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DETERMINANTS OF FINANCIAL
PERFORMANCE OF COMMERCIAL
BANKS IN NEPAL
Ishwor Ninabung

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DETERMINANTS OF FINANCIAL PERFORMANCE
OF
COMMERCIAL BANKS IN NEPAL
(With reference to NABIL, SCBNL, NIBL, EBL and HBL)

A Thesis

Submitted By
Ishwar Kumar Rai
Patan Multiple Campus
Roll No. ………..
Exam Roll No: ……………….
TU Reg. No: ………………….

Submitted To:
Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirement for the degree of

Master of Business Studies (MBS)

Kathmandu, Nepal
April 2019
 RECOMMENDATION

This is to certify that the thesis:

Submitted by

Ishwar Kumar Rai

Entitled:

Determinants of Financial Performance of Commercial Banks In Nepal (With

reference to NABIL, SCBNL, NIBL, EBL and HBL)

has been prepared and approved by this campus in the prescribed format of Faculty
of Management. This thesis is forwarded for examination.

.......................................... ................................. ................................

Dinesh Man Malego Ballav Niroula Dinesh Man Malego
(Thesis Supervisor) (MBS Coordinator) (Asst. Campus Chief)

Date: _______________________

ii
 VIVA-VOICE SHEET

We have conducted the viva-voce examination of the thesis

presented by:

Ishwar Kumar Rai

Entitled
"Determinants of Financial Performance of Commercial Banks In Nepal (With
reference to NABIL, SCBNL, NIBL, EBL and HBL)"

and found the Thesis to be the original work of the student written in accordance with
the prescribed format. We recommend the thesis to be accepted as partial fulfillment
of the requirement for Master's Degree in Business Studies (MBS)

Viva-Voce Committee

Chairperson, Research Committee : …………………………………

Member (Thesis Supervisor) : …………………………………

Member (External Expert) : …………………………………

Date : …………………………………

iii
 DECLARATION

I hereby declare that the work reported in this thesis entitled “Determinants
of Financial Performance of Commercial Banks in Nepal (With reference to
NABIL, SCBNL, NIBL, EBL and HBL)" submitted to Patan Multiple Campus,
Tribhuvan University is my original work. It is carried out in the form of the
requirement for the Master's degree in business studies under the supervision of
Associate Prof. Dinesh Man Malego of Patan Multiple Campus, Tribhuvan
University.

Ishwar Kumar Rai

Roll No. …………..
Exam Roll No: …………..

Date: April 2019

iv
 ACKNOWLEDGEMENT

This thesis project entitled “Determinants of Financial Performance of

Commercial Banks in Nepal (with reference to NABIL, SCBNL, NIBL, EBL and
HBL)" has been prepared as partial fulfillment of the requirement for Master's
Degree in Business Studies (MBS) of Tribhuban University, Nepal. So I would like to
extend my special gratitude to all those who have contributed directly and indirectly
to complete this project.

My sincere gratitude to my thesis supervisor Associate Prof. Dinesh Man

Malego for providing necessary guidance on preparing this thesis report. This thesis
would not have been possible without his supervision and guidance. He has been so
kind and supportive throughout the period. I owe my deepest gratitude to Prof. Dr.
Yuga Raj Bhattarai for time and guidance for completing this thesis report. His advice
and unassuming attitude has given me a supportive environment and learning
motivation. Likewise, I take this opportunity to express my gratitude to associate prof.
Shiva Prasad Pokharel for his valuable suggestions and MBS program coordinator
Mr. Ballav Niroula for his full support and guidance.

Furthermore, I am thankful to all the administrative and library team of Patan

Multiple Campus. I have not forgotten my friends for their support in many ways.
Last not the least, my special thanks to my family for their never-ending moral
support to complete this thesis project as well my academic journey.

Thank You,
Ishwar Kumar Rai
April, 2019

v
 Table of Contents

Page No.
TITLE PAGE
RECOMMENDATION II
VIVA-VOICE SHEET III
DECLARATION IV
ACKNOWLEDGEMENT V
TABLE OF CONTENTS VI
LIST OF TABLES VIII
LIST OF FIGURES IX
LIST OF ABBREVIATION X

CHAPTER - I :INTRODUCTION ….…………………………….. 1

1.1 Background of Study ............................................................................................ 1
1.2 Statement of the Problem ...................................................................................... 2
1.3 Objectives of the Study ......................................................................................... 4
1.4 Significance of the Study ...................................................................................... 4
1.5 Limitation of the Study ......................................................................................... 5
1.6 Organization of the Study ..................................................................................... 6

CHAPTER - II : REVIEW OF LITERATURE .................................... 7

2.1 Conceptual Review ............................................................................................... 7
2.1.1 Concept of Commercial Bank ...................................................................... 7
2.1.2 Concept of Financial Performance............................................................... 9
2.1.3 Areas and Importance of Financial Performance Analysis........................ 10
2.1.4 Factors Affecting Performance of Banks ................................................... 12
2.1.5 Measures of Bank Performance ................................................................. 12
2.1.6. Concept of Variables................................................................................. 14
2.2. Review of Related Studies ................................................................................. 14
2.2.1. Review of Related Articles ....................................................................... 14
2.2.2 Review of Related Thesis .......................................................................... 17
2.3 Concluding Remarks ........................................................................................... 19

vi
CHAPTER-III : 20RESEARCH METHODOLOGY ......................... 20
3.1 Research Design.................................................................................................. 20
3.2 Population and Sampling .................................................................................... 20
3.3 Source and Types of Data ................................................................................... 21
3.4 Data Collection Procedure .................................................................................. 21
3.5 Methods of Data Presentation and Analysis ....................................................... 22
3.5.1 Data Analysis Tool .................................................................................... 22
3.5.1.1. Financial Tools....................................................................................... 22
3.5.1.2. Statistical Tools ...................................................................................... 25
3.6 Variables Specification ....................................................................................... 29
3.6.1 Dependent variables ................................................................................... 29
3.6.2 Independent variables ................................................................................ 30
3.6.2.1 Bank Specific (Internal) Independent Variables: .................................... 30
3.6.2.2. Macroeconomic (External) Independent Variables: .............................. 31

CHAPTER-IV : 32PRESENTATION AND ANALYSIS OF DATA 32

4.1 Existing position of profitability indicators and their selected predictors. ......... 32
4.2. Descriptive Statistics of Variable....................................................................... 35
4.3 Correlation Matrix of study variables ................................................................. 36
4.4 Multiple Regression Analysis ............................................................................. 37
4.5 Major Findings .................................................................................................... 42

CHAPTER-V : 47SUMMARY, CONCLUSION AND

RECOMMENDATIONS ........................................................................ 47
5.1 Summary .......................................................................................................... 47
5.2 Conclusion ....................................................................................................... 49
5.4 Recommendations .......................................................................................... 50

BIBLIOGRAPHY ................................................................................... 52

APPENDICES ......................................................................................... 57

vii
 LIST OF TABLES

Table 3.1 Summary of Variables 31

Table 4.1 Performances, Bank specific and macroeconomic indicators .................... 33
Table 4.2 Descriptive Statistics of Variable of Sample Banks ................................... 35
Table 4.3 Correlation Matrix of variables................................................................... 36
Table 4.4 Regression coefficients of ROA with other independent variables ............ 38
Table 4.5 Regression coefficients of ROE with other independent variables ............ 39
Table 4.6 Regression coefficients of NIM with other independent variables............. 41

viii
 LIST OF FIGURES

Figure 3.1 Graphical Presentation of function of commercial banks. ........................... 8

Figure 3.2 Theoretical Framework Relationship of study variables ............................ 14
Figure 4.1 Existing position of dependent variables .................................................... 33
Figure 4.2 Existing position of independent variables................................................. 34

ix
 LIST OF ABBREVIATIONS

BAFIA : Bank And Financial Act

BFIs : Bank and Financial Institutions
CAR : Capital Adequacy Ratio
CBS : Central Bureau of Statistics of Nepal
e.g. : For Example
EBL : Everest Bank Limited
GDP : Gross Domestic Product
GDPR : Gross Domestic Product Growth Rate
HBL : Himalayan Bank Limited
HDI : Human Development Index
i.e. : That is
INF : Annual Inflation Rate
NABIL : Nabil Bank Limited
NFRS/IFRS : Nepal Financial Reporting System / International Financial
Reporting System
NIBL : Nepal Investment Bank Limited
NIM : Net Interest Margin
NRB : Nepal Rastra Bank
ROA : Return on Assets
ROE : Return on Equity
SCBNL : Standard Chartered Bank Nepal Limited
SIZE : Bank Size

x
 CHAPTER - I
INTRODUCTION

1.1 Background of Study

Due to the changing banking environment, profitability, which is one of the
most important criteria to measure performance of banks have come under intense
pressure. Profitability is critical to the survival of commercial banks. Firstly,
dividends are paid from profits (cash profits) and secondly, profit is an important
source of retained earnings. Retained earnings are residual profits after dividends are
paid. These earnings are important component of bank capital for its sustainability.

Financial performance analysis is a study of relationship among the various

financial factors in business as disclosed by a single set of statement and a study of
the trend of these facts as shown in a series of statements. By establishing a strategic
relationship between the item of balance sheet and income statements and other
operative data, the financial analysis unveils the meanings and significance and allows
its user a better understanding of a firm's position and overall performance.
Evaluating the financial performance of business allows decision makers to judge the
results of business strategies and activities in objective monetary terms. It also helps
to evaluate and decision making process for business operation. Normally the ratios
are used to determine the financial performance an organization.

Performance evaluation is the important approach for enterprises to take

decision. The performance evaluation of a commercial bank is usually related to how
well the bank can use its assets, shareholder's equities and liabilities, revenues and
expenses. The performance evaluation of banks is important for all parties including
depositors, investors, bank managers and regulators. The evaluation of a bank's
performance usually employs the financial ratio method because it provides a simple
description about the firm's financial performance in comparison with previous
periods and helps to improve its performance of management.

1
 As to the knowledge of researcher, there are few studies in Nepal in relation to
financial performance analysis. Distinctly studied by different researchers such as,
Pradhan (1986) studied entitled a study of financial ratios in public corporations of
Nepal. Jha & Hui (2012) studied on a comparison of financial performance of
commercial banks: A case study of Nepal. Awasthi (2003) has studied on a
comparative study of financial performance between Nepalese commercial banks.
Bhandari (2012) researched on Performance evaluation of commercial banks in Nepal
using AHP. Bhattarai (2018) studied the impact of bank specific and macroeconomic
variables on performance of Nepalese commercial banks by defining return on asset
(ROA) as the performance measure. Rai, Ojha, Singh, Gyawali, & Gupta (2015)
studied entitled "Determinants of financial performance in Nepalese financial
institutions" taking the data of 2005 to 2014.

Hence, as to the knowledge of the researcher, there were no studies on recent

data and topic related to this title “Determinants of Financial Performance of
Commercial Banks in Nepal" (with reference to Nabil Bank Ltd., Nepal Investment
Bank ltd., Nepal Standard Chartered Bank Nepal ltd., Everest Bank ltd. and
Himalayan Bank Ltd.). This study evaluates sample banks performance in terms of
profitability for the period 2013/14 -2017/18. This study will be of particular
importance to the academicians, Stock Investor and shareholder, researchers and
concerned stakeholders of the sample banks.

1.2 Statement of the Problem

The main objective of the commercial bank is to collect deposits as much as
possible from the customer and to mobilize into the most profitable and preferable
sector. Due to the profit driven objective of the business, establishment of these of the
banks have concentrated only in urban area, like Kathmandu, Pokhara, Birgunj,
Hetauda, Biratnagar, etc. which has raised certain questions. This application is not
able to contribute the socio- economic development of the country where around 80%
people live in rural and majority of the population depends upon agriculture. These
banks should expand their operation in rural areas. NRB, as the central bank has ruled
that joint venture banks should invest 10% of their total investment in the rural areas.

2
However, these banks are inclined to pay fines rather than investing their resources to
such less profitable sector.

However, Given the rapid development of financial markets, banks are facing
intense competition. According to NRB Monthly Banking & Financial Statistics -
Asar 2075, There are total of 157 BFIs, in which twenty eight of them are
Commercial Banks. in the other hand, the banking sector has experienced weighty
changes mostly due to technological innovations and the unstoppable forces of
globalization have continued to create expansion opportunities as well as challenges
to bank‟s managers to ensure their bank remain profitable and competitive. So, the
managers in the industry must know and understand variables that significantly
influence the profitability of the bank. This is crucial considering the fact that banks
play a crucial role in the development of the economy.

Murerwa (2015) observed that several factors affect profitability of bank. The
profitability performance and changes in profitability of a bank, regardless of its
ownership are determined by internal variables and external variables. The internal
variables are related to the bank itself and they are influenced by the working and
performance of the management. The external variables are the result of the
macroeconomic environment in which the bank is operating. What are the exact
factors that influence the performance in terms of profitability of commercial banks in
Nepal?

Basically, this study has focused on the financial performance of sample

banks. In Nepal, many banks and financial companies were opened up within a span
of few years. However, after the promulgation of Merger Laws 2011 and bylaws
2015, the number of bank and financial institutions are decreasing. Although joint
venture banks have managed to perform better than other local commercial banks
within the short period of time, they have been facing a neck competition against one
another.

Therefore, by analyzing the determinants of performance of the commercials

banks in Nepal would be the good to know for its stakeholders like-
creditors/depositors, investors, mangers etc. Thus, the present study seeks to explore
the factors affecting the financial performance of sample banks. This financial

3
performance analysis of the banks would be highly beneficial for finding out the
determinants of financial performance and set the strategies for better performance.
This study is directed to resolve the following issues:

i. What is the existing position of selected bank performance indicators, bank

specific variables and macroeconomic indicators?
ii. What are the bank specific and macroeconomic factors that influencing bank
performance?

1.3 Objectives of the Study

Our activities should be motivated to achieve specific goals, which is a
desired outcome. The main objective of this study is to examine the determinants of
financial performance of commercial bank in Nepal with reference to NABIL, NIBL,
SCBNL, EBL and HBL and the extent to which they impact on performance. The
specific objectives for the study are as follows:

i. To examine the existing position of selected bank performance indicators,

bank specific factors and macroeconomic factors.
ii. To evaluate the macroeconomic factors which influence the financial
performance of the commercial banks

1.4 Significance of the Study

The study is significant for providing an improved understanding of the
determinants of commercial banks' profitability and their precise effect on overall
performance. Financial performance of a firm affects the interest of its stakeholders.
The stakeholders refer to trade creditors, bondholders, investors and management and
other user of financial statements. Trade creditors are interested in the liquidity of the
firm, bondholders are interested in the cash flow ability of the firm, investors are
interested in present and expected future earnings as well as stability of these earnings
and management is interested in internal control, better financial condition and better
performance of firm.

4
 Commercial banks are one of the major core components of modern economy.
They give greater contribution to GDP too. On the other hand, bank and financial
institutions are in tight competition with one another within the industries as well. At
this situation, the commercial banks should be more competitive. They should
become financially healthy and must have growth potentiality. In addition, they have
to shape their plans and strategies accordingly.

Therefore, the conclusions drawn from this study are beneficial and valuable
for commercial banks in formulating the right operational policies that enable them to
generate sustainable profitability, which is essential for them to maintain ongoing
activity. The conclusions are also crucial for the investors by improving their
understanding of how to take the right investment decision that enables them to obtain
fair returns. Finally, it is also useful for researchers and academicians in the field of
finance, economics and banking for carrying out further studies in this area.

1.5 Limitation of the Study

This study is conducted for the partial fulfillment of Master Degree in
Business Studies. So, it possesses some limitations of its own kind which is
constraints of data, information etc. The main limitations of the study will be as:

a) This study will be focused only on financial aspects and not on the operational
aspects of the sample banks. So, the conclusion derived from this study will
solely depend upon financial aspects and macroeconomic aspects but will be
completely free from operational aspects.
b) There are 28 commercial banks currently operating in Nepal. However, This
study is limited to only five commercial banks of Nepal, namely; Nabil Bank
Ltd., Nepal Investment Bank Ltd., Standard Chartered Bank Nepal ltd.,
Himalayan Bank Ltd. and Everest Bank Ltd.
c) The study deals with only certain financial tools such as profitability ratio and
statistical tools.
d) This study will deal only with data of five fiscal years from 2013/14 to
2017/18 of sample banks.
e) The study is based on secondary data.

5
1.6 Organization of the Study
This study has been organized into five chapters. Chapter one includes the
background of the study with the subject matter of the study, statement of the
problem, objective of the study, significance of the study and limitation of the study.
Following on this, chapter two of the study presents reviews of the existing literature
on the concept of financial performance analysis from books, dissertation, articles,
journals, report etc. It also includes conceptual framework and research gap. Chapter
three presents the research methodology in which the way and technique of the study
applied in the research process will be covered. Then, presentation and analysis of
data will be in chapter four. Finally, chapter five will summarize the whole study
along with conclusion and recommendations.

6
 CHAPTER - II
REVIEW OF LITERATURE

A literature review is a comprehensive summary of previous research on a

topic. The literature review surveys scholarly articles, books, and other sources
relevant to a particular area of research. (Bloomsburg University of Pennsylvania)

This Chapter reviews the main banking profitability and performance theories
that have been developed and used by the researchers and discuss their relevance to
this study. So that past studies, their conclusions and deficiencies may be known and
for further research to be conducted. The main reason for a full review of research is
to know the outcomes of those research in areas where similar concepts and
methodologies had been used successfully. This chapter will be in three sub-topics as
follow:

2.1 Conceptual Review

2.1.1 Concept of Commercial Bank
According to the Banks and Financial Institutions Act, 2063, “Bank” means a
corporate body incorporated to carry on financial transactions as prescribed by the
Rastra Bank". Sub-section (1) of Section 47 of this Act further explains specific
function of the commercial Bank in Nepal. Nepal Rastra Bank has classified Nepalese
banks and financial institutions into four classes: Class A, B, C and D based on
minimum paid up capital requirement and some other criteria. Aforesaid class 'A'
category banks are known as commercial banks in Nepalese context. Monetary Policy
2015-16, has made a provision of minimum 8 billion paid capital for class 'A' banks
which is commercial bank.

Singh (2010) defines a commercial bank as a financial institution which

performs the functions of accepting deposits from the general public and giving loans
for investment with the aim of earning profit. In fact, commercial banks, as their name
suggests, axe profit-seeking institutions, i.e., they do banking business to earn profit.

7
 A commercial bank is a type of financial intermediary and a type of bank.
Commercial banking is also known as business banking. Commercial banks, as the
name itself signifies, designed to accept deposit and advance credit to commercial
sector. Their operations are mainly commercial in nature and they handle short-term
finance. But new developments have come up as they are also handling medium term
and long term financing. Commercial banks, these days, undertake various financial
activities and provide various kinds of financial services.

Figure 3.1 Graphical Presentation of function of commercial banks.

Banks collect the money through acceptance of deposit from persons who do
not need it at the present, and lending it to persons who want it for investment, serve
as financial intermediaries thereby providing ideal source of fund for investment that
is crucial in increasing production, exports, creation of jobs and foreign exchange
earnings of the country (Li, 2007).

Apart from the primary function of receiving deposits and lending, and
statutory functions specified in the Acts, banks play an important role in the economic
development of a country. Commercial banks are the heart of financial system.
Modern commercial bank does not stop with merely receiving and lending functions.

8
They make fund available through their lending and investment activities to
borrowers, individuals, business houses and government. Doing so, they facilitate
both the flow of goods and services from producers to consumers and the financial
activities of the government.

2.1.2 Concept of Financial Performance

According to the Business Dictionary, the term performance is scribed as "The
accomplishment of a given task measured against preset known standards of accuracy,
completeness, cost, and speed. In a contract, performance is deemed to be the
fulfillment of an obligation, in a manner that releases the performer from all liabilities
under the contract." Whereas, "Financial performance is the level of performance of
a firm over a specific period of time and expressed in terms of the overall profits or
losses incurred over the specific period under evaluation" (Bodie, et al. (2005).

The word 'performance' means 'the performing of an activity, keeping, in view

the achievement made by it.' In other words, 'performance' means 'the role played by
an arrangement keeping in view the achievement made by it.' In the context of banks,
it takes into account the way of their progress. Financial performance analysis is a
study or relationship among the various financial factors in business as disclosed by a
single set of statement and a study of the trend of these facts as shown in a series of
statements (Nirmal, 2004). By establishing a strategic relationship between the item
of balance sheet and income statements and other operative data, the financial
analysis unveils the meanings and significance of such items. Moreover, Financial
performance analysis is a process of evaluating the relationship between components
parts of a financial statement to obtain a better understanding of a firm's position and
performance (Ahuja & Majumdar 1998).

Financial performance is the process of measuring the results of an

organization policies and operations in terms of monetary value. These results are
reflected in the firm's profitability, liquidity or leverage. Evaluating the financial
performance of business allows decision makers to judge the results of business
strategies and activities in objective monetary terms. Normally the ratios are used to
determine the financial performance an organization. A well designed and
implemented financial management is expected to contribute positively to the creation

9
of a firm's value (Padachi, 2006). "Financial analysis is to analyze the achieved
statement to see if the results meet the objectives of the firm, to identify problems, if
any, in the past or present and/or likely to be in the future, and to provide
recommendation to solve the problems" (Pradhan, 1986).

Various different researchers and writers have different idea and definition
about performance. However, majority of the researchers have used the term
performance to express the range of measurements of transactional efficiency on input
& output efficiency. Hence, financial performance is the process of measuring the
results of an organization policies and operations in terms of monetary value. In other
word, financial performance analysis is a study of relationship among the various
financial factors and identifying the financial strengths and weaknesses of the firm by
properly establishing the relationship between the items of as disclosed by a single set
of financial statement and a study of the trend of these facts as shown in a series of
statements. By establishing a strategic relationship between the item of balance sheet
and income statements and other operative data, the financial analysis unveils the
meanings and significance of such items. Financial performance analysis is a process
of evaluating the relationship between components parts of a financial statement to
obtain a better understanding of a firm's position and performance.

2.1.3 Areas and Importance of Financial Performance Analysis

Financial Performance analysis includes analysis and interpretation of
financial statements in such a way that it undertakes full diagnosis of the profitability
and financial soundness of the business. The financial analysis program provides vital
methodologies of financial analysis.

2.1.3.1. Areas of Financial Performance Analysis:

In Financial Performance Analysis, we often focus on the firm's production
and productivity performance (total business performance), profitability performance,
liquidity performance, working capital performance, fixed assets performance and
fund flow performance. To evaluate the performance of commercial banks, various
financial ratio analysis tools can be used, such as: profitability analysis, liquidity
analysis, working capital analysis and financial structure analysis.

10
2.1.3.2. Importance of Financial Performance Analysis
Financial Performance Analysis unveils the financial health and stability of a
firm. It helps in determining the current position and in planning for upcoming
business plan. The key factor indicating a firm's growth and future potentiality is the
level of profitability achieved. So, there is a direct relationship between utilizing
financial resources and the profit generation for a firm.

Importance of use of financial data varies according to the specific interest of

the party involved and their interest is affected by the financial performance of a firm.
So, the financial performance analysis is important for different reasons:

 Shareholders: Shareholders are the owners of the company. Time and again,
they may have to take decisions whether they have to continue with the holdings
of the company's share or sell them out. The financial statement analysis is
important as it provides meaningful information to the shareholders in taking
such decisions. Shareholders are also interested in present and expected future
earnings as well as stability of these earnings as they have invested their money
on it.
 Management: Management team is responsible for taking decisions and
formulating plans and policies for the future. They, therefore, always need to
evaluate its performance and effectiveness of their action to achieve the
company's goal. Therefore, staying informed about the performance of the
company is crucial to the management team of firm. So, their areas of interest is
focused in internal control, better financial condition and better performance
where information about the present financial condition, evaluation of
opportunities in relation to this current position, return on investment provided
by various assets of the company etc.
 Creditors / Depositors: Since, creditors/depositors are the liquidity providers of
the bank. They seek for the safety of their deposits. The sufficient liquidity
management will in better result in performance. So, the performance of bank is
important for them for making decision on whether to hold or extend the
deposit limits etc.
 Investors: Investors always seek for the potential profitable opportunities to
invest their fund so that they could secure their capital and get the reasonable

11
 return. They look for the present and expected future earnings as well as
stability of these earnings, through major sources and uses of funds.

2.1.4 Factors Affecting Performance of Banks

Different studies undertaken on the performance of banks suggest that
performances of banks are affected by both internal and external factors. Shaher,
Kasawneh & Salem (2011) studied twenty-three factors that affect the performance,
out of which they have narrowed down the top five factors that affect the performance
of banks, which are: Banks characteristic, Competition environment, Economic
indicator, Regulation and legal environment and Country risk.

Mohana (2012) suggests that the so called bank specific factors because
depending on the likely impact they have on the profitability of the bank they can be
reinforced (positive treatment) or weakened (negative treatment) by the management
of the bank. The major internal factors that affect performance of banks include:
capital structure, asset quality, management efficiency, earning quality, liquidity, bank
size, technology, human capital, loan performance and income diversification among
others.

Moreover, some of the factors that affect the performance of the bank could be
under the control of banks management and the others could be beyond
management‟s control. Those factors which could be under the control of the
management are called internal or bank specific factors likewise, those factors which
are beyond the management‟s control are referred as external or macroeconomic
factors and these factors are related to the industry and macroeconomic factors of the
country. These factors such as bank concentration, inflation, GDP growth, effective
tax rate, interest rate, among others.

2.1.5 Measures of Bank Performance

Among the large set of performance measures for banks used by academics
and practitioners alike, a distinction can be made between traditional, economic and
market-based measures of performance. Traditional performance measures are similar
to those applied in other industries, with return on assets (ROA), return on equity
(ROE) or cost-to-income ratio being the most widely used. In addition, given the

12
importance of the intermediation function for banks, net interest margin (NIM) is
typically monitored (European Central Bank, 2010).

 Return on Asset (ROA)

The return on assets (ROA) is the net income for the year divided by total
assets, usually the average value over the year. The ROA reflects the ability of a
bank‟s management to generate profits from the bank‟s assets employed for the
business. 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. This ratio is calculated as net profit after tax divided by the
total assets.

 Return on Equity (ROE)

Ratio of Return on Equity (ROE) is an internal performance measure of
shareholder value, and it is by far the most popular tool. Return on equity is the return
to shareholders on their equity. Siraj and Pillai (2012) describes that return on equity
measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested. The amount of net income
returned as a percentage of shareholders equity. Net income is for the full fiscal year
(before dividends paid to common stock holders but after dividends to preferred
stock). This ratio is calculated as net profit after tax divided by the average total
shareholder's equity fund.

 Net Interest Margin (NIM)

Angbazo (1997) Explains that net interest margin represents the difference
between the generated interest income and the interest expense relative to the interest
earning assets. The margin is set by the intermediaries at the level that covers all the
costs and risks that are related to financial intermediation. An optimal margin should
generate enough income to expand the capital base as the bank expose itself to more
risk. In other word, NIM is the difference between the interest income less interest
expense divided by total loan and advances. NIM reflects the cost of banks
intermediation services and the efficiency of the bank. This ratio is calculated as net
interest income divided by the average loan and advances.

13
2.1.6. Concept of Variables
The relationship between bank performance and its determinants are
established by testing the relationship between two dependent and independent
variables from bank specific internal factors in and macroeconomic factors, which is
external factor. According to the (Business Dictionary 2018) Variable is a
characteristic, number, or quantity that increases or decreases over time, or takes
different values in different situations. Two basic types are (1) Independent variable:
that can take different values and can cause corresponding changes in other variables,
and (2) Dependent variable: that can take different values only in response to an
independent variable. As per the objective and the design our study, the relationship
of performance of bank and the determinants are established as following:

Independent Variables

Bank Specific Variables:

Dependent Variables
 CAR
 Bank Size

Performance Measures:
 ROA
Macroeconomic Variables:  ROE
 GDP  NIM
 INF

Figure 3.2 Theoretical Framework Relationship of study variables

2.2. Review of Related Studies

2.2.1. Review of Related Articles
Maharjan (2016) concludes in his research that capital adequacy and liquidity
position are the major determinants of profitability of Nepalese commercial banks. He
has conducted the research to examine the impact of bank specific and

14
macroeconomic variables on profitability of Nepalese commercial banks. The banks‟
profitability performance was measured by return on assets, return on equity and net
interest margin. Capital adequacy, credit risk, liquidity position and bank size are used
as bank specific variables and macroeconomic variables include inflation and gross
domestic product growth rate. The study was based on secondary data of 19 banks
with 114 observations for the period of 2009 to 2014. The result shows that return on
assets, return on equity and net interest margin are positively related with capital
adequacy, credit risk, and bank size. Likewise, inflation and gross domestic product
have positive relationship with bank profitability measure return on assets and return
on equity but negative relationship with net interest margin.

Pradhan and Parajuli (2017) studied about the effect of capital adequacy and
cost income ratio on the performance of Nepalese commercial banks. They had found
the evidence for a positive relationship of bank size with return on asset (ROA),
which mean larger the banks, higher would be the ROA. On the other hand, the study
observed that there is a negative relationship of capital adequacy, equity capital with
ROA. This means that higher the capital adequacy lower would be ROA. The result
also showed that there is a positive relationship of capital adequacy, bank size and
debt to equity ratio with ROE. This means that higher the capital adequacy, higher
would be ROE. Similarly, the study also observed that larger the bank, higher would
be the ROE. This study was based on the secondary data collected from 20 Nepalese
commercial banks through 2009-10 to 2014-15 leading to a total of 120 observations.

Bhandari and Nakarmi (2014) conducted research entitled “Performance

evaluation of commercial banks in Nepal using AHP". On their study, they have
focused to explore the determinants of performance exposed by the financial ratios
and determine the financial performance of commercial banks in Nepal through
Analytical Hierarchy Process (AHP) based on their financial characteristics. The
financial parameters were derived by segregating five major criteria, which were
Liquidity, Efficiency, Profitability, Capital Adequacy and Assets Quality. The
performance evaluation was done for 13 commercial banks for financial data from
year 2008/09 to 2011/12. The paper emphasizes financial decision problems to have
strong multi criteria character, establishes priorities for performance parameters of

15
commercial banks among financial indicators identified, and ranks banks according to
those indicators. They found through a sensitivity analysis that an apparent Capital
Adequacy risk for Nepal Bank Limited and Rastriya Banijya Bank which has to be
improved significantly.

Pandey et al. (2014) examined the impact of corporate governance on firm

performance on twenty-two commercial banks in Nepal with data of 2010 to 2014.
The return on assets and return on equity were selected as bank‟s performance
variables for this study as the dependent variables. Board size, independent directors
and female directors were the independent variables. Leverage and firm size were the
control variables. The regression models were used to examine the Impact of board
structure on financial performance of Nepalese commercial banks. They found that
larger the firm size, higher would be the ROA. Board size and presence of female
directors were negatively related to ROE. Therefore, larger the board size and larger
the female directors, lower would be the ROE. The result also shows that greater the
number of independent directors, higher will be the ROE.

Bhattarai (2018) in his study "Impact of Bank Specific and Macroeconomic

Variables on Performance of Nepalese Commercial Banks" studied by defining return
on asset (ROA) as performance measure variable with the annual data period of 2011
o 2016. While default risk, capital adequacy ratio and cost person assets as bank
specific independent variables. Likewise, annual growth rate of GDP, exchange rate
and inflation rate as the macroeconomic independent variables. He has used
regression models to test the impact of importance of bank specific and macro-
economic variables on bank performance. In his study, the estimated regression models
revealed that cost per loan assets was significantly negatively associated with banks'
profitability. However, exchange rate was found significantly negatively associated to
profitability. Therefore, he has concluded that the commercial banks profitability in Nepal
is mainly influenced by cost per loan assets. The macroeconomic variables were not
found significant determinant during his study period.

Kattel (2014) studied on the commercial bank of Nepal entitled, "Evaluating

the Financial Solvency of Selected Commercial Banks of Nepal: An Application of

16
Bankometer." For this study, he as sample 6 joint venture bank and 22 private sector
commercial banks in Nepal. The major keywords focused on the study were
Bankometer, capital adequacy, financial soundness and solvency. The aim of this
study was to evaluate the financial soundness of joint venture banks and private sector
banks in Nepal by using Bankometer model for the period covering secondary data
from 2007-2012. The study concludes that private sector banks are in sound solvency
position in comparison to joint venture banks.

Jha & Hui (2012) conducted research entitled “A comparative financial

performance analysis of public sector, joint venture and private sector commercial
banks in Nepal” With the objective of a study on a comparison of financial
performance of commercial banks in the context of Nepal of different ownership
structured commercial banks. They focused their study to examine and study the
comparative financial performance of 18 commercial banks taken as sample. They
have used CAMEL framework as a financial tool for financial performance
measurement purpose. They had used the data period from 2005-2010. They found
that public sector banks were significantly less efficient than their counterparts.
domestic private banks were equally efficient to foreign-owned (joint venture) banks.
Their estimation results revealed that return on assets was significantly influenced by
capital adequacy ratio (CAR), interest expenses to total loan and net interest margin
(NIM), likewise, capital adequacy ratio had considerable effect on return on equity

2.2.2 Review of Related Thesis

Jha (2014) completed her Doctor of Management dissertation entitled
"Performance appraisal of commercial banks and linkage financial indicators with
economic growth in Nepal." With the objective of examining the current state of the
Nepalese commercial banks, whether or not does efficiency difference in the
commercial banks due to its ownership, whether or not commercial banking financial
variables, risk management factors based on CAMEL framework and efficiencies
reason to economic growth etc. The study revealed that the capital adequacy ratio,
interest expenses to total loan and net interest margin were significant but had a
negative effect on return on assets (ROA) whereas non-performing loan and credit to
deposit ratio did not have any substantial effect on return on assets. The capital

17
adequacy ratio positively influenced the return on equity but net interest margin had
no significant effect on return on equity. Moreover, the study found evidence that
bank specific factors contribute to ROA and ROE performance.

Thapa (2009) had completed a thesis entitled "A financial performance of five
banks in Nepal" (SCBL, NABIL, HBL, EBL & NIBL) with the objective of analyzing
and comparing liquidity, profitability, stability and market value positions among top
five commercial banks and to examine how the performance position of commercial
banks in Nepal. In the study, He found that except SCBNL, all remaining bank had
been maintaining lower capital adequacy ratio as per the directive of central bank.
SCBNL is successful to generate cheaper fund, which has helped SCBNL to perform
better. Moreover, NABIL and SCBNL having higher Capital Adequacy Ratio has
managed to produce higher ROA.

Nakarmi (2010) conducted a thesis research on the topic "Non-performing

assets and profitability of commercial banks in Nepal". He found that the Correlation
coefficient between NPA and ROA mostly came out to be negative. This shows that
increase in profitability is affected by the amount on Non-Performing Assets. These
finding supports the theory that, higher the NPA lower will be the ROA and vice-
versa.

Murerwa (2015) conducted a thesis research on the topic of "Determinants of

banks’ financial performance in developing economies: Evidence from Kenyan
commercial banks, Nepal is also one of the developing country like Kenya, the
findings of the African developing country can be relatable to Nepalese banking
industry. Main objective of his thesis was to evaluate the macroeconomic factors
which influence the financial performance of the commercial banks in Kenya. On the
basis of his study, he concluded that industry specific factors are regarded as a critical
pointer of the financial performance of the Kenyan commercial banks. External
market structure indeed affects the financial performance of the Kenyan banks.
Moreover, he argues that the impact posed macroeconomic factors on the financial
performance is minimal.

18
 Rai et al. (2015) studied entitled "Determinants of financial performance in
Nepalese financial institutions" taking return on asset (ROA), return on equity (ROE)
and net interest margin (NIM) as the dependent variables while capital adequacy ratio,
assets quality, management efficiency, liquidity management, GDP growth rate and
inflation were chosen as independent variables with the data of 2005 to 2014. They
found the result that higher the capital adequacy ratio, management efficiency and
liquidity management, higher would be the return on equity and return on assets.
Likewise higher the GDP growth rate and inflation rate, higher would be the return on
equity and return on assets. The study also indicates that higher the assets quality
lower would be the return on equity and return on assets. The study also revealed that
larger the capital adequacy ratio and assets quality, higher would be the net interest
margin. It also shows that higher the management efficiency, liquidity management,
GDP growth rate and inflation rate, higher would be the net interest margin.

2.3 Concluding Remarks

Empirical studies are very useful and appreciated by personnel in various
related fields, including academicians, bankers, shareholders and the public. The
aforementioned reviews and studies represent only a preliminary survey of the
relevant issue. However, the previous studies cannot be ignored as they provide the
foundation for the present study. This study is continuity in research by linking the
present study with the most recent data studies. Most of the empirical researches were
based on the data that were before the Nepal Rastra Banks's mandatory provision of 8
billion paid up capital on 2015. It shows that there is a scant of study based on recent
data. Therefore, this thesis study has attempted to fill this research gap by taking
recent data of FY 2013/14 to 2017/18, which includes the data of after the period of
the 8 billion mandatory paid-up capital for commercial banks in Nepal. More
importantly, the time and situation are different in this study period. So, this study
will be useful to all stakeholders such as managements, shareholders, depositors etc.

19
 CHAPTER-III
RESEARCH METHODOLOGY

Research methodology refers to the various sequential steps (along with the
rationale of each step) to be adopted by a researcher in studying a problem with
certain objective in view. The purpose of this chapter is to discuss the methods
adopted throughout the study to accomplish the research objectives. The chapter is
organized in five sections. This chapter describes about research design, population
and sample, sources of data and method of data analysis.

3.1 Research Design

Creswell (2014) suggests that in an investigative study there are three familiar
types of research approaches to business and social research namely- inquiry within
qualitative, qualitative and mixed method approach. Though, each approach has its
own strengths and limitations. Moreover, certain types of social research problems
call for specific approaches. Hence, in selecting an approach one should take in to
account that nature of the research problem, the personal experience of the researcher
and the audience for whom the report will be written.

Considering the research problem and objectives, the quantitative nature of the
data collected, quantitative research approach found to be appropriate for this study.
Descriptive and analytical research designs have been used in this study.

3.2 Population and Sampling

At present, there are 28 commercial banks operating in Nepal. They constitute
the total population for the study. Out of them, five commercial banks namely Nepal
Nabil Bank ltd, Investment Bank Ltd., Standard Chartered Bank Nepal ltd, Everest
Bank ltd. and Himalayan bank ltd. are selected as a sample representative for the
study of determinants of financial performance analysis as a sample.

20
 While selecting the banks for the study, convenience sampling technique has
been adopted. Convenience sampling is a type of non-probability sampling that
involves the sample being drawn from that part of the population that is close to hand.
Although, there are some limitations, convenience sampling can be used by almost
anyone and has been around for generations. One of the reasons that it is most often
used is due to the numerous advantages it provides. This method is extremely speedy,
easy, readily available, and cost effective, causing it to be an attractive option to most
researchers (Dudovskiy, 2018). In view of speedy collection and cost effective, this
study has adopted convenience sampling technique in order to select the banks as
sample. Moreover, the reason behind choosing of the latest five year from 2013/14 to
2017/18 period is to include a fresh data in the analysis.

3.3 Source and Types of Data

Secondary data is used for this study to meet the objectives of the study. The
annual report of sample banks is the main source as well as their official website and
other information related to Nepalese banking industries. Therefore, the major sources
of data include following:

 Annual reports of the selected sample banks

 Related bulletins, circulars and directives, reports, periodically published by
various government bodies like: Nepal Rastra Bank, Central Bureau of
Statistics etc.

3.4 Data Collection Procedure

Since this study is using the secondary data as per its need and nature of study,
the data have been obtained from various official websites and records of the related
banks. Since, various data obtained through different sources can't be used directly for
the analysis in their original form. So, they have been re-evaluated, edited and
tabulated to bring them into appropriate form for the analysis as per the demand of
nature of study. The researcher has made the collected data trust worthier getting them
form authorized sources. All the gathered data have been used according to the need
and requirement of this study.

21
3.5 Methods of Data Presentation and Analysis
This section consists of presentation, interpretation of available data. The data
collected from annual report were in the form of raw. They are simplified and
converted into the necessary format form according to research objective in
understandable manner and shown in appendices. Mainly, the profitability ratio will
be calculated and tested with the bank specific and macroeconomic variables with the
statistical tool correlation and regression analysis to find out their relationships.

3.5.1 Data Analysis Tool

3.5.1.1. Financial Tools
Since this study is related to the financial performance analysis, financial tools
are more useful as they help to identify financial strength and weakness of the firm.
Although, there are various types of tools available, this research has primarily focus
on Profitability ratio analysis assuming it the most suitable tools.

"Ratio is simply a number expressed in terms of another. It refers to the

numerical or quantitative relationship between two variables that are comparable"
(Palanivelu, 2012). Moreover, it is used as a technique to quantify the relationship
between two sets of financial data and provides information relation to strength and
weaknesses of financial data in relation to others. Particularly, researcher has used
return on assets (ROA), return on equity (ROE), net interest margin (NIM), capital
adequacy ratio (CAR) and bank size in this study.

i) Return on Asset (ROA)

ROA is a financial ratio that gives the percentage of return (profit) that a
company is producing in relation to its overall resources (total assets). The return on
assets (ROA) is the net income for the year divided by total assets, usually the average
value over the year. The ROA reflects the ability of a bank‟s management to generate
profits from the bank‟s assets employed for the business. 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. It shows the
efficient management at using assets to generate earnings. (Siraj and Pillai 2012)

22
found that the ratio of net income to total assets measures the return on total assets
(ROA) after interest and taxes. This ratio is calculated as net profit after tax divided
by the total assets.

ii) Return on Equity (ROE)

Ratio of Return on Equity (ROE) is an internal performance measure of
shareholder value, and it is by far the most popular tool. Return on equity is the
return to shareholders on their equity. Siraj and Pillai (2012) describes that Return
on equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested. The amount of net
income returned as a percentage of shareholders equity. Net income is for the full
fiscal year (before dividends paid to common stock holders but after dividends to
preferred stock). This ratio is calculated as net profit after tax divided by the
average total shareholder's equity fund.

iii) Net Interest Margin (NIM)

Net interest margin represents the difference between the generated
interest income and the interest expense relative to the interest earning assets. The
margin is set by the intermediaries at the level that covers all the costs and risks
that are related to financial intermediation. (Angbazo 1997) quotes that an optimal
margin should generate enough income to expand the capital base as the bank
expose itself to more risk. In other word, NIM is the difference between the
interest income less interest expense divided by total loan and advances. NIM
reflects the cost of banks intermediation services and the efficiency of the bank.
This ratio is calculated as net interest income divided by the average loan and
advances.

23
iv) Capital adequacy ratio (CAR)
The capital adequacy ratio (CAR) is a measure of a bank's capital. It is
expressed as a percentage of a bank's risk weighted credit exposures. Capital 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. Dang (2011) concluded that capital
adequacy ratio has positive relationship with banks performance. However, In
Nepalese context, Poudel (2012) found significant negative association between
capital adequacy ratio and bank performance. Capital adequacy ratio is calculated
dividing capital fund by risk weighted assets. As per the NRB guideline,
commercial banks in Nepal must maintain the capital adequacy ratio above 10
percent.

( )

v) Bank Size (Size)

Bank size is a natural logarithm of total assets. In this study, bank size has
been taken as bank specific internal independent variable as it influence the
performance of the bank. Kosmidou and Zopounidis (2006) found that the
negative effect of bank size on performance. The authors point out that, the bigger
the bank size, the more difficult to manage it. In contrast, Masood and Ashraf
(2012) had found a positive impact of bank size on performance. In the study it has
been concluded conclude that a large bank size reduces costs due to economies of
scale that this entails, large banks can also raise capital at a lower cost.

vi) Gross Domestic Product Growth Rate (GDPR)

The GDP is the measure of total economic activity within the economy of
a country for the given year and it is widely used economic indicator. In this study
we have employed the GDP growth rate as a measure of macroeconomic
conditions. Growth rate of GDP is the rate of change in annual GDP. Shubiri
(2010), has found the relationship microeconomic factors with the stock price and
firm performance and found highly positive significant relationship between
market price of stock& firm performance and gross domestic product.

24
 Athanasoglou et al. (2008) had found a positive association between economic
growth and financial sector profitability. It is widely assumed that growth in GDP
which growth in economic activities has positive impact on performance of banks
as well, because higher GDPR growth leads to higher consumption and economic
activity. The GDPR annual data has been obtained from annual report of Central
Bureau of Statistics (CBS) of Government of Nepal.

vii) Inflation Rate (INF)

Inflation is another vital macroeconomic indicator which refers the
changes in aggregate price level of consumer goods and services purchased by
households. Clements and Galvao (2008) found that higher the average inflation
rate the higher the uncertainty of firms‟ performance. Likewise, Perry (1992) has
found that the effect of inflation on bank profitability depends on whether
inflation is anticipated or unanticipated. By making accurate forecast of inflation,
the manager can increase the rates on loan faster than the rate at which operating
cost is increasing so that inflation favorably impacts on profitability. In the
situation where inflation is unanticipated, bank managers are slow in adjusting the
rate on bank loans so that the rate of increase of operating cost is faster than the
rate of increase of bank revenue resulting in an adverse impact on profitability.
We have obtained average inflation rates from Financial Stability Report of Nepal
Rastra Bank.

3.5.1.2. Statistical Tools

The data are analyzed with some statistical concepts, formulas and models. In
this research study mean, standard deviation, correlation analysis and regression
analysis are used to analyze collected data.

–
i) Mean (X)
Mean is the average of sum of total values to the number of observations in
the given sample. It represents the entire data, which lies almost between the two
extremes. For this reason an mean is frequently referred as a measure of
central tendency. It is calculated with following relationship:

25
 – x1 + x2 + x3 + x4 …………… + xn –
Mean ( X) = n Or, X =

Where,

–
X = Arithmetic Mean return

x1, x2, x3, x4 …………… xn = Set of Observation

x = Sum of given Observation

n = Total number of Observations

ii) Standard Deviation

Standard deviation is a statistical tool that measures the ranges and size of
deviance from the middle or mean. It measures the absolute dispersion. Higher the
standard deviation higher will be the variability and vice versa. In other words, it
helps to analyze the quality of data regarding its variability. It is calculate as:

–
(X -X) 2
Standard Deviation (S.D.) = n

Where,

–
X = Arithmetic Mean return

X = Set of Observation

n = Total number of Observations

iii) Coefficient of Correlation Analysis

Coefficient of correlation is widely used in to measure the degree of
relationship between two variables. Two variables are said to have correlation
when the value of one variable is accompanied by the change in the value of the
other. There are some major principle of correlation analysis. We have adopted

26
 Karl Pearson's Coefficient analysis method for this study. It is calculated by the
following formula relationships of two variables and denoted by small „r‟.

n xy – x y
Correlation Coefficient (r) =
n x – ( x)2 n y2 – ( y)2
2

Where,

r = coefficient of correlation

ΣXY = Sum of product of two series.

ΣX2 = Sum of squared of X series

ΣY2 = Sum of squared of Y series

n = Sample size

The value of this coefficient can never be more than + 1 or less than -1.
Thus, + 1 and -1 are the limit of this coefficient. The value of r = + 1 implies the
correlation between variables is positive and vice- versa and zero represents that no
correlation. Value of 'r' is interpreted as per the strength of association as following
criteria.

Positive r Negative r Correlation Strength

0.1 to 0.3 - 0.1 to - 0.3 Weak

0.3 to 0.5 - 0.5 to - 0.5 Average

0.5 to 1.0 - 0.5 to - 1.0 Strong

iv) t- Statistics
t-test is a widely used statistical tool to test the validity of assumption of
the study for small samples. For applying t distribution, the t- values are
calculated first and compared with the tabulated value of t distribution at a
certain level of significance for given degree of freedom. If the computed value
of “t” exceeds the table value, it is known that the difference is significant at 5
percent level of significance but if t- values are less than the corresponding

27
 tabulated of the „t‟ distribution, the difference is not termed as significant. Under
those hypotheses t statistic is expressed as following:

r
t=  n-2
1 - r2

Where,

t=calculated value of t

r= correlation of coefficient between the variables

n= number of sample

iv) Multiple Regressions Analysis

Multiple linear regression attempts to model the relationship between two
or more explanatory variables and a response variable by fitting a linear equation
to observed data. Every value of the independent variable x is associated with a
value of the dependent variable y (Yale University1).

On this regression analysis, Bank profitability performance variables

(dependent) return on assets (ROA), return on equity (ROE), net interest margin
(NIM) will be tested for their relationship with explanatory variables. The
explanatory variables are independent variables, which are taken from bank
specific (internal) and macroeconomic (external) factors such as bank size (SIZE),
capital adequacy ratio (CAR). Similarly, annual gross domestic product growth
rate (GDPR) and annual inflation rate (INF) to examine their effect and
relationships.

Regression Analysis Model:

The model estimated in this study assumes that the bank perforamnce
measures ROA, ROE and NIM depends on bank specific and macro specific

1
http://www.stat.yale.edu/Courses/1997-98/101/linmult.htm

28
variables. Therefore, the following model has been employed for the study of
relatiosnhip and effect of the study variables.

Model 1: ROA = β + β1CARit + β2SIZEit+ β3GDPGRit + β4INFit + eit (1)

Model 2: ROE = β + β1CARit + β2SIZEit+ β3GDPGRit + β4INFit + eit (2)
Model 3: NIM = β + β1CARit + β2SIZEit+ β3GDPGRit + β4INFit + eit (3)

Where:
CARit = Capital adequacy ratio of bank ith for the time period t
ROAit = Return on assets of bank ith for the time period t
SIZEit = Size of bank ith for the time period t
GDPRit =Gross Domestic Product for time period t
INFit = Inflation Rate for time period t
β = The intercept (constant)
β1, β2, β3, β4, = The slope which represents the degree with which bank
performance changes as the independent variable changes by
one unit variable.
e = error component

3.6 Variables Specification

3.6.1 Dependent variables
The dependent variable is an item that its result depends on the other
independent variable. As the experimenter factor changes independent variables, the
effect on the dependent variable is changed and observed and recorded.

Bank performance is usually measured by ROA, ROE or NIM. Studies

conducted on the determinants of banks performance use one or a combination of
these ratios as a measure of performance in their analysis. European Central Bank
(2010) suggests that return on assets (ROA), return on equity (ROE) or cost-to-
income ratio being the most widely used. In addition, given the importance of the
intermediation function for banks, net interest margin (NIM) is typically monitored.
The choice of the financial performance ratios (ROA, ROE, NIM) depends on the
objective of the performance measure since the output of each of the performance

29
measure differs. The result of ROA, ROE and NIM depends upon the internal
components of the bank which is connected with other various internal and external
factors, Therefore, as per the objective and research design of this study, ROA, ROE
and NIM has been taken as dependent variables.

3.6.2 Independent variables

The independent variable is the variable whose change isn‟t affected by any
other variable in the experiment. It remains constants unless researcher changes or it
changes itself. Banks performance is affected by both internal and external factors.
Internal factors are bank specific factors over which banks management has control
whereas external factors are factors over which the management of the bank lacks
control. For the purpose of this study, four independent variables are included. From
these four variables, two variables are from internal and external each and assuming
that, they best explain the determinants of bank performance as per our study purpose.

3.6.2.1 Bank Specific (Internal) Independent Variables:

Bank's performance is influenced by bank specific variables and those
variables are determined and influenced by the bank's internal environment. A bank's
internal environment is composed of the various elements within the organization,
including management, corporate culture, Policies, leadership etc. According to
Mohana (2012) the bank specific factors reflect the difference related to policies and
decisions of a bank‟s management. Such performance determinants are capital
structure, bank size, income diversification and operating costs which are derived
from balance sheet and income statement.

(Kosmidou and Zopounidis 2006; Masood 2012) have found the relationship
between banks performance and size of the bank. likewise, Dang (2011) and Poudel
(2012) has found the relationship between performance of and bank and the capital
adequacy ratio. Therefore, Bank size (SIZE) and capital adequacy ratio (CAR) have
been taken as independent internal variables as representative variables from the bank
specific independent variable for this study purpose.

30
3.6.2.2. Macroeconomic (External) Independent Variables:
Another group of variables impacting bank profitability performance are
macroeconomic conditions and market structure control variables. A complete
economic environments of the country is the macroeconomic factors which is external
factors for the banks.

Shubiri (2010) and Athanasoglou et al. (2008) found the significant

relationship between gross domestic product growth and performance of bank.
similarity, Clements and Galvao (2008) and Perry (1992) found the significant
relationship between inflation rate and the performance of bank. Therefore, GDPR
and INF have been taken as independent external variables as representative variables
from the macroeconomic independent variable for this study purpose. The GDPR
annual data has been obtained from annual report of Central Bureau of Statistics
(CBS) of Government of Nepal and inflation rates from Financial Stability Report of
Nepal Rastra Bank.

Table 3.1
Summary of Variables

Variables Description
Dependent variables
ROA = Return on assets Net income/total assets
ROE = Return on equity Net income/Total equity
NIM = Net interest margin Net interest income to average earning
Independent variables
Bank specific variables
SIZE = Bank size Natural logarithm of total assets
CAR = Capital adequacy ratio (Tier 1 capital+ Tier 2 capital)/Risk weighted
exposures
Macroeconomic variables
GDPR = Gross domestic Rate of annual change in GDP
product growth rate

INF = Inflation Aggregate price level change in general price level

of goods and services in an economy.

31
 CHAPTER-IV
PRESENTATION AND ANALYSIS OF DATA

This chapter includes analysis of collected data and their presentation. The
purpose of this chapter is to analyze and elucidate the collected data to achieve the
objective of the study following conversion of unprocessed data to an understandable
presentation. In this chapter, the data have been analyzed and interpreted using
financial and statistical tools following the research methodology dealt in the third
chapter. In the part of analysis, various tables have been used to present the data
collected from various sources have been converted into the required tables according
to their homogeneity. The calculated results of the analysis have been presented in the
suitable forms.

4.1 Existing position of profitability indicators and their selected

predictors
The existing position of sample banks shows the direction of the business
growth in one glance. Users of financial information may get an idea of it from a
simple line chart of trend without digging the pile of data. From the five return on
asset (ROAs) of five-sample bank each, a simple arithmetic mean (average) is
calculated and made one average mean for one year up to five years. Likewise, similar
process is adopted for return on equity (ROE), net interest margin (NIM), capital
adequacy ratio (CAR) and bank size (SIZE) as well. Gross domestic product growth
rate (GDPR) and annual inflation are used as the independent macroeconomic
variable for this study. The data of gross domestic product growth rate (GDPR) and
inflation rate (INF) are sourced from archive of Nepal Rastra Bank and Central
Bureau of Statistics Nepal's National Account reports.

This simple line chart presents the trend of the financial performance of
commercial banks in Nepal and macroeconomic trend from 2013/14 to 2017/18. The
following table 4.1 and figure 4.1 and figure 4.2 show the trend of the commercial
banks' financial performance for five fiscal years as expressed by return on asset

32
(ROA), return on equity (ROE) and net interest margin (NIM). Similarly, bank
specific and macroeconomic factors capital adequacy ratio (CAR), bank size (SIZE),
gross domestic product growth rate (GDPR), and inflation rate (INF).

Table 4.1
Performances, Bank specific and macroeconomic indicators

Fiscal Years
Particulars Unit
2013/14 2014/15 2015/16 2016/17 2017/18
ROA = Return on Assets % 2.18 1.72 1.93 2.09 2.12

ROE = Return on Equity % 25.05 20.48 19.49 17.20 15.81

NIM = Net Interest Margin % 3.79 2.98 3.11 3.35 3.66

CAR = Capital Adequacy Ratio % 11.51 12.25 13.41 14.67 15.06

SIZE = Bank Size No. 7.86 7.96 8.02 8.07 8.12

GDPR = GDP Growth Rate % 5.99 3.32 0.59 7.91 6.29

INF = Inflation Rate % 9.1 7.2 9.9 4.5 4.0 *

(Source: Appendix - V) * Provisional

Dependent variables
30

25
Percentage / Value

20

15 ROE

10 ROA
NIM
5

0
2013/14 2014/15 2015/16 2016/17 2017/18
Fiscal Year

Figure 4.1 Existing position of dependent variables

33
 Independent variables
16
14
12
Percentage / Value

10
CAR
8
SIZE
6
GDPR
4
INF
2
0
2013/14 2014/15 2015/16 2016/17 2017/18
Fiscal Year

Figure 4.2 Existing position of independent variables

As it can be seen in the figure 4.1 and figure 4.2, the commercial banks'
performance has shown a downward trend. Average ROE is declining continuously
from 25.05 percent to 15.81 percent in five years study period. ROA 2.18 to 2.12 is
relatively stable except 1.72 in year 2014/15. Similarly, NIM also seen stable 3.79 %
to 3.66%. Bank specific independent variables CAR and bank size is continuous but
mild upward trend. CAR is seen 11.51% and 15.06% and bank size is seen 7.86 and
8.12 in year 2013/14 and 2017/18 respectively. One of the possible reason of this
negative trend relationship between these performance indicators and bank specific
independent variables can the decline in economic activities in the country due to the
political instability in the country. Moreover, merger and acquisition bylaws
introduced Nepal Rastra Bank in 2015/2016 may also have affected the on it, because,
the new bylaws had made a the management of the banks

The trend of gross domestic product growth rate (GDPR) is quite irregular i.e.
5.99, 3.32, 0.59, 7.91, 6.29. However, the trend of annual inflation rate INF is in
downward trend except year 1015/16 i.e. 9.1, 7.2, 9.9, 4.5, 4.0. The GDPR and INF
are the factors that highly vulnerable with national economic environment which is
seen in the data as well from the data during the year 2015/16 to 2017/18. One of the
possible reason of this result can be due to hope of political stability in the country,

34
the economic activities are greatly are increased which is reflected in GDPR and INF
accordingly.

4.2. Descriptive Statistics of Variable

The descriptive statistics of the variables used in the study have been
presented in Table 4.2. The result shows that the minimum and maximum of
performance measure in terms of profitability indicators ROE, ROA and NIM along
with other independent variables of sample commercial banks in Nepal.

Table 4.2
Descriptive Statistics of Variable of Sample Banks

Variable Minimum Maximum Mean Std. Deviation

ROA 1.59 2.66 2.12 0.28
ROE 12.52 30.36 19.61 4.71
NIM 2.84 4.24 3.38 0.42
CAR 10.84 22.99 13.38 2.93
SIZE 7.73 8.24 8.01 0.14
GDPR 0.59 7.91 4.82 2.63
INF 4.00 9.90 6.94 2.42
Source: Appendix vi,

ROE mean is 19.61 from the range to minimum 12.52 to maximum 30.36
percent, which is satisfactory since it is said to be good with ROE to 15 to 25 is said
to be good in general. However, standard deviation for ROE is highest of all other
variable, which shows that deviation form center point larger in compare to other
variables. ROA with mean value of 2.12 is also satisfactory. CAR mean is 13.38 from
the range of 10.84 to 22.99. CAR of all sample bank is above the mandatory
minimum requirement of 10 percent required by Nepal Rastra Bank's regulatory
directive, but the deviation is also a bit higher. Average GDPR of five years study
period is 4.82 with the range from 0.59 to 7.91. Similarly, INF mean 6.94 with the
range from 4.00 to 9.90 percent, which indicates the higher volatility in economic
activities in the country within this study period. SIZE and NIM are relatively stable

35
and minimum volatility, which is indicated by standard deviation values 0.14 and 0.40
percent respectively

4.3 Correlation Matrix of study variables

A correlation matrix is a table showing correlation coefficients between
variables. Each cell in the table shows the correlation between two corresponding
variables (www.displayr.com). A correlation matrix is used as a way to summarize
data. This allows us a glance of which variables have correlation in which level of
strength and significance. Correlation matrix is presented as following in Table 4.3.

Table 4.3
Correlation Matrix of variables

ROA ROE NIM CAR SIZE GDPR INF

ROA 1.000
ROE 0.393 1.000
NIM 0.859 0.444 1.000
CAR 0.098 -0.481 -0.098 1.000
SIZE -0.090 -0.304 0.001 -0.141 1.000
GDPR 0.454 * -0.126 0.482 * 0.158 0.123 1.000
INF -0.148 0.525 *, **
-0.153 -0.363 -0.487 -0.728 1.000
Note: * Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).

This Correlation Matrix is calculated through Microsoft Excel 2010 with the
input data as processed in Appendix v of this study, which has been extracted from
annual reports of selected sample banks. This matrix presents the degree of
relationship between two variables. Two variables are said to have correlation when
the value of one variable is accompanied by the change in the value of the other.
Calculated coefficients of correlations have been tested for validity of significance
with t-test at 0.05 and 0.01 level with degree of freedom of 18. According the tested
result return on assets (ROA) and net interest margin (NIM) are significantly
correlated at 0.05 confidence level in positive direction with gross domestic product

36
growth rate (GDPR), similarly, return on equity (ROE) is correlated with annual
inflation rate (INF) significantly at 0.05 confidence level in positive direction.

4.4 Multiple Regression Analysis

This section presents the overall analysis and results of the regression analysis
on the determinants of bank performance. In this study ROA, ROE and NIM were
used as a main performance measure. The reason for using those variables as the
measurement of bank performance was because those profitability variables reflects
the overall ability of a bank‟s management to generate profits from the bank‟s assets
and also indicates how effectively the bank‟s assets are managed to generate
revenues. Return on assets (ROA), return on equity (ROE) and net interest margin
(NIM) are the profitability measure indicators, so, they are the dependent variable in
this study. Independent variables are categorized into two categories- bank specific
and macroeconomic variables, which is also termed as internal and external variables.
Capital adequacy ratio (CAR) and bank size (SIZE) have been taken as the
representative independent variables from internal bank specific factors. Likewise,
gross domestic product growth rate (GDPR) and annual inflation rate (INF) have been
taken as another independent variables as the representative of macroeconomic
variables. The regression analysis result of ROA, ROE and NIM with other
independent variables CAR, SIZE, GDPR and INF are presented in separate table for
each model.

Multiple regression analysis test has been performed with MS Excel 2010
using the input data extracted from annual reports of selected sample banks. Test of
significance criteria is set by comparing the P-value with common alpha level, which
is 0.05. A smaller p-value than default alpha value (P< 0.05) has been interpreted as
that the obtained coefficient of regression of selected dependent and other
independent variables or predictor is significant and vice versa. Table 4.4 presents the
regression analysis result of bank specific and macroeconomic variables on return on
assets (ROA).

37
Table 4.4
Regression coefficients of ROA with other independent variables

(Model: ROAit = β + β1CARit + β2SIZEit+ β3GDPGRit + β4INFit + eit )

Coefficients Standard Result
Variable t-Stat P-value
(β) Error (Significance)
(Constant) -1.249 4.943 -0.253 0.803 No
CAR 0.020 0.023 0.866 0.397 No
SIZE 0.272 0.556 0.489 0.630 No
GDPR 0.091 0.034 2.662 0.015 Yes
INF 0.071 0.048 1.478 0.155 No
Regression Statistics
Multiple R 0.5508 Standard Error 0.2572
R Square 0.3034 Observations 25
Adjusted R Square 0.1641
Source: Annual reports of sample banks extracted in Appendix vii, and results are
drawn from MS Excel 2010.

Table 4.4 shows that multiple R 0.5508 indicates that correlation relationship
among the variables, which mean the return on assets (ROA) is correlated by 55.08
percent with the independent variables capital adequacy ratio (CAR), bank size
(SIZE), gross domestic product growth rate (GDPR) and annual inflation rate (INF).
Also according to the correlation's basic criteria, those variables are correlated with
the strong relationship i.e. between 0.5 to 1 range. Similarly, R square tells that this
statistics of the model was 30.34 %. Which indicates that about 30.34 % of the
variability in the dependent variable (Return on Asset) is explained by the
independent variables used in the model that are capital adequacy ratio, gross
domestic product growth rate, bank's size and inflation rate collectively explain 30.34
percent of the change in ROA. The remaining portion of the variability in the
dependent variable is left unexplained by the explanatory variables used in the study.

Based on the above presented result, sample independent variables except

GDPR have the positive influence to return on asset but insignificant up to the level of
0.05 (i.e. P-value > 0.05). but gross domestic product growth rate has positive
relationship with return on asset and is significant at the alpha value 0.015 < 0.05,
which means gross domestic product growth rate has above 95 percent of influence in

38
return on asset. In other word, increase in gross domestic product growth rate in 1 unit
will influence in the return on asset by 0.091. It is evident from the above result that
higher the gross domestic product growth rate will results higher the higher rate of
return on asset and vice versa. When we come to individual coefficient among the
explanatory variables, capital adequacy ratio (CAR), bank size (SIZE), gross domestic
product growth rate (GDPR) and annual inflation rate (INF) had a coefficient of
0.020, 0.272, 0.091 and 0.071 respectively. This result reveals that there was a
positive relationship between return on assets and those independent variables. Thus
the directional change to either ways on those independent variables will effect to
change in return on asset (ROA) in the same direction.

The empirical studies also have supported such relationship findings between
return on asset (ROA) and independent variables. Lipunga (2014) also found that the
size of the bank, management efficiency and liquidity had an impact on ROA.
Similarly, Alkhazaleh and Almsafir (2014) also had found the result that supports this
study result. According to this empirical study, "large banks are assumed to have
more advantages as compared to their smaller rivals and have a stronger bargaining
capability and making it easier for them to get benefits from specialization and from
economies of scale and scope."

Table 4.5
Regression coefficients of ROE with other independent variables

(Model 2: ROE = β + β1CARit + β2SIZEit+ β3GDPGRit + β4INFit + eit )

Coefficients Standard Result
Variable t-Stat P-value
(β) Error (Significance)
(Constant) No
25.694 71.351 0.360 0.723
CAR No
-0.476 0.325 -1.464 0.159
SIZE No
-1.677 8.025 -0.209 0.837
GDPR No
0.814 0.492 1.654 0.114
INF Yes
1.411 0.690 2.044 0.043
Regression Statistics
Multiple R
0.6936 Standard Error 3.7128
R Square
0.4811 Observations 25
Adjusted R Square
0.3773
Source: Annual reports of sample banks extracted in Appendix vii, and results are
drawn from MS Excel 2010.

39
 Table 4.5 shows that value of multiple R 0.6936 is indicating that return on
equity (ROE) is correlated with other independent variables capital adequacy ratio
(CAR), bank size (SIZE), gross domestic product growth rate (GDPR) and annual
inflation rate (INF) positively with 0.6936. This correlation is strong correlation
among the variables according to the correlation's basic criteria, which are in
correlation with the strong relationship i.e. between 0.5 to 1 ranges. The value of R-
square was 0.4811, which means that 48.11% of the total variation in the value of ROE
was due to the effect of the independent variables. The adjusted R square was 0.3773,
which shows R square on an adjusted basis, the independent variables were collectively
37.73% related to the dependent variable ROE and the remaining percentages of the
variability in the dependent variable is left unexplained by the explanatory variables
used in the study.

By analyzing the result presented in table 4.5, the study found negative
coefficient in capital adequacy ratio (CAR) -0.476 and bank size (SIZE) -1.677 with
return on asset (ROE). This indicates that there is a negative affect between capital
adequacy ratio, bank size and the banks‟ profitability indicator, return on asset (ROE),
although it was insignificant (0.723, 0.159 and 0.837 > 0.05). On the other hand,
macroeconomic variables- gross domestic product growth rate (GDPR) and annual
inflation rate (INF) have the positive coefficient with the return on equity of the
sample banks, which inflation rate has significant influence at 0.05 alpha value level
(0.043<0.05). In other word, inflation has affected on return on equity by 95 percent
level.

Other empirical studies also support the result of this study on positive
relationship of ROE with GDPR and INF. Manandhar et al. (2014), The regression
results of the explanatory variables on ROE indicated that size is not an important
factor affecting return on equity. Similarly, Maharjan (2016), concludes that inflation
and gross domestic product have positive relationship with bank profitability measure
return on assets and return on equity." However, the coefficient of regression result of
ROE with SIZE and CAR are of mixed results.

40
Table 4.6
Regression coefficients of NIM with other independent variables

(Model 3: NIM = β + β1CARit + β2SIZEit+ β3GDPGRit + β4INFit + eit)

Coefficients Standard Result
Variable t-Stat P-value
(β) Error (Significance)
(Constant) -1.973 7.150 -0.276 0.785 No
CAR -0.001 0.033 -0.044 0.966 No
SIZE 0.505 0.804 0.628 0.537 No
GDPR 0.137 0.049 2.789 0.011 Yes
INF 0.096 0.069 1.383 0.182 No
Regression Statistics
Multiple R 0.5788 Standard Error 0.3721
R Square 0.3350 Observations 25
Adjusted R Square 0.2020
Source: Annual reports of sample banks extracted in Appendix vii, and results are
drawn from MS Excel 2010.

Table 4.6 shows the coefficient of regression analysis result that net interest
margin (NIM) is correlated with other independent study variables capital adequacy
ratio (CAR), bank size (SIZE), gross domestic product growth rate (GDPR) and
annual inflation rate (INF) positively with 0.5788. This correlation is strong
correlation among the variables according to the correlation's basic criteria, which are
in correlation with the strong relationship i.e. between 0.5 to 1 ranges. The value of R-
square was 0.3350, which means that 33.50% of the total variation in the value of NIM
was due to the effect of the independent variables capital adequacy ratio (CAR), bank size
(SIZE), gross domestic product growth rate (GDPR) and annual inflation rate (INF). The
adjusted R square was 0.2020, which shows R square on an adjusted basis, the
independent variables were collectively 20.20% related to the dependent variable net
interest margin (NIM) and the remaining percentages of the variability in the
dependent variable is left unexplained by the explanatory variables used in the study.

The coefficient of regression result at table 4.6 shows the existence of a

negative but insignificant relation between capital adequacy ratio (CAR, -0.001) and
net interest margin (NIM) since the p-value of net interest margin (NIM) with capital

41
 adequacy ratio (CAR) is larger than default alpha value at 0.05 (0.966>0.05). On the
other hand, bank size (SIZE), gross domestic product growth rate (GDPR) and annual
inflation rate (INF) have the positive coefficient with the net interest margin (NIM) of the
sample banks, though it was insignificant in SIZE and INF as their p-value 0.537 and
0.182 were larger than alpha value 0.05. But the relationship of NIM with GDPR is seen
positive and significant as well as it's p-value is smaller than alpha value i.e. 0.011 < 0.05.
This indicates that the gross domestic product growth rate has a positive influence in net
interest margin. So, the larger the rate of GDPR, larger will be the rate of net interest
margin and vice versa.

Empirical study of Manandhar et al. (2014), they have also found that "size is
an important factor affecting net interest margin. It shows that bigger the size of the
firm, higher would be the net interest margin." This study also have found the same
kind of result though it was not significant at the alpha level 0.05. But mixed results
are found for capital adequacy ratio (CAR) as Maharjan, (2016), found that beta
coefficients are positive for capital adequacy,

4.5 Major Findings

The findings and discussions of this study from analysis and interpretation of
the data during the study period have been summarized as following:

i. Performance measure indicators ROA, ROE and NIM from Table 4.2 and figure
4.1 has revealed that one of the major indicator of the performance measure return
on equity (ROE) is in continuous downward trend during the study period.
ii. As presented by simple arithmetic mean of sample bank, the average return on
equity (ROE) in 2013/14, it was 25.05 percent and at the end of the study period
2017/18, the mean ROE was declined to 15.81 percent. ROE is more than a just
measure of profit but it's a measure of efficiency. So, This result indicates that the
shareholder's earning declining.
iii. Declining ROE shows that the shareholders' fund is not in optimum utilization by
the management of the bank. However, the average of five years ROE of 19.61
percent is still good in terms of profitability and shareholder's earning.

42
 iv. Average return on asset (ROA) and net interest margin (NIM) of sample banks of
study period were mild upward and relatively stable. ROA was in range of 1.72 to
2.12 with average of 2.01 percent, which is satisfactory.
v. Net interest margin was ranged from 2.98 percent to 3.79 percent. It shows that
banks are earning average of 3.38 percent from their interest earning assets.
Moreover, it also indicates that banks earning from interest earning assets (loan
and advances) higher (NIM 3.38%) than that of their overall earning from total
assets (ROA 2.01).
vi. Profitability performance of the banks during the study period were found to be
affected by the Merger and Acquisition Bylaws 2015 of Nepal Rastra Bank. This
new bylaws and related directive had made a mandatory provision to lift their
paid-up capital to 8 billion within 2 fiscal years onwards of announcement. So, the
banks were in pressure to raise their capital, then, managements and directors of
the banks were so in focus on it. Therefore, they raised the capital by distributing
the stock dividend which, resulted raise in shareholder's capital but they could not
manage to earn in the ratio of increased capital in short period.
vii. It is also found that profitability performance of banks were affected by change in
categorization criteria of provisioning of non-performing loans directives of Nepal
Rastra Bank in which, provisioning criteria for non-performing loans were made
additional strict, which resulted in shrink in net free profit and ultimately
influenced to decline in return on equity (ROE).
viii. As seen in table 4.2 and figure 4.2, the independent variable for this study- capital
adequacy ratio (CAR) and size of the bank (SIZE) were in mild and steady
upward trend.
ix. All the sample bank's capital adequacy ratios were above the mandatory level of
minimum 10 percent set by regulatory body Nepal Rastra Bank. The average
capital ratio of sample five banks during the study period was ranged from 11.51
percent to 15.06 percent.
x. On the correlation analysis result, return on assets (ROA) was found to be
correlated with gross domestic product growth rate (GDPR) and capital adequacy
ratio (CAR) positively with correlation value of 0.454 and 0.098 respectively,
whereas negatively correlated with bank size and inflation rate with correlation
value of -0.090 and -0.148 respectively.

43
 xi. Among the correlation relationships of ROA, only with gross domestic product
growth rate (GDPR) is significant at 0.05 level of t distribution test. This result
shows that higher the gross domestic growth rate, higher will be the return on
assets of the commercial banks in Nepal and vice versa.
xii. ROA is positively associated with CAR and GDPR. However, ROA tends to
move in the opposite direction with SIZE and INFLATION RATE (INF) though it
was not significant at 0.05 and 0.01 level. This study is consistent with the
empirical study of Manandhar et al. (2014). But inconsistent with Bhattarai
(2018).
xiii. High fluctuation on gross domestic product growth rate (GDPR) from o.59 to 7.92
percent and inflation rate (INF) from 9.9 to 4.3 were observed in latest two years,
which contributed for mixed result with empirical study results.
xiv. Return on equity (ROE) was found to be negatively correlated with other
independent variables except with inflation rate but ROE is correlated with INF
in same direction with strong strength association 0.525. While testing the
significance of these coefficients of correlation, correlation between ROE and INF
only found significant at 0.05 and 0.01 and remaining variables were insignificant
in 0.05 and 0.01 both levels.
xv. Correlation analysis result shows that higher the inflation rate, higher would be
the return on equity rate and vice versa. But ROE tends to move in negative
directions with CAR, SIZE and GDPR. There are mixed result in the empirical
studies conducted on earlier periods. Rai et al. (2015) had found exact opposite
result. Whereas, Manandhar et al. (2014) had found the positive relationship of
ROE with INF. Which has supported this study as well.
xvi. Net interest margin (NIM) was found to be in positive relationship with gross
domestic product growth rate (GDPR) with significant at 0.05 level. But
negatively correlated with inflation rate (INF) and capital adequacy rate (CAR).
Positive relationship with bank size (SIZE) but was insignificant.
xvii. It is evident from the obtained result that higher the gross domestic product
growth rate, higher would be the net interest margin rate and vice versa. Empirical
studies had found mixed results in this case as well. Manandhar et al. (2014) had
found negative relationship of NIM with both GDPR and INF. But. Rai et al.
(2015) had found the positive relationship of NIM with GDPR and INF both.
From this results also, we can conclude that the relationship of net interest margin

44
 (NIM) with gross domestic product growth rate (GDPR) and inflation rate (INF) is
of irregular nature.
xviii. Regression analysis result of bank specific variables and macroeconomic variable
on the return on asset (ROA) shows that capital adequacy ratio (CAR), bank size
(SIZE), gross domestic product growth rate (GDPR) and inflation rate (INF) has
positive influence on return on asset (ROA).
xix. Influence of GDPR has significant positive relationship on ROA. This means that
higher the GDPR, higher would be the ROA of the banks. Thus, the directional
change to either ways on those independent variables will effect to change in
return on asset (ROA) in the same direction.
xx. Among the various internal and external various determinants of commercial
banks, 33.34 percent of the variation on return on asset (ROA) is determined by
the capital adequacy ratio (CAR), bank size (SIZE), gross domestic product
growth rate (GDPR) and inflation rate (INF) collectively. The remaining portion
of the variability in the dependent variable is left unexplained by the explanatory
variables used in the study. This result is consistent with empirical study result of
Bhattarai (2018) and Rai et al. (2015).
xxi. On the result of regression analysis of independent variables, it is found that ROE
has positive relationships with macroeconomic variables: CAR, SIZE, GDPR but
insignificant.
xxii. Inflation rate (INF) has highest positive and significant influence of return on
equity (ROE). This means that, higher the inflation rate (INF), higher would be
the return on equity (ROE) rate and vice versa.
xxiii. Relationship of ROE with other independent explanatory variables was influenced
by 48.11 percent. The remaining portion of the variability in the dependent
variable was left unexplained by the explanatory variables used in the study. Other
empirical studies also have supported this result. Rai et al. (2015), found the
higher GDPR and INF has positive relationship with return on equity (ROE).
Manandhar et al. (2014), had found SIZE coefficients were negative in all but not
an important factor for ROE.
xxiv. Regression analysis result of net interest margin (NIM) with studied independent
variables was found to be in positive relationship with bank size (SIZE), gross
domestic product growth rate (GDPR) and inflation rate (INF). But relationship

45
 was negative and insignificant with capital adequacy ratio (CAR). Bank size
(SIZE) has the largest coefficient but it was also found to be insignificant.
xxv. Gross domestic product growth rate (GDPR) has the positive and significant
relationship with net interest margin (NIM). This means that higher the gross
domestic product growth rate (GDPR), higher would be the net interest margin
(NIM) rate and vice versa.
xxvi. Relationship of NIM with independent variables CAR, SIZE, GDPR and INF was
influenced by 33.50 percent. The remaining portion of the variability in the
dependent variable was left unexplained by the explanatory variables used in the
study. The empirical studies has mixed findings on this relationships tests. Rai et
al.(2015), found that higher the GDP growth rate higher would be the net interest
margin, higher the inflation rate higher would be the net interest margin. But they
also found same with the capital adequacy ratio (CAR), which is opposite of this
study result. Manandhar et al. (2014), had found the different result on gross
domestic product growth rate (GDPR) and inflation rate (INF).

46
 CHAPTER-V
SUMMARY, CONCLUSION AND RECOMMENDATIONS

This is the final chapter of the study. This chapter includes the overall
summary of this study. Based on the finding of the study, conclusions were drawn and
possible recommendations were offered for strengthen the financial position of the
sample banks.

5.1 Summary
In recent decades, Nepal has come through various vicissitudes politically,
economically and more. Commercial banks are one of the major core components of
modern economy, yet, they were not unaffected by those situations. On the other
hand, bank and financial institutions are in tight competition with one another within
the industries as well. At this situation, the commercial banks should be more
competitive. They should become financially healthy and must have growth
potentiality. In addition, they have to shape their plans and strategies accordingly.
This study is directed to resolve the following issues:

i. What is the existing position of selected bank performance indicators, bank

specific variables and macroeconomic indicators?
ii. What are the bank specific and macroeconomic factors that influencing bank
performance?

This study was undertaken with the objective of examining the determinants
of financial performance of commercial banks in Nepal (With reference to NABIL,
SCBNL, NIBL, EBL and HBL). The specific objectives of this study were as follow:

i. To examine the existing position of selected bank performance indicators,

bank specific factors and macroeconomic factors.
ii. To evaluate the macroeconomic factors which influence the financial
performance of the commercial banks

47
 The study has a limitations in different ways. The study is based on secondary
data available on annual reports on official websites of selected sample banks, Nepal
Rastra Bank and Central Bureau of Statistic of Nepal for macroeconomic variables. In
this study, only selected tools are used. The study covers only five years period, i.e.
from 2013/14 to 2017/18. The accuracy of secondary data absolutely relies on the
annual report of sample banks. There are several determining factors of performance
of commercial banks. The study has carried out only three dependent variables return
on assets (ROA), return on equity (ROE) and net interest margin (NIM). Likewise,
four independent variables such as capital adequacy ratio (CAR), Bank size (SIZE),
gross domestic product growth rate (GDPR), and inflation rate (INF) were selected
from bank specific and macroeconomic variables.

The study has been organized in five major chapters- (i) Introduction, (ii)
Review of literature, (iii) Research Methodology, (iv) Presentation and Analysis of
Data and (v) Summary, Conclusion and Recommendation. As per the nature of study,
secondary data were used to perform the analysis of the bank financial performance.
The data were collected as per the requirement study from the annual reports
published on official website of selected sample banks, periodical reports of Nepal
Rastra Bank, Annual Statistical Book of Neal and National Account by Central
Bureau of Statistics of Nepal, and Economic Survey of Government of Nepal. The
data comprised of five consecutive fiscal years of 2013/14 to 2017/18.

As a analysis tool, descriptive statistics were used to examine the data

according to the requirement of the objective of the study. Correlation analysis and
regression analysis were performed to test the relationship between dependent and
independent variables. The return on equity (ROA), return on assets (ROE) and net
interest margin (NIM) three variables were selected as the dependent variables. Total
four independent variables were chosen as explanatory variables. Out of which, two
Independent variables- capital adequacy ratio (CAR) and bank size (SIZE) were from
bank specific variables. Likewise, gross domestic product growth rate (GDPR) and
inflation rate (INF) were from macroeconomic variables.

The regression models were estimated to test the effect of bank specific
variables and macroeconomic variables on performance of Nepalese commercial
banks. The reveals that higher the gross domestic product growth rate (GDPR), higher

48
would be the return on asset (ROA), return on equity (ROE) and But it was found that
the inflation rate (INF) had the positive and significant coefficient with inflation rate
(INF). The study also reveals that the bank specific independent variables have less
contribution in profitability performance of Nepalese commercial banks, since their
coefficients were found to be not significant and different relationship with ROA,
ROE and NIM. However, still there are more internal and external factors affect the
performance of commercial banks which was expressed by regression analysis
through R square values.

5.2 Conclusion
The objective of this study was to examine the factors or determinants that
influence and impact on bank performance by defining profitability as performance
measure. Return on asset (ROA), return on equity (ROE) and net interest margin
(NIM) were used Three dependent variables of performance measures. And two
category explanatory variables were used as the independent variables such as: capital
adequacy ratio (CAR) and bank size (SIZE) as the bank specific independent
variables and gross domestic product growth rate (GDPR) and inflation rate (INF) as
the macroeconomic variables for the year 2013/14 to 2017/18.

Performance trend of the commercial banks as presented by return on equity

(ROE) has been found in downward continuously throughout the study period. Return
on asset (ROA) and net interest margin (NIM) were in stable. Whereas capital
adequacy ratio (CAR) and bank size (SIZE) were in upward trend, The reason of this
inverse and weak relationship is because of provision came through Merger and
Acquisition Act 2011 and its bylaws 2015/16. Due the mandatory provision of raising
paid-up capital to 8 billion, banks were unable to convert increased fund and assets
into profit in proportion. However, this will help banks to become stronger
apparently.

By using the analysis tools Coefficient of Correlation test and Multiple

Regression models, Gross domestic product growth rate (GDPR) has positive
relationship with return on asset (ROA) and net interest margin (NIM). Likewise,
inflation rate (INF) has positive relationship with return on equity (ROE). This result

49
indicates that higher the gross domestic product growth rate (GDPR), higher would be
the return on asset (ROA) and net interest margin (NIM) and vice versa. Likewise,
higher the inflation rate (INF), higher would be the return on equity (ROE) of the
commercial banks in Nepal. However, to the small extent and uneven way, there is
the influence of internal variables- capital adequacy ratio (CAR) and bank size (SIZE)
as well. Based on the aforementioned relationships results, gross domestic product
growth rate (GDPR) is the major factor that affecting the profitability performance of
commercial banks in Nepal then followed by inflation rate (INF). Moreover, it is
evident that bank's profitability performance is more affected by macroeconomic
factors than bank specific factors.

5.4 Recommendations
1. Gross domestic product growth rate (GDPR) gets fluctuated due to the
business cycle and monetary policy of the country. As the gross domestic
product growth rate (GDPR) is found to be in the positive relationship with
profitability performance of commercial banks in Nepal, it is wise to keep
eyes on the sector wise businesses to mobilize the investment fund to balance
the profit earning.
2. Although inflation seemed to have a positive influence on bank profitability,
high inflation may generally be undesirable. The results suggest that probably,
bank managers are accurately predicting inflation and are able to adjust their
lending rates accordingly. Low inflationary regimes create stable economy and
a friendly investment environment for businesses, enabling businesses to
pursue long term project critical to their survival and growth. Therefore, bank
managements should stay alerted and cautious on inflation prediction and
business plan.
3. Return on equity (ROE) is not just profit measure tool but it also reflects the
efficiency banks. Declining trend of return on equity (ROE) indicates that the
shareholder's funds are not in optimum utilization. It also indicates the lack of
proper leverage structure on capital mobilization. So, increasing in deposits
and increasing in asset turnover of bank will be profitable. Likewise,
reconsidering the leverage of capital structure also recommended.

50
4. Net interest margin (NIM) seems stable, however, when increase in bank size
(SIZE) and significant positive relationship with gross domestic product
growth rate (GDPR) should have influence in growth of net interest margin
(NIM) by increasing the economic activity and reducing interest expense.
Moreover, it indicates the banks are facing some level of liquidity crunch
problem. Therefore, forecasting and maintaining the liquidity position in
advance will be favorable.
5. The benefit of size would reflect in the ability to reach wider markets. Banks
should therefore be encouraged to look beyond local market and strategically
expand their operations to other geographical markets and sectors of the
economy. Location of bank branches is strategically paramount if banks must
maximize return on investment. The agriculture and agro-processing sector is
still a potential market for banks. In conjunction with branch expansion, bank
should consider diversification of their product portfolio. In this way banks
can leverage on their assets to offer other auxiliary services and maximize the
returns.

51
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56
 APPENDICES

APPENDIX - i
Calculation of Bank Specific internal Variables of
Standard Chartered Bank Nepal Ltd. (SCBNL)
Fiscal Years
Particulars
2013/14 2014/15 2015/16 2016/17 2017/18
Extracted Data (NRS in Million)
Net Interest Income 2,007.66 1,913.52 1,849.88 2,328.42 3,298.03
Net Profit 1,336.59 1,310.35 1,292.50 1,549.99 2,189.90
Total Assets 53,324.10 65,059.04 65,185.73 78,356.01 84,031.56
Total Shareholders Fund 5,088.09 6,092.74 7,524.18 12,379.79 13,925.50
Total Capital (Tier1+Tier2) 5,333.52 6,111.79 7,779.41 11,975.10 13,986.85
Total Risk Weighted Asset 43,470.43 46,672.65 47,485.47 56,801.99 60,838.82

Calculated Variables
ROA = Net Profit/Total Assets 2.51% 2.01% 1.98% 1.98% 2.61%
ROE = Return on Equity 26.27% 21.51% 17.18% 12.52% 15.73%
NIM = Net Interest Income /
3.77% 2.94% 2.84% 2.97% 3.92%
Total Assets
CAR = Tier 1 + Tier 2 Capital /
Total RWA 12.27% 13.10% 16.38% 21.08% 22.99%
Bank Size = Log (Total Assets) 4.73 4.81 4.81 4.89 4.92
Source: Annual report of sample banks

57
 APPENDIX - ii
Calculation of Bank Specific internal Variables of
Nabil Bank Ltd. (NABIL)
Fiscal Years
Particulars
2013/14 2014/15 2015/16 2016/17 2017/18
Extracted Data (NRS in Million)
Net Interest Income 3,696.41 3,526.28 4,325.97 5,562.78 6,262.06
Net Profit 2,319.56 2,093.81 2,819.33 3,702.38 3,981.89
Total Assets 87,274.55 115,986.53 127,300.20 144,017.86 160,978.07
Total Shareholders Fund 7,640.99 9,485.59 11,595.03 16,699.18 20,586.36
Total Capital (Tier1+Tier2) 8,302.90 10,154.46 12,203.61 14,752.64 18,710.88
Total Risk Weighted Asset 72,406.12 86,045.35 99,603.30 118,827.90 143,877.44

Calculated Variables
ROA = Net Profit/Total Assets 2.66% 1.81% 2.21% 2.57% 2.47%
ROE = Return on Equity 30.36% 22.07% 24.32% 22.17% 19.34%
NIM = Net Interest Income /
4.24% 3.04% 3.40% 3.86% 3.89%
Total Assets
CAR = Tier 1 + Tier 2 Capital / 11.47% 11.80% 12.25% 12.42% 13.00%
Total RWA
Bank Size = Log (Total Assets) 4.94 5.06 5.10 5.16 5.21
Source: Annual report of sample banks

58
 APPENDIX - iii
Calculation of Bank Specific internal Variables of
Nepal Investment Bank Nepal Ltd. (NIBL)

Particulars Fiscal Years

2013/14 2014/15 2015/16 2016/17 2017/18
Extracted Data (NRS in Million)
Net Interest Income 2,995.80 2,978.80 3,921.11 4,784.15 5,850.18
Net Profit 1,939.61 1,961.85 2,550.88 3,114.13 3,659.32
Total Assets 86,173.93 104,345.44 129,782.71 150,818.03 171,893.55
Total Shareholders Fund 7,925.48 9,806.95 16,287.75 18,707.88 24,871.02
Total Capital
8,993.85 11,754.29 18,182.54 20,367.20 22,695.80
(Tier1+Tier2)
Total Risk Weighted
79,776.91 98,745.83 121,867.35 156,448.46 179,258.50
Asset
Calculated Variables
ROA = Net Profit/Total 2.25% 1.88% 1.97% 2.06% 2.13%
Assets
24.47% 20.00% 15.66% 16.65% 14.71%
ROE = Return on Equity
NIM = Net Interest 3.48% 2.85% 3.02% 3.17% 3.40%
Income / Total Assets
CAR = Tier 1 + Tier 2 11.27% 11.90% 14.92% 13.02% 12.66%
Capital / Total RWA
Bank Size = Log (Total 4.94 5.02 5.11 5.18 5.24
Assets)
Source: Annual report of sample banks

59
 APPENDIX - iv
Calculation of Bank Specific internal Variables of
Himalayan Bank Ltd. (HBL)
Fiscal Years
Particulars
2013/14 2014/15 2015/16 2016/17 2017/18
Extracted Data (NRS in Million)
Net Interest Income
2,494 2,673 3,450 3,765 4,322
Net Profit
959 1,112 1,936 2,178 1,876
Total Assets
74,719 84,753 101,218 108,502 116,462
Total Shareholders Fund
6,083 6,959 8,824 11,705 14,139
Total Capital (Tier1+Tier2)
7,156 8,042 9,815 12,614 14,349
Total Risk Weighted Asset
63,729 72,184 90,507 103,797 115,140
Calculated Variables
ROA = Net Profit/Total
Assets 1.28% 1.31% 1.91% 2.01% 1.61%
ROE = Return on Equity 15.77% 15.98% 21.94% 18.61% 13.27%
NIM = Net Interest Income /
3.34% 3.15% 3.41% 3.47% 3.71%
Total Assets
CAR = Tier 1 + Tier 2
11.23% 11.14% 10.84% 12.15% 12.46%
Capital / Total RWA
Bank Size = Log (Total
4.87 4.93 5.01 5.04 5.07
Assets)
Source: Annual report of sample banks

APPENDIX - v
Mean (Average) Indicator of SCBNL, NABIL, NIBL and HBL and GDPR and
INF in corresponding fiscal years
Fiscal Years
Particulars Unit
2013/14 2014/15 2015/16 2016/17 2017/18
ROA = Return on Assets % 2.18 1.72 1.93 2.09 2.12
%
ROE = Return on Equity 25.05 20.48 19.49 17.20 15.81
%
NIM = Net Interest Margin 3.79 2.98 3.11 3.35 3.66
CAR = Capital Adequacy % 11.51 12.25 13.41 14.67 15.06
Ratio
No.
SIZE = Bank Size 7.86 7.96 8.02 8.07 8.12
GDPR = GDP Growth % 5.99 3.32 0.59 7.91 6.29
Rate
%
INF = Inflation Rate 9.1 7.2 9.9 4.5 4.0

60
 APPENDIX - vi
Description Data of sample banks

Bank Years ROA(y1) ROE(y2) NIM(y3) CAR(x1) SIZE(x2) GDPR(x3) INF(x4)

2013/14 2.51 26.27 3.77 12.27 7.73 5.99 9.1
2014/15 2.01 21.51 2.94 13.10 7.81 3.32 7.2
SCBNL 2015/16 1.98 17.18 2.84 16.38 7.81 0.59 9.9
2016/17 1.98 12.52 2.97 21.08 7.89 7.91 4.5
2017/18 2.61 15.73 3.92 22.99 7.92 6.29 4.0
2013/14 2.66 30.36 4.24 11.47 7.94 5.99 9.1
2014/15 1.81 22.07 3.04 11.80 8.06 3.32 7.2
NABIL 2015/16 2.21 24.32 3.40 12.25 8.10 0.59 9.9
2016/17 2.57 22.17 3.86 12.42 8.16 7.91 4.5
2017/18 2.47 19.34 3.89 13.00 8.21 6.29 4.0
2013/14 2.25 24.47 3.48 11.27 7.94 5.99 9.1
2014/15 1.88 20.00 2.85 11.90 8.02 3.32 7.2
NIBL 2015/16 1.97 15.66 3.02 14.92 8.11 0.59 9.9
2016/17 2.06 16.65 3.17 13.02 8.18 7.91 4.5
2017/18 2.13 14.71 3.40 12.66 8.24 6.29 4.0
2013/14 2.17 15.77 3.34 11.23 7.87 5.99 9.1
2014/15 1.75 15.98 3.15 11.14 7.93 3.32 7.2
HBL 2015/16 2.02 21.94 3.41 10.84 8.01 0.59 9.9
2016/17 2.16 18.61 3.47 12.15 8.04 7.91 4.5
2017/18 2.20 13.27 3.71 12.46 8.07 6.29 4.0
2013/14 2.25 28.40 4.14 11.31 7.85 5.99 9.1
2014/15 1.85 22.85 2.90 13.33 8.00 3.32 7.2
EBL 2015/16 1.59 18.38 2.87 12.66 8.06 0.59 9.9
2016/17 1.83 16.04 3.25 14.69 8.07 7.91 4.5
2017/18 1.97 16.00 3.36 14.2 8.16 6.29 4.0
Sum ( ) 52.89 490.19 84.41 334.54 200.17 120.50 173.50
Count (n) 25 25 25 25 25 25 25
Minimum 1.59 12.52 2.84 10.84 7.73 0.59 4.00
Maximum 2.66 30.36 4.24 22.99 8.24 7.91 9.90
Mean 2.12 19.61 3.38 13.38 8.01 4.82 6.94
Standard Deviation 0.28 4.71 0.42 2.93 0.14 2.63 2.42
Source: Annual report of sample banks and Nepal Rastra Bank,

61
 APPENDIX - vii
Calculation of correlation of coefficient between ROA and CAR

ROA(y1) CAR(x1) xy x2 y2
2.51 12.27 30.80 150.55 6.30
2.01 13.10 26.33 171.61 4.04
1.98 16.38 32.43 268.30 3.92
1.98 21.08 41.74 444.37 3.92
2.61 22.99 60.00 528.54 6.81
2.66 11.47 30.51 131.56 7.08
1.81 11.80 21.36 139.24 3.28
2.21 12.25 27.07 150.06 4.88
2.57 12.42 31.92 154.26 6.60
2.47 13.00 32.11 169.00 6.10
2.25 11.27 25.36 127.01 5.06
1.88 11.90 22.37 141.61 3.53
1.97 14.92 29.39 222.61 3.88
2.06 13.02 26.82 169.52 4.24
2.13 12.66 26.97 160.28 4.54
2.17 11.23 24.37 126.11 4.71
1.75 11.14 19.50 124.10 3.06
2.02 10.84 21.90 117.51 4.08
2.16 12.15 26.24 147.62 4.67
2.20 12.46 27.41 155.25 4.84
2.25 11.31 25.45 127.92 5.06
1.85 13.33 24.66 177.69 3.42
1.59 12.66 20.13 160.28 2.53
1.83 14.69 26.88 215.80 3.35
1.97 14.2 27.97 201.64 3.88
2 2
y = 52.89 x = 334.54 xy =706.69 x =4682.43 y =113.79

For Calculation of coefficient of correlation (r)

We have,

n = 25

n xy – x y
r= =
n x – ( x)2 n y2 – ( y)2
2

( ) ( )
=
√ ( ) ( ) √ ( ) ( )

= 0.0982, Hence r = 0.982

62
 For T – test
r
t=  n-2
1 - r2

= √
√ ( )

= 0.099 x 4.796

= 0.473, Hence, tcal = 0.473

Degree of freedom (d.f) = n - 2 = 25 - 2 = 23

APPENDIX - viii
For coefficient of correlation 'r' and t-value of rest of the variables also have
been calculated with the same formula and process in MS Excel using the data
processed at appendix vi for the ease of working, which are as following:

Coefficient of correlation of ROA, ROE and NIM with independent

variables CAR, SIZE, GDPR and INF

ROA ROE NIM

Variables
r tcal Value r tcal Value r tcal Value
CAR 0.0982 0.4731 -0.4811 -2.6322 -0.0977 -0.4706
SIZE -0.0897 -0.4319 -0.3043 -1.5322 0.0014 0.0065
GDPR 0.4538 2.4423 -0.1261 -0.6095 0.4823 2.6406
INF -0.1475 -0.7154 0.5253 2.9610 -0.1531 -0.7429

63