. Followings are the ratios which are concerned with objective of the study.

Presentation of data
Profitability Ratios
Profitability ratios are a class of financial metrics that are used to assess a business
ability to generate earnings compared to its expenses and other relevant costs incurred
during a specific period of time. For most of these ratios, having a higher value
relative to a competitor's ratio or relative to the same ratio from a previous period
indicates that the company is doing well. Important profitability ratios are as follows
a. Return on Assets(ROA)
b. Return on Capital Employed(ROCE)
c. Return on Shareholder’s Equity(ROSE)
d. Interest earned to Total Assets Ratio(IETA)
e. Net Profit to Total Deposit Ratio(NPTD)
f. Earnings Per Share(EPS)
g. Price Earnings Ratio(P/E Ratio)
h. Yearly Trend Analysis of Net Profit of NBL

a. Return on Total Assets (ROA)

The return on total assets (ROA) is a ratio that measures the bank’s net profit against
its total net assets. The ratio is considered to be an indicator of how effectively a
company is using its assets to generate earnings before contractual obligations must
be paid.
Net Profit After Tax(NPAT )
ROA = ×100%
Total Assets

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Table 4.1 Calculation of ROA
FY Net Profit(NP) Total Asset(TA) ROA:(NP/TA)× 100%
2071/072 449,200,000 39,018,489,785 1.15%
2072/073 974,037,010 60,018,207,850 1.62%
2073/074 960,608,067 69,186,488,883 1.39%
2074/075 1,382,200,000 87,701,310,349 1.58%
2075/076 2,006,200,000 116,592,269,147 1.72%
(Source: NBL Annual Report 2075/076)

Figure 4.1ROA

ROA
2.00%

1.60%

1.20%

0.80%

0.40%

0.00%
2071/072 2072/073 2073/074 2074/075 2075/076
Source: Table 4.1
Return on assets (ROA) shows the percentage of profit earned in assets employed by
the bank. It is continually increasing over the years which are depicted in the fig 1.
The ROA in year 2075/076 has increased to 1.72% as compared in the year 2074/075
1.52%. It shows that the assets used are significantly used than previous year.

b. Return on Capital Employed(ROCE)

Return on capital employed (ROCE) is a financial ratio that measures a company's
profitability and the efficiency with which its capital is employed.
Net Profit after Tax+ Interest
ROCE = x 100 %
Capital Employed

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Table 4.2 Calculation of ROCE
FY Net Profit after Tax+ Capital ROCE
Interest(a) Employed(b) (a/b×100%)
2071/072 490,934,769 3,737,831,410 13.13%
2072/073 1,021,097,641 6,729,595,396 15.17%
2073/074 1,007,705,708 7,430,811,296 13.56%
2074/075 3,480,923,038 11,505,717,290 30.25%
2075/076 5,805,462,121 11,744,198,350 49.43%
(Source: NBL Annual Report 2075/076)

Figure 4.2: ROCE

ROCE
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2071/072 2072/073 2073/074 2074/075 2075/076

Source: Table 4.2

Return on Capital Employed (ROCE) has increased significantly at FY 2075/076 to

49.43% as compared to FY 2074/075 30.25%. It is so because it has paid off
significant part of outstanding loans. Despite heavy increment on profit of the year
ROCE increases sharply due to fall in short term loan liabilities. ROCE has increased
over the year because the bank has considerably increased its operation and size.

c. Return on Shareholder’s Equity(ROSE)

Return on equity (ROSE) is the amount of net income returned as a percentage
of shareholders equity. Return on equity measures a corporation's profitability by

17
revealing how much profit a company generates with the money shareholders have
Net Profit after Tax
invested. ROSE = '
Shareholde r sEquity
Table 4.3 Calculation of ROSE
FY Net Profit after Tax(a) Shareholder’s Equity(b) ROSE (a/b x100%)
2071/07 449,200,000 3,230,788,362 13.90%
2
2072/07 974,037,010 6,138,398,929 15.86%
3
2073/07 960,608,067 7,323,493,296 13.12%
4
2074/07 1,382,200,000 8,705,717,294 15.88%
5
2075/07 2,006,200,000 11,304,821,950 17.75%
6
(Source: NBL Annual Report 2075/076)

Figure 4.3: ROSE

ROSE
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2071/072 2072/073 2073/074 2074/075 2075/076
Source: Table 4.3
Return on Shareholder’s Equity (ROE or ROSE) has also increased from 15.88% to
17.75% from FY 2074/075 to FY 2075/076. It is satisfactory return on owner’s
investment. Despite increment in shareholder’s equity ROSE increment is good sign
that bank is performing satisfactorily.

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d. Interest earned to Total Assets Ratio(IETA)
The primary earning of the bank is interest income earned on it disbursement of loan.
Interest earned to total assets is another important ratio to measure profitability and
efficiency of the bank
Interest Earned
IETA = x 100 %
Total Assets
Table 4.4 Calculation of IETA
FY Interest Earned(a) Total Assets(b) IETA(a/b x100%)
2071/072 1,379,900,000 39,018,489,785 3.53%
2072/073 1,758,400,000 60,018,207,850 2.92%
2073/074 2,289,779,960 69,186,488,883 3.31%
2074/075 2,889,600,000 87,701,310,349 3.29%
2075/076 3,566,800,000 116,592,269,147 3.06%
(Source: NBL Annual Report 2075/076)

Figure 4.4: IETA

IETA
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2071/072 2072/073 2073/074 2074/075 2075/076

Source: Table 4.4

Interest earned to Total Assets ratio (IETA) has fallen from 3.39% to 3.06% from FY
2073/74 to FY 2074/75. Total assets of bank have significantly increased. It increases
liquidity by increasing amount of current asset and not increasing interest earning
loan disbursement. This is one of the major reasons which have reduced IETA.

e. Net Profit to Total Deposit Ratio(NPTD)

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It shows the net profit after tax to total deposit the bank has accepted. It is calculated
as:
Net Profit after Tax
NPTD =
Total Deposit

20
Table 4.5 Calculation of NPTD
FY Net Profit after Tax(a) Total Deposit(b) NPTD(a/b x100%)
2071/072 449,200,000 34,111,465,761 1.32%
2072/073 974,037,010 52,292,058,154 1.61%
2073/074 960,608,067 60,175,983,690 1.60%
2074/075 1,382,200,000 74,682,917,000 1.85%
2075/076 2,006,200,000 101,910,485,000 1.97%
(Source: NBL Annual Report 2075/076)

Figure 4.5: NPTD

NPTD
2.50%

2.00%

1.50%

1.00%

0.50%

0.00%
2071/072 2072/073 2073/074 2074/075 2075/076

Source: Table 4.5

Net Profit to Total Deposit ratio (NPTD) has increased from 1.85% to 1.97% from
FY 2074/075 to FY 2075/076 despite deposit increased. It has clearly depicted that
deposit has been efficiently utilized into profit earning investment by the bank.

f. Earnings Per Share(EPS)

Earnings per share (EPS) were the portion of a company's profit allocated to each
outstanding share of common stock. Earnings per share serve as an indicator of a
company's profitability.
¿
EPS= Net Profit available¿ Equity Shareholders No . of ordinary shares outstanding

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Net profit available to equity shareholder is calculated as net profit after dividend
paid to preferred stockholders.
Table 4.6 Calculation of EPS
FY Net Profit available to equity No. of ordinary shares EPS(a/b)
shareholders (a) outstanding(b)
2071/072 390,529,255 24,181,378 16.15
2072/073 803,712,190 41,068,584 19.57
2073/074 780,807,220 50,115,996 15.58
2074/075 1,561,930,000 80,803,417 19.33
2075/076 1,823,733,000 80,803,417 22.57
(Source: NBL Annual Report 2075/076)

Figure 4.6: EPS

EPS
25

20

15

10

0
2071/072 2072/073 2073/074 2074/075 2075/076

Source: Table 4.6

Earnings per Share have increased from 19.33 to 22.57 from FY 2074/075 to FY
2075/076. It shows bank is distributing satisfactory return to its equity stockholders.
EPS is continually increasing which can be depicted by analyzing past trend of the
bank. It shows bank is performing well for its actual owners as well.

g. Price Earnings Ratio (P/E Ratio)

22
The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures
its current share price relative to its per-share earnings. The price-earnings ratio is
also sometimes known as the price multiple or the earnings multiple.
Market Value per share
P/E Ratio =
Earning per Share
Table 4.7 Calculation of P/E Ratio
FY Market Value per Share(a) Earnings per Share(b) P/E Ratio(a/b)
2071/07 432 16.15 26.75
2
2072/07 640 19.57 32.70
3
2073/07 479 15.58 30.75
4
2074/07 515 19.33 26.64
5
2075/07 388 22.57 17.19
6
(Source: NBL Annual Report 2075/076)

Figure 4.7: P/E Ratio

PE Ratio
35
30
25
20
15
10
5
0
2071/072 2072/073 2073/074 2074/075 2075/076
Source: Table 4.7
Price-Earnings ratio (P/E ratio) has considerably fall from 26.64 to 17.19 due to sharp
fall in market price of share at FY 2075/076 compared to FY 2074/075. There is
sharp fall in market price from 515 to 388. There are several internal and external

23
reasons for such fall in price of share in secondary market. The reduction of P/E Ratio
is due to fall in market price of its share.

h. Yearly Trend Analysis of Net Profit of NBL

The net profit trend is analyzed with least square method as Y (Net profit) on X
(Year)
And estimated the Net profit on the basis of Y= a +bX for FY 2075/076.

24
Table 4.8 Trend analysis of Net profit
FY X Net Profit (Y) in 00,000 XY X2
2071/072 1 4492 4492 1
2072/073 2 9740 19480 4
2073/074 3 9606 28818 9
2074/075 4 13822 55288 16
2075/076 5 20062 100310 25
∑X=15 ∑Y=57722 ∑XY=208388 ∑X2=55

Normal Equations are:

∑Y= na + b∑X…………………1
∑XY = a∑X + b∑X2………………2
2
∑ X .∑ Y −∑ X . ∑ XY 55 x 57722−15 x 208388
And, a = 2 = 2 = 977.8
n∑ X −¿ ¿ 5 x 55−15
n ∑ XY −∑ X ∑ Y 5 x 208388−15 x 50769
b= 2 = 2 = 3522.2
n ∑ X −¿ ¿ 5 x 55−15
Now, Regression on Y on X or estimated profit trend over years is given by
Y = 977.8 + 3522.2X
The estimated profit of the FY 2075/076 is Y (2075/076) = 2,211,100,000

Table 4.9 Comparison of Actual Profit and Trend

FY Net Profit after Tax Projected Profit Y= 977.8 + 3522.2X
2071/072 449,200,000 450,000,000
2072/073 974,037,010 802,220,000
2073/074 960,608,067 1,154,440,000
2074/075 1,382,200,000 1,506,660,000
2075/076 2,006,200,000 1,858,880,000
(Source: NBL Annual Report 2075/076)

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Figure 4.8: Trend profit and Actual profit comparison

Projected and Actual Profit

25000
20000
15000
10000
5000
0
2071/072 2072/073 2073/074 2074/075 2075/076

Actual Profit Expected Profit

Source: Table 4.8

4.2 Findings
The findings of this study are as follows:
a. Despite some inefficiency the bank is performing very satisfactorily. It has
balanced between stability and profit with interest of its stakeholders.
b. There is consistency between expected profit and Expected projected over the
year. It shows bank has steady and balanced growth over time period. It has
managed to keep balance with profit and return on shareholder’s worth.
c. Due to fluctuation of market price of share P/E ratio is not quite satisfactory.
Overall performance of the bank is quite satisfactory in terms of profitability
ratio analysis.
d. In FY 2074/075 Profitability ratios shows there was considerable fall in
performance of the bank. The prime reason of such fall down was devastating
earthquake which slowed down overall economic activities of the country.

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 CHAPTER - V
SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary
Nepal Bank is leading commercial bank in Nepal which has played important role in
money and capital market. There are several qualitative and quantitative techniques to
measure the current and potential performance of any organization as NEPAL BANK
Ltd. Among these techniques, ratio analysis is most important one. Every firm is most
concerned with its profitability. One of the most frequently used tools of financial
ratio analysis is profitability ratios, which are used to determine the company's bottom
line and its return to its investors. Profitability measures are important to company
managers and owners alike. If such firm has outside investors who have put their own
money into the company, the primary owner certainly has to show profitability to
those equity investors.

Profitability ratios show a company's overall efficiency and performance. Profitability

ratios are divided into two types: margins and returns. Ratios that show margins
represent the firm's ability to translate invested resources into profits at various stages
of measurement. Ratios that show returns represent the firm's ability to measure the
overall efficiency of the firm in generating returns for its shareholders.

5.2 Conclusion
After analyzing different profitability ratios, it is concluded that NEPAL BANK is
performing very satisfactorily because it has efficiently used its assets which is
reflected in ROA. Despite increment in total deposit it has efficiently channelized
these deposits into the profit earning investments. Since, ROE and EPS are
continually increasing bank is able to address and secure interest of ordinary
shareholders. Heavy increment in ROCE and fall in short term loan liability has
shown its efficiency in term of liquidity as well. Overall performance of Nepal Bank
is quite impressive.

Despite efficient and satisfactory performance there are certain areas it must consider
in which is exposed in terms of profitability ratios. In case of IETA which has

27
decreased because of increase in idle current asset which must be efficiently
channelized into interest earning investment. It has to revise its loan disbursement
policy which must be improving loan disbursement. It may reduce interest rate and
other enhancement policies. Increment in ROA, ROE and EPS is small so it must
consider increasing rate of increment but in terms of percentage basis these are
satisfactory. In case of P/E ratio, it has fallen sharply due to fall in market price of
share in secondary market. It must come forth to enhance market price of its share. It
may increase cash dividend, issue bonus shares accordingly. The fall in market price
of share is quite high.

5.3 Recommendations
Based on the critical evaluation of the above findings, this study hereby makes the
following recommendations with the sincere convictions that they will help to reduce
the problems associated with the liquidity management and profitability in
commercial banks.
i. Since the survival of commercial banks profitability management, the
effective management should be balanced with profit maximization concept.
The ideal ratio among current assets and current liabilities is said to be 2:1.
ii. The banks should strike a balance between liquidity and profitability so as to
meet regulatory requirement as well as shareholder’ wealth aspirations.
iii. To achieve the competitive advantages in banking industry, deposit must be
utilized as loan and advances by formulating and implementing sound and
effective investment policy. The largest item of the bank assets side is loan
and advances. The banks should also consider rural areas in making
investment policy.

28
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Website
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