Profitability determinants of Nepalese commercial banks

Abstract

Purpose-The purpose of this study is to examine the the key determinants of profitability of Nepalese commercial banks. Methodology-This study employs descriptive statistics to describe the profitability of Nepalese banks and its determinants. Further, the degree of correlation among different indicators of profitability and its determinants has been assessed by calculating correlation coefficient. Finally, this study has adopted a panel data regression model (Fixed Effect Model and Random Effect Model) to investigate the determinants and their impact on profitability of Nepalese commercial banks. Findings-The analysis reveals that the bank pofitability measured by ROA of Nepalese commercial banks is significantly affected by concentration ratio, banking sector development, GDP growth, inflation and exchange rate significantly in opposite direction rather it is not significantly affected by the internal factors like bank size, capital base, deposit, loan, off-balance sheet activities and number of branches. Another indicator of bank profitability; NIM is significantly affected only by capital adequacy, absolute number of branches and inflation rate. Conclusion-This study concluded that the profitability of Nepalese commercial banks measured by return on assets is significantly influenced by the external factors. Among external factors, industry specific factors have high degree of impact on return on assets whereas macroeconomic variables have quite a weak degree but significant impact on profitability of Nepalese commercial banks as measured by return on assets. Further, the profitability measured by net interest margin (NIM) is significantly influenced only by capital adequacy, absolute number of branches and annual inflation rate.

Impact of Bank Specific Factors on Profitability of Nepalese Commercial Banks

“…The size of Nepalese commercial banks denoted by total assets has positive significant impact on profitability of Nepalese commercial banks. This result is similar to the previous studies of Sufian (2010), Athanasoglou et al (2006), Flamini, McDonald andSchumacher (2009), Sufian and Habibullah (2009), Mahmud, Mallik, Imtiaz, and Tabassum (2016), Kawshala and Panditharathna (2017), Serwadda (2018), Ivan, Nazaria, and Jovena (2018) and Bhattarai (2016) but inconsistent with the findings of Ben naceur and Goaid (2008), Ben naceur (2003), Rahaman and Akhter (2015), Alshatti (2016), Neupane (2020) and Zerihun (2021). The bank can mobilize their resources based on their size for the achievement of target and goal of commercial banks for sound profitability…”

“…The study also depicted that the total equity has not significant impact on the profitability of Nepalese commercial banks which indicates that high capitalization is not experienced for high returns. This result is consistent with the findings of Ben naceur and Goaid (2008), Ben naceur (2003), Sufian and Habibullah (2009), Kawshala and Panditharathna (2017) but the contrast with the finding of Sufian (2010), Athanasoglou et al (2006), Rahaman and Akhter (2015), Mahmud, Mallik, Imtiaz, and Tabassum (2016), Alshatti (2016), Bhattarai (2016) and Neupane (2020). The high capitalization of commercial banks reduces the divisible dividend because of proper utilization of the financial resources.…”

“…Bhattarai (2016) revealed the performance of Nepalese commercial bank is positively affected by expenses per loan asset and size of bank whereas non-performing loan ratio, capital adequacy ratio and cash reserve ratio has negative effect on performance Nepalese commercial banks. Neupane (2020) found that the profitability of Nepalese commercial banks is insignificantly affected by size of bank, deposit amount, capital base, loan and advances, number of branches and activities relating to off-balance sheet as the internal factors.…”

Analysis of Macroeconomic Influence Return on Assets Banking Study on Conventional Commercial Banks in Indonesia for the Year 2018–2020

“…In general, macroeconomic variables which are regularly used as determinants of financial institution overall performance from numerous researches are countrywide earnings or monetary increase, inflation, and hobby rates, [1]- [6] used the variables of monetary increase and inflation. Meanwhile, withinside the studies of [7]- [9] brought the change price variable two other measures that are often discussed related to bank performance that is often used return on assets (ROA) and return on equity or ROE [10]- [13].…”

Role of macroeconomic factors predicting financial performance of commercial banks in Nepal

“…macro economic factors influence to the financial performance of the banks (Kirimi, Kariuki, &Ocharo, 2020;Brahmaiah, &Ranajee, 2018,Petria, Capraru, &Iulian, 2015. GDP, inflation rate, interest rate, and exchange rate have been established strong significant macroeconomic variables influencing the financial performance of banks (Neupane, 2020;Simiyu,&Ngile, 2015;Bhattarai, 2015;Saeed, 2014).…”