A Research Report on Comparative Ratio Analysis of EBL & NIC

CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION

1.1.1 Introduction to Bank

It has become quite difficult to find out the evolution era of banking activities. Economists have assumed that people carried out banking activities before 12th century. If we go through the word origin of bank, the word Bank is derived from the Italian word “Banco” which refers to the bench on which bankers would keep its money and their records. Similarly, Latin word Bancus, French word Banque and so on. All these refer to the same meaning i.e., “Bench” on which banker would keep his money and record. In the ancient period, the money lender used a bench to accept and give loan to borrowers by sitting in a bench. In such a way, they came in a good transaction of money and thereby started the banking transaction. Later on it started to be called as “Bank” by English man. Business activities started to increase in the economy, because of increasing mobility of people. These activities started to cover the different nations. Hence, people started to think about the banking activities as per the need of the society. In this course, the first bank, Bank of Venice was established in 1157 A.D in Venice. After this, the second banking institution Bank of Barcelona in Spain was established in 1401 A.D. Similarly, Bank of Geneva in 1407 A.D. Nepal Bank Limited on 30th Kartik 1994 B.S, and Nepal Arab Bank in 2041 B.S, which is the first joint venture bank of Nepal.

It came to know that banking business has got a modern age after the establishment of BANK OF ENGLANDS in 1694 A.D. Though, several other banks were introduced but the actual acceleration in the growth of banks started after introduction of banking act 1833 in United Kingdom. Then after, the bank started spreading throughout the world in short period of time. The functions of these banks expanded gradually as per the need of the society and the businessmen.

Meaning of Bank

Bank is financial institution, which purchase and sell the use of money and credit. It deals with money in the sense that it accepts different kinds of deposits, disburse loans, and render other financial services. Since, banks are rendering a wide range of services to several people; they have become an essential part of modern society. Therefore, in other words, we can say that a bank is an institution which accepts deposits from the public and these deposits in turns advances loans by creating credit. Bank creates credit by giving loan of traders, industrialist and businessman. Bank moves money in terms of receipt of income and payment of expenditure and deposit. Thus, broadly we can say, any institute involved in monetary transaction is called bank. Some economists have defined the term bank in their own way.

In this context, a bank mainly performs the basic two functions:

i. Draws surplus money from people, which are not in use.

ii. Lend this money to those who are in need to use it (either for business or industrial purpose).

But now-a-days, modern banking system provides various other functions, with the aim of earning profits. Banks are those sectors without which we cannot imagine about development. Finance is considered as blood of every organization. Hence, bank provides blood to business organization in terms of loan.

In the words of Kent, “A Bank is an organization whose principle operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to other for expenditure.”

Similarly, in the words of Walter Leaf, “A Bank is that institution who is always ready to receive money on deposit to be return against the cheque of their deposits.”

In the same manner, G. Crowther has defined bank in his book "An Outline of Money" as, "A bank is an institution collects money from those who have it to spare or who are saving it out of their income, and it lends this money to those who requires it.

Banking History in Nepal

Going with the historical evidences we can find some crude banking activities in the earlier period of time. During the phase of development in banking concept in Nepal, the first banking institution was established in 1994 B.S in the name of Nepal Bank Limited. It is the first bank in the banking history in Nepal. NBL was the pioneer in the modern banking history of Nepal. In 2003 B.S, Rastra Bank was established as Nepal’s first central bank. Similarly, Rastriya Banijya Bank was established in 2022 B.S, as the second commercial bank of Nepal, and Agricultural Development Bank in 2024 B.S. The commercial transactions were difficult with these banks and Nepal Arab Bank (NABIL) was established in 2041 B.S. This is the first Joint Venture with Arab Bank in the history of Nepal. NABIL bank launched its operation with a marketing concept i.e., “Customer is King in market”. Subsequently, other commercial banks, agricultural banks, industrial banks were established there after.

Introduction to Everest Bank Limited

When Government adopted open market and liberal economic policy, then only there was a suitable environment for commercial Banks to be established. As a result modern commercial banks were establishing by the investors in collaboration with foreign bank in form of limited company to utilize the opportunity created by the government. Because the government's encouragement and open market policy for joint venture bank operation, Everest Bank Limited was established on first Kartik 2051 by issuing 30% shares to general public and remaining hold by the promoters. Later it was collaborated with Punjab National Bank India in 1995, which holds 20% share of EBL. On the date of establishment the capital structure of EBL were, authorized capital Rs 12,000,000 issued capital Rs.6,000,000 and paid up capital Rs. 30, 000,000.

TABLE A

Share holding pattern of EBL

(Rs.in million)

Nepalese promoters	50
Punjab National Bank (Joint-Venture Partner)	20
General Public	30

TABLE B

Capital Structure of EBL

                                                                                    (Rs. in million)

Authorized Capital	600
Issued capital	316.8
Paid up Capital	315
Preference Share Capital	140

With a view to increase the volume of its transactions and providing more services to General Public it has expanded its operation at different places in Kathmandu Valley. The branch offices of EBL in Kathmandu Valley are:

Lazimpath Branch (Head Office)

Baneshwor Branch (Main Branch)

New Road Branch

Teku Branch

Satungal Branch

Pulchowk Branch

Some other branches are being operated outside Kathmandu Valley too, with the purpose to expand its services in other part of country. They are:

Biratnagar Branch, Hanumandas Road

Birjung Branch, Adarshanagar.

Managalapur Branch, Rupendehi.

Butwal Branch, Chawrha Highway

Duhabi Branch, Sunsari.

Simra Branch, Surya Niwas

Janakpur Branch, Janakpur

Dhangadi Branch, Kailali

Birjung Branch, Adarshanagar

Board of Director of EBL

The members of board of directors are as follows:-

Mr. Bishnu Krishna Shrestha - Chairman

Mr. Sh. Jaspal Singh Jass - Executive Director

Dr. Bal Gopal Vaidya - Director

Mr. Ved K Shrestha - Director

Mr. Arun Man Sherchan - Director

Mr. Harwant Singh - Director

Mr. Ratna Sansar Shrestha - Director, (FCA)

Mr. Nabin Bhakta Shrestha - Public Shareholders

Mr. Shivasharan K.C. - Director, Public Shareholders

 

Introduction to Nepal Industrial and Commercial Bank Limited

Nepal Industrial and Commercial Bank Limited (NIC Bank), which commenced operation on 21 July 1998, is the first commercial bank in the country to be capitalized at NPR 500 million. The Bank was promoted by some of the prominent business houses of the country. The current shareholding pattern of the Bank constitutes of promoters holding 65% and general public holding 35%. NIC Bank is one of the most widely held banking companies in Nepal with close to 35,000 shareholders. The shares of the Bank are actively traded in Nepal Stock Exchange with current market capitalization of about NPR 2,976 million.

Within 8 years of commencing business the Bank has grown rapidly with 8 branches throughout the country with 2 more being opened this year. All branches throughout the country with 2 more being opened this year. All branches are inter-connected through V-Sat and capable of providing on line, real time transactions.

The Bank is the first commercial bank in Nepal to be ISO 9001:2000 certified for quality management system.

The Bank is run by professionals and believes in the highest standards of corporate governance.

Board of Director of NIC

The members of board of directors are as follows: -

Mr. Jagdish Prasad Agrawal - Chairman

Mr. Tulsi Ram Agrawal - Director

Mr. Ashok Kumar Agrawal - Director

Mr. Bimal Kumar Agrawal - Director

Mr. Rajendra Aryal - Director

Mr. Birendra Kumar - Director

1.2 AREA OF STUDYS

The area of study of this research report is Finance. This report is concentrated to analyse the comparative financial performance of two joint venture banks, namely EBL and NIC Ltd. The financial tool that is used to analyse the performance is Ratio Analysis.

Both of these banks are operating under the same conditions and problems. Opportunities are also similar, because they are established more or less at the same period. Thus it would be relevant to make a comparative analysis of these two banks. Main focus of this study will be on aspect such as liquidity, profitability, stability etc. So, this study aims to have a comparative analysis as regard to different ratios of both the banks.

This analysis hopes to concentrate on policy aspects adopted by these banks in the context of fund collection and resource mobilization. It seems to be essential for commercial banks for resource collection and their effective mobilization

1.3 ISSUES TO BE ADDRESSED

These studies basically focus our attention to reveal the struggle and success achieved by the EBL and NIC. Commercial Bank's main motive is to make profit by providing quality service to the customers. In Nepal, the profitability rate, operating expenses, dividend distribution among the shareholders etc. have found to be inconsistent. There must be some reasons behind the difference of performance. Organizations established at the same period with equal capital, operating in the same condition have different earning capacity. The problem of the study is ultimately, to find out the reasons about the difference in financial performance between EBL and NIC.

1.4 OBJECTIVE OF THE STUDY

The general objective of this study is to evaluate & compare the financial performances of the selected joint venture banks, i.e. EBL & NIC. The specific goals of the proposed study are mentioned below.

To analyze the financial position of the selected banks.
To examine, analyze & compare the financial performance of these banks in terms of liquidity position, capital structure, management of assets, profitability etc.
To find out discrepancies if any.
To recommend the appropriate measures to correct the weakness on the basis of findings of an analysis.

Financial policy of HMG and commercial banks, monitoring and collection policies of the banks will be kept in mind while doing the study.

1.5 NEED OF STUDY

The primary need of the study is to fulfill the university requirement for the BBA 5th semester course. Apart from this, the needs of study arise because of researcher aims to gain practical experience and knowledge about the relevant subject so as to apply the for managerial decision in the future.

A sound financial performance is important for the growth of business enterprises and financial institution. It is necessary that financial management of an institution must be appropriate to yield a fair rate of return on capital employed in them. Any mistake made in financial management adversely affects the financial condition of an institution. In this regard, it is required to measure the financial performance of the Joint Venture Banks from time to time.

All investors invest their fund on share for the purpose of getting greater return; the firm always maximize the value of heir fund. Different investors invest their funds in joint venture and simultaneously they take a more acute interest in the government for dividend, top management for remuneration. So on, that causes to maximize the value of the firm.

This study will also help as a literature for the further study about the relating topics.

LIMITATIONS OF THE STUDY:

Besides this study following were limitations.

1) There is lack of financial resources to have a deep and large – scale study on the topic.

2) Data collection is one of the major problems of the study. This study is based on annual data, which are available in profit and loss account and balance sheet.

3) The study will be based on the data collected from the bank, magazine, books and annual reports.

4) Using the organization’s computer resource was almost impossible and no access to the organization’s internet was granted to be able to gain extra information due to privacy of the organization

5) The major limitation faced while conducting this study has been the small amount of the respondents from the banks’ departments and lack of quick accessibility of required reports of the banks.

1.6 Organization of Study

1.6.1 Research Design

Research design is the main part of a thesis of any research work. The research design serves as a framework for the study, guiding the collection and analysis of the data, the research instruments to be utilized, and the sampling plan to be followed.

According to Kerlinger, "Research design is the plan, structure, and strategy of investigation conceived so as to obtain answers to research question and to control variance".

This research aims to discover how the banks performed in the last year and its relevance in the present and future. Therefore, the reliability of the research largely depends upon the authenticity and reliability of the data collected and in this case the data collected from the reports published by the EBL and NIC.

1.6.2 Research Methodology

Research Methodology is a way to solve the research problem in a systematic manner. The research methodology describes about the methods to be used and the reasons why they are being used. The primary objectives of this study is to analyze the financial statements of the EBL and NIC. Here, the financial statements of the last year of EBL and NIC will be analyzed with help of a financial tool like ratio analysis.

The research is divided into three major chapters. They are Introduction, Presentation and Analysis of Data, and Summary and Conclusion. The first chapter includes the introduction, area of study, issues to be addressed/ questioned to be answered, objectives of study, need of study and organization of study.

The second chapter includes presentation of data of figures in tables, charts, graphs etc., analysis of data using some financial tools, and major findings.

Finally, the chapter includes a brief summary of the report, major conclusions derived from the analysis of data and suggestion if any.

1.6.3 Sources of Data

Data collection is one of the most important aspects of any research study. With the data, the research study cannot be carried on. Data are of two types. They are primary and secondary data. Primary data are those that which are collected for the first time where as secondary data are those that which are already gathered by others.

This study is based o secondary data. The data are extracted from the website of Nepal Stock Exchange Limited (www.nepalstock.com), EBL (www.everestbank.com), annual report published by EBL for EBL and published reports and website of NIC (www.nic.com) for NIC, and others various magazines, newspaper, and research report.

1.6.4 Data Collection Technique

The data solely depends upon secondary data. Required data are collected from the concerned banks as well as from the website of Nepal Stock Exchange Limited. Data are gathered through following procedure. Firstly, financial statements of these banks i.e. (EBL and NIC Limited) were downloaded from the Internet to the computer disk. Secondly, all the downloaded financial statements were transcribed into computer printout. Thirdly, the required financial statements of these two banks were taken for the analysis.

1.6.5 Data Analysis Tools

Collection of data is useless until and unless financial and statistical tools are analysed. Therefore, certain financial and statistical tools such ratio analysis have been used to analyse the income statement and balance sheet to extract some valuable information as well for the operation of these two joint venture banks.

1.6.6 Sampling Method

EBL and NIC are the leading banks in the banking sector of Nepal and it is hope that the banks will represent the banking sector of Nepal. Therefore, the sampling has been conducted according to the judgmental sampling method under non-probability sampling design.

CHAPTER 2
PRESENTATION AND ANALYSIS OF DATA

In this chapter, the annual reports of respective banks have been collected for analyzing the financial performance of and statistical tools such as, ratio analysis.

2.1 PRESENTATION OF DATA

1. Balance Sheets of Everest Bank Limited and Nepal Industrial and Commercial Bank Limited for the fiscal years 2005/2006.

Balance Sheet of Everest Bank Limited

As on 32 Ashad 2063 (16th July, 2006)

Share Capital and Liabilities	This Year Amount Rs.	Previous Year Amount Rs.
1. Share Capital	518,000,000	518,000,000
2. Reserve and Funds	444,808,301	314,617,365
3. Debentures & Bonds	300,000,000	300,000,000
4. Borrowings	---	---
5. Deposit Accounts	13,802.444,988	10,097,690,989
6. Bills Payable	15,805,995	17,777,860
7. Proposed Dividend and Dividend Payable	114,666,758	23,527,388
8. Income Tax Liabilities	---	3,312,244
9. Other Liabilities	763,558,645	457,590,572
TOTAL	15,959,284,687	11,732,516,418

 

Assets	This Year Amount Rs.	Previous Year Amount Rs.
1. Cash Balance	259,247,645	192,590,297
2. Balance with Nepal Rastra Bank	1,139,514,873	779,669,004
3. Balance with Banks/Financial Institutions	154,104,976	77,729,907
4. Money at Call and Short Notice	66,960,000	570,000,000
5. Investments	4,200,515,220	2,128,931,852
6. Loans, Advances and Bills Purchased	9,801,307,676	7,618,671,476
7. Fixed Assets	152,089,805	134,068,090
8. Non-banking Assets	7,436,642	24,570,614
9. Other Assets	178,007,850	206,285,178
TOTAL	15,959,284,687	11,732,516,418

Balance Sheet of Nepal Industrial & Commercial bank Limited

As on 32 Ashad 2063 (16th July, 2006)

Share Capital and Liabilities	This Year Amount Rs.	Previous Year Amount Rs.
1. Share Capital	600,000,000	500,000,000
2. Reserve and Funds	166,462,479	184,193,958
3. Debentures & Bonds	200,000,000	---
4. Borrowings	457,705,060	450,371,046
5. Deposit Accounts	8,765,950,638	6,241,378,160
6. Bills Payable	91,508,236	28,329,320
7. Proposed Dividend and Dividend Payable	10,954,038	54,011,043
8. Income Tax Liabilities	4,630,863	2,040,229
9. Other Liabilities	86,390,394	50,072,809
TOTAL	10,383,601,708	7,510396,565

Assets	This Year Amount Rs.	Previous Year Amount Rs.
1. Cash Balance	139,186,303	69,777,858
2. Balance with Nepal Rastra Bank	455,769,231	837,300,718
3. Balance with Banks/Financial Institutions	154,183,545	103,307,989
4. Money at Call and Short Notice	353,515,103	89,880,961
5. Investments	2,479,912,524	1,572,902,035
6. Loans, Advances and Bills Purchased	6,655,964,020	4,711,712,301
7. Fixed Assets	39,863,854	59,495,866
8. Non-banking Assets	2,645,625	3,465,000
8. Other Assets	102,561,503	62,558,837
TOTAL	10,383,601,708	7,510396,565

2. Profit and Loss Accounts of Everest Bank Limited and Nepal Industrial and Commercial Bank Limited for the fiscal years 2005/2006.

Profit and Loss Accounts of Everest Bank Limited

For the period from 1 Shrawan 2062 to 32 Ashad 2063

(16 July 2005 to 16 July 2006)

Particulars	This Year Amount Rs.	Previous Year Amount Rs.
1. Interest Income	903,411,137	719,297,855
2. Interest Expenses	401,397,351	299,565,269
Net Interest Income	502,013,786	419,732,586
3. Commission & Discount	96,839,264	78,130,046
4. Other Operating Incomes	48,902,381	31,479,208
5. Exchange Fluctuation Income	14,397,970	27,077,784
Total Operating Income	662,153,401	556,419,624
6. Staff Expenses	70,924,675	60,597,367
7. Other Operating Expenses	143,562,167	129,067,225
8. Exchange Fluctuation Loss	---	---
Operating Profit Before Provision for Possible Loss	447,666,559	366,755,032
9. Provision for Possible Loss	70,465,665	88,926,593
Operating Profit	377,200,894	277,828,439
10 Non-Operating Income/Expenses	2,959,467	2,974,088
11. Loan Loss Provision Written Back	---	5,252,936
Profit from Regular Operations	380,160,361	286,055,463
12. Profit/(Loss) from Extra-Ordinary Activities	---	5,252,936
Profit after considering all activities	380,160,361	280,802,527
13. Provision for Staff Bonus	34,560,033	28,080,253
14. Provision for Income Tax	---	---
Current Year’s	106,753,311	81,914,477
Previous Year’s	1,556,081	2,593,186
TOTAL	237,290,936	168,214,611

Profit and Loss Accounts of Nepal Industrial & Commercial bank Limited

For the period from 1 Shrawan 2062 to 32 Ashad 2063

(16 July 2005 to 16 July 2006)

Particulars	This Year Amount Rs.	Previous Year Amount Rs.
1. Interest Income	579,979,428	457,069,969
2. Interest Expenses	340,221,921	225,992,488
Net Interest Income	239,757,507	231,617,481
3. Commission & Discount	29,447,261	27,101,792
4. Other Operating Incomes	20,242,413	9,180,305
5. Exchange Fluctuation Income	25,387,941	24,605,930
Total Operating Income	314,835,122	292,505,508
6. Staff Expenses	45,494,167	39,003,504
7. Other Operating Expenses	57,356,334	51,629,103
8. Exchange Fluctuation Loss	---	---
Operating Profit Before Provision for Possible Loss	211,984,621	201,872,901
9. Provision for Possible Loss	60,913,102	19,952,248
Operating Profit	151,071,519	181,920,653
10 Non-Operating Income/Expenses	59,335	284,887
11. Loan Loss Provision Written Back	10,359,202	5,085,849
Profit from Regular Operations	161,490,056	187,291,389
12. Profit/(Loss) from Extra-Ordinary Activities	10,359,202	4,261,599
Profit after considering all activities	151,130,854	183,029,790
13. Provision for Staff Bonus	13,739,169	18,302,979
14. Provision for Income Tax	40,804,011	50,971,077
Current Year’s	40,804,011	50,971,077
Previous Year’s	---	---
TOTAL	96,587,674	113,755,734

2.2 ANALYSIS OF DATA

2.2.1 RATIO ANALYSIS

Ratio is an arithmetical relationship between two figures. It, in general, is a statistical yardstick through which the relationship between two figures can be compared and measured. Financial statements are prepared not as end in themselves but in order that users can make decisions. The financial statements need to be interpreted. Moreover, a single figure taken from financial statement can mislead or may not even make sense at all. For instance, sales of Rs. 1 million may not indicate anything about the performance of the firm. Therefore, there is a need for one figure to be compared with another to have meaningful understanding about the performance and, more importantly, about the firm. Calculation of ratios allows the relationship between different parts of financial statement to be seen more clearly.

ratio analysis of financial statements refers to the process of determining, interpreting, and presenting the relationship of items and groups of items analyzed from the financial statements. Financial ratios are fundamental analytical tools for interpreting financial statements. Financial ratio analysis relates items in financial statements mathematically in a meaningful way. Financial ratios can help describe the financial condition of an organization, efficiency of its activities, its comparable profitability, and the perception of investors as expressed by their behavior in financial markets. The financial ratios often permit analyst and decision maker to piece together a scenario about where an organization has come from, its current condition, and its possible future. Analyst evaluates these ratios against particular characteristics of a company and industry. Though there are many categories of financial ratios, they are commonly categorized in five classes – profitability, liquidity, efficiency, leverage and valuation.

Ratio analysis is a powerful tool of financial analysis. In financial analysis, a ratio is used as an index or yards stick for evaluating the financial position and performance of a firm. Ratio helps to summarize the large quantities of financial data and to make qualitative judgment about firm’s financial performance.

According to Wixon, Kell and Bedford, “A ratio is an expression of the quantitative relationship between two numbers.”

According to Kohler, “A ratio is the relationship of one amount to another expressed as the ratio of or as a simple fraction, integer, decimal fraction or percentage.”

Process of Financial Statement Analysis

Analysis is a process of breaking down a complex set of data and placing them into a convenient and definite group to present them in a comprehensible format to facilitate interpretation.

Interpretation is explaining the significance of facts and figures analyzed. Analysis includes the following steps:

1) Breaking the financial statements into simpler ones

2) Regrouping

3) Rearranging the figures given in the financial statement

4) Calculating ratios

Financial statement analysis is a technique of answering various questions regarding the financial performance of a firm in the past, present and the future. The analysis enables the analysts to recommend corrective measures to be taken as and when the need arises. To address the following questions, the financial statement analysis is undertaken.

1) How was the performance of the firm in the past? In which areas did the firm faced problems?

2) How is the present performance of the firm? Has the performance improved or deteriorated when compared to the past? In which areas does the firm face problems?

3) What will be the future performance? Is there possibility of problems arising in the future?

4) What are the corrective measures that can be taken at present to improve the

5) performance? How will the recommended alternatives influence the firm’s performance?

6) If the recommended alternatives improve firm’s performance, will the incremental benefits exceed the cost?

Importance and Limitations of Ratio Analysis

Once we have discussed about the ratio analysis, we also have to be aware of its importance and limitations.

Importance of Ratio Analysis

1) Ratio analysis simplifies the financial statements. It indicates the changing financial condition of the firm.

2) Ratio analysis provides data for inter-firm comparison and highlights factors that attribute to the firm’s success and/or failure.

3) Ratio analysis assists management in its basic functions of forecasting, planning,

4) coordinating, controlling and communicating.

5) Ratios can be used in used to measure inter-firm and intra-firm efficiency.

6) Ratios can serve as index of efficiency and can be used for management control.

7) Ratio analysis serves as an effective instrument to assess business characteristics such as liquidity, solvency, etc.

Limitations of Ratio Analysis

1) Ratios are quantitative tools. To draw conclusion and to make decision, only quantitative tools do not suffice. We must consider qualitative factors also.

2) Many writers have different opinion about the same item and they have defined it according to their perception. Therefore, there is no standard formula to calculate ratios. This results in inconvenience in comparison.

3) A single ratio fails to disclose financial condition of a firm whereas many ratios lead to confusion.

4) Ratios are based on historical data; thus, they lack ability to predict or forecast future. They only reveal past condition.

5) Ratios are means and not end in themselves. They serve as guide to present problems; they do not indicate solution to problems.

Financial ratio is thus mathematical relationship between two figures. Though there are many ratios, only those ratios have been covered in this study, which are relevant to the financial performance of the banks.

2.2.1.1 PROFITABILITY

Profit is the difference between revenues and expenses over a period of time. A company should earn profits to survive and grow over a long period of time. So profits are essential, but profit earning is not the ultimate aim of company and it should never be earned at the cost of employees, customers and society.

However, profitability is a measure of efficiency and the search for it provides an incentive to achieve efficiency. The profitability of a firm can be measured by its profitability ratios and profitability ratios are those ratios, which indicate degree of success in achieving, desired profit levels. In other words, the profitability ratios are designed to provide the answers to questions such as,

Is the profit earned by the firm adequate?

What rate of return does it present?

What is the rate of profit for various divisions and segments of the firm?

What is the earning per share?

What amount is paid in dividends/

What is the rate of return to equity holders? And so on.

Profitability ratios are of two types: those showing profitability in relation to sales, and those showing profitability in relation to investment. Together these ratios indicate the firm’s efficiency of operation.

In the present study, the profitability ratios are computed by relating the profits of a bank to its investment. Such ratios are popularly known as return on investment. Here investment may refer to return on assets, return on capital employed and return on shareholder’s equity.

In this section, some profitability ratios have been calculated to reflect the degree of success in achieving desire profit level by Himalayan Bank Limited and Nepal SBI Bank Limited.

2.2.1.1.1 Return on Equity (ROE)

The objective of every bank is to earn high profit. If the banks utilize its equity properly, then only the bank can earn maximum profit. Equity capital is a banks own capital. The return on equity shows the extent to which a bank is successful to mobilize its equity. It is the measuring rod of the profitability of a bank. A high ratio indicates the success of bank in mobilizing its equity capital and vice versa. Following formula will help to calculate this ratio:

2.2.1.1.2 Return on Total Assets (ROTA)

Return on assets ratio measures how well management uses all the assets in the business to generate an operating surplus. This ratio provides the foundation necessary for a company to deliver a good return on equity. A company without a good return on total assets (ROA) finds it almost impossible to generate satisfactory ROE.

Higher the ROA indicates the higher efficiency in the utilization of total assets and vice-versa. ROA is low due to low profit. In other words, it is low utilization of bank’s assets and over use of higher interest bearing amount of debt and vice-versa. In this study, ROA is examined to measure the profitability of all the financial resources in bank-assets and is calculated by applying the following formula:

2.2.1.1.3 Equity Capital Ratio (ECR)

Equity capital ratio shows the relationship between shareholder equity and capital employed. It can be obtained by dividing shareholder capital by capital employed.

2.2.1.1.4 Spread

The spread of commercial banks and financial institutions can be computed in various ways and interpreted as per the literature.

According to Fred C. Yeager, “the spread is defined as the ratio of (Net Interest Revenue – Interest expense) to the total assets”.

According to George Hemple and Jess B. Yawdtiz, “spread management emphasizes the difference between the return on assets and cost of liabilities over time”. A high positive spread is generally desirable and is readily accepted by any type of financial institution.

In the present study, spread is considered as the difference if interest income and the interest expense.

2.2.1.1.5 Net Operating Cost Ratio

The net operating cost ratio is net operating costs divided by total assets.

Where,

Net Operating Cost = Operating Cost + Loan Losses Provision + Other Income

2.2.1.1.6 Interest Income Ratio

The interest income ratio is interest income divided by average total assets.

2.2.1.1.7 Interest Expenses Ratio

The interest expenses ratio is interest expenses divided by average total assets.

2.2.1.2 Liquidity

Liquidity ratios measures the short-run solvency of the firm. Liquidity ratios indicate how capable a business is of meeting its short-term obligations as they fall due. Difference between current assets and current liabilities is known as working capital which provides the liquidity in business organization. Liquidity provides health, strength, honor, generosity and beauty as conspicuously and undeniably as the want of it creates illness, weakness, disgrace, meanness and ugliness.

It is extremely essential for a business organization to be able to meet its obligations as they become due, so it should maintain sufficient liquidity neither excess nor less. As it measures the ability of the firm to meet its short-term obligations, it reflects the short-term financial strength and weakness of the firm.

A high degree of liquidity shows inability of proper utilization of fund whereas the lack of liquidity shows the signal of poor creditworthiness, loss of creditor’s confidence or even in legal tangles resulting in the closure of the company. So the firm should maintain appropriate liquidity over the immediate future to meet its short-term liabilities as they fall due. To measure the liquidity position of Everest Bank Limited and Nepal Industrial & Commercial Bank Limited, the following ratios have been calculated.

2.2.1.2.1 Loan Ratio

Loans are non-liquid assets. Most loans cannot be sold and must be held until maturity. Thus, a high ratio of loans to total assets means low liquidity. On the other hand, loans are generally the most profitable assets, so a high ratio of loans to total assets generally contributes to profitability.

2.2.1.2.2 Cash and Bank Balance Ratio

The cash and bank balance ratio is cash balance plus bank balance divided by total deposits.

2.2.1.2.3 Purchased Liability to Total Assets

Purchased liabilities are the short-term fund raised in the money market.

Higher the ratio, the less is the liquidity in the company. Here EBL has less percentage of purchased liabilities to the total assets.

2.2.1.3 SAFETY

2.2.1.3.1 CREDIT QUALITY

It is difficult to measure credit quality using financial statement information, but some insights can be gained through ratio analysis.

2.2.1.3.1.1 Cash Loss Provision Ratio (Credit Loss Provision to Total Assets)

The ratio of credit loss provisions to total assets is one such measure.

Higher the credit loss provision ratio increases safety but means high anticipated loan default risk.

2.2.1.3.1.2 Credit Loss Coverage

The credit loss coverage measures the margin for error provided by income.

Higher the credit loss coverage means a greater margin for error and thus more safety.

2.2.1.3.2 CAPITAL ADEQUACY

Capital provides protection for depositors and other creditors in the event that assets decline in value or the financial institution suffers losses.

2.2.1.3.2.1 Capital Adequacy on Risk Weighted Assets

The capital adequacy on risk-weighted assets is defined as the capital fund divided by total risk weighted assets.

2.2.1.3.2.2 Equity Capital Ratio

2.2 MAJOR FINDINGS

1) EBL earns more return on equity than NIC.

2) EBL earns more return on total assets than NIC.

3) NIC has more equity to total assets than EBL.

4) EBL earns more spread than NIC.

5) NIC expends less operating cost than EBL.

6) EBL earns more interest income to total assets than NIC.

7) EBL earns less interest expenses to total assets than NIC.

8) EBL has more liquidity than NIC in terms of loan invested.

9) EBL is more liquidity than NIC in terms of cash and bank balance ratio.

10) NIC has liquidity in the company because purchase liquidity to total assets ratio of NIC is higher than EBL. So, NIC has more liquidity than EBL.

11) NIC is safer than EBL according to credit loss provision ratio.

12) EBL has more credit loss coverage than NIC; it means a greater margin for error and thus more safety.

13) NIC has more capital adequacy than EBL.

14) NIC has more equity to average total assets than EBL, so NIC is the better.

CHAPTER 3
SUMMARY, CONCLUSION & RECOMMENDATIONS

3.1. SUMMARY

The financial institution in general and commercial banks plays an important role in the economic development of the nation. Basically, financial system is the channel through which mobilization and allocation of savings is carried out in the economy. With this objective, commercial banks play a vital role. Banking helps to mobilize small savings collectively to the huge capital investment.

Increasing competitions in the banking sector has narrowed the profit margin. This study was started to study and compare the performance of the two financial institutions in terms of profitability, liquidity and safety.

The proposed banks were EBL and NIC. The performance of the bank was analyzed through ratio analysis. These banks are helping in providing all kinds of probable banking facilities to the national as well as international customers by its trained and efficient personnel. The study is based on secondary data that has been processed and analyzed comparatively. The annual report of 2005/2006 has been examined for the purpose of the study.

While comparing the financial performance of EBL and NIC, it has been classified into three chapters i.e. Introduction, Presentation and Analysis of data and lastly summary and conclusion.

In the first chapter, introduction, area of study, statement of the problem, objective of study, need of the study and organization of the study. Similarly, second chapter deals with the data presentation and analysis by using financial and statistical tools. Lastly, it is concerned with the summary and conclusion for improving the future performance.

3.2 MAJOR CONCLUSIONS

1) Since EBL has equity capital ratio of 3.25%, which is less than the equity capital ratio of NIC, which is 5.28%. The ROE of EBL is more than NIC. But EBL (1.49%) is better than NIC (0.93%) in terms of ROTA. Spread is important than interest income and interest expenses ratio and EBL earns spread of 3.15% than spread 2.31% of NIC. EBL however has higher net operating rate than NIC.

2) Looking at the loans to total assets ratio, it is found that EBL has used 61.41% of total assets for loans and advances whereas NIC only uses 64.10% f its total assets for loans and advances. Having lower loan to total assets ratio gives EBL more liquidity than NIC but it has adversely affected the profitability of EBL.

3) NIC has lower net loans and advances in comparison to EBL but it has higher default rate suggested by ratio of NPA to TA. EBL has higher cash and bank balance ratio than NIC, it means EBL is highly liquidity.

4) EBL has better credit loss coverage than NIC, which means greater margin for error and thus more safety, but EBL has less credit loss provision, which means that EBL decreases its safety.

5) Both of the banks have higher capital adequacy ratio than the mark specified by the NRB. But capital fund of NIC is more adequate than that of EBL.

6) Usually, it is said that higher the deposits, higher the loans but this doesn’t hold true incase of these banks.

3.3 SUGGESTIONS

Based on the analysis conducted in chapter 2, the following suggestions have been provided to all stakeholders.

1) The management of NIC should take appropriate steps towards the deposits as it is falling down than EBL’s deposit. The low volume of deposits adversely affects in investments. The management on NIC may provide certain incentive factors to deposits so that deposits can be increased. The management can reduce the minimum balance in saving account, or may provide other services like insurance schemes, any branch banking, etc.

2) The concerned authority of NIC should focus on interest income, as it is decreasing and lower than EBL’s. There could be many reasons like non-payment of interest by client in time, improper utilization of assets, low level of investment. Efficient management of loans and advances focusing on recovery of interest in time and finding new area of investment can solve these problems.

3) NIC has established NPA management cell for recovery of graded and written of accounts. That’s why it has lower net credit loss ratio. EBL should also multiply the efforts and formulate proper policies to recover its written-off accounts.

Read More: Ratio Analysis of Nepal Bank Limited